Angel Investors Have Drawn A Line In The Sand

25 Jul

A great article in today’s editorial section of the Wall Street Journal by Chairman David Verrill of the Angel Capital Association.

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.

Dear New Angel Investors, Please Verify Your Status. Love, the SEC

15 Jul

The below post is a guest post by Kiran Lingam, the general counsel of SeedInvest. Kiran and I met through the Georgia Crowdfunding Community which I founded in April of this year.

Kiran’s analysis of the new SEC Title II rules are detailed and highlight some of the new issues related to the new SEC rules of Title II of the JOBS Act. If you are a current angel investor or intend to become an angel investor soon, pay particular attention to the new “verification” of accredited investors required for angels interested in investing in companies that might use “general solicitation”, aka “advertising”.


On July 11, the SEC approved new rules pursuant to Title II of the JOBS Act to lift the ban on general solicitation for securities offerings so long as all purchasers are accredited investors.  As a key part of this, issuers will also be required to take “reasonable steps to verify” that each purchaser is accredited.

Historically, accredited investor verification has only required self-certification, where an individual checks a few boxes indicating that he is accredited and why he is accredited.  Under this new rules, the SEC explicitly indicated that this will no longer be sufficient where general solicitation is used under the new exemption in Rule 506(c).

The Original Rule

In lieu of self-certification, the SEC adopted the proposal it released last August relying on a “principal based approach” where an issuer would need to balance a number of factors to determine what constituted “reasonable steps to verify.”  These factors include:

  • the nature of the purchaser and the type of accredited investor that the purchaser claims to be (i.e. if a purchaser is a well-known venture capital fund or a broker-dealer, then this is a positive; if they claim to be an individual making $201,000 then that is a factor);
  • the amount and type of information that the issuer has about the purchaser (i.e. how well does the issuer know the person and their financial position); and
  • the nature of the offering, such as the manner in which the purchaser was solicited to participate in the offering, and the terms of the offering, such as a minimum investment amount (i.e. a high minimum investment would be a positive factor, broad open solicitation to a large number of people would be a negative factor, etc.)

The uncertainty cause by having to apply this factor test on a deal by deal (and persons individual by individual) basis was a huge concern when the SEC released the proposed rules last August.

The New Safe Harbors

Thankfully, the SEC has modified the prior proposal to provide 4 “non-exclusive” safe harbors where an issuer can be sure they have complied with the “reasonable steps to verify” standard unless they have knowledge to the contrary.

  1. Net Income Verification.* Review of an individual’s IRS documents including (W-2, 1099, K-1, 1040) for most recent two years, together with a written certification from the individual that they expect to continue to have enough income to qualify as accredited.
  2. Net Worth* – Review of the following documents, which must be dated within the prior 3 months, together with a written representation from such person that all liabilities have been disclosed
    1. For Assets: bank statements, brokerage statements and other statements of securities holdings, certificates of deposit, tax assessments and appraisal reports issued by independent third parties
    2. For Liabilities: a credit report
    3. Third Party Verification:  Written confirmation from one of the following that they have verified accredited investor status within the last 3 months:
      1. Registered broker-dealer
      2. Registered investment advisor
      3. Licensed attorney or CPA
  1. Pre-Existing Accredited Investors. Pre-existing investor of an issuer that were previously verified as accredited under 506(b)

*If relying on joint income or net worth with a spouse, then documents for the spouse must also be provided.

Issuers will likely need to have the ability to use all of these methods depending on the information available for their potential investors.  Moreover, “reasonable steps to verify” is a separate and in addition to the requirement that all purchasers are accredited investors.  This means that failure to verify would cause a violation of 506(c) even if all the purchasers are accredited.

It therefore seems likely that in order to efficiently use 506(c), issuers will need to rely on integrated solutions or platforms with built-in and automatic online verification methods (like SeedInvest).

“Reasonable Belief” Requirement Clarified

An issuer will be entitled to rely on a third party that has verified a person’s status as an accredited investor, provided that the issuer has a reasonable basis to rely on such third-party verification.   Further, so long as the issuer took reasonable steps to verify that the purchaser was an accredited investor and had a reasonable belief that such purchaser was an accredited investor at the time of sale, they will not have violated the 506(c) exemption if an unaccredited investor purchases securities (i.e. by falsifying the verification materials).


