David gives a detailed outline of the recent new rules related to Rule 506 Regulation D of the 1933 Securities Act. The SEC put out new rules on July 10, 2013 and the rules were published in the Federal Registry on July 23, 2013. New rules go into effect 60 days after publication in the Federal Registry, so effective September 23, 2013, these rules will be live. Angel investors and startups raising capital from accredited investors should both take note and make sure to understand these new rules and regulations. If you are not aware of the potential impact that these new 506(b) and 506 (c) rules might have on angel (accredited) investors and the companies (primarily startups) they fund, read David’s article immediately.
Barring any last minutes changes, I believe that these rules will go live on September 23. I have thoroughly read both the 69 page Proposed Rules and the 116 page Final Rules. I predicted back in September that the SEC would proceed with stricter verification (I also thought that they might regulate a minimum investment). Based on my reading of both of these documents, I think that the SEC has realized that the Form D/Private Offering market has grown extensively in the last 10-15 years. There have been a few studies done of the Form D/Private Offering market, but nothing comprehensive on a multiyear timeline that I am aware of. With the JOBS Act interstate crowdfunding regulations coming, I think the SEC now knows that the private offering market will now draw more attention and it needs to measure the market, learn more about the market, and perhaps decide if more, or less, regulation is needed. The SEC also is not confident that all companies using private offerings even take the time to file the current Form D forms—so the market could be even bigger than they anticipate.
Angel investing is important, no doubt. I am an angel investor and am biased to angel investing and startups. However, the size of the Form D/Private Offering market is $800B-$900B—perhaps approaching $1T. Angel investing consists of $20B-$25B—so roughly 2%-3% of the total Form D/Private Offering market. The SEC may be looking at this perspective, and not necessarily trying to restrict angel investing or harm startups. They are trying as best they know how to measure the Form D/Private Offering market, learn about the market and protect investors within the ENTIRE market.
The SEC has played “hands-off” for many, many years which has led to wonderful growth of both the angel market and startups in general. However, with the JOBS Act and national crowdfunding coming, it has now attracted the attention of the government.
The next 60 days are going to be interesting.
*These are my own personal thoughts and opinions and do not reflect the policy, thoughts or opinions of any organization I am associated with.