A new federal rule could decrease the number of angel investors, a trade group for such investors said in a press release this week, but one Des Moines lawyer doesn't think it will stop local investors.
The Securities and Exchange Commission (SEC) ruled last week that businesses can raise money through private offerings by advertising to investors. The move, which was a provision of the Jumpstart Our Business Startups Act passed by Congress last year, is intended to make it easier for startup companies get their message in front of more potential investors.
The rule requires companies to verify that investors are accredited by obtaining copies of an investor's tax forms for income verification, or by getting written confirmation from a third party, such as an attorney or registered investment adviser.
The rule takes away the ability of angel investors to self-certify their status, said the Angel Capital Association trade group.
The group worries that many angel investors will not be willing to provide their personal financial information to companies asking for investments. One expert told the St. Louis Business Journal the new rule could decrease angel group investment activity by as much as 75 percent.
But Chris Sackett, managing partner at BrownWinick Attorneys at Law, points out that the new rule just provides an alternative option, and that companies raising money don't have to use it. If an investor decides to fund a company that hasn't advertised, both parties can do things the "same way as they always have."
To put it simply: If a startup advertises, it has to go through more work to ensure investors are accredited. If it doesn't advertise, it doesn't.
"I think some of the folks who are responding to this, frankly, may be overreacting a bit," Sackett said. "It's possible that this could have some adverse effect on angel investing, but frankly, that's somewhat unlikely."
Sackett doesn't expect the rule to negatively affect the local Plains Angelsorganization, of which BrownWinick is a lead sponsor. Plains Angels launched through the Greater Des Moines Partnership late last year to bring together a group of local angel investors. Its numbers have pushed above 100.
Sackett thinks that if anything, the new rule will open up more investment opportunities. The key for investors, when working with companies that have advertised, is to talk with their advisers to understand how this rule will really affect them, he said.
To receive SEC accreditation as an angel investor, the investor must make more than $200,000 annually or have a net worth of greater than $1 million, excluding the value of his or her primary residence.