Help Save Our Innovation Economy from the SEC’s Rewrite of Reg D


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onerous for angels in San Diego and elsewhere in California who invest an average of $25,000 apiece in startup companies—and we fear our entrepreneurs will suffer as a result.

Until now, individual investors were free to self-accredit; the amounts they invest are miniscule compared to the tens of millions that hedge funds typically invest in a deal. So requiring angel investors to obtain what is in effect a current and independently audited financial statement would be costly for the entrepreneur and unreasonable and impractical for the investor.

If these rules are finalized on September 23, those of us who would have continued to invest in start-ups will seek alternate investment opportunities that are much less troublesome. The net result will be that fewer of us will invest in early stage companies effectively choking off most or all of the $23 billion that angels invest in start-ups annually. It would strangle a sizeable job creation engine—exactly the opposite of what Congress intended.

A provision in the new regulations could also curtail the standard practices most early-stage companies currently use to gain exposure to angel investors, including pitch days, demo days, open office hours, angel group screenings and meetings, and pitch contests. Such events could all be construed to fall under general solicitation. A company that violates the revised solicitation rules, or fails to meet the verification standard, or the array of filing and pre-filing deadlines, would be subject to penalties that prohibit the company or fund from raising new capital for one year. This makes 501(b) investments highly problematic since the penalties would, in effect, shut down the company.

Calmer heads must prevail here for the sake of our economy. If small businesses and innovation are to continue thriving and serve as the backbone of growth for our nation, Reg D must acknowledge the great value that reputable organizations like the Tech Coast Angels and others groups play in helping new companies get started. If not, angel investments may be curtailed—to the detriment of our regional and national fortunes, as well as those who are courageous enough to start companies.

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Gary Phillips is the current president of the San Diego Tech Coast Angels, an affiliate of the largest angel investor group in the United States. Members of the Tech Coast Angels provide funding and guidance to more early-stage, high-growth companies in Southern California than any other investment group. Follow @

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One response to “Help Save Our Innovation Economy from the SEC’s Rewrite of Reg D”

  1. Someone is getting the real issues with the JOBSAct – thank you for your post – we need more discussions like this. The more I read the regs and think about the implications, the more I am convinced that the JOBSAct is sending us backwards… not forward, like so many have hoped for. ~Patrick @INVESTyR