The angel investing horror story goes something like this: An entrepreneur publicly solicits seed capital under new securities laws, but accidentally accepts investment from an unaccredited investor. When this violation of JOBS Act rules is discovered, the entire investment round must be rolled back and the money—if there’s any left—returned. It’s the ultimate lose-lose situation.
“Everything shuts down and everyone loses money,” says Yi-Jian Ngo, managing director of the Alliance of Angels, a long-tenured angel group in Seattle.
It almost doesn’t matter whether this has actually happened under new rules born of the 2012 JOBS (Jumpstart Our Business Startups) Act, which lifted the longtime ban on general solicitation of securities offerings by small companies, provided the companies verify that all investors are accredited. The fear that it could, along with continuing uncertainty, has caused some entrepreneurs and investors to avoid generally solicited deals altogether. (It had been illegal since 1933 to advertise a non-registered stock offering to the general public. Until the JOBS Act, small companies selling equity did so privately, through quiet offerings in which shares were sold only to accredited investors with whom the company had a pre-existing relationship.)
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.
Now some angel investing groups are taking steps to clear away some of the ongoing JOBS Act confusion, and remove the costly burden from startup entrepreneurs of verifying that all of their investors are indeed accredited.
The Alliance of Angels is among about 15 groups to have the Established Angel Group Certification from the Angel Capital Association (ACA), a national nonprofit trade organization based in Overland Park, KS. The certification essentially provides a company seeking investment verification that all the investors in the angel group are accredited, meaning—for now, anyway—they have net worth in excess of $1 million or annual income of at least $200,000 (or $300,000 for married couples).
Other groups to receive the certification so far include Hub Angels Investment Group of Cambridge, MA; Launchpad Venture Group in Boston; the Bellingham Angel Investors in Bellingham, WA; and the Tech Coast Angels, with various locations in Southern California.
The ACA issues the certification to groups that are established with the purpose of early-stage investment; have a code of conduct; include processes to allow individual members to invest their own money or participate in the group’s investment decisions; regularly require members to self-certify that they are accredited and aware that angel investing is risky; and vet new members thoroughly.
While the Securities and Exchange Commission hasn’t made an official pronouncement on the certification, it is in keeping with guidance that SEC officials have intimated, says Marianne Hudson, executive director of the ACA. Keith Higgins, who heads the SEC’s corporate finance division, speaking for himself at an ACA event last year, “essentially endorsed” the certification, she says. In the speech, which is posted in its entirely online, Higgins described a “principles-based approach” in which companies issuing stock can look at “the particular facts and circumstances to determine the steps that would be reasonable to verify that someone is indeed an accredited investor,” and that reliable third-parties could undertake this verification.
Angel investing remains a relationship-based endeavor. New investors are frequently invited in by business and social acquaintances (though that too is starting to change with efforts such as Seattle Angel Conference and The Lion’s Den casting a wider net for would-be investors).
That social aspect is a big part of what makes the EAG Certification work, proponents say. “It’s very unusual to join [the Alliance of Angels] without any references, without any kind of background,” Ngo says. “So in most cases, when someone applies, chances are we would know someone who’s connected to that person and we would be able to tell fairly quickly whether or not this is really someone who’s accredited.”
The EAG Certification will also be a competitive differentiator, Ngo says, 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.
It’s worth stepping back for a moment to remember why lifting the ban on general solicitation—in place for more than eight decades—was significant in the first place, and how we ended up with Rule 506(c) of Regulation D of the Securities Act of 1933. There was
