ACA Kicks Off Campaign to Fight SEC Rules Killing Angel Investing, Hurting Startups, and Hindering Job Growth

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.

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Rep. Schweikert Speaks on the ‘JOBS’ Act at the ACA Summit; Golden Seeds Jean Peters tells congress about Angels

During his keynote address at last week’s ACA Summit, Congressman David Schweikert (R-AZ), Chairman of the Small Business Subcommittee on Investigations, Oversight, and Regulations, spoke passionately of the importance of creating an ecosystem conducive to entrepreneurial investment. 

“Capital formation is the future of job creation, and therefore our economy,” says Schweikert.  “I believe that by the end of the decade the way we finance will look very different than it did when we grew up, and it is our responsibility to ensure that legislation supports present day needs.”

In the 112th Congress, Schweikert was the leading author of investment legislation which became part of the ‘JOBS’ Act, signed into law by President Obama.  In Congress, Schweikert is a prominent voice in driving the Securities and Exchange Commission (SEC) to promulgate rules on the ‘JOBS’ Act.  The ‘JOBS’ Act, passed more than a year ago, includes a number of initiatives aimed at increasing access to capital for startups and high growth firms, and requires the SEC to publish detailed rules before activities such as equity crowdfunding may begin.

“We were honored to have Congressman Schweikert join us at the Summit,” says ACA Chairman David Verrill.  “He is a leading voice for angel investors and a tenacious advocate for driving the SEC rulings related to the ‘JOBS’ Act.  We also appreciate his advocacy for an expanded Regulation A and IPO onramp, the two pieces of the JOBS Act he spearheaded and which are leading to exit opportunities for investors and to growth for entrepreneurial companies.”

Just a week prior to the Summit, Jean Peters, ACA Board Member and Managing Director of Golden Seeds, testified before the subcommittee chaired by Mr. Schweikert to advocate on behalf of angel investors and entrepreneurs. The “JOBS Act Implementation Update” hearing was hosted by the House Small Business Subcommittee on Investigations, Oversight, and Regulations and witnesses included representatives of the SEC, entrepreneurs, investors, and academics. 

“Angels fund the majority of early stage deals," Peters told the subcommittee. 

“Let me briefly describe angel investing: Angels are accredited investors whose capital comes from our personal pocketbooks. Most are former entrepreneurs, or were successful in business – and want to help others up that ladder. We invest at the most primal point of capital formation -- small startups with high growth potential.

“These companies come out of university research, local business incubators and economic development efforts. They reflect the entrepreneurism that is addressing the business, education and health care challenges we face as a nation today.

“Angels are the only source of capital for most startups, and supply up to 90% of outside equity raised by seed-stage companies after they exhaust any resources from friend and family, according to Kauffman Foundation estimates. 

“In fact, angel investors fund 20 times the number of seed-stage companies than venture capital. In 2011, angels invested $23 billion dollars in 66,000 early-stage companies, while VCs put a few billion into 1,800 startups, plus $20 billion in 2,000 later stage companies. 

“Angel-funded companies are in every state and industry sector. They are crucial for job growth. According to Census Bureau data, startups comprise less than 1% of companies, but generate 10% of new jobs in any given year. 

“Without angel funding, these businesses would simply never get off the ground.”

Of Peters’ involvement in the hearings, Congressman Schweikert comments: “We greatly appreciate Jean coming to DC to help tell this important story and further drive the SEC rules forward.   ACA plays an important role in providing a voice for public policy makers on the critical needs of angel investors and our mandate to do no harm in furthering our vision for economic growth of start-up enterprises.”

The 2013 ACA Summit, held last week in San Francisco, was the largest ever worldwide professional gathering of angel investors, with over 650 attendees.