You're welcome, and thank you in turn.

We basically agree on the purpose and utility of regulation D. By clearing defining what the safe harbor provisions are, it opens the doors to capital formation for small business without imposing hugely expensive compliance requirements, and I am heartily in favor of keeping capital formation a relatively simple process - especially in times like these when credit markets remain chilly and many otherwise healthy or promising businesses are unable to expand for lack of ready capital. I also agree that imposing stricter fiscal requirements for accreditation risks shrinking the liquidity pool and thus starving one of the most dynamic segments in the economy, with serious implications for job creation and economic growth.

Now, you mention that this legislation, if enacted pushes the SEC in a regulatory direction that will make this area more litigious, and here we differ, although I know I am presenting a rather flimsy theoretical opinion against your solid empirical one! It seems to me that you're assuming a shrinking liquidity pool will drive entrepreneurs to engage in increasingly risky behavior in order to develop their businesses; if the pool of accredited investors shrinks then capital will have to be sought from unaccredited ones, and uncertainty will ensue, followed by painful and expensive legal wrangling when a good portion of these ventures fail or underperform.

But is it not rather simplistic to assume that if the supply of investors is artificially constrained, the demand for investment will necessarily run towards the same uncertain and litigation-prone methods of capital formation that preceded the establishment of Regulation D? Might we not instead see an increase in the number of partnerships or directorships taken up as a condition of investment, but still in accordance with other safe harbor provisions of regulation D besides those based on the net worth of a natural person?

I am not attempting to argue this as a debating point. Rather, I am seeking to understand why you anticipate one outcome rather than another. For example, is it your professional experience that angels are tolerant of risk but don't wish to shoulder the various obligations of a directorship, whether due to the burdens of compliance or because it might compromise their objectivity as investors? Is the distribution of wealth such that an increase - say, a doubling - of the financial barrier to accreditation necessarily halves the size of the capital pool, or shrinks it in direct proportion to the number of angels? In other words, if middling investors with more than a million but less than two all disappeared from the angel pool, what of the fact that no upper cap on the assets of wealthier angels exists - a newly imposed $2m threshold is of no material consequence to an angel with $10m to invest, whereas the middling investor's capital contribution is necessarily limited to less than the accreditation threshold. Finally, such restrictions might create opportunities for business development companies, not unlike YC, which are large enough to shoulder the burden of compliance and act as reliable brokers for high risk investors (eg a hedge fund manager who might wish to put 1% of his fund into high risk ventures with great upside potential and can easily offset the risk with more pedestrian investments, but lacks the time or expertise to seek out many tiny startups). The 'shotgun' approach of investing small sums in many disparate ventures with the understanding that only a few will yield significant returns could probably be formalized and maybe even simplify the capital formation process for startups, as YC seems to be doing. It seems to me that one of the most common and frustrating questions for new entrepreneurs is where to find an angel in the first place - for many people and industries, finding someone who can listen to and act upon your pitch is mysterious, so I feel there's an unmet demand here for business development as a kind of brokerage service.

I don't mean this as an endorsement or even a comment on the Dodd legislation as a whole - I've only read three pages of this 1300-page bill, am ambivalent about committing the 1-2 week sot evaluate the whole thing, and am painfully aware that its introduction to the senate is taking place in a charged and acrimonious political atmosphere, which is rarely a recipe for regulatory bliss. For that matter, it is inevitably molded by the global financial crisis, and as we know hard cases generally result in bad law, just as Sarbanes-Oxley's burden of compliance is thought by many people to have cost more than the problem it was intended to solve. So I appreciate your worries that the legislation might well be reactionary - by intent, in effect, or even both.

It does strike me that the prescriptions in this bill as they relate to capital formation are pretty mild. To the extent that the bill is agenda-driven, I think its primary purpose is to rein in the perceived excesses of large financial institutions and the fast-talking social engineers of the financial world as exemplified by Bernie Madoff - in short, to put a leash on fat cats for the public good (one may or may not agree that this a worthy aim; I just think that this is the basic intent). I agree that startup capital formation has not been a bed of nettles for investors or played any major role in the structural problems of our financial system, and frankly I doubt the bill's intent is to choke off investment in startups.

While uncertainty of the kind you describe may enrich trial lawyers, is there really so much profit to be had in litigating cases brought by investors who sit between the existing and potential future thresholds? I suppose one could see a situation where some breakout company does well and and has an IPO and is awash in cash, only for someone to point out an obscure legal failing of their very first fundraising round 5 years later and sue them for a billion...but it'd be a lot easier to buy some old company with a patent and take a vacation in Texas. I don't know a whole lot about the economics of the legal industry; it just seems to me that you're extrapolating an awful lot from a fairly bland directive to inspect and tune up one small component of the regulatory mechanism. After all, a great many people subscribe to the view that inflation is the economic equivalent of rust, and the bill basically says to consider its effects rather than issuing detailed prescriptions for dealing with it.