63 posts categorized "Accredited Investor Definition"

Three longer reads for where we are after General Solicitation Day

We are now living in the second day after General Solicitation Day. All trying to take stock of what has happened, and how the landscape is different.

And there is no shortage of media coverage! (Here, from a news angle, is a good overview from the Wall Street Journal: General Solicitation Brings Startups Capital, Risks. I was interviewed for this article and love the quote they got from me: "The government is doubling down on the idea that accredited investors can fend for themselves.")

PhotoBut today I wanted to call out three different, longer-form pieces of writing, each published within the last week. Each, in a different way, lends a deeper perspective on where we in the startup financing ecosystem are now.

Each will be a reference piece in the weeks and months to come.

1. Paul Spinrad's take on where we are, how we got here, and how all the different pieces fit together.

Here is an article that Paul Spinrad published on a PBS website: Online Platforms Give the First Public Look at Private Equity. As I said on Twitter yesterday, Paul's is the best written, broadest article yet on general solicitation and the changes to private financing rules.

Among the delights of Paul's well written survey are: an explanation of how public offerings came to be squeezed into a private exemption framework; the balance or contrast of considerations when approaching policy for accredited and non-accredited crowdfunding; and how private equity platforms are rolling out new features to facilitate the new rule set.

On Monday in GeekWire, I tried, not very effectively, to point out some of the new features on some of the leading online platforms. Paul's take on the same topic is far more accomplished. And that topic is only one facet of his survey.

2. Trent Dykes', Megan Muir's and Kiran Lingam's whitepaper on do's and do not's at demo days and pitch events.

This one, Demo Days, Pitch Events and the New Reg D, is controversial. I've had an earful from several people already on how this whitepaper may get one or another thing wrong.

But I greatly admire the ambition and timeliness of it. The question that the rest of us hem and haw about – am I automatically generally soliciting if I show up at a demo day or pitch event? - they tackle.

Whether or not you agree with the protocols and checklists they lay out, Dykes, Muir and Lingam are calling out the right factors to consider and giving laypeople the means to educate themselves about general solicitation.

3. The Gunderson law firm's comment letter to the SEC on the proposed Reg D rules.

This is a letter published on the SEC's received comments page, signed by a Gunderson partner, Sean Caplice.

There are a ton of comment letters on the proposed rules, none too few from big law firms.

What's remarkable about the Gunderson letter is that it provides answers to all 101 "requests for comment" posed by the SEC in its proposing release.

Most commentators either cherry pick which of the SEC's questions they want to answer, or skip the agency's questions altogether and comment from the perspective of the commentators' own agenda or frames of reference. For tackling all 101 requests for comment, and for that reason alone, I think the Gunderson comment letter is a touchstone. (Kudos to Joe Wallin for pointing the letter out to me.)

Thoughts on yesterday's SEC webcast

First of all, let's be clear that yesterday's meeting was not a meeting of the commissioners of the Securities and Exchange Commission.

It was, instead, a meeting of an advisory group to the SEC.

And so, necessarily, there could be no important votes taken, no new rules authorized, nothing as momentous for startup and emerging company financing as the July 10 meeting of the Commissioners, when two final rule sets were approved and a radical new rule set was proposed.

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But the meeting was important. The advisory committee was there, key SEC staff were there, an important state securities regulator was there.

And so many of the right policymakers were either there in person or represented, and got the benefit of hearing David Verrill, Chair, and Marianne Hudson, Executive Director, present, on behalf of the Angel Capital Association, an excellent overview of how important angel financing is in the startup financing ecosystem and to America's overall innovation economy.

Yes, it continues to be important to educate policymakers about some of the things those of us in the startup financing ecosystem take for granted.

I understand from Jean Peters that the ACA slides presented yesterday will be posted to the ACA site. I'll try to remember to link to that when I see it.

The most dramatic moment of the meeting yesterday was when Catherine Mott (pictured above), a member of the advisory group, former Chair of the ACA, and angel investor, asked the staff whether demo days and pitch events - common features of today's startup financing ecosystem, ostensibly okay in the past under old 506 - constituted general solicitation.

