Final rules ending the ban on general solicitation
for companies seeking investment from accredited investors eliminates the
ability of angels to self-certify their status, and will result in many angels
refusing to participate in this type of investing, according to the Angel
Capital Association (ACA).
The ACA is calling on Angels
and Entrepreneurs nationwide to participate in a campaign to bring the light of
reason to the current SEC interpretation of the JOBS Act. “ACA is doing our
part in Washington, meeting with the SEC and legislators,
speaking out to the media, and everything we can do,” says Marianne Hudson, executive
director of the ACA. “In the near future, we will send out additional tools and
templates to support this fight. This will include a message template and easy
way to contact your Congressional delegation. We know that Congress will be
interested in what you say to them. They did not intend to hurt small
businesses and cut private funding to them when they passed the JOBS Act – their
goal was to create more capital and jobs! We believe their voices will help us
get to the right solution.”
“With thousands fewer angels participating in this
market, startups will have far less access to capital, the millions of jobs they
create each year will disappear, and the economy will suffer,” says Marianne
Hudson, executive director of ACA. “This
is the exact opposite of Congress’ intent in its near-unanimous passage of the
JOBS Act.”
Under the JOBS Act, the Securities and Exchange
Commission was tasked with lifting the ban on general solicitation for issuers privately
raising capital under Regulation D Rule 506(c), provided that issuers take
“reasonable steps to verify” that all investors are accredited.
In final rules published last week, the SEC provided
a convoluted, “principles-based approach,” along with several “safe harbors” that
issuers may use. Safe harbors include: “reviewing pay stubs for the two most recent
years and current year;” or “reviewing copies of any IRS form that reports
income,” (including Form W-2, Form 1099 or a copy of filed Form 1040). For married accredited investors, the rule
specifies that both spouses would have to divulge such information to an
issuer. Alternatively, a safe harbor
would occur if the investor submits a certified statement from a third party
such as an “attorney, accountant or registered investment advisor,” provided
that the third party could establish that it had also undertaken “reasonable
steps to verify” that an investor was accredited. Third party verification would need to be
updated every three months.
The current SEC definition of accredited investor
for a natural person is an individual with annual income exceeding $200,000
and/or net worth greater than $1 million excluding the value of a primary
residence. For a married couple, the income test increases to $350,000. Under Dodd-Frank legislation, this definition
will be revisited in the coming year, and a General Accounting Office study is
expected to be released within a week with recommendations that could
substantially raise qualifying amounts.
“Angel investors provide the fundamental source of
start-up capital in our economy,” Hudson said. “Not a single angel I have
spoken with is willing to provide personal financial information to an issuer
who is asking them for investment. This
violation of privacy is untenable, especially for the angels who do multiple
deals a year. If an issuer has
information on total net worth or income of an investor, that provides vast
information asymmetry. This would be
like having your bank demand to know your net worth before you could open a
bank account to put money in, or the stock market demanding to know your net
income before you can trade securities.”
“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. “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.”
Statistics on the impact angel investors have on
small business growth and the economy include:
Between 200,000 and 400,000 accredited investors participate in angel investing each year. In 2012, there were 234,000 accredited investors in Reg D offerings alone, of which 91,000 participated in non-financial offerings.
Angels invested nearly $23 Billion in more than 67,000 companies in 2012.
Almost 400 angel groups have invested in companies in every state.
Angels invest up to 90% of the outside equity that startups raise.
Angel investment is focused on innovative, high growth firms that create the most new jobs and are credited with creating all net new jobs in the US in any given year.
“It is critical for angel investors to have a
reliable safe harbor without having to divulge personal financial information
or having to pay a third party to comb through their financial statements every
three months,” Hudson said. “We believe there
must be a clear safe harbor for ACA members to self certify within their groups,
which only accept accredited investors and which provide ongoing education and
support to ensure this investing is done to the highest professional
standards.”
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).
About Angel Capital Association
The Angel Capital Association is the leading
professional and trade association supporting the success of angel investors in
high-growth, early-stage ventures. ACA provides professional development,
industry voice, public policy advocacy and an array of benefits and resources
to its membership of 200 angel groups and more than 10,000 individual
accredited investors. www.angelcapitalassociation.org
; Twitter: @ACAAngelCapital.
No comments:
Post a Comment