Security and Exchange Commission rule changes that include requiring angel investors to file financial information with a third party in order to invest in startups that do public solicitation for funding has investment groups and entrepreneurs in Rhode Island and across the nation up in arms.
“The proposed SEC rules will kill startup funding and startups – the only net new-job creation engine in the country,” said Max Winograd, CEO, president and co-founder of NuLabel Technologies, a 4-year-old East Providence company. “We’re in a slightly different stage now, transitioning to larger rounds with strategic corporate investors, but our first dollars that came in the door were angel investors.”
An SEC rule change approved in July that go into effect Sept. 23 were adopted to implement the Jumpstart Our Business Startup Act and lift the ban on general – which means public – solicitation for funding. General solicitation could include situations such as public comments that a startup is seeking funding during a business-plan competition or in online information.
Companies such as NuLabel, which have successfully navigated the startup process, continue to support the blossoming of the ecosystem, which is threatened by the new SEC regulations, Winograd said.
The SEC’s new rule permits companies to use general solicitation and general advertising to offer securities, but when that type of solicitation is used, it puts the burden of verifying “accredited” investors on the company, rather than allowing investors to self-certify, which is still allowed in private solicitation. The new rule requires the issuer of the securities to take “reasonable steps” to verify that purchasers are accredited investors when using general solicitation.
An SEC spokeswoman who declined to be identified last week also pointed out the new rule includes the word “may” when describing the options issuers have for verifying an accredited investor.
Such ambiguity could create unwanted legal issues for startups, says Winograd. “Someone who appeared to be an accredited investor and looked great when the deal was made could use that ambiguity in court when the deal goes south. So a company will have to be prudent and ‘may’ will mean ‘shall.’ ”