- Posted by Jeff Carter
- on July 16th, 2013
Before everyone jumps up and down and congratulates themselves on the new rules regarding the JOBS Act, let?s look at the fine print.
The Angel Capital Association did and found some horrible language that will kill angel investment by wealthy independent investors in the US. ?To give you a sense of scale, individual angels invested almost as much as venture capital did last year in high risk early stage startup deals.
Statistics on the impact angel investors have on small business growth and the economy include:
- Between 200,000 and 400,000 accredited investors participate in angel investing each year. In 2012, there were 234,000 accredited investors in Reg D offerings alone, of which 91,000 participated in non-financial offerings.
- Angels invested nearly $23 Billion in more than 67,000 companies in 2012.
- Almost 400 angel groups have invested in companies in every state.
- Angels invest up to 90% of the outside equity that startups raise.
- Angel investment is focused on innovative, high growth firms that create the most new jobs and are credited with creating all net new jobs in the US in any given year.
The most onerous of the provisions relate to privacy. ?No surprise there. ?The government always wants to be in your business.
In final rules published last week, the SEC provided a convoluted, ?principles-based approach,? along with several ?safe harbors? that issuers may use.? Safe harbors include: ??reviewing pay stubs for the two most recent years and current year;? or ?reviewing copies of any IRS form that reports income,? (including Form W-2, Form 1099 or a copy of filed Form 1040). ?For married accredited investors, the rule specifies that both spouses would have to divulge such information to an issuer.
Alternatively, a safe harbor would occur if the investor submits a certified statement from a third party such as an ?attorney, accountant or registered investment advisor,? provided that the third party could establish that it had also undertaken ?reasonable steps to verify? that an investor was accredited.? Third party verification would need to be updated every three months.
So, now to invest in a company I have to release all my personal financial information? ?Or I can pay a third party every three months to make sure that I am accredited? ?Forget it.
?Angel investors provide the fundamental source of start-up capital in our economy,? Hudson said. ?Not a single angel I have spoken with is willing to provide personal financial information to an issuer who is asking them for investment.? This violation of privacy is untenable, especially for the angels who do multiple deals a year.? If an issuer has information on total net worth or income of an investor, that provides vast information asymmetry.? This would be like having your bank demand to know your net worth before you could open a bank account to put money in, or the stock market demanding to know your net income before you can trade securities.?
?These SEC rules provide no safe harbor for our angel members, which effectively could kill most angel investment in this country,? said David Verrill, board chairman of ACA.? ?Our member angel groups have decades of history investing in startups while self-certifying their accredited status without one single iota of fraud.? Our process works because angel groups know their members well, and focus on the education and skill needed to do this type of investing well.? Angels do not have to invest in start-ups, but we are almost entirely the only ones who do so ? some 90% of outside equity raised by start-ups comes from angel ranks.?
Hey, I am for the democratization of capital. ?I want the average investor to have a shot at finding a hot startup and creating wealth. ?Crowdfunding is cool, has benefits and limitations and should be legal.
But, it seems like every single new rule or law that comes out of this administration becomes a total invasion of personal privacy. ?Obamacare, Dodd-Frank, the NSA, immigration, the IRS. ?Where does it stop?
Most angels I know will quit. They?ll manage their existing investments and exit. Taking their capital with them. ? In the aftermath will be VC funds that don?t invest at an early level. ?Businesses won?t have access to capital that jumpstarts them.
Can?t government just pass something nice, simple and elegant that doesn?t invade privacy?
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The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.
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