Fred Schwed was a customer’s man in a Wall Street brokerage during the stock market boom of the 1920’s. Following the Great Depression, Schwed penned an investment classic. The title of his book was reportedly taken from a reply to a stockbroker who offered the trope, “a rising tide lifts all boats.” If that’s so, answered a would-be investor, then “where are the customers’ yachts?”

We’re all familiar with how the stock market boom of the “Roaring ‘20’s” came to a crashing end, and how the U.S. government imposed regulations on the financial industry to protect unwitting investors from unscrupulous stock jobbers. The Securities Acts of 1933 and 1934, plus the Investment Advisors Act of 1940 and the Investment Company Act of the same year, remain in force. Along with state regulations, the federal acts govern the conduct of the financial industry—including important aspects of angel investing.

From the perspective of the federal securities laws, wealthy individuals and certain institutions that meet the requirements as Accredited Investors have been allowed to invest in private securities offerings under regulatory exceptions—Section 4(a)(2) of the Securities Act or the safe harbor under Regulation D—which exempts types of private placement securities offerings from Securities Act registration.

To comply with regulations, Angel Capital Group serves Accredited Investors, who are:

  • individuals with earned income that exceeded $200,000 (or $300,000 together with a spouse) in each of the prior two years, and who reasonably expect the same for the current year, OR
  • have a net worth over $1 million, either alone or together with a spouse (excluding the value of the person’s primary residence).

Visit the U.S. Security and Exchange Commission’s website for more complete information.

It’s important to note that Angel Capital Group is neither an investment broker, with respect the 1933 Act, nor does ACG claim to be an advisor according to the 1940 Act. ACG serves to form individual investors into angel investing groups, and to support those groups through mentoring, education in best practices, ongoing administrative assistance, and deal curation. Angel Capital Group does not offer investment advice or publish research reports; however, we facilitate member-managed due diligence, and coordinate discussion between investors and entrepreneurs during negotiations about deal terms.

The exemptions from securities registration afforded by Regulation D to the 1933 Securities Act have generally provided entrepreneurial businesses the most utility for offering small, private issuances of stock or other securities. One of the requirements of Regulation D has been a prohibition on general solicitation and advertising. To comply with the regulation’s safe harbor provision, an issuing company or its agents must have a preexisting, substantive relationship with persons to whom the securities are offered. An important function that Angel Capital Group provides is to establish just such a “preexisting, substantive” relationship with all of our investor members. ACG performs the necessary actions of questioning investors on their status as qualified investors, knowing members’ professional backgrounds, ascertaining investors’ tolerance for risk, and determining investors’ objectives as they relate to angel investing. Moreover, while representing our diverse investor membership at various public entrepreneur-themed events, such as technology transfer conferences, accelerator program “demo days,” pitch contests, and angel investing educational events, ACG is ideally positioned to meet with entrepreneurial companies ahead of their presenting to investors so that substantive discussion related to companies can take place prior to securities’ offerings.

It’s worth mentioning that in 2012, the regulatory landscape governing angel investing changed with the passage of the JOBS Act and a new Rule 506(c), which allows companies to conduct some securities offerings through general solicitation as long as two conditions are met: the securities can be sold only to accredited investors and the issuer must take “reasonable steps to verify” the purchaser’s accredited investor status. Angel Capital Group member historically have used an earlier rule—Rule 506(b)—to make investments. A key difference between 506(b) and 506(c) is that under 506(c) the issuer is held responsible for verifying investors’ net worth and income, which has prompted firms seeking investment to require substantial disclosure from individual investors. (Under Rule 506(b), the investor could “self-certify” regarding their accredited investor status.) At the time of this writing, ACG has not invested using the 506(c) safe harbor; however, we are keenly aware that with the passage of the JOBS Act, a spotlight has been cast on what constitutes “general solicitation.” This spotlight is expected to bring with it increased scrutiny; so, will events such as accelerator demo days and pitch contests fall under the regulators’ glare? For many years, ACG been a leader in our industry’s professional association, the Angel Capital Association (ACA). Through ACA, we have made our members’ voices heard to the SEC on this and other important issues. We’ll continue to stay abreast of regulatory affairs on behalf of our members, and will keep our affiliated angel groups informed as part of our ongoing commitment to provide the best quality angel experience for our members.

For more information, see:

This is published under the Appalachian Regional Commission POWER Grant, PW-1835-M.

Copyright Appalachian Investors Alliance, Inc. 2018
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