How Market Forces are Changing Traditional Angel Investing

8 Jul

Two recent news articles that caught my attention in the last few weeks have confirmed my personal opinion that angel investing has changed considerably from when I first became involved in this type of investing. Perhaps changed forever and perhaps changing faster than many are expecting. I have 15+ years of experience in angel investing—-I did my first angel investment in 1996 before it was called “angel” investing and am still making investments in private companies as well as local VC funds. I ran the Atlanta Technology Angels as Executive Director (and investing member) from 2002-2010 and BOD member 2002-2012, and served on the Board of Directors of the Angel Capital Association from 2007-2010. I am now a member of the AIM angel group, the co-Chair of the Georgia Venture Capital Coalition and the founder of the Georgia Crowdfunding Community.

The articles are I recently saw are here and here and below:

The first article  gives an example how angel groups are increasingly investing outside of their local geographic areas of influence and knowledge.  The second article shows a concern  that the SEC will, once again since 2010, change the criteria of an accredited investor.  Both of these issues have been seemingly sacrosanct in importance over the years that I have been involved in angel investing. “All angels invest locally where they can drive to inspect the company they are investing in.” and  “The definition of an accredited (angel) investor has largely been intact since 1933 and is unlikely to change.” Heard those, right? Yep, me to. I’ve even used those myself in the past.

Nothing changes–until one day, it does.

Along with the above articles, here is my thinking of  how the “traditional” model of angel investing is changing (or already has changed):

1.) JOBS Act

The SEC and FINRA quietly posted two notices last week during the 4th of July Holiday. Both government departments are moving forward on the JOBS Act rules and regulations. The next wave of  unaccredited “average joe angels” are coming–and they number in the millions.

2.) Intrastate Crowdfunding

Georgia and Kansas now have State Securities rules and regulations that allow private, for-profit companies in those respective states to raise capital through capital raises from unaccredited investors. Yes, this is state based crowdfunding and it is completely legal for both unaccredited and accredited investors. North Carolina has a bill in the NC General Assembly for legal instrastate crowdfunding in the current 2013 session–and it may pass. Other states are considering similar legislation or rules and regulations.

Georgia has a burgeoning “Invest Georgia Exemption” infrastruture” starting to build. The next 90 days in Georgia and North Carolina are going to be exciting.

3.) Battle for the “Accredited Investor”

I’ll go on record here and predict that there will soon be an epic battle nationwide for the market share of accredited investors. Why? The “No-Action” letters recently given to Second Market (who has a partnership with AngelList) and FundersClub. Both are clearly intending to be first movers, are well funded and are likely going to concentrate on marketing to accredited investors—across the nation. And, they will use the JOBS Act Title II–which will enable them to advertise to these investors legally and on all advertising mediums.  For example–If I am an accredited investor in Georgia-I will now be advertised to in a legal fashion to invest in private companies across the nation. Is an angel investor in Georgia going to take a chance on a Boston or New York or Silicon Valley company? You betcha. Will this reduce the amount of “local only” Georgia angel capital going into local Georgia businesses? Probably. Will those same local Georgia companies have access to a national angel audience? Yes.

4.) Syndication

Angel Group Syndication has been quietly going on for years. It is increasing in acceptance by most angel groups and is continuing to  grow in popularity. Here is a great example.  Why is this important? The ability to invest in companies outside of local geographic areas just wasn’t efficient 10 years ago. With the advent and growth of groups such as the Angel Capital Association and others, individual angels and angel groups across the nation are getting to know each other in a variety of ways and investing outside geographic areas of influence has become more accepted and efficient. Local investing only by local accredited angels is going the way of the Tasmanian devil.

Note to entreprenuers: Local angels are great, but remember to ask about syndicate partners.

5.) Changing criteria for definition of an accredited investor. (Above)

The SEC, in 2010, changed the definition of an “accredited” (angel)  investor by excluding the individual’s primary residence. This was the first time since 1982 that the SEC has reworked the accredited investor criteria. The SEC has the ability starting in July, 2014 to review the accredited investor criteria again and make changes without going back to Congress. Why is this important? Any increase in criteria is likely to substantially reduce the number of angel investors in the USA.

That’s enough for now. Don’t want too many darts thrown my way from my current and former angel investor brethren. However, I’d love your feedback.  Am I right? Wrong? Misguided? Looking for a fight?

See you in the market!

