Angel Insights Blog

By Marianne Hudson, Executive Director Emeritus

The Securities and Exchange Commission issued a concept paper seeking comments on “harmonizing” securities offering exemptions a few months ago.  These exemptions, like Regulation D, which investors rely on for more than half of all private offerings, set the rules for how securities can be bought and sold without extensive registrations. This SEC paper provided a truly unprecedented opportunity for organizations like ACA to suggest improvements to regulations that impact angels and the startup companies we support. 

Just before I retired from ACA, I agreed to lead the development of ACA’s response letter to the 211-page SEC paper.  I believe it was important to do so because the current SEC Chairman is focused on improving capital markets and investor liquidity and this was our chance to provide ideas that would support early-stage investing.  Perhaps this activity could lead to the improvements ACA and our members have sought for years.  The SEC was seeking “comment on possible ways to simplify, harmonize and improve the exempt offering framework to promote capital formation and expand investment opportunities while maintaining appropriate investor protections.”

ACA submitted our response ahead of a September 24 deadline.  You can see the full ACA letter here, but below is a summary of the key issues we wrote about:

• Investors and issuers (entrepreneurial companies) are well served by current Rule 506(b) of Regulation D throughout a continuum of company growth.  Not many changes are needed to this exemption.

• The thresholds for net worth and income for accredited investors work well.  Please continue the current financial thresholds as they are.  We also believe that it could be helpful to expand the accredited investor pool by including individuals who are financially sophisticated based on education and/or experience.

• We pushed back on ideas submitted by others to expand the accredited investor pool, such as allowing investors to opt into accredited status after receiving disclosures or by working with a registered intermediary.

• The SEC paper included a large range of ideas they had received from past commenters on the accredited investor definition.  Perhaps the biggest was whether investors should be subjected to limits on the amount they can invest – where we responded with an emphatic no.

• Rule 506(c) that allows for general solicitation of offerings needs several improvements if it is really going to become useful for startups and angel investors: provide a simple questionnaire for individuals to certify their own accredited investor status, expand the length of time for third party verification from three months to one year, and provide better clarifications on what methodologies qualify as investor verifications in the complicated discussions of “principles-based methodology.”  As some ACA member angel groups know, ACA created the Established Angel Group certification as one of these methodologies.

• Clarify what “general solicitation” means.  The current definition is very broad and could include a large majority of angel-like offerings, restricting some practices that have been in use for decades without problems or fraud.

• Demo days should not be considered as forms of general solicitation.  The SEC should provide more clarity on demo days to address interpretations by attorneys in the startup investment market that limit the impact of these events.

• Angel investors need more liquidity to improve the startup investing market.  If angels were able to sell shares to other accredited investors in private secondary markets, many of these investors would pour more capital into additional promising entrepreneurial companies.  (Thanks very much to our friends at AngelList and also ACA’s Public Policy Advisory Council for their ideas on needed rule changes to make this happen.)

ACA will keep members updated on the SEC’s actions after they review the response letters they received from our association and many other experts.  Your professional association will continue to fight for the ideas that will provide the best possible environment for American angel investors and for the economic growth that new businesses provide.