I was going to write that Mott asked the question "pointedly." But that would be misleading. Mott is one of those fearless individuals who disarms others with unfailing politeness and charm.

When she did not get a straight answer to her question, Mott persisted. It is exactly the right question to ask, of course. Come September 23, people are going to need to know what box to check: 506(b) or 506(c). So they necessarily need to know what "general solicitation" is, or what activities which today are ostensibly under 506(b) will transfer over to 506(c).

At the same time, you can understand staff reluctance to opine on this matter. They cannot tacitly admit, I don't think, that the current prohibition on general solicitation in Rule 506 offerings is being flaunted. (Which it is.)

Joe Wallin, Doug Cornelius, Lori Smith and I were live blogging the meeting. See the transcript here.

Joe went absolutely nuts with delight when Mott pressed her question. You can see his almost real-time summary of the exchange at minute five of this video. (Yes, Joe was doing double duty, liveblogging on my blog and at the same time participating in Broc Romanek's Spreecast on Reg D!)

Reuter's article on Startupequality.org's letter to the SEC

Yesterday's Reuters article by Sarah N. Lynch aptly summarizes both the point and the context of Startupequality.org's petition to the SEC.

6a01156e3d83cb970c019aff4dd4d9970dLooks like Reuters attempted to get the SEC to comment, for the journalistic record, on the petition. But the article says that an SEC spokesperson declined.

It does, however, looks like the spokesperson may have pointed out the strictures on the SEC's ability to modify the accredited investor definition, strictures imposed in 2010 by Dodd-Frank.

Question for us: is there anything in Dodd-Frank that would keep the SEC from tweaking (reporter Lynch's verb; I like it) the accredited investor definition by providing an express definition for the term "spouse," as used in the accredited investor definition? One might presume that the agency would be required to do some tweaking or clarifying, in light of the Supreme Court's ruling in Windsor.

What I find, reaching back to Section 413 of Dodd-Frank for the legislative stricture, is that the new net worth standard of the accredited investor definition (imposed by by Dodd-Frank) is grandfathered for four years.

I believe the SEC can indeed legally consider how to remedy the unlawful discrimination in the accredited investor standard. I believe the US Constitution requires that it do so.

Same-sex relationships and angel investing

Encouraging to see the US Treasury Department and the Internal Revenue Service rule "that same-sex couples, legally married in jurisdictions that recognize their marriages, will be treated as married for federal tax purposes."

"However," the government press release goes on to state, "the ruling does not apply to registered domestic partnerships, civil unions, or similar formal relationships recognized under state law."

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We took a different approach for StartupEquality.org. For purposes of ending discrimination against gay, lesbian and transgender persons in the rule set for angel investing in the United States, we propose that domestic partnerships, civil unions, and similar relationships recognized by state law should count. 

Here's the regulatory recommendation submitted today to the SEC by StartupEquality.org:

A spouse of a natural person shall mean another person, regardless of gender or sexual orientation, whose relationship with the person specified: (1) may be characterized as such person's (i) husband, (ii) wife, (iii) spouse, (iv) domestic partner, or (v) designated beneficiary under any applicable state law for the purpose of ensuring that each person in a two-person relationship has certain rights or financial protections based upon such designation; or (2) is that of the other party to a civil union with such person.

The recommendation is part of a comment letter signed by 58 people who are, in the words of the petition, "business persons; members of angel groups, trade associations and advocacy groups; partners and associates of venture capital funds; startup founders; individual angel investors; and other persons interested in the health and vibrancy of America's startup ecosystem."

The comment letter has been submitted in connection with the SEC's open call for public comment on changes to Regulation D, which is the foundational rule set for the startup financing ecosystem in the United States.

One thing the StartupEquality.org petition might have done, but didn't, was cover the point covered in the Treasury/IRS ruling - namely, that a valid marriage for purposes of the accredited investor definition stands up, regardless of the law in the jurisdiction in which the given investor resides. But I am glad we chose to say that civil unions, domestic partnerships, and similar relationships should count.