The Early Growth of the Georgia Crowdfunding Community

3 Jul

I have written previously on the current ability within Georgia to “crowdfund” Georgia-based companies by non-accredited Georgia investors here and here. If you are not yet aware of this new ability to help fund young Georgia startup companies, please do read the earlier articles

Let’s take a look at a few metrics below in the growth of our Georgia Crowdfunding Community I set up on MeetUp back in April. The intent of this Meetup group is to help form a Georgia-specific community revolving around the “Invest Georgia Exemption”(IGE). The IGE allows non-accredited investors (accredited investors, or “angel investors” already have the ability to invest in any private company) to invest in many young, private, Georgia based startups and allows Georgia-based companies to raise additional capital from a much larger segment of the Georgia population.

Here is a link to the Georgia Crowdfunding Community Meetup Group. Please join!

Georgia Crowdfunding Community Meetups to date:

April 17: 23 attendees
May 15: 150+ attendees

Future Scheduled Meetups:

July 30: Atlanta Tech Village
August 15: Atlanta Tech Village

Details on the upcoming July and August Meetups are on the Meetup site here.


April: 20 members
May: 50 members
June: 98 members (almost to 100!)

The Georgia Crowdfunding Community Meetup group is roughly doubling in membership every 30 days. In April when I first started the group, I was hoping for 100 members by end of June. We came close—96 members at the end of June!

I think this group needs to be MUCH MUCH LARGER. We need to set a new goal and try to hit 500 members by end of September!!

With the upcoming Meetups on July 30 (Atlanta Tech Village) and August 15 (ATDC), there will be a lot of activity in the market. To hit 500 members by September 30, we will all have to keep an eye out for those in the community who are interested in learning more about Georgia Crowdfunding and actively recruit them to this Meetup Group. Please push them to this group.

Can you imagine how much we can help build the crowdfunding community in Georgia if we have 500 members within 6 months? Wow.

I am continuing to work to help create a strong identity for the group and to establish priorities for this Meetup group to grow and flourish. Please let me know all of your thoughts, feedback and recommendations.

The Invest Georgia Fund

5 Jun

On April 29, 2013, Governor Nathan Deal signed into law House Bill 318 which enabled the creation of the Invest Georgia Fund.

The Invest Georgia Fund will be $100M in size and will be invested into Georgia companies over a five year period. Most likely, the Invest Georgia Fund will be funded in fiscal years 2104 – 2018.

The Invest Georgia fund will be a state-based investment fund that will, in turn, allocate capital to Georgia-based venture capital and private equity firms to invest in Georgia-based companies.

A seven person Invest Georgia board will be appointed by Governor Deal., Lt. Governor Cagle and House Speaker David Ralston to oversee the program and to help select an independent fund administrator which will be tasked with helping to select the Georgia-based investment firms.

The fund administrator  is expected to consist of experienced investment professionals and will be responsible for administering the Invest Georgia Fund and responsible for selecting a group of Georgia based venture capital and/or private equity funds in two categories, early stage venture capital funds and growth stage venture capital funds. 40% of the monies in the Invest Georgia Fund will be designated to the Georgia-based seed/early stage funds and 60% of the monies in the Invest Georgia Fund will be designated to the Georgia-based growth stage funds.

Congratulations to all involved!

5 Georgia-based Investment Related Laws or Rules You Need to Know

30 May

If you are a Georgia angel investor (accredited or now non-accredited), a general partner or limited partner in a Georgia-based venture fund, or a Georgia entrepreneur seeking to raise capital in the great State of Georgia, you need to know about these 5 Georgia laws and/or rules…

I will write longer posts on each of these over the next two weeks, but for now I have included links and or a sentence or two why these laws or rules are significant for investors and entrepreneurs in the State of Georgia.


House Bill 249:

Firefighter’s Pension Fund Alternative Investment legislation

Passed April 27, 2010

Signed into law May 24, 2010

Effective July1, 2010

This law establishes the ability of the Georgia Firefighters pension fund to invest in Alternative Investments. This ability has been banned in Georgia for 30+ years. Here is the report of current alternative investments.


House Bill 1069

Georgia Angel Investor Tax Credit, 2010-2013

Passed April 29, 2010

Signed into law June 4, 2010

Effective June 4, 2010

This law gives a credit on state income taxes to individual angel investors that invest in Georgia-based “qualified companies”. (Read the legislation.)  This law is in effect from 2010-2013, but has now been extended in the 2013 Georgia Legislative Session to 2015.



