SEC rule changes cause ‘confusion’ for angels

Angel investors in Rhode Island are adapting to the initial impacts of what they say are complex – and unfolding – new rules by the Securities and Exchange Commission, adopted to implement the Jumpstart Our Business Startup Act.
“There’s a lot to be determined as to how the new SEC regulations will impact the market with general solicitation,” said Cherrystone Angel Group Executive Director Jennifer Schwall. “The rules as they relate to angel investing will allow for startup companies to seek investment from the general public, as well as other capital resources.”
New SEC regulations, which went into effect in September 2013, allow startups to publicly solicit funding, but require the company to provide substantial documentation that their investors are accredited.
While private or “quiet” solicitation by a startup continues to allow investors to self-certify they are accredited, the approval for general solicitation has opened a wide door to funding opportunities and creates a changing landscape.
“With the proposed crowd-funding rules, startups can seek funding through new avenues, including announcing raises on Twitter and potentially seeking investment from the general public,” said Schwall. “Cherrystone is watching these new regulations closely and is interested in seeing how these new opportunities will be regulated.”
According to SEC regulations, an accredited investor must meet one of several requirements. However, the two main points of accreditation that are most applicable to angel investors are having a net worth of $1 million, excluding primary residence, or having an income exceeding $200,000 for each of the two most recent years, said Schwall.
“We have made some changes based on the new and proposed SEC regulations. We’ve asked our members to submit accredited investor certification annually, as well as asking our applying companies to declare if they are raising a quiet or general solicitation round,” said Schwall. “This allows us to determine what steps need to be taken to comply with the new regulations.” Angel investors will gather to sort out the new SEC rules with commission representatives and attorneys at the Angel Capital Association summit, “Angel Impact: Entrepreneurial and Economic Success,” to be held in Washington, D.C., from March 26-28.
Rhode Island’s Cherrystone Angel Group and Ocean State Angels are ACA members, but neither was planning to send representatives to the summit.
“The JOBS Act is still being implemented,” said Cherrystone Angel Group Chairman Robert J. Manning. “Where it really gets confusing is that you have a huge spectrum of fundraising, from crowd funding on the Web, where a startup wants to raise $10,000 or $20,000, all the way up to established venture capital and private-equity firms.
“The regulations may cross over, about who can invest and where,” said Manning.
“One change since the new SEC rules is that we have more questions in our due-diligence process to make sure companies we’re considering investing in understand the solicitation process,” he said.
“We believe the new regulations are going to allow us to widen our fundraising capabilities,” said Manning. “We’re looking into the … alternative funding sources, such as some of the bigger crowd-funding sites, and whether we can use these mechanisms to syndicate with new groups of investors.”
One issue surrounding the new SEC regulations is whether angel investors are required to submit financial documents to a third party, possibly to a representative of the startup doing public solicitation for funding, to be certified as accredited, a step many investors oppose. An option suggested by some angel investment groups is that membership in the group qualifies as certification.
“I think there’s a lot of confusion so far about the new regulations and people are doing things different ways. Many are relying on legal counseling,” said Angel Capital Association Executive Director Marianne Hudson. “We’ve heard some of the angels have stepped back and others said they’re just not going to invest in deals that are publicly advertised. Having the entrepreneurs or a third party see all of their financial documents doesn’t go over well with most angel investors.”
Tim Ehrlich, co-founder of Ocean State Angels, says the new SEC rules haven’t impacted his group yet because they haven’t finalized any deals since the changes. The group focuses its investments in life sciences companies in Rhode Island.
“We’ll get reports from the ACA conference as to how angel groups are addressing these issues and how it’s playing out,” he said.
“We’re more careful now, because the rules are written tougher, but it hasn’t hampered us in any way,” said angel investor Ray Mathieu, who is part of both Ocean State and Cherrystone angel groups.
The angel investment climate in Rhode Island has proven healthy for both groups.
Cherrystone Angel Group, which was formed in 2004, has grown from 35 members in 2010 to 65 members in 2013, said Schwall.
Ocean State Angels, which was formed in 2012, grew from 12 initial members to 26 investors.
“[The increase in investors] is a sign that there are people who are already investing in companies and looking for additional ways to do that when they’re provided with access to resources,” said Ehrlich. •

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