New SEC Rules Could Kill Angel Investing

The Angel Capital Association has a press release that you should read.  The new rules covering angel investing are exceedingly onerous, and could potentially drive individual investors away.  Here is the interpretation from the ACA:

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.

“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.”

HPA is for allowing individuals access to startup investing.  HPA is for the innovative crowdfunding platforms that are being developed.  There are benefits to those platforms and limitations to them.   But, the new JOBS Act rules need to be less onerous, and not an invasion of privacy.  .

Please contact your local elected representative and ask them to make sure that the SEC doesn’t kill angel investing in the US.

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