Congress has not been friendly to startups this past decade.
A few results of their well-intended efforts:
1. Startups today have little or no realistic hope of gaining liquidity through an IPO, leaving them in a position where M&A is their only realistic exit, with the result being that valuations are lowered for founder exits (the consequence of Sarbanes-Oxley, among other new laws).
2. Startups today can't simply price their stock based on the reasonable business judgment of a board of directors, nor can they use a simple 10 to 1 ratio in pricing their preferred versus their common stock, but must instead incur significant expense in having to do independent outside appraisals just to take simple steps such as issuing stock options (the new 409A statute and accompanying regulations have brought this about).
3. The VC market has been all but dead for the past two years, owing in no small part to congressional actions that helped fuel the Fannie/Freddie subprime mess, leading to a financial meltdown.
4. Add to this the hammer that is about to fall on angel funding as reflected in the Dodd bill, and startups will not only have their VC funding sources largely dried up but will have far more restricted access to early-stage funding across the board. In practical terms, this will mean that funding activities will need to be based on: (a) having access to comparatively wealthy angel investors (maybe 25% of the current pool) while being prepared to incur significant delays in getting funds pending a minimum 4-month wait; or (b) relying on Section 4(2), which is the section of the 1933 Securities Act that offers an exemption from registration for private placements but without benefit of the safe-harbor approach of Regulation D and its rules relating to accredited investors (the equivalent of "walking on the high wire without a net").
Maybe any given point above is over-simplified or overstated but the broad pattern is clear. No individual item is ruinous but each contributes to costs and restricts options. It is not a good trend for startups.
Freddie and Fannie did absolutely nothing to fuel the subprime mess. They were not allowed to invest in any subprime mortgages during the bubble and were later forced by law to invest in them when the crash was already happening, because that was Bush's plan to stop the crisis. This is just an excuse that people that caused the sub-prime mess use.
- In 2000 Fannie buys $600 million, and Freddie buys $18.6 billion, and guarantees 7.7 billion more.
- 2002-2006 the GSE's buy 38-90 billion a year in subprime mortagages
As far back as 1999 you can find stories stating that Fannie was being pressured into subprime:
Their activity appears smaller than the market at large, but it's not non-existant. It doesn't seem on face value that they were not allowed to invest. Is there some rule I am missing?
It seems I was wrong about that. But still their activity was just a small part of the market at large and they only bought the safest tranches. Saying they were responsible for the mess is just wrong, imo.
One, they did buy subprime mortgages; two, they've lost hundreds of billions of taxpayer dollars so far (and will lose more) paying for their distortions of their mortgage market. Hundreds of billions of dollars burned, lost, destroyed fueling housing demand, and you think that had nothing to do with the subprime crisis?
If you didn't have GSEs in the market, interest rates on mortgages would have been higher. That is the role they played, but it was quite small on a relative scale.
A few results of their well-intended efforts:
1. Startups today have little or no realistic hope of gaining liquidity through an IPO, leaving them in a position where M&A is their only realistic exit, with the result being that valuations are lowered for founder exits (the consequence of Sarbanes-Oxley, among other new laws).
2. Startups today can't simply price their stock based on the reasonable business judgment of a board of directors, nor can they use a simple 10 to 1 ratio in pricing their preferred versus their common stock, but must instead incur significant expense in having to do independent outside appraisals just to take simple steps such as issuing stock options (the new 409A statute and accompanying regulations have brought this about).
3. The VC market has been all but dead for the past two years, owing in no small part to congressional actions that helped fuel the Fannie/Freddie subprime mess, leading to a financial meltdown.
4. Add to this the hammer that is about to fall on angel funding as reflected in the Dodd bill, and startups will not only have their VC funding sources largely dried up but will have far more restricted access to early-stage funding across the board. In practical terms, this will mean that funding activities will need to be based on: (a) having access to comparatively wealthy angel investors (maybe 25% of the current pool) while being prepared to incur significant delays in getting funds pending a minimum 4-month wait; or (b) relying on Section 4(2), which is the section of the 1933 Securities Act that offers an exemption from registration for private placements but without benefit of the safe-harbor approach of Regulation D and its rules relating to accredited investors (the equivalent of "walking on the high wire without a net").
Maybe any given point above is over-simplified or overstated but the broad pattern is clear. No individual item is ruinous but each contributes to costs and restricts options. It is not a good trend for startups.