Angel Group Certification Program Helps Angels and Entrepreneurs Do Deals

Sometimes new regulations create the need for market leaders to adjust, so that efficiencies for all can continue.  One such example is a set of rules set by the Securities and Exchange Commission for “generally solicited” offerings.  The rules – or really the market interpretation of the rules – have created so much confusion that the Angel Capital Association decided to develop a certification program for part of the angel market, angels who invest through angel groups, so that angels and entrepreneurs can actually do generally solicited deals.

When Congress passed the JOBS Act in 2012 they allowed for the very first time the ability for entrepreneurs to raise equity capital by advertising rather than through existing relationships in private.  Fearing fraud, Congress also required that companies take “reasonable steps to verify” that investors in these deals are accredited investors and asked the SEC to set the detailed rules.  The SEC’s rules said that copies of income or wealth documents or certifications by accountants and lawyers would work, as would a complicated set of methods that look at the facts and circumstances of the deal.

Many angels have not wanted to provide their financial documents or pay a third party to verify their wealth or income.  Unfortunately this has meant the considerably fewer deals have used general solicitation, so the opposite impact intended in the JOBS Act.  And the fallout isn’t limited to angels, notes a recent article:  This caution can also be seen at startup accelerators such as Techstars, which have dialed-down the specific financial details presented on stage at their demo days and even explored new company presentation models to ensure they don’t accidentally generally solicit investment.

Enter the Angel Capital Association and the new Established Angel Group certification.  “EAG” is an easy and sensible accredited angel verification method for angel group members.  An angel group with an Established Angel Group designation indicates to entrepreneur issuers, their legal counsel and others that reasonable steps have been taken to verify that the group’s member investors are accredited investors.

Remember I mentioned the “complicated set of methods” for verification?  EAG simplifies the process for angel groups that have strong vetting processes for their member angels, they confirm accredited status at least annually, and many provide education and best practices to their members.  So far 15 angel groups have been certified and entrepreneurs can double check their status via ACA’s website and get a letter from the angel group that the involved investors are members in good standing of the angel group.

The Alliance of Angels, one of the certified EAGs, notes in an Xconomy article that the certification has extra benefits:  “The EAG Certification will also be a competitive differentiator,” says managing director Yi-Jian Ngo. “As angel groups jockey for deal flow in a marketplace where entrepreneurs—particularly the best of them—have more options for raising early capital, including crowdfunding platforms, startup competitions, and proliferating angel groups.”

The general concept has been supported by an important official at the SEC, and it is growing in acceptance by attorneys who represent entrepreneurs and angel investors.  William Carleton, an attorney who chairs ACA's public advisory council made this comment to me last fall: “the EAG as an example of the methodology in the rules. Providing this process helps entrepreneurs because it says `when you deal with someone who is a member of an Established Angel Group, you know many things about that person that are pertinent - the group has a code of ethics, represents that members are accredited based on long relationships, and was formed for long term investing, not as a one shot deal in the heat of the pressure of a particular opportunity.'" 

Take a look at the EAG rules and how they might help you as an angel investor or entrepreneur. They don’t apply to every angel, but they should make a dent in the market as more and more entrepreneurs start taking advantage of advertising their investment offerings.

Current groups that are certified: