Angel Capital Association says new SEC rules could hinder angel investment
By Hanah Cho
11:48 am on July 17, 2013
Last week, federal securities regulators lifted a ban on advertising by startups and companies seeking to raise capital, a decision hailed by supporters who believe the move will make it easier for entrepreneurs to find investors.
The Securities and Exchange Commission approved the change that was part of the Jumpstart Our Business Startups (JOBS) Act, which was passed by Congress in 2012.
The Angel Capital Association, a trade group that represents networks of angel investors, however, is raising concerns about the new rule’s impact.
SEC’s new rule says startups can advertise their investment opportunities as long as they take steps to verify the investors are accredited. Accredited investors are generally wealthy individuals, whose net worth generally exceeds $1 million or annual income exceeds $200,000 in each of the two most recent years.
SEC guidelines call for startups to review copies of an investor’s IRS forms for income verification or get written confirmation from a registered broker-dealer or investment advisor.
Those steps pose a problem because the new rule eliminates the ability of angel investors to self-certify their status, according to the ACA. As a result, many angel investors will stop investing, the group predicts.
Asking investors to provide personal financial information to a startup or entrepreneur is akin to a bank demanding to know your net worth before you could open a bank account, said Marianne Hudson, ACA’s executive director. It is also a violation of privacy, she said.
Dallas angel investor Jim Lafferty agreed.
“Today, every time any of us makes a private investment, we sign a document that indicates that we meet the SEC’s definition of an accredited investor,” said Lafferty, chairman of the board of the North Texas Angel Network, an ACA member. “We take on the liability associated with saying that we’re an accredited investor. If we’re not, it’s our problem, not the entrepreneur’s problem.”
Lafferty said angel investors would be weary to provide personal financial information to entrepreneurs.
“Angel investing is a private investment with a private company,” said Lafferty, who runs Lewisville-based Genesis BioSystems, a medical device manufacturer. “Investors will have concerns over privacy and disclosure and where the data goes. Will it end up in the hands of the IRS or the SEC? It will immediately have a major impact on private investment.”
The new rule becomes effective 60 days after publication in the Federal Register.
Separately, the SEC is still considering rules for so-called crowdfunding, which is intended to open up equity investment opportunities to the general public as part of the JOBS Act.