99. Public Policy for Angel Investors, Part 2 (David Verrill)

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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?

Guest Links:

Key Takeaways:

The three takeaways that we review will recap the top 3 priorities for the ACA.  The were:

Top 3 issues for the ACA:

  1. Capital Gains exemption for small businesses
  2. Issues w/ regard to the JOBS Act
  3. 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
      1. Sponsored by federal, state or local governments, university, non-profit, angel group, venture forum
      2. The advertising does not refer to any specific offering of securities by the issuer,
      3. The host organization doesn’t make investment recommendation or provide investment advice
      4. 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
      5. 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.


Tip of the Week:   Dumb Money Breeds Lazy Behavior

*Please excuse any errors in the below transcript

Nick: Yeah, recently I was noticing one of the more vocal investors out west was using Periscope to stream a Demo Day, a live Demo Day. And while it was nice to be able to view it, I was also a little nervous for him and for the Demo Day itself that he’s, he’s streaming this out and making it more of a, a general public event as opposed to, you know, more of a private Demo Day with investors.

David: Yeah. So, the HALOS Act, if you really want to get into the details, has, talks about Demo Days that must meet 5 criteria. One, they are sponsored by Federal State or local governments, a college, university, nonprofit, angel group, venture forum. So basically it covers all of the likely suspects who’d be hosting such a meeting. The advertising can’t make any specific investment offering, the host organizations sponsors don’t make any investment recommendation or provide investment advice. There’s no specific information regarding the investments including the type of security, the amount being offered. And that’s really the, the, the primary requirements that the HALOS Act will cover you for.

Nick: Got it. Anything else on any of the top three priorities before we move on?

David: No, I mean, there are a couple of little things that, that we’ve weighed in on lately. So for example there’s a 99 investor role for people like me who, who have a fund and there’s a limit of 99 people for that fund. We’re trying to get that increased to a larger number. And, and I think the, the real proponents of that are the, the platforms like #AngelList and, and #FundersClub, where they’re forming syndicates and funds of syndicates that have larger numbers of people. So they’re, they’re leading the battle with that fight. But we, we’ve put our support into it from the #ACA. We, we think that angels groups are getting bigger, their structures are likely to include funds, so we’d like to, to make sure that we increase that, that level. And there are a few other things that, that are sort of coming down the pipe that we’re, we’re, we’re keeping an eye on. But nothing really useful to chat about here.

Nick: Yeah. So you mentioned a few of the key players here. Who else within the ecosystem is taking action on public policy issues for angels?

David: Yeah, well, you know, traditionally in, in this space the, the #National Venture Capital Association has been the big player. At times we work hard to align ourselves with the#NVCA. At, at other times we, we try to show some distinction because we are different in that we’re investing our own money rather than somebody else’s. And , and these are individuals rather than institutions that are, are making the underlying investments. So, but basically we do similar things. We fund companies that are, are not yet public. Many of them are in very early stages. So the #NVCA has been a very active public policy advocate in, in Washington for many, many years. The platforms are becoming a new and important player. I think that the, the growth of platforms has been pretty strong. I mean, I, I think perhaps many of us had, had a, a bit of irrational exuberance at how fast they would grow. But they’re finding their way in the ecosystem. And if you look at some of the, some of the numbers from #AngelList and others, they’re becoming pretty quickly a, an important player. So they are developing their own advocacy group. And we certainly talk with them quite a bit about it. A lot of the states have individual tax incentive programs. And so there’s a bit of state to state influence. For example, in, in your neck of the wood I know that Wisconsin instituted a, a state tax rebate. And that encouraged a number of the neighboring states to follow suit so that they could be competitive for, for where startups were, were locating themselves. So, you know, there’s an important state level of activity. And then obviously we, we have a grassroots policy. We have a public policy advisory group which is largely made up of pretty experienced and high powered lawyers and accounting firms that, that give us guidance as we go. And then we’re, we’re engaging a, a lobbying firm #Eris in, in DC. And they’re very well connected on both sides of the aisle, and obviously with the regulating bodies as well.

Nick: Yeah. Are there both regulatory and legislative efforts?

