Category Archives: Legislation

Note to the SEC on Accredited Investor Definition

8 June 2014

 

The Honorable Mary Jo White, Chairman

US Securities and Exchange Commission

100 F St. NE

Washington, DC  20549

 

RE:  Accredited Investor Definition

 

Dear Chairman White:

 

As a board member of the Angel Capital Association (ACA) and the Chair of the Seattle Alliance of Angels, I urge the Commission to protect angel funding to ensure the health of the startup economy we support, by retaining the existing financial thresholds in the current accredited investor definition.  These thresholds — $1 million in net worth or $200,000 in income — have worked well for decades, creating a vital accredited angel investor sector that is the primary source of funds for early-stage companies that drive the innovation economy and job-creation nationwide, and with very little fraud.

I have been an active angel investor for over 25 years, founded and chair the Alliance of Angels (the largest angel network in the Pacific Northwest that has invested over $80M in almost 200 companies during the last 18 years), and have helped start many companies, leading several to IPOs.  During this period, I have come to know many entrepreneurs and even more angel investors.  I have yet to encounter even one investor who said that they would benefit from changing the accredited investor threshold.

Angel investors are sophisticated.  Unlike bankers or VCs, we invest our own money – not someone else’s.  We are not in just the financial centers of New York, Boston, and San Francisco, but are in every major city and town in the country.  We invest not just our own money, but also our time, energy, expertise, and reputation in helping startups get off the ground, thrive, and become major forces in the economy.  We do this because many of us have been entrepreneurs and benefited from the innovation ecosystem.  And we do this knowing that a large percentage of the investments we make will not succeed.  But some will and what successes they can become!

 

If financial limits were sharply increased, angel investment in early-stage companies would suffer.  An increase in the net worth threshold to $2.5 million, advocated by some, could cut upwards of 60 percent of current accredited investors out of the market.  The startup ecosystem would be devastated by such a dramatic shrinkage of this vital investor pool, especially in regions where venture capital is not prevalent. A contraction in angel investing could stall local economic development, university technology initiatives, and stem innovation and job growth. At the same time, millions of Americans would instantly lose the opportunity to participate in the innovation economy that is largely the purview of companies raising funds privately from accredited investors.

 

It is important to consider investor protection, the public interest and our current economy.  However, the SEC should note that, as more accredited individuals have engaged in angel investing, direct investment in startups has remained largely free of fraud.  This is a result of concerted due diligence, negotiated terms, and ongoing entrepreneur support and mentoring that are the hallmark of angel investing.

 

Given the importance of the innovation economy to the nation, the need for capital formation in the early-stage sector, and the need to balance access to investment opportunity with investor protection, I urge the Commission to adopt the following approach to the accredited investor definition:

 

  • Maintain the current financial thresholds of $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.
  • Incorporate the concept of “sophistication” for individuals who do not meet the above thresholds to prudently expand the accredited investor pool, using a detailed questionnaire to identify qualitative information about knowledge and experience with this type of investment.

 

Such an approach will continue to provide investor protection while also recognizing the growing role and importance of accredited investor investment in innovation and growth that are essential to serve the public interest and sustain our nation’s economy.

 

I believe that raising the limits will have a chilling effect on the angel investment ecosystem, with adverse effects on the entire economy for a generation.  At a time when risk capital is exceedingly hard for entrepreneurs with great ideas to obtain, any action to place further limitations on angel investors is likely to cause a further retraction of the highest growth segment of our economy.  While I understand that is not your intent, it will be an unintended consequence.  In the strongest possible terms, I urge you not to take such an unwarranted action that will have deep repercussions for years to come with no real upside benefit.

 

Thank you for your consideration.

 

Sincerely,

Daniel Rosen

Chair, Alliance of Angels (Seattle)

Member of the Board, Angel Capital Association

 

Comment to the SEC

November 4, 2013

Elizabeth Murphy, Secretary

U.S. Securities and Exchange Commission

100 F Street NE

Washington, DC 20549

 

Re: File No. S7‐06‐13, Amendments to Regulation D, Form D and Rule 156

Dear Ms. Murphy:

Thank you for the opportunity to provide comments to the Commission on your proposed amendments to Regulation D and Form D.  Many others have provided you detailed comments on why the proposed rules are neither suitable to current market conditions nor aligned with the goals of the JOBS Act that they were supposed to support.  I am not a securities attorney, and recognize that many of the legal arguments in these other comments will have more sway with the commission, so rather than pile on to those already exhaustive and accurate comments, I would like to take a more personal approach.

