In the world of angel investing, the law of unintended consequences just struck and struck hard.
Instead of easing the access to capital for new businesses, the just-announced rules governing the Jumpstart our Business Startups (JOBS) Act of 2012 could destroy angel investing, making it much harder, if not impossible, for some Oklahoma startups to raise capital.
Here's the situation.
Under the JOBS Act, the Security and Exchange Commission was directed to lift the ban on general solicitation and advertising to investors for private offerings to make it easier for entrepreneurs to reach more qualified investors.
A condition was that companies (issuers) raising capital via solicitation take “reasonable steps to verify” that all investors are accredited. The SEC definition of an accredited investor is an individual with an annual income exceeding $200,000 and/or net worth greater than $1 million excluding that person's primary residence.
Accreditation isn't new — angels and other individual investors in private equity have been self-certifying for decades. What is new is that for those deals that are generally solicited, angels can no longer self-certify.
Instead, investors will be required to divulge personal financial information in the form of pay stubs, tax returns, or brokerage statements or be certified quarterly by an attorney or accountant. (For offerings that do not use solicitation, the SEC rules haven't changed, although entrepreneurs and investors alike must be very careful to keep these offerings completely private.)
“Not a single angel I have spoken with is willing to provide personal financial information to an issuer who is asking them for an investment,” said Marianne Hudson, executive director of the Angel Capital Association. “The violation of privacy is untenable. It is critical for angel investors to have a reliable safe harbor without having to divulge personal financial information or having a third party comb through their financial statements every three months.”
The rule is even more onerous considering that Angel Capital Association members have been investing in startups for years while self-certifying accreditation without a hint of fraud. Angel groups, like Oklahoma's SeedStep Angels, have strong investment and membership best practices. They recruit members they know. They seek education and focus on the skills needed to do this type of investing well.
The Angel Capital Association (www.angelcapitalassociation.org) is pushing for a “safe harbor” recommendation to permit ACA members to self-certify within their groups for generally solicited offerings.
Congress didn't intend to hurt small business and cut private investment when they passed the JOBS Act. This recent action by the SEC is yet another example of when something isn't broken we sure don't need the federal government to fix it — the results can be disastrous.
Scott Meacham is president and CEO of i2E Inc., a nonprofit corporation that mentors many of the state's technology-based startup companies. i2E receives state appropriations from the Oklahoma Center for the Advancement of Science and Technology. Contact Meacham at i2E_Comments@i2E.org.
DID YOU KNOW?
Angels are estimated to have invested nearly $23 billion in more than 67,000 companies in 2012, focusing on innovative high-growth firms that create the most new jobs.