David: Yeah, I mean, Congress hasn’t really done a whole lot in the last 8 years. So, I, I wouldn’t say that there’s been a high volume of, of stuff that’s been coming down the pipe. And it’s been nice to see the bipartisan embracing the HALOS Act and things of that nature. So there are a few harmless things that we’ve brought forward that have been embraced by both sides of the aisle in, in Congress. And  you know, there’s been some interesting opposition mostly in the form of, of consumer protection. So #Maxine Waters of California is a huge consumer advocate. And, and you can always count on her going against anything that expands the ability for people to invest in any alternative investment. And, you know, I, I, I guess in the grand scheme of things it’s, it’s good to have a, a cheque and balance, her voice has been pretty loud. And I think we’ve done a good job of trying to make sure that there are appropriate investor and consumer protections. And the SEC I think is going through a bit of a transition. They’ve got some open slots. It will be curious to see how those slots get filled. And obviously they really don’t care about helping the economy develop. They care about protecting people against fraud and inequality. And so they’re not always aligned with the rah-rah business development activities that members of Congress might have and/or that the angel ecosystem might, might enjoy. But they’re rational people and they’re willing to listen. And obviously they want to talk with people from many different perspectives. And they do so. But we found them to be open and, you know, they don’t talk about what they might be doing or where they’re leaning. So it’s a bit of a puzzle but we certainly are able to, to put our, our two cents in on a regular basis.

Nick: Yeah. And on that point, we’ve already touched on a bunch of the different actions in, in the lobbying groups that you work with. But can you talk more about the actions and processes that you execute to improve the public policy situation?

David: Yeah. So we, we have a strategic review every year at the #ACA, where we put together a list of our priorities for the coming year and our list of existential threats. And then we, we translate that into what our grassroots group needs to do in terms of which states and which members of Congress we need to, to reach out and touch and educate. And we, we talk with #Eris our, our public policy firm. And we get them motivated to, to make sure that we’re meeting with the right committees, the sub committees and members of Congress to let our voice be, be known. And they give us, they’ve got their finger on the pulse of what’s going on. And so there’s some interesting vagaries of the way that Congress works or doesn’t work depending upon your perspective. But when there’s something in the bipartisan space, it tends to go quickly, and there’s a lot of back room negotiating. And so a bill that you look at today and, and really like the, the, the wording of it, by Friday will have some pretty significant changes. And so, you know, having, having our, our pulse through #Eris on what’s going on in DC is critically important. And then we’re often invited to comment and/or participate in talking with a, a lead in Congress about how to, how to put a bill forward and what wording to use. And so having a, a public policy advisory committee, very high powered lawyers who love to disagree with each other is a healthy thing. So we’ve got, I think we’ve put together a really, you know, sort of top to bottom process. It has components of grassroots and focus on Congress that I, I think really allows us to punch above our weight and we’ve ben able to put this together in a relatively short order.

Nick: #David, what in your estimations are the biggest risks to the fund raising environment related to today’s topic?

David: Well, aside from Brexit and the world economy, you know, falling off a cliff, I think that there are a couple of things that are going to create some issues for us. One of them is the unaccredited crowd funding, unaccredited equity crowd funding that is now possible.

Nick: Yeah

David: So, you know, look, I think we all want as many startups to be funded as possible, but I don’t know what your track record is #Nick, but I know that the people that are on the #ACA board and the people that are running groups across the country are working their tails off to a, find the right companies, perform the right amount of due diligence and then get in the boat and row to help these companies be a success. It’s hard work. It’s not just for fun. And, and there no mechanisms for people that aren’t experienced angels and, and, and because they haven’t had the capital to become an angel, there aren’t enough cheques and balances like in the public markets for an average Joe to be, become a successful angel investor. So, you know, online trading and, and things of that nature have really taken off in the public markets for, for twenty years. And the individual investor has a huge number of resources to take advantage of in the public market space. In the private markets you just don’t have that information. And worse, even if there were sources of information, we’re talking about startup companies here. There is no 5 year earning history. So you just don’t have data. And in order to be successful you’ve got to build a portfolio, you’ve got to become active, at least in my estimation. And I don’t see any of those aspects as part of unaccredited equity crowd funding. And so I fear that there’s going to be people who take advantage of, of investors in, in that category. And that when the first class action suit hits the fan, it’s going to splash mud all over our industry and perhaps bring a new regulation upon us. It’s just my opinion. I , I suspect that there will be some successes in that space. But I, I consider myself kind of a professional angel investor. It’s what I do all day every day. And I have for 16 years. And for, you know, somebody who hasn’t got any experience and really doesn’t have the wherewithal to put enough of money into something to negotiate terms and, and sit on a board, I just think it’s a , it’s a tough way to have any success. So that for me is in the number one slot of existential risks to us.

