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New accreditation rules will clip the wings of angel investors

New rules will limit the participation of individual investors in startup companies.
Published: July 23, 2013

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.”

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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.


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