I have been an accredited investor who has been an active angel investor for over 20 years.  As such, I’ve made well over 50 investments in startups and have chaired the largest angel group in the Pacific Northwest that has made over 200 such investments.

Angel investing has moved from a curiosity to an asset class.  Angel Investors are individuals, scattered across the country in every major city and town in the US, who invest their own money (unlike banks or VCs).  And, to make their companies succeed, they must also invest their time, knowledge, experience, and networks.  We do this willingly, giving back to the communities that help us become successful, knowing that on the average over 50% of these startups will fail and not return the investment capital we have contributed.  Occasionally, one or our companies succeeds wildly, creating many jobs and sometimes a whole new industry.

Here in the Pacific Northwest, as in many other areas of the country, the amount of venture capital financing has diminished.  Angel Investors have often stepped into the breach, investing both more and for longer than in the past.  These private investments are not liquid; we know that going in.  We know that we typically have to hold our investments for over 7 years from time of first investment and often over 10 years.  These are risky investments.

Since we operate on our own, we do not have the infrastructure of a large firm.  Typically, our individual investments are small – in the range of $25,000 to $100,000 – and the companies are at their very earliest stages (when we can add the most value to help them succeed), raising only a few hundred thousand dollars to get going.  More often than not, we invest in a small technology team with a good idea, who have not yet hired any real “business people,” have no infrastructure and are working out of a temporary office.  It is our hope that the capital and time we contribute (we are not paid; just equity) will help these companies become the next Microsoft, Google, or Facebook, creating thousands of high-paying jobs.

In order to get these companies going, simplicity is required in financing and deal structure.  Having travelled and worked in many countries, the US system has been the envy of the world.  Simple Reg D financings have been the cornerstone of the entire asset class and ecosystem.  We learn of a small team, help them get up and running, do a simple and quick financing, and then help them grow.  The SEC deserves a lot of credit for their foresight in this asset class and the Federal preemption that has allowed it to grow and create jobs and companies.

However, your latest rule-making has put all of that in jeopardy.  You have proposed a set of rules that would at best make these financings difficult and at worst completely crippled the asset class.  By asking the proverbial 2 guys in the garage to take on the same responsibilities that you would require of an established company with on-staff legal departments and millions in revenue is the definition of insanity.  Requiring potential investors to turn over personal financial information to a company that has no real ability to keep it secure is ridiculous.  But most of all, it strikes me that you are trying to fix a problem that doesn’t exist – angel investors know each other and the risks they are taking.  There is little or no fraud in this asset class.

If you do impose a host of restrictions and limitations on the asset class that is working well and is not suffering from any problem other than, perhaps, needing even more capital, you risk causing the capital to dry up for these fragile companies that have driven the US economy.

This is exactly opposite the intent of the JOBS Act.  And, in my humble opinion, contrary to our national interest.  We need more capital going into angel deals, not less.

Please resist the temptation to cripple angel investing.

Respectfully,

Daniel Rosen, CEO

Dan Rosen & Associates

Kirkland, WA

General Solicitation

Once again, through inadvertent action, the federal government is about to threaten Angel Investing. This all started as a way to increase investment in startups, when congress passed, and the Obama signed the JOBS Act (see: http://blog.drosenassoc.com/?p=97). Title II of the JOBS Act allows “General Solicitation and Advertising” of private placements (like Angel deals). One would think this is good for two principal reasons: (1) it roughly brings current practice into compliance, since many angel groups post their deals on a web site (like Gust, which is used by many angel groups) or run events where companies present to their members and others; and (2) more and more angel deals are funded by many angel groups (usually called syndication), so there is an implicit solicitation. We liked this idea. It allows our companies to reach a broader audience of only accredited investors. All good, right?