I'll update this post when the comment letter is posted to the SEC site. It usually takes a few days.

Update 09/05: the letter is up on the SEC site already! Here is the link.

Photo: King County, WA / Flickr.

Something to track this September

I'm late to this news: a crowdfunding bill has been introduced in the Wisconsin State Legislature.

Zach Brandon told me this was coming but I am only just looking at the bill for the first time today.

And it looks like there is more going on in this bill than crowdfunding.

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Check out this bit of the "analysis by the Legislative Reference Bureau" that prefaces the text of the bill itself:

"For purposes of securities registration exemptions, this bill creates a state law definition of "accredited investor" and changes the criteria for being an accredited investor [under federal law]. The bill lowers the individual income threshold [under Reg D] from $200,000 to $100,000 and lowers the joint income threshold [under Reg D] from $300,000 to $150,000. The bill also lowers the net worth threshold [under Reg D] from $1,000,000 to $750,000 and specifies that the net worth calculation includes the person's primary residence as both an asset and a liability."

Wow!

We'll have to (a) return to this bill and figure out what is going on, and (b) try to get a sense of how viable the bill might be.

Photo: Peasap / Flickr.

Another way to give input on the changes coming to startup and emerging company financing

There is a committee, the "Advisory Committee on Small and Emerging Companies," which from time to time gives the SEC recommendations that flow from a "focus on interests and priorities of small businesses and smaller public companies."

Pc-gold-noticeAccording to this public notice, this committee is going to have an open and web-cast hearing on September 17, to discuss "matters relating to rules and regulations affecting small and emerging companies under the federal securities laws."

Here's what's in play right now, ranked more or less in order of which will come first:

  • How extensive will the changes be to Regulation D and the Form D filing requirements, both for Rule 506(b) and Rule 506(c). Will there be Form D notice pre-filing and information filing requirements for issuers that utilize Rule 506(c) (allowing general soliciation and general advertising as long as all purchasers are accredited and the issuer takes reasonable steps to verify the accredited status of such purchasers)?
  • Will transitional rules make those who use 506(c), come September 23, regret that choice?
  • Will the accredited investor definition continue to discriminate against investors who meet the objective financial standards, but are discriminated against because they are in a same-sex relationship and live in jurisdictions that do not permit them to marry?
  • Will the GAO report recommendations on changes to the accredited investor standard be construed or applied make it easier to be an accredited investor (providing additional ways for natural persons to satisfy the test), or to make it harder (raising thresholds or piling on additional requirements to be satisfied)?

Schedule permitting, I will plan to live blog the webcast on September 17. In the meantime, the notice invites the public to submit "statements."

So here is yet another way to give input on the changes coming to startup and emerging company financing.

Photo: Archives New Zealand.

The mission of startupequality.org

"StartupEquality.org has a simple mission," writes Dan Shapiro in an important guest post on TechCrunch. That mission "is to get same-sex couples the same rights to invest in startup companies as heterosexual couples."

CaptureOur "ask" of the SEC is to expressly acknowledge that persons in civil unions, domestic partnerships, or similar state law relationships, should have the same ability to pool resources, for purposes of satisfying accredited investor thresholds, as persons who are married.

Here's the rule Startupequality.org is proposing that the SEC adopt:

A spouse of a natural person shall mean another person, regardless of gender or sexual orientation, whose relationship with the person specified: (1) may be characterized as such person's (i) husband, (ii) wife, (iii) spouse, (iv) domestic partner, or (v) designated beneficiary under any applicable state law for the purpose of ensuring that each person in a two-person relationship has certain rights or financial protections based upon such designation; or (2) is that of the other party to a civil union with such person.

I encourage every member of the wac6.com community to read Dan's post and also consider weighing in on the comment thread developing there.

We didn't used to talk about discrimination against sexual orientation in the startup community. But now that we see how embedded it is in the enabling rule set, we have to confront it.

And the way to start is to acknowledge the inequity and to talk about it.

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