Serving as the voice of the North American angel community, the Angel Capital Association is pleased to bring you our new Insights Blog, featuring commentary on startup investment trends, the latest on public policy affecting entrepreneurial investment, and other topics top of mind to active accredited investors.
We encourage you to participate in the discussion, and we hope you enjoy the blog!
Yesterday ACA submitted a comment letter to the Securities and Exchange Commission on its proposed rules on "Amendment to Regulation D, Form D, and Rule 156". For background, these rules would require issuers that generally solicit their offerings to submit an advanced Form D 15-days before they advertise, provide all of their solicitation materials to the SEC by the day of use, include "legends" in all materials, and provided a one-time 30-day "cure" to submit filings. If misfilings were not cured, then the issuer would lose the right to raise funds under Regulation D for one year.
Many ACA members were very concerned about the impact this could have on startups - including putting early-stage companies out of business. ACA's letter, which you can download here, focuses on those concerns and also offers recommendations to reduce the burden on startups.
The world of equity fundraising has really changed since September 23, when the SEC rules lifting the ban on general solicitation became effective. We’ve seen entrepreneurs use new ways to promote their investment opportunities, but we’ve also seen media coverage with many questions and misinformation about everything from how to verify that investors are accredited investors to what really makes a deal
“generally solicited”. Questions and comments still abound about the proposed rules on Regulation D, Form D and Rule 156.
Startups, investors, and the startup support community are asking lots of questions in the media and directly to ACA and other organizations. So I want to let you know about a couple of resources that can help you navigate these waters:
- Webinar on October 3 at 4p Eastern – The New SEC Rules and What the Startup Community Needs to Know. This program, a partnership of the Angel Capital Association and Global Accelerator Network, is for startups and the innovation and support community to learn about the new and proposed SEC Rules on General Solicitation. These rules will really change how entrepreneurs raise equity capital – particularly if they participate in demo days and economic development venture forums (many of which will be considered general solicitation based on regulatory language and discussions to date). Hear the information from angel investors, legal counsel and get a chance to ask questions. Registration and information is available here.
The SEC’s new rule lifting the ban on general solicitation becomes effective on Monday, September 23rd. This new rule 506(c) requires that issuers using general solicitation take reasonable steps to verify its investors are accredited investors. Recently, ACA issued guidance that verifying membership in an Established Angel Group (EAG) should meet the “principles-based methodology” in the SEC rule.
The EAG method conforms well to the flexible, principles-based-methodology that the SEC has designed. As the SEC has noted, it expects many practices – including methods already in use by which issuers have verified investors are accredited – to be developed and evolved as useful to the early-stage company ecosystem.
It is likely that many if not most deals that angel groups will see going forward will fall under the category of Rule 506(c). Current SEC language describing general solicitation includes: “any seminar or meeting whose attendees have been invited by any general solicitation or other advertising.” SEC staff on Tuesday publicly stated that “most demo days and pitch competitions” are likely to be considered general solicitation (See: sec.gov for Advisory Committee on Small and Emerging Companies Meeting held September 17, 2013. Webcast archive expected to be available shortly.)
This blog article was written by Ingrid Vanderveldt, Entrepreneur-in-Residence at Dell, an ACA annual partner.
My journey and experiences on both sides of the table, as both an entrepreneur and an investor, have made me aware of the special relationship between investor and investee. When both sides strive to create maximum value, beyond the traditional financially-focused benchmarks, the relationship, fostered well, can produce tremendous results that will spill into every other area that leads to longstanding success.
Form a support group.
Before you start any new undertaking, it is helpful to prepare; investing is no different.
ACA today provided guidance on the significance of angel group membership in connection with new standards for accredited investor verification. Under Securities and Exchange Commission (SEC) Rule 506(c), which becomes effective September 23, 2013, startups and emerging companies that generally solicit for investors will have heightened duties to verify that all
purchasers are accredited.*
Rule 506(c) represents a significant change in securities law, and uncertainty about the verification process is of concern to members of the Angel Capital Association and the active angel community at large. ACA has been vocal in our objections to the rule’s safe harbors that would require sharing wealth or income data, but it is important to recognize that they are not the full rule. The SEC provided a significant and flexible approach for complying with this rule using a principles-based methodology. ACA is providing its guidance on how membership in an Established Angel Group may meet the requirements for a startup that uses general solicitation to verify that all investors are accredited under the principles-based methodology specified in Rule 506(c).
Earlier this month, Laura Baverman wrote an article in USA Today entitled "Time is Right to Consider Angel Investing". I was tickled with the article because not only did it get the message to many potential angels that angel investing could be a great activity for them, but that it quoted a number of ACA members and friends - such as Dan Mindus of NextGen Angels, John May of New Dominion Angels, the managing team of Golden Seeds (great photo, by the way!), and Rob Wiltbank of Willamette University and the Angel Resource Institute, among others.