Well, not so much. The legislation also asks that the SEC use “reasonable steps to verify” that they are accredited. Even with that, it seems pretty straightforward. The reasonable steps to verify have been around a long time (under Rule 506B). Every time angels (or other accredited investors) make an investment, the deal documents come with a short form that you fill out how you qualify as an accredited investor. The SEC has given “safe harbor” using this mechanism.

But the SEC is considering that this long-accepted method will not be acceptable if an issuer (a startup company raising money using Regulation D) uses the new General Solicitation rule (Rule 506C). Instead, the SEC originally proposed that investors would have to give the issuer copies of their tax returns. The Angel Capital Association (ACA) wrote a very strident response that this would severely diminish angel investing, since few angels would turn over their tax returns to a startup. And, of course, the startup would have to find a way to preserve these records and keep them confidential – a real mess, given that most startups don’t even have permanent offices.

The ACA Public Policy Committee fought hard to ensure that existing “quiet offerings” (Rule 506B). Therefore, if you don’t take advantage of the General Solicitation (“noisy offerings”), you still can take advantage of the existing rules.

If you do use a noisy offering, then you will need to follow new rules, which have not yet been written. But the preliminary rules (and discussions with SEC) show that the SEC is unlikely to allow “self certification” for these offerings. Therefore, one of two outcomes now looks likely: (1) issuers (or their attorneys) will have to collect a lot of information about their investors and investors will have to share a lot of personal information; or (2) new third-party certifiers will emerge to do this.

Is this really so bad? YES – this is bad. First and foremost, we all rely on the “safe harbor” on the Reg D investments. At this point, the rules don’t give this safe harbor for any particular mode of validating accreditation. This means that deals can be challenged and unwound. Very bad. Secondly, even using third party validation, will cause the costs of these deals to increase. Instead of money going to hire engineers and sales people, it will be used on deal overhead. Very bad. And lastly, most angels HATE extra paperwork. If the validation requires that you hunt through and list all of your deals for the last 5 years (it would take me hours to do this!) And, I would be generally unwilling to provide my tax returns to anyone. In the end, it would just mean a lot of extra paperwork and time. I would probably avoid any deal that used a noisy offering.

I think that the SEC (and the legislators who supported the JOBS Act) really needs to recognize that the angel investing arena has self-regulated very well and the current system has worked well. Extending the current process for noisy offerings makes a ton of sense. It is the right way forward.

After all, “if it ain’t broke, don’t fix it!”

Angel Investing and Job Creation

As you know, I chair the Public Policy Committee of the Angel Capital Association (http://www.angelcapitalassociation.org/). In that regard, I’ve spent a bunch of time in Washington, DC, meeting with legislators and executive branch people. I thought it would be useful to post a simplified version of the story we tell.

It still surprises me, being so immersed in Angel Investing, that there is so little understanding of what we do. Many confuse what we do with banking. Others confuse us with venture capitalists. And yet others confuse us with friends and family. The ACA Public Policy agenda, when stripped to its essence, is comprised of the following four items:

1) Educational. Angel investing (and therefore angel investors) are the wellspring of our economy; we are the true job creators. We are not Wall Street; we are Main Street. We invest our own money (not other peoples’ money) in virtually every community in the country to start high-growth, high-potential startups that transform the economy to the 21st Century. We do this knowing that (statistically) over half will fail and we will lose our money. When we back the winner, we plow the returns back into more startups. We are not looking for government protection. But encouragement will make a difference in the rate and amount we invest in these high-growth companies.

2) Do no harm. Sometimes there are unintended consequences of legislative actions. One good example of this were several provisions in the original draft of the Dodd-Frank Financial Reform act that would have eliminated over 70% of the eligible angels and made Reg D filings difficult or impossible. This would have severely hampered Angel Investing and curbed the companies we support. We take aggressive, but prudent, actions to ensure that such actions are understood and not taken.

2) Cap Gains. Reauthorizing the Section 1202 zero capital gains for Qualified Small Business, first through the extenders bill (making it retroactive to 1/1/12) and in place till the Congress has time to make it permanent. We need some structural changes (e.g. 2 year rather than 5 year holding period; LLCs as well as C corps; and changing the roll-over period to 1 year from 60 days) that we will work with staff to explain. And.. this needs to be permanent so that we can use it as an incentive; we look at lots of companies and the timing can’t be accurately predicted, so our members (and all angel investors) need to be able to plan on this or they won’t use it. When angels get an exit, they re-invest their proceeds in new deals; this is the flywheel upon which angel investing is based. If a substantial proportion of the proceeds are absorbed by taxes, the entire asset class looks much less attractive. And remember that Angels (unlike VCs who invest other people’s money and only make a return when they invest) don’t have to invest in these deals.