Nick: Yeah. I couldn’t agree more. I mean, some of the, even some of the intelligent, well educated, experienced public investors still don’t understand all the basics of angel investing. It’s a different sort of asset class and not everyone knows what they’re doing when they get involved in it.

David: Indeed, indeed.

Nick: #David, what can individual investors do to support and improve the fund raising environment?

David: Well, I, I think that we’re, if we just keep doing what we’re doing, and if we can attract more people into the space, we’ll all help ourselves. I think that, you know, I’m in, I’m in kind of an interesting ecosystem here in Boston where, you know, within lets see, within 3 blocks of where I’m sitting right now in Kendall Square there are close to a 1000 startups. There are another 1000 in the Seaport area of, of Boston, another 500 downtown. So there’s just a huge number of startups. And I think unfortunately there aren’t enough angels in our ecosystem to support all the, all the best ones. So I think we’re, one of the things that we’re trying to do is attract other people to the space. And so, you know, we spend a lot of time networking. We, for our group when we’re opening up a new fund, we just don’t solicit anybody, we go to our existing angel investors and say hey do you have a colleague or, or a friend that is an accredited investor that is considering or is already making some angel investments, and like, like the, the structure that we provide. And so that sort of word of mouth is good to bring people into the system. We have some public face events where we offer a little bit of education for people considering becoming an, an angel. And, you know, being a good player in the ecosystem I think is overall critical for all of us. We’re not trying to screw any founder out of, you know, an extra five percentage points of ownership because what goes around comes around. And I think, you know, we’re kind of a kinder, gentler private investor. And, and hopefully the people that enter the ecosystem will, will take on that, that approach as well.

Nick: Any final thoughts on the topic that we didn’t cover?

David: You know, we could talk about a thousand different things. And I’m, and I’m, I’ve listened to a couple of your, of your podcasts, and you’ve, you’ve done a great job of covering a lot of them. I think for me public policy is a big item and I thank you for giving me the opportunity to, talk a little bit more about it and, and help translate what’s happening in VC to what’s happening in, in your pocketbook for all angel investors. So, appreciate that.

Nick: Absolutely. #David if we could address any topic related to startups or venture, what topic do you think should be addressed and who would you like to hear speak about it?

David: Ooh, you know, I’m, I’m very active in the annual #ACA Summit, and we have some pretty spectacular speakers. #Vint Cerf gave one of the, the better talks a couple of years ago. #Brad Feld gave a really interesting talk recently. #Brad was, was given a, a, sort of angel of the, of the year award, the Hans Severiens Award this past year. And, and he, he started his congratulatory speech by saying he didn’t realize he was an angel investor, although he certainly is. And I just find people like that to, to be enlightening. They have a level of intelligence and a level of perspective that informs all the rest of us and puts the thing that we do, funding early stage companies and the people that dare to, to start them. It’s, it’s a compelling proposition. It isn’t easy. Perspective is needed. A portfolio is needed. And the more active you are in, in these companies, the better off they will be and the better off you will be for it. And so people like that really inspire me.

Nick: Yeah, I’m with you. We were very fortunate. The, the first deal we led as part of our group #New Stack Ventures, #Brad decided to participate in. So it was, it was really nice to have #Brad coming along and, and joining the group and as an angel investor. And

David: There you go

Nick: sort of helping us at, at the same time that he’s helping this, this great company.

David: And I would, you know, those, both #Brad and #Vint have a, a national platform if you will. I would say one of the people in, in my region that inspires me is #Jean Hammond. #Jean is a member of number, a member of number of angel groups, #Golden Seeds, #Launchpad, #Hub. She also has founded with a few other people the #LearnLaunch Accelerator here in town. She’s probably got a portfolio reaching close to 200 companies. And she’s taught me a lot of lessons. And, and one I repeat quite frequently when I’m speaking with an entrepreneur about the terms of, of an investment and, and #Jean’s commoner phrase is, If you both walk away from the negotiation a little bit disappointed, then you find the, found the right valuation for the company. So, she has, she has been an inspiration to a lot of people in this ecosystem. And we’re certainly proud to have her as a member of the #Hub Angels.

Nick: And just to wrap up here, what’s the best way for listeners to connect with you?

David: dverrill@hubangels , 2 r’s, 2 l’s. I’m on LinkedIn. If you can’t find me then, you know, try and harden up.

Nick: Awesome. Well, here again it was great to connect with you out in Massachusetts. Hope we have a chance to talk further, and thank you so much for the time today.

David: Thanks, #Nick, all the best.