Friday, April 29, 2016

House passes bill easing solicitation restrictions on angel investors

By Amanda Maine, J.D.

The House of Representatives has passed a bill aimed at encouraging investments from “angel” investors by exempting certain investor events from being considered “general solicitation” under the federal securities laws. The bill passed on a 325-89 vote, although some Democrats and the Obama Administration have expressed concerns that it does not do enough to protect investors.

HALOS Act. The Helping Angels Lead Our Startups Act (HALOS Act) clarifies the definition of “general solicitation” under Rule 506 of Regulation D. Rule 506 allows companies to offer securities for sale to up to 35 non-accredited investors and an unlimited number of accredited investors as long as the securities are not marketed through general solicitations or advertising. Under the JOBS Act of 2012, issuers that take “reasonable steps” to verify that the purchasers are actually accredited investors may market its securities through general solicitations or advertising. The “reasonable steps” requirement was added to protect unsophisticated investors who may not understand the risks of investing.

The HALOS Act would exempt issuers that hold investor events, such as “Demo Days,” from requiring the taking of reasonable steps to verify the accredited investor status of specific groups deemed “angel investors,” essentially exempting these events from being considered a general solicitation. An “angel investor group” under the HALOS Act is a group that: (1) is composed of accredited investors interested in investing personal capital in early-stage companies; (2) holds regular meetings and has defined processes and procedures for making investment decisions, either individually or among the membership of the group as a whole; and (3) is neither associated nor affiliated with brokers, dealers, or investment advisers. The HALOS Act also rolls back the verification requirement for sales groups sponsored by colleges, nonprofits, and trade associations.

According to House Financial Services Chair Jeb Hensarling (R-Texas), the HALOS Act fixes “regulatory overreach” by helping angel investors provide early-stage capital for startups.

Investor protection concerns. While the bill passed with bipartisan support, Financial Services Committee Ranking Member Maxine Waters (D-Calif) raised concerns that the HALOS Act could harm retail investors. Events sponsored by government entities, nonprofits, and universities, she said, are likely to attract non-accredited investors, which are the people the verification requirement is intended to protect. Waters had offered an amendment that would codify existing relief that the SEC has already provided to angel investor groups and would limit the exemptions to operating companies to prevent shell companies and hedge funds from soliciting unknowing investors into potentially risky offerings. However, the Waters amendment was defeated by a vote of 139-272.

The Obama Administration also issued a statement expressing concerns with the bill. In the statement, the Administration acknowledged that exempting angel investors and other groups from the requirement that issuers take reasonable steps to verify an investor’s accredited investor status could make it easier to raise capital. However, it could also result in some investors being subject to increased risk. The Administration stated that it would like to work with Congress on the HALOS Act as it moves forward to increase protections for investors.

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