An move by the U.S. Securities and Exchange Commission (SEC) to change rules to make it easier for startup companies to land financing could have exactly the opposite effect. New rules published recently could “effectively kill most angel investment in this country,” according to the Kansas City, MO-based Angel Capital Association.
The rules ending the ban on general solicitation for companies seeking investments from accredited investors eliminates the ability of angel investors to self-certify their status – requiring them instead to provide personal financial information to an issuer or to a third party such an accountant who can verify their status.
For a background piece on these SEC rules see: “The SEC’s Bluff on Lifting the Ban on General Solicitation and Advertising.”
Here’s what Forbes had to say: The SEC’s Removal of General Solicitation Changes Everything.
So-called Safe Harbors in the convoluted SEC rules include allowing the would-be angel investors to provide pay stubs for the two most recent and current years or IRS forms that report income. Currently, the SEC defines an accredited investor as one with annual income over $200,000 ($350, 000 for a married couple) or net worth of more than $1 million excluding a primary residence.
Coming regulations could substantially raise qualifying amounts, the ACA says.
Bernie Dixon, chair of the Atlanta Technology Angels, says of the new rules:
“It is early in the process and many terms of the new ruling are unclear such as “private offering, advertised offering and what defines qualified investor certification. All important because many regulatory actions to date have served to encourage or impel crowdfunding and other advertising of investment offerings.
These new rules appear to add just as much burden as encouragement to entrepreneurs. I don’t believe the intent of the SEC was to deter this type of early stage funding. At this point the issues require more consideration and less speculation.”
“Angel investors provide the fundamental source of startup capital in our economy,” says Marianne Hudson, executive director of the ACA. “Not a single angel I have spoken with is willing to provide the personal financial information to an issuer who is asking them for an investment. This violation of privacy is untenable, especially to angels who do multiple deals a year.”
“These SEC rules provide no safe harbor for our angel members, which effectively could kill most angel investment in this country,” said David Verrill, board chairman of ACA.
Is this another incidence of government trying to fix something that’s not broken. The situation reminds us of states passing voter restriction laws allegedly aimed at preventing fraud, even though no evidence of voter fraud exists.
Not one iota of fraud
“Our member angel groups have decades of history investing in startups while self-certifying their accredited status without one single iota of fraud. Our process works because angel groups know their members well, and focus on the education and skill needed to do this type of investing well. Angels do not have to invest in start-ups, but we are almost entirely the only ones who do so – some 90% of outside equity raised by start-ups comes from angel ranks.”
“It would be devastating for the economy if innovative startups that create all net new jobs in the US lose access to this critical capital,” Verrill said. “Congress passed the JOBS Acts as a way for small businesses to access more capital and therefore create more jobs. Unfortunately, these rules appear to do the opposite.”
She warns that “with thousands fewer angels participating in this market, startups will have far less access to capital. The millions of jobs they create every year will disappear and the economy will suffer. This is the exact opposite of Congress’ intent in passing the JOBS Act.”
Further information on ACA recommendations are available in: ACA December, 2012 letter to the SEC and ACA testimony to a Congressional committee in April, 2013).
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