New SEC fundraising rules draw complaints from investor groups
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.”
Show commenting policy
TribLive commenting policy
You are solely responsible for your comments and by using TribLive.com you agree to our Terms of Service.
We moderate comments. Our goal is to provide substantive commentary for a general readership. By screening submissions, we provide a space where readers can share intelligent and informed commentary that enhances the quality of our news and information.
While most comments will be posted if they are on-topic and not abusive, moderating decisions are subjective. We will make them as carefully and consistently as we can. Because of the volume of reader comments, we cannot review individual moderation decisions with readers.
We value thoughtful comments representing a range of views that make their point quickly and politely. We make an effort to protect discussions from repeated comments either by the same reader or different readers.
We follow the same standards for taste as the daily newspaper. A few things we won't tolerate: personal attacks, obscenity, vulgarity, profanity (including expletives and letters followed by dashes), commercial promotion, impersonations, incoherence, proselytizing and SHOUTING. Don't include URLs to Web sites.
We do not edit comments. They are either approved or deleted. We reserve the right to edit a comment that is quoted or excerpted in an article. In this case, we may fix spelling and punctuation.
We welcome strong opinions and criticism of our work, but we don't want comments to become bogged down with discussions of our policies and we will moderate accordingly.
We appreciate it when readers and people quoted in articles or blog posts point out errors of fact or emphasis and will investigate all assertions. But these suggestions should be sent via e-mail. To avoid distracting other readers, we won't publish comments that suggest a correction. Instead, corrections will be made in a blog post or in an article.
- Dick’s cuts PGA professionals as golf business declines
- Health insurers will refund $5.2M to Pa. subscribers, group plans
- Rising number of health care workers have less than 4-year degree, study shows
- Federal appeals courts disagree on Obamacare subsidies
- S&P 500 reaches new heights
- GM issues 6 more safety recalls
- Europe thirsts for U.S. craft beer
- Study: Google dominates driverless car buzz
- 1,600 StubHub accounts breached, N.Y. official says
- U.S. growth weakest since recession, IMF says
- 10 million Americans sought help to enroll in Obamacare