If you are new to angel investing or just starting to think about making these investments in innovative startups, I recommend that you talk with people you know who are angel investors, attend an angel group meeting near you to get an idea of how they work, and read up on how angel investing works with articles, posts, and books from experienced angels. ACA and our members are here to help you as you learn about the fun, adventurous and fulfilling world of investing in and mentoring some really great entrepreneurs.
This post was written by John Huston, ACA Chairman Emeritus and Founder & Manager of Ohio TechAngels.
Like most ACA member groups, the Ohio TechAngel Funds (OTAF) conduct postmortems after our exits, regardless of whether they are positive or negative. From our positive exits, we’ve gleaned that even our best entrepreneurs have always fallen woefully short of their revenue projections. From the autopsies of our losing investments, we’ve realized that rarely had we missed major risks, but often grossly underweighted their likelihood, impact, or both. And, we had insufficiently
discussed them with management to ensure all possible efforts were being taken to mitigate them.
Therefore OTAF added the premortem discipline to our due diligence process, making it a required step prior to recommending any investment. With the benefits greatly outweighing the time required, we are convinced there is a high return on this effort.
Project planning has exposed many executives to the premortem technique which is nicely explained by Gary A. Klein in his September 2007 Harvard Business Review piece entitled “Performing a Project Premortem”: http://hbr.org/2007/09/performing-a-project-premortem. In this article he states:
Dan Rosen is a Board member of the Angel Capital Association, the world’s largest organization of accredited investors, and is also chairman of the Alliance of Angels, a Seattle-based angel investment group. To read the original post on VentureBeat, click here.
On July 10th, the Securities and Exchange Commission released rules allowing entrepreneurs to publicly advertise their investment opportunities, finalizing a portion of the JOBS Act of 2012. These included a final rule lifting the ban on general solicitation and provided guidance on how issuing entrepreneurs could “reasonably” verify their investors are accredited; a final rule disqualifying “bad actors” from investing in private offerings; and a proposed rule requiring entrepreneurs to submit multiple reports and information for solicited offerings. The Angel Capital Association (ACA) has taken a strong stance on these rules, stating that these rules could greatly reduce entrepreneur access to angel investment, as they require investors to provide their private wealth or income information to issuers or third parties, and also may require entrepreneurs to submit considerable information to the SEC with harsh penalties for missing filing dates.
Choose Taurman and Clayton White are members of ACA and co-founders of the South Coast Angel Fund, formed in 2010 to foster entrepreneurial endeavors throughout Louisiana and the Gulf Coast. The group recognizes the value of supporting the entrepreneurial community for the economic benefit of the entire region. Their initiatives include seminars, mentoring start-up companies and early stage capital. We recently spoke with Choose and Clayton about their outlook on angel investing and how that is being shaped for the next generation in New Orleans and the Gulf Coast.
ACA: Tell me a bit about your professional backgrounds leading up to South Coast Angel Fund.
Choose: I came to New Orleans after the army and attended Tulane University Graduate School of Business. During this time, I fell in love with venture capital but quickly realized that there weren’t going to be many VC deals in New Orleans, as they were mostly in Houston and Boston at the time. My wife and I started our own business in factory and plant automation, which we sold years later. After Katrina, Clayton and I, who had known each other for years, met up again, and we started a conversation about how we could work together.
Clayton: My background is in law. I also co-founded a business in 1985 and took it through two rounds of venture and fell in love with the process. After Katrina, Choose and I began to talk about how we could work together. We thought about starting an angel fund and were quickly introduced to the Irish Angels and Piedmont Angels. They opened their arms to us, and we had the opportunity to watch how they operated for two years. Out of that experience, we started the South Coast Angel Fund.
Social media can indeed be a good way to start the process of finding investors. The first thing to do is to use your immediate network to reach beyond it, and that’s where LinkedIn does a marvelous job. I just checked my statistics there, and it turns out that 14 million people can get a warm introduction to me through one or more people whom we both know. That’s a lot of people, and probably covers a good percentage of the active entrepreneurs currently seeking
funding. What this means is that if you draw up a list of potential investors, the odds are very good that you will be able to find someone to introduce you them.
Specialized networks are also very useful. They include the aforementioned AngelList, which includes several thousand individual investors, and, as Quintin Adamis pointed out (thanks!) Gust, the company of which I’m the CEO. Gust is currently used by over 40,000 angel investors and venture capitalists to manage their investment review processes, through their participation in one of over 1,000 angel groups or venture funds.