David Verrill, Chair of the Angel Capital Association, wrote a great blog today on the latest SEC rules. He also has an op ed piece in today's Wall Street Journal. In summary:
- Under the rules, typical startup fundraising activities--business plan competitions, accelerator DEMO days, pitch events, even posting on Gust--will be considered general solicitation.
- The good--general solicitation is now okay. Previously, there were dire consequences for startups that fell under general solicitation rules.
- The bad--when companies engage in general solicitation, their Angle investors are subject to new rules. Self-certification of accredited investor status is no longer accepted. The Angel investor must provide tax returns or account statements to the startup company, or obtain regular certification from a third party such as a lawyer, accountant, or investment advisor--perhaps as often as every 90 days.
- Angel investors will not deliver their personal financial statements to startup companies. They will simply stop investing. The time and cost burden of third parties is another big incentive to stop investing. Since when do Angel investors use "investment advisors" in invest in startups? The fundamental principle of Angel investing is that each Angel investor makes their own independent decision.
- For companies that do not engage in general solicitation, the prior self-certification rules apply. Unfortunately, the general solicitation definition in the new rules is so broad that it will apply to nearly all startups.
By the way--how important is Angel investing to the economy? Consider these stats for 2012:
- Angels invested nearly $23 billion in more than 67,000 startup companies (20 times more companies than those funded by VCs)
- This represents more than 90% of the outside capital these companies used to get started
- By comparison, venture capitalists invested $27 billion, with little going to true startups
- The startup companies that angels funded last year created nearly 275,000 jobs
David Verrill says it best: "Angels are the lifeblood of startup companies in the US. Angels invest on every Main Street in the US, not just Wall Street. Angels are primary job creators in our economy. Angels provide expertise, mentorship and a whole host of other benefits besides their money. Angels tend to plow profits back into the startup ecosystem. Angels invest their own money, not those of a pension fund. There is almost no fraud in the angel world."
His full blog is available here: http://www.angelcapitalassociation.org/blog/why-is-the-aca-making-a-big-deal-about-the-sec-ruling-on-general-solicitation/?