Angel Investors Share Concerns With SEC Ahead Of General Solicitation

Angel Investors Share Concerns With SEC Ahead Of General Solicitation

inShare6September 19, 2013 @ 10:18 am By

securities and exchange commission secYesterday the SEC held a meeting of top advisors and staff to discuss the latest rulemakings and initiatives from within the Commission. The Angel Capital Association was invited to speak on a new rule to go into effect on September 23rd that lifts the ban on general solicitation for private placement offerings under new Rule 506(c) of Regulation D.

Angel investors have been vocal about their concerns regarding certain elements of this new rule…

The SEC needs to recognize the power of angels, and the value chain of funding a company from startup to successful exit. The SEC needs to protect angels with safe harbors against 506c. The SEC needs to continue preserving the self-certification of accreditation in 506b. And the SEC needs to maintain the current levels of income and wealth for accreditation without onerous and unnecessary requirements – including third parties. Only these actions will allow the Jumpstart Our Business Startups (JOBS) Act to achieve its intended goals – to make it easier for companies to gain funding, and create more high paying jobs.David Verrill, WSJ Op-Ed, July 2013

acaSelf accreditation provides a fast and easy way for angel investors to self-certify without having to expose specifics regarding their income and/or net worth. At one point some within the ACA were calling this verification standard an “angel killer,” but that stance has since softened based on language in the rule allowing for “principles-based verification.” The ACA has issued their own guidance on verification standards.

The topic of pitch events was also discussed prominently, as William Carlton explained on his Counselor @ Law blog

The most dramatic moment of the meeting yesterday was when Catherine Mott, a member of the advisory group, former Chair of the ACA, and angel investor, asked the staff whether demo days and pitch events – common features of today’s startup financing ecosystem, ostensibly okay in the past under old 506 – constituted general solicitation.

This issue will resonate deeply with the startup community, many of whom have arguably been generally soliciting their offerings for years via various demo days and pitch events. This exact issue was recently included in a notice filed against Candace Klein by the State of Ohio, a move that seemed unfair considering the proliferation of these types of activities within the greater startup ecosystem. It led Charles Sidman to question whether the State of Ohio was participating in “selective enforcement.”

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Historic Change in General Solicitation Law That Goes Into Effect Monday

jobs_actAn 80-year-old ban that has prevented private companies from publicly advertising their efforts to raise funds will lift on Monday.

If you are an entrepreneur struggling to find investors, that may be very good news. But hold the champagne for now.

What this historic change in general solicitation law really means is that if you are an entrepreneur looking to raise money from investors, you might want to spend some quality time with a lawyer before you go shouting it from the rooftops.

That’s because the Securities and Exchange Commission is expected on Monday to release further guidance on how it will regulate the new law – guidance that may determine how much the change will ultimately end up benefiting entrepreneurs.

“The proposed rules are absolutely critical to determining whether this will be successful or not. They have the potential to dramatically reduce the ability of companies to take advantage of this,” says Rory Eakin, co-founder of CircleUp, an online portal that connects consumer-product entrepreneurs with accredited investors. If the SEC requires companies to file excessive amounts of paperwork, many entrepreneurs may choose to not take advantage of the rule change, says Eakin.

2. Only accredited investors can actually purchase equity in a private company. While the lift of the ban means that entrepreneurs can tell the world that they are raising money, it’s still only accredited investors who are able to make investments, explains Jay Kalish, general counsel at the equity crowdfunding platform, OurCrowd, on a conference call with reporters and investors earlier this week.

In the U.S., an accredited investor has to have $200,000 in annual income over the past two years and be able to prove a reasonable expectation that he or she will maintain such an income during the current year, or $1 million in net worth, not including the value of his or her primary home. Also, anyone with a history of fraud or a felon, a so-called “bad actor,” will not be able to participate.

3. Your mom, grandma and sister will all start to see more advertisements from startups, even if they aren’t accredited investors. While only accredited investors will be able to purchase private company stock, everyone is going to see more advertisements. “For the non-accredited investor, the regular consumer, you can’t stop what is being publicly put in your face, right? Just by virtue of being a consumer of media and just a consumer, period, you will be messaged, too, and that is different than before. It used to be that the SEC prevented you from seeing these sorts of things,” says Mittal. “There is a whole new type of messaging that regular people will be exposed to.”

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CrowdPad.co’s Release Postponed – Developers Warn Real Estate Crowfunding Investors

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English: A frame from a screencast from the US...
English: A frame from a screencast from the US House Financial Committee full committee hearing “An Examination of the Extraordinary Efforts by the Federal Reserve Bank to Provide Liquidity in the Current Financial Crisis which took place Tuesday, February 10, 2009, 1:00pm, 2128 Rayburn House Office Building. The frame shows Chairmen Ben Bernanke responding to a question posited by John E. Sweeney Full Committee (Photo credit: Wikipedia)

We’ve decided to hold of the launch of this real estate crowdfunding platform due to inherent legal difficulties and risks involved in crowdfunding real estate. We will revisit this later after the SEC rulings roll out and the kinks are worked out on existing sites; however, we see significant investment risk and an unacceptable (to us) litigation risk in all existing real estate crowdfunding platforms, at least a great deal more than we are willing to expose our client’s investment capital to. We will launch The Aria Group’s investment portal for accredited investors next week. It is unknown at this time if we will release the crowdfunding portal of non-accredited investors. We wish to err to the side of caution and not run into the already crowded space with anything less than our ability to offer investors a fully secure, predictable and litigation proof investment vehicle. Although recent market indicators predict a rebounding market yesterday’s meeting of The Federal Reserve’s Open Market Committee posed some significant unanswered questions that we at CrowdPad would like to see resolved which won’t happen until sometime after Fed Chairman Bernanke‘s successor takes the reins at the end of January 2014. We feel that the loss of traction by waiting until February will be far outweighed by our ability to continue to monitor existing real estate crowdfunding platform performance following the SEC’s release of the new regulations for several months and also allowing for the transition to Bernake’s successor and the release and analysis of the upcoming holiday shopping indicators.

We will instead opening our closed investment portal for accredited investors only within the next few weeks on our parent corp’s website at The Aria Group. We take the integrity and security of our client’s investments very seriously and simply do not wish to get caught up in the current frenzy to rush to market an investment platform which we see as having a higher than acceptable risk factor for our clients.ARIALogoSpec1