Today we cover Part 2 of Public Policy for Angel Investors with David Verrill of Hub Angels Investment Group. In this segment we address:
- Recently I was a little uncomfortable when I noticed an investor that was live streaming a demo day via Periscope, where startups were discussing fundraise details. Would this be at risk of being considered a general solicitation?
- Any other public policy issues related to the top three priorities that you’d like to touch on?
- Who, within the ecosystem, is taking action on public policy issues for angels?
- Are there any other efforts on either regulatory or legislative side?
- Can you walk us through the actions and/or processes that you execute to improve the public policy situation?
- What, in your estimation, are the biggest risks to the fundraising environment re. today’s topic?
- What can individual investors do to support and improve the fundraising environment re. today’s topic?
- Do you have any final thoughts on the topic that we didn’t cover?
- Hub Angels Investment Group
- Angel Capital Association- Public Policy
- Part 1 of the interview on Public Policy
The three takeaways that we review will recap the top 3 priorities for the ACA. The were:
Top 3 issues for the ACA:
- Capital Gains exemption for small businesses
- Issues w/ regard to the JOBS Act
- Accredited Investor Definition
1- The Capital Gains Exemption
- Part of the American Tax Payer Relief Act
- Qualified Small Business Tax Exemption
- Invests in a Company that is a C Corp
- Holds that company’s equity for five years
- In the event of an exit, Section 1202 excludes 100% of capital gains
- Percentage has changed over the past five years, but for now it’s 100% going forward
- Need to make sure that the company is subject to QSBS treatment in the term sheet… with the two primary issues being that it is a C Corp and held for 5 years
- ACA is trying to get the holding period down from 5 years to 3
- Also trying to get the same treatment for an LLC that currently exists for C Corps
- And recall from Dave Berkus that the clock doesn’t start until debt is converted into equity in the case of a convertible
- This also passes through to funds, whether it’s an individual investment or one done through a fund… as is the case with Hub Angels
2- Issues related to the JOBS ACT
- The major problem here is that general solicitation has had an unclear definition
- This is when an entrepreneur is publicizing their fundraise
- Remember that if they do solicit, then they’re subject to special filings and must verify financial accreditation of all angels
- HALOs Act exempts a business plan contest or demo day as exempt from general solicitation
- Prior to the Halos Act a demo day would have been considered general solicitation
- Halos Act passed by house but still needs to go through the Senate
- Five criteria https://www.congress.gov/bill/114th-congress/house-bill/4498/text must be met
- Sponsored by federal, state or local governments, university, non-profit, angel group, venture forum
- The advertising does not refer to any specific offering of securities by the issuer,
- The host organization doesn’t make investment recommendation or provide investment advice
- The host organization does not receive compensation for the event which would require registration as a broker or dealer or as an investment advisor, and
- No specific information regarding a securities offering is communicated. However, on this point, the bill does say that the following can be disclosed:
- that the issuer is in the process of offering securities or planning to offer securities
- the type and amount of securities being offered;
- the amount of securities being offered that have already been subscribed for; and
- the intended use of proceeds of the offering.
- From my standpoint, these allowances keep the situation a bit unclear. On one hand, the act says that no specific info regarding the offering can be communicated. On the other hand, it says that the startup can disclose that they are raising, the type and amount of securities, what’s been invested to-date and the use of proceeds. Those to me sound like details of the fundraise.
3- Accreditation Definition
- Under Dodd-Frank the SEC must review the accredited investor definition every four years
- SEC has been late in deciding this since 2014 when they were scheduled to conduct their review
- Recall that an accredited investor has either a) 200k of income or 300k w/ spouse or b) $1M net worth excluding your primary residence
- When the issue was raised in 2014, the SEC considered doubling the accreditation requirements
- Would’ve eliminated over 60% of angels in the United States
- 400k people that are angel investors in the U.S. more than half of which would not meet these requirements
- Fortunately, through David’s and the ACA’s efforts, the conversation went from reducing the number of angels, to keeping it the same, to potentially increasing the number of angel investors. By expanding the accreditation definition w/ a measure of sophistication, those with the wherewithal, if not the income requirements, could also angel invest.
Also… aside from these three top priorities, the ACA is also focused on increasing the 99 investor rule to a great number of investors that can participate in an SPV for a single investment or fund.