Secretary of State Amends Rule 590-4-2.08

Creates: Invest Georgia Exemption

Very important rules to come out of the Secretary of State office, IMO. Vince Russo, the General Counsel in the Secretary of State Office worked closely with Secretary of State Brian Kemp to get these rules out in 2011, with the final rules established in early 2012 . These rules give Georgia for-profit companies the ability to raise up to $1,000,000 per year from Georgia  residents (both accredited and non-accredited). Non-accredited investors can invest up to $10,000 per company and accredited investors can choose to invest more. Georgia for-profit companies are also allowed to advertise their capital raise to Georgia residents.

See my earlier post here for more information.



Senate Bill 402

Employees’ Retirement System of Georgia Enhanced Investment Authority Act

Passed March 29, 2012

Signed into law, April 6, 2012

Effective July 1, 2012

This law gives the ability of the Employment Retirement System of Georgia (excluding the Teachers Retirement System) to invest in Alternative Investments, up to 1% a year from passage of law up to a 5% cap of total assets. The law also defines alternative investments.



House Bill 318

Invest Georgia Venture Capital Fund

Passed March 25, 2013

Signed into law, April 29 2012

Effective April 29, 2013

This law creates the structure of a $100M venture capital fund that would allocate capital to Georgia-based venture and private equity funds. These funds in turn would invest in Georgia-based high growth companies over a five year period.


House Bill 318

Georgia Angel Investor Tax Credit renewed, 2014-2015

Passed April 29, 2010

Signed into law June 4, 2010

Effective June 4, 2010

See an earlier post here for up to date information on this law.

We are making some great strides here in Georgia in creating a thriving public/private collaboration that is working to help fund, build and support Georgia-based companies!

The Basis of Legal Crowdfunding in Georgia

3 May

Last week, I wrote a post about about equity crowdfunding in Georgia. It was my most widely read post and has generated numerous emails and phone calls and has caused a number of hallway conversations at the Atlanta Tech Village where I have an office on the second floor.  The general reaction to the news has been positive, but also with a sense of curiosity that this rule has existed for 18 months in Georgia with virtually no one noticing.

Let me first clear up some misperceptions:

-  The Invest Georgia Exemption in the not the same as the Invest Georgia legislation that  was recently signed into law (otherwise known as House Bill 318). Similar names, but very different and not related. The Invest Georgia Exemption(s) is a state security regulation, promulgated by the Georgia Commissioner of Securities (aka: Georgia Secretary of State) and the Secretary of State Securities Division “in the public interest”, that allows for-profit Georgia companies to raise a limited amount of capital through a public offering from accredited and non-accredited Georgia  investors without the added expense of filing a registration statement with the state or federal government.  The Invest Georgia legislation, signed in to law on April 29, 2013, allows for the structure of a $100M state-based venture capital program to be built out over five years.

Now let’s move on to how the Invest Georgia Exemption is allowed.

The Invest Georgia Exemption is possible as a result of federal exemption for intrastate offerings in section 3(a)(11) of the Securities Act of 1933 and SEC rule 147, 17 C.F.R. 230.147. I will not go into an explanation of these pre-existing exemptions, but rather point them out so that you may review them. It is important to understand that the federal provisions that Georgia is relying on are pre-existing and are not “new”.

It is my opinion that these specific rules related to the Invest Georgia Exemption have not been used much over the last few decades for five reasons:

-  Credit and capital for young companies has been relatively easy to access for a number of decades. This is no longer true.

-  These specific rules are very obscure and have been underutilized.

-  With the delay of the implementation of the JOBS Act, these specific rules are garnering more attention.

-  Use of these specific rules and regulations have been perceived to be burdensome, costly and more time-consuming than traditional sources of capital

- It is quite important to note that another obscure rule,  Rule 506 of Regulation D , which is often used to implement  “angel investing”,  has turned angel investing into an asset class and has helped fund thousands of companies over the last decade–but only “accredited” investors can invest in these companies.

So, Georgia’s crowdfunding rules are actually based on pre-existing, but underutilized, rules and regulations. I wonder what other obscure rules and regulations are out there that could be used to help fund Georgia companies!

(Special thanks to Vince Russo for ongoing guidance related to understanding of the IGE and for serving as “copy editor” of this particular post.)


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