July 27, 2014
Dear Chairman White:
I am a partner in a startup company and I am writing to urge the SEC to protect angel funding, by retaining or reducing the existing financial thresholds in the current accredited investor definition. Early-stage companies like our company, BomBoard LLC, depend on accredited angel investors for funding.
We have raised seed funding and Series A funding from about 20 investors thus far. We are registered under 506(c) for our latest round and have more insight into to the financial situation of each investor than we had under the prior 506(b) self declaration. Three out of our four 506(c) investors would not have meet the $2.5 million net worth threshold, but all of them are experienced people who fully understands the investment risks they are taking. We think about half of our prior 16 investors would not have qualified under a $2.5 million net worth rule.
The original intent behind the JOBS act was to make it easier for worthwhile companies to raise money. Eliminating the general solicitation rules under 506(c) has allowed us to pursue accredited investors on a broader scale. We have also had people, who did not meet the current accredited investor definition tell us that they think it is unfair that they are not allowed to invest in us. Why should these potentially high return investments be reserved for the people who are already rich?
Over the years I have met people making $75,000 per year who were well more investment and business savvy than the people who made a lot more money or had a lot higher net worth, so the main reason for the current criteria is that wealthy people can better handle a complete loss. This is true, but there are no restrictions on people investing in high risk public securities. The chance that high flyers like Tesla could lose 50% of their value is probably as high as angel investors loosing 100% of a Series A round investment. Furthermore, angel investors have a better opportunity to do true due diligence and get inside financials than would be possible for a public company.
I urge the SEC to adopt the following approach:
Maintain the current financial thresholds ($200,000 income per individual $300,000 for joint filers, or $1 million net worth not including primary residence) for individuals to qualify as accredited investors under the current disclosure rules.
Expand the definition to include a lower financial threshold (e.g. $125,00 / $200,000 / $500,000) provided the company creates a formal Private Placement Memorandum containing information relevant to the offering including risk factors, investors sign a document where it would impossible for them to miss that they could lose the entire investment and liquidity may be a long time off even if the company is doing well.
Consider requiring a 14 day waiting time from the investor provides the money till the company closes on the investment to give investors a chance to change their mind. This limits the effectiveness of anyone trying to use high pressure sales techniques similar to timeshare sales.
Incorporate the concept of sophistication for individuals and businesses, who do not meet the above thresholds. This should include safe harbors for certain professions, job titles, educations, people who have owned or been partners in private companies and companies over a certain revenue size. For non-safe harbor people, the SEC could add restrictions such as investors confirming they have invested in individual stocks in the past and that including this investment, no more than 25% of their net worth (excluding primary residence) is tied up in 506 types of investments.
Such an approach will continue to provide investor protection while making more funds available to worthwhile companies.
Thank you for your consideration.
COO / CFO