ACA Principles-Based Memo for Angel Group Funding Applicants and White Paper Detailing Background on Established Angel Group Method

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: for Advisory Committee on Small and Emerging Companies Meeting held September 17, 2013. Webcast archive expected to be available shortly.)

Because of ACA’s concern that even “quiet” offerings may inadvertently slip into the category of having generally solicited – and because many of our members’ applicants may actively seek to do so, ACA has provided the EAG approach to enable our 10,000+ plus active angel members to continue to invest in this vital asset class without the burden, expense and privacy concerns that would arise if members were required to provide private financial data to issuers or third parties.

If your member angel group elects to rely on the EAG method, we are providing you with a Message to Entrepreneur Applicants Regarding Established Angel Groups, for use with candidate companies for potential funding. This memo states that your angel group meets the EAG definition and specifies that members will not provide personal financial data to companies seeking investment (directly or through third parties).

ACA has also developed a detailed White Paper: “Applying the Principles-Based Verification Methodology Under General Solicitation Rule 506(c): Established Angel Group and Other Methods,” which expands on the background and reasoning behind the guidance ACA released two weeks ago.

ACA will continue to develop and offer more tools and information on this issue. For the latest materials, see ACA’s Resource Page on SEC Rules.