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New SEC fundraising rules draw complaints from investor groups

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By McClatchy Newspapers
Saturday, July 27, 2013, 9:00 p.m.
 

Federal rules designed to make it easier for startups to attract investors sparked complaints from investor groups that say the rules could make fundraising more difficult.

Organizations that represent angel investors, wealthy individuals who provide essential capital to startups in exchange for an ownership stake in the business, are upset about Securities and Exchange Commission rules that emerged this month. The rules, which permit startups to openly solicit funding from investors, include financial disclosure requirements.

“We value our privacy,” said Elaine Bolle, president of RTP Capital, a group of nearly 40 North Carolina angel investors who collectively invested in about 10 startups in the past two years. “The requirement that we provide our financial information to an entrepreneur is going to really tamp down angel investing.”

The Angel Capital Association, a national organization, contends fewer angels will invest in startups under the SEC rules that take effect in September.

“I have not talked to any angel who would want to provide any of their private financial documentation to an entrepreneur,” said Marianne Hudson, the association's executive director. “This is an extra roadblock that will take some angels out of the game.”

Angel investors are a crucial source of money for information technology and life science startups that haven't matured to the point that they can seek larger sums from venture capitalists. The seed funding that angels provide often enables startups to take technology to the “proof of concept” stage.

Last year, angel investors forked over nearly $23 billion to more than 67,000 companies, according to the association.

The rules were triggered by the Jumpstart Our Business Startups Act, a law Congress passed last year. The rules end a prohibition on “general solicitation or general advertising” in effect since 1933. It forced startups, hedge funds and venture capital funds to raise funds from accredited investors behind closed doors.

The SEC defines an accredited investor as someone with annual income of more than $200,000 or net worth of more than $1 million after excluding the value of their primary residence. Startups are restricted to soliciting funds from accredited investors because such investments are risky and an accredited investor presumably can take the financial hit if the investment tanks.

Lifting the ban will enable startups and others to openly solicit investors — advertising, via websites and social media, etc. They'll be able to talk to news reporters about fundraising plans, which the SEC has frowned upon.

The tradeoff is that startups must take “reasonable steps to verify” that an investor is accredited in order to accept their money. That's in contrast to the current practice of investors simply attesting “under penalty of law” that they qualify, Hudson said.

The rules don't spell out precisely what reasonable steps startups should follow, but they offer examples that worry angels. They include providing W-2 forms or income tax forms. Or the investor could submit a statement from an attorney, accountant or investment adviser attesting they qualify as accredited.

Hudson said providing that third-party proof could be costly and “a hassle.”

 

 
 


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