Angel Investors - The 3 Percent

A study conducted by the Securities and Exchange Commission (SEC) found that, in a given year, less than 3% of US households that qualify as accredited investors make angel investments (based on Reg D filings). Even when looking at this statistic over a longer time, specifically a five year period, the SEC found the percentage of angel investors only rose to about 7%. Many in the private equity investment community believe that this low percentage of funding participation is responsible for inhibiting the availability of seed financing for startup companies. It is for this reason that a great deal of hope and expectation was placed on the SEC’s revised regulations for General Solicitations which took effect on September 23rd of this year. While many marketing and PR firms have geared up to handle new campaigns spurred by the revised regulation, most startup companies and their investment advisors are taking more of a “wait and see” approach. One of the main reasons for this hesitation is the fact that the SEC has different verification requirements for accredited investors that are solicited via general advertising. Currently, angel investors need only sign a form stating that they meet the requirements as an accredited investor. Under the new regulations, if the investor has been solicited though general advertising, the issuer or its representatives must verify accredited investor status by submitting tax returns or other audited financial statements. The underlying assumption in believing that the revised General Solicitation regulations will increase the active pool of angel investors is that these individuals simply have not been aware of such investment opportunities. Although this might be true in some cases, it is unlikely that these individuals, or their financial advisors, are ignorant of angel funding as an option for their investment portfolio. A more likely scenario is that they have made a conscience decision not to participate in these types of investments and a barrage of investment promotions is not going to convince them to do otherwise. Ultimately, only time will tell with regard to the impact of the new rules related to General Solicitations. However, the reality is that it will not be until the SEC extends angel investment opportunities to non-accredited investors as the final phase of the implementation of the JOBS Act (which is not expected until 2014) that we will see a significant increase in the number of individuals participating in the seed funding of startup companies.

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