Suggestions on how to make lift better for startups, by reducing or eliminating legal and regulatory burdens, from a startup lawyer.

1. Startup America
Suggested Legal and Regulatory Changes To
Make Life Better For Startups
From a Startup Lawyer
Joe M. Wallin
Seattle, Washington
@joewallin
joewallin@dwt.com

2. What Is Startup America?
President Obama announced Startup America on January
31, 2011.
One of the goals of the initiative is to "reduce regulatory
barriers for high growth firms."
Startup America is an acknowledgment that most job growth
in America comes from young companies.
I am a startup lawyer. The following is a collection of
recommendations for the Startup America Initiative Team to
"reduce regulatory barriers for high growth firms."
The opinions expressed in these slides are my own.
I can't take credit for all of these ideas, but any mistakes are
mine.

3. First, Make It Easier For Startups To
Raise Money
There are current regulatory burdens that make it difficult for
startups to raise funds from private investors.
These regulatory burdens take a number of forms.
One impediment is the definition of the term "accredited
investor."
Most startups will limit their fund raising to raising money
only from "accredited investors" because to do otherwise
results in onerous and unacceptable legal and accounting
compliance costs.
So, what is the problem?

4. The Government Is Making It Harder
To Be An Accredited Investor
The Dodd-Frank Act made it harder to qualify as an
accredited investor.
Dodd-Frank requires that an investor's primary residence
not be considered as an asset in determining an investor's
net worth, and requires the SEC to consider raising the
thresholds to qualify as an accredited investor every 4
years.
Before Dodd-Frank, the thresholds to qualify had been
stable for 20 years.
I do not believe that the government should be increasing
the financial thresholds to qualify as an accredited investor.
I believe we should make it easier to qualify so that more
people can invest in startups and startups can more easily
raise money.

5. Allow Startups To Advertise That They
Are Fundraising
Right now in order to comply with securities laws startups
have to work by word of mouth only in trying to raise funds.
They can't publicly announce that they are raising money.
This makes it difficult for startups to raise money and drives
startups into the arms of intermediaries and brokers.
Why not allow startups to advertise that they are raising
money?
Why not allow startups to post on their web sites that they
are raising money?
Why not allow a free and open and competitive market for
funds and investment opportunities, rather than the inside
game that is played now?
Let's end the insider game of angel investing.

6. Provide Angel Investment Tax Credits
Investors in startups frequently have to wait for years for
either (i) a liquidity event in which they either make or lose
money, or (ii) a business failure, in which case they can take
a tax loss.
In other words, angel investors have to wait a long time to
recover the tax basis in their investments.
Let's give angel investors a tax credit when they invest in
small companies that are creating jobs.
Senator Mark Pryor of Arkansas has introduced a bill, S.
256, which deserves our support.

7. Make Internal Revenue Code Section
1202's 100% Exclusion Permanent
Section 1202 provides a 100% tax exclusion from gain on
the sale of qualified small business stock held for more than
5 years.
But this exclusion is only good for stock bought before the
end of this year.
To be meaningful, this tax exclusion needs to be made
permanent.
Let's make the Section 1202 exclusion permanent.

8. Fix Internal Revenue Code Section
1045
Internal Revenue Code Section 1045 allows taxpayers who
haven't met the 5 year holding period under Section 1202 to
rollover their gain on the sale of qualified small business
stock to continue to try to meet the 5 year holding period.
The problem is Section 1045 only gives investors 60 days to
find rollover investment opportunities.
This is too short of a time frame to find rollover investment
opportunities in qualified small businesses, especially
because these investment opportunities are typically
learned of via word of mouth.
Let's extend this rollover period to something more on the
order of 365 days.

9. Repeal The New 1099 Rules
Under rules to become effective 1/1/2012, if you are in
business, you will have to issue a Form 1099 to any
corporation from whom you buy more than $600 in goods
during the year.
This rule literally means that if you are a freelance coder,
and you buy a new PC from the Microsoft store, you are
going to have to issue a Form 1099 to Microsoft, or face
severe IRS penalties.
Or if you are self-employed and your monthly supply costs
at the local office supply store are more than $50 on
average, you are going to have to issue your local office
supply store a Form 1099 at the end of the year.
These rules make no sense; let's repeal them.

10. Make Incentive Stock Options Work
Again
Incentive stock options are a great idea, because if they
were allowed to work the way they were originally
envisioned employees could more easily participate in the
equity of small companies while minimizing the tax burden
of doing so.
The problem is, because the alternative minimum tax
applies to the spread between the fair market value of the
stock received on the exercise of a stock option and the
strike price on the options, ISOs are now not such a good
deal and don't work at all like they were originally intended.
Let's repeal the alternative minimum tax as it applies to
incentive stock options.

11. Fix Section 83(b) Elections
Section 83 of the Internal Revenue Code allows founders to
avoid tax when their founders' shares vest, but only if they
file an election within 30 days of first receiving their stock.
This rule applies even if the founders paid fair market value
for their stock!
This is a very short time deadline and a trap for the unwary.
There is no ability to extend the 30 day period. If you miss it,
you are stuck.
Let's fix the rules to not require an 83(b) election when no
tax would be due.

12. Repeal Internal Revenue Code Section
409A
Internal Revenue Code Section 409A imposes taxes,
including a 20% penalty tax, on "nonqualified deferred
compensation plans."
It was enacted in response to executives at large public
companies deferring tens of millions of dollars of salary
income into the far future.
But it has been applied to startup company stock options,
making it more difficult for startups to grant equity incentives
to employees and contractors.
Regulatory guidance pushes small companies to obtain
costly third party appraisals before granting stock options.
The abuses that led to the enactment of Section 409A don't
exist at small companies.
Let's repeal Section 409A as it applies to small companies.

13. Repeal Rule 701's Mathematical Limits
Rule 701 is the federal securities law exemption for granting
stock options and other equity incentive awards to
employees and independent contractors.
It contains mathematical limitations on how much startups
can grant in compensatory equity awards.
Why make it harder for startups to offer equity incentives to
employees and contractors?
Let's simplify Rule 701 by removing its mathematical
limitations.

14. Make It Easier To Go Public
Startups need a vibrant IPO market.
We need to make it easier for companies to do initial public
offerings.
We need to consider how we can make the process of
going public and being a public company less burdensome.