SEC Lifts Advertising Ban on Private Capital Raise Offerings

Source: Angel Capital Association (

In July 2013, the Securities and Exchange Commission approved two rules and one proposed rule that will change how entrepreneurs raise angel capital and may make investment more difficult for angels and startups alike. We want to make sure ACA members have the information you need as soon as possible.

The issues are complex, but here is a quick summary:

1. The SEC is lifting the ban on general solicitation for startups raising capital under Regulation D Rule 506(c) – as required in last year’s JOBS Act – and providing rules on how issuers take “reasonable steps to verify” that all investors are accredited.

Here’s the important thing for you to understand: for solicited deals, angels will no longer be able to self-certify their accredited status. Instead issuers will need to verify accredited status with “safe harbor” categories such as IRS documentation or certification from an attorney, accountant, or registered investment advisor. Investors who have previously invested in an issuer will be grandfathered in additional investments in that particular company. The rule as proposed last August is here.

ACA wants to ensure that accredited investors have other safe harbors that are easy, inexpensive, and protect privacy so that your investment activity in job-creating startups continues. We will continue our quest to get the SEC’s approval for two items: membership in a reputable angel group or ACA, and a self-certification questionnaire that adds four simple questions (more details are in our December, 2012 letter to the SEC and Jean Peters’ testimony to a Congressional committee in April, 2013). We believe that the professionalism of ACA membership should serve as a benchmark standard.

General solicitation will be allowed beginning in 60 days after the rules are published in the Federal Register (which should happen in the next several days).

We should also note that the rules for private offerings that do not use general solicitation have not changed as it relates to verifying accredited status.

2. “Bad actors” will not be able to participate in Reg D 506 offerings. In general, ACA supports this rule because it increases investor protections against fraud, but it ensures uniform regulation of these private offerings across the United States and it keeps the reporting requirements for entrepreneurs the same as they are currently. The current uniform system is efficient for small businesses that attract angel capital. ACA promoted this issue as part of our work on amendments to Dodd-Frank financial reform act in 2010. The SEC rule as proposed in 2011 is here.

3. The SEC will propose a new rule requiring issuers to file an expanded Form D before they start soliciting their private offerings and also after the investment closes. This proposed rule has not yet been posted by the SEC, so we need to understand more details on it – but we will be commenting on it during the 60 comment period. Two of the commissioners who dissented in the vote said this proposal could create a regulatory regime that restricts capital formation and goes against Congressional intent in the JOBS Act to support startups and create jobs. As Joe Wallin, a member of ACA’s public policy advisory committee put it, “This sounds like Sarbanes-Oxley for startups. Great idea!” (not).

From today’s hearing, we understand that the SEC will increase enforcement of the requirement to submit Form D (resulting in loss of 506 exemption) and add new required information in the form. Among those items are types of investors in the offering, type of general solicitation used, methods used to verify accredited investor status, and much more information on the issuer.

If you are following reports on these issues today and in the coming days, you may see conflicting information and interpretations. This is because of the complexity and the fact that the final details are yet to be posted by the SEC. We will stay on top of this and provide additional details and clarity as we learn more.

About Scale Finance

Scale Finance LLC ( provides contract CFO services, Controller solutions, and support in raising capital, or executing M&A transactions, to entrepreneurial companies. The firm specializes in cost-effective financial reporting, budgeting & forecasting, implementing controls, complex modeling, business valuations, and other financial management, and provides strategic help for companies raising growth capital or considering M&A/recapitalization opportunities. Most of the firm’s clients are growing technology, healthcare, business services, consumer, and industrial companies at various stages of development from start-up to tens of millions in annual revenue. Scale Finance LLC has offices throughout the southeast including Charlotte, Raleigh/Durham, Greensboro, Wilmington, and Myrtle Beach with a team of more than 30 professionals serving more than 100 companies throughout the region.