Senate eyes change for ‘angel investors’

Senate eyes change for ‘angel investors’
© Getty Images

A bill designed to make it easier for startups to obtain capital from wealthy investors is awaiting Senate action after passing the House last week by a large margin.

The measure has support in both parties and from business groups, but passage in the Senate is no sure thing, as some Democrats and financial-reform advocates have concerns that the legislation would remove protections for investors.

ADVERTISEMENT

The legislation, called the Helping Angels Lead Our Startups (HALOS) Act, would exempt events like “demo days” from certain Securities and Exchange Commission (SEC) requirements.

“This bill expands access to capital by ensuring small businesses can continue to connect with so-called angel investors,” said House Small Business Committee Chairman Steve Chabot (R-Ohio), the bill’s lead sponsor.

Startups often connect with wealthy “angel investors” by holding demo days — events hosted by universities, local governments and other groups where entrepreneurs can showcase cutting-edge products.

Under SEC rules stemming from the 2012 Jumpstart Our Business Startups (JOBS) Act, demo days can be considered “general solicitations” for capital. If an event is considered a general solicitation, the SEC requires that the entrepreneurs take reasonable steps to verify the investors are accredited and meet minimum net worth or income requirements.

Supporters of the bill say the SEC requirements are burdensome to businesses that want to take part in demo days and could discourage
investors from participating.

The HALOS Act would direct the SEC to revise its rules to clarify that the limits on general solicitations don’t apply to business presentations and communications at demo-day events sponsored by certain organizations, such as colleges, nonprofits and angel investor groups.

The events would not be subject to the limits as long as advertising does not reference a specific offering from the business and the business does not distribute specific information about an offering of securities at the event.

The House passed the HALOS Act last week — ahead of this week’s celebration of National Small Business Week — by a vote of 325 to 89. No Republicans voted against it, and Democrats were about evenly split.

In the Senate, the bill has been referred to the Senate Banking Committee, which has yet to move on it. The lead sponsor of the Senate bill, Sen. Chris MurphyChristopher (Chris) Scott MurphyWant to improve health care? Get Americans off of their couches Situation in Yemen should lead us to return to a constitutional foreign policy Overnight Defense: Biden honors McCain at Phoenix memorial service | US considers sending captured ISIS fighters to Gitmo and Iraq | Senators press Trump on ending Yemen civil war MORE (D-Conn.), is urging the Senate to follow in the House’s footsteps and act as soon as possible.

“Right now, unnecessary restrictions are holding back our startups, making it difficult for them to innovate, grow and create jobs,” Murphy said in a statement last week. “I’ve heard from entrepreneurs all over Connecticut and the most important thing we can do is make it easier for investors to put capital behind them.”

Supporters of the HALOS Act say the bill would make it easier for startups to connect with investors, allowing them to grow and create jobs. They note that major companies such as Amazon, Starbucks and Facebook all received initial funding from angel investors.

“I believe that most Americans also believe that our economy works better for all Americans when small businesses can focus on creating jobs rather than navigating meaningless, bureaucratic red tape,” House Financial Services Committee Chairman Jeb Hensarling (R-Texas) said during floor consideration of the measure.

“The HALOS Act provides an important fix to regulations so it will be easier for our small businesses to attract investments,” he added.

But opponents of the bill argue it removes important safeguards for investors.

“This bill would make changes to investor protections under the JOBS Act that I believe are ill-advised and could lead to unintended consequences for our regulatory framework,” said House Financial Services ranking member Maxine Waters (D-Calif.).

Waters offered an amendment that aimed to bolster investor protections in the bill, but it failed.

The advocacy group Americans for Financial Reform sent letters to lawmakers in opposition to the bill, saying the exemption from the investor-verification requirement “is overly broad and would likely lead to losses for investors who are not prepared to take the significant risks associated with purchases of unregistered securities.”

Public Citizen, a liberal watchdog group, also urged lawmakers to vote against the bill, saying it “could allow hucksters to promote high risk investment products at an almost unlimited number of venues,” including churches.

Obama administration officials said they “look forward to working with the Congress on this legislation as it moves forward,” but have expressed concerns that the bill does not consider the importance of investor protections.

The measure would create an exemption to a requirement that “helps ensure that unsophisticated investors do not make investments when they may not understand the attendant risks,” the Office of Management and Budget said in a statement.

But backers of the bill believe investors are protected in demo days.

Those who participate in the events “are generally part of what we call the startup ecosystem,” Marianne Hudson, executive director of the Angel Capital Association (ACA), told The Hill. “It doesn’t attract people walking off the street.”

Prior to the passage of the JOBS Act, investors self-certified that they were accredited investors, and if the bill were enacted, that practice would continue.

The ACA said in a letter to Hensarling earlier this year that the actual investors in startups would continue to only be accredited investors if the bill was enacted.

Molly Day, vice president for public affairs at the National Small Business Association, said business owners will still do their due diligence, regardless of how they meet the investors.

If the bill is enacted, businesses will still go into demo days “with both eyes open,” she said.