Dealing Angels

Those of us working on S.227 -- the tweak to Vermont's licensed lender bill that would allow angel investors and venture investors to lend money to Vermont businesses without being subject to licensing -- have had a busy couple of weeks.  BISHCA (“Banking Insurance Securities and Health Care Administration” which regulates licensed lenders through its Banking Division) could not support the bill as it was introduced but was willing to work with us on crafting language that would be acceptable. BISHCA's primary objection was that our language was too broad and would allow individuals and entities to circumvent the licensed lender law, rather than exempting a particular type of lending transaction favored by angel investors and venture investors. A flurry of drafting and redrafting ensued, with the Vermont Bar Association's business committee pitching in, on a pro-bono basis, to help out.  We finally settled on the following language:

    (A) a person making an unsecured commercial loan, which loan is expressly subordinate to the prior payment of all senior indebtedness of the commercial borrower regardless of whether such senior indebtedness exists at the time of the loan or arises thereafter.  The loan may or may not include the right to convert all or a portion of the amount due on the loan to an equity interest in the commercial borrower.

 

 

  (B) For purposes of this subdivision, "senior indebtedness" means: (i) all indebtedness of the commercial borrower for money borrowed from banks, trust companies, credit unions, insurance companies, and licensed lenders, and any guarantee thereof;  and (ii) any other indebtedness of the commercial borrower that the lender and the commercial borrower agree shall constitute senior indebtedness. 

    The key to achieving consensus was the subordination language. The Vermont Bankers Association was initially wary of the bill but the subordination language favoring secured licensed lenders eased their concerns.  Of course, this language means that angels and venture investors will not be able to make secured business loans, but the reality is that most loans made by these investors are short- term, unsecured bridge loans and unsecured, convertible debt loans, so the language should prove workable.

    On Friday, we had a successful meeting with Senate Finance Committee on S.227.  BISCHA sent three people including Paulette Thabault, Commissioner; Herb Ogden, General Counsel; and Steve Knudson, the Banking Division Attorney who worked on the language negotiation.  All three testified in favor of the bill.

Tom Moody of Downs Rachlin (the firm that did the bulk of the work negotiating favorable language) testified in favor of the bill on behalf of the Vermont Bar Association’s business lawyers’ committee. Tom had assembled a particularly compelling piece of evidence which was a state-by-state list of commercial lending regulations.  Turns out that only 9 states, including Vermont, regulate commercial lending transactions.  Of those states, six (Iowa, Maryland, Minnesota, New Hampshire, New York and Rhode Island) require licenses for small (less than $50K typically) commercial lending transactions. 

Several of the Senators expressed surprise that only South Dakota and Vermont had comprehensive license requirements for commercial transactions.  California has comprehensive regulation, too, but with an exemption similar to what we are trying to accomplish with S.227. 

Reg Gignoux, a founder of the North Country Angels, testified in favor of the bill and I testified in favor of the bill on behalf of venture investors. Chris D’Elia of Vermont Bankers Association testified that the bankers could support the bill, but Chris wanted to make sure the committee understood that as more exemptions are created in the Licensed Lender Law, the VBA members are questioning why they are subject to regulation on commercial transactions. This prompted a fairly lively discussion among the committee members and Chris. I told Chris outside of the meeting that the angel and venture community would be happy to join with the banks to support deregulation of commercial lending during a future regulatory session.  The upshot is that the committee seemed pleased that all parties worked together to craft a workable solution and they are going to reconvene next week to decide whether to vote S.227 out of committee.  I'll continue to follow the progress of this bill for the Tiger.

(ed.note: apologies for earlier version which contained repeated material.)

Comments

[Jon Harrison]

One cannot help but admire the willingness of you reformers to get your hands dirty trying to change things. The bill is certainly an improvement over current law. Good luck!

[GreggB]

Only 9 states have these laws, wonder what it is like in the other 41. Probably anarchy and mayhem. Daily riots, power outages, food shortages etc. In all seriousness I keep coming across laws that only a handful of states have and VT happens to be one of them. For such a small place we sure do take a proactive stance against...
everything.