Angel Groups and the SEC

The SEC recently issued guidance on angel groups and the general solicitation and general advertising of private company securities offerings.

General solicitation and general advertising of private company securities offerings is a hot area. The JOBS Act allows companies that are raising money solely from accredited investors to generally solicit and generally advertise their offerings. However, the SEC threw in an important new requirement if you generally solicit or generally advertise your offer:

  • You have to ask your investors to verify that they are accredited by asking for copies of their tax returns or personal financial statements.

Most companies don’t want to ask their investors for their personal financial statements or personal tax returns. Most companies prefer to stay within the confines of Rule 506(b)–which does not allow general solicitation or general advertising, but also does not require verification. In a Rule 506(b) offering a company can rely on an investor’s certification that he or she is accredited, as long as they have a reasonable belief that the certification is true.

Companies that are trying to raise financing in a Rule 506(b) offering then need to be aware of the rules and carefully follow them.

And a reasonable question to ask here is–is a pitch to a group of angels a general solicitation or general advertising? The answer is–it depends. If the pitch is at a public meeting  — the answer is — companies don’t do this if you don’t want to take the additional verification step.

If the pitch is before a private angel group, you should be in good shape. I have quoted the SEC guidance below. It is helpful. It is a step in the right direction in terms of public policy pronouncements in the area.

Question 256.27

Question: Are there circumstances under which an issuer, or a person acting on the issuer’s behalf, can communicate information about an offering to persons with whom it does not have a pre-existing, substantive relationship without having that information deemed a general solicitation?

Answer: Yes. The staff is aware of long-standing practices where issuers and persons acting on their behalf are introduced to prospective investors who are members of an informal, personal network of individuals with experience investing in private offerings. For example, we acknowledge that groups of experienced, sophisticated investors, such as “angel investors,” share information about offerings through their network and members who have a relationship with a particular issuer may introduce that issuer to other members. Issuers that contact one or more experienced, sophisticated members of the group through this type of referral may be able to rely on those members’ network to establish a reasonable belief that other offerees in the network have the necessary financial experience and sophistication. Whether there has been a general solicitation is a fact-specific determination. In general, the greater the number of persons without financial experience, sophistication or any prior personal or business relationship with the issuer that are contacted by an issuer or persons acting on its behalf through impersonal, non-selective means of communication, the more likely the communications are part of a general solicitation. [August 6, 2015]