3) Angel Tax Credit. Other countries and lots of states have enacted an angel tax credit that has spurred investment in high-growth startups. Typically this is 25% in the year of investment. Zach has some wonderful data from WI. These tax credits do a great job in stimulating new investment.

More will follow.

JOBS Act – What does it mean for angels

I have been asked repeatedly over the last several weeks: “What does the JOBS Act mean for Angels?” In this and other future blog postings, I will give my perspective.

First, what is the JOBS Act? It stands for Jumpstart Our Business Startups Act; it has nothing to do with earlier jobs stimulus efforts other than sharing an acronym. It is a regulatory reform act and does not have any tax elements. The full text can be found at: http://www.govtrack.us/congress/bills/112/hr3606/text (There are other pending legislations that address how to stimulate early-stage company investment through tax incentives.)

Broadly speaking, the JOBS Act is intended to provide more capital to startups that fuel the growth of our economy. It does the following:

  1. Removes some of the most onerous provisions of Sarbanes-Oxley Bill from emerging growth companies. The argument is that, while large, publicly traded companies needed the extra oversight and transparency, it was never intended to cripple the ability of high-growth startups from tapping the public markets.
  2. Brings the Securities Act of 1933 into the 21st century by recognizing that markets and communications have changed.
  3. Potentially allows for the revitalization of Reg A filings as a way for smaller companies to raise money from public markets.
  4. Enables “Crowdfunding” – a way that very early stage startups can get many small investors to stake their company early in the lifecycle of the company.

Much of the attention to the JOBS Act has been focused on the Crowdfunding part, so I’ll address this in this posting. However, the largest impact is likely to be from the other provisions, which will modernize and simplify the operations of Angel financings, small IPOs, etc. I’ll address those in future postings.

Crowdfunding (Title III of the JOBS Act)

In the past, startups were typically initially financed by “friends and family.” There are legendary stories of entrepreneurs mortgaging their homes to start their businesses, and then reaching out to their family, friends, and associates to get the company off the ground. As the original Senate bill said, the decline in home values has caused much of this source of early-stage capital to dry up.

Crowdfunding has precedence. People have contributed small amount of money (via the net) to charities, arts, etc. The music and theatre industries have tapped their fan base to ask for money for new works.

The difference with these precedents and Crowdfunding is the purchase of equity, which has been highly regulated. In the US, only accredited investors (a person with over $200k of annual income or over $1M in net worth; see http://www.sec.gov/answers/accred.htm for the full definition) could invest in highly-speculative private shares. The accredited investors were thought to be sophisticated investors, who could do appropriate diligence on the company and assess the risks. In general, Angels and VCs are the primary investors in this category.

There is still a raging debate on the advisability of allowing less sophisticated investors to enter this asset class. On one hand, the optimists say “why should only the very wealthy be allowed to buy early shares in a company like Facebook?” On the other hand, the pessimists would say, “this is a recipe for fraud; charismatic fraudsters will prey on the unsophisticated investors getting them to invest an amount of money that they can’t afford to lose in companies that don’t really exist.”

The devil will be (to some degree) in the details. The Act calls for a 270 day period for the SEC to write the rules. It also includes some safeguards:

  • A company may only raise $1M in a year from Crowdfunding;
  • No investor may invest more than $10,000 (or $2,000 if the investor has an income of less than $100k);
  • The investment can only be through a registered broker or funding portal;
  • A degree of public transparency by publishing the terms of the deal, the basis of the price, cap table, etc. that Angels would typically study;
  • Take steps to prohibit “bad actors” from issuing securities using Crowdfunding to help prevent fraud.

This is an experiment that marries the internet, social networking, and modern communications with selling private securities. It could work, it could fizzle, or it could be a great vehicle that tests the innovative spirit of fraudsters. If it works, it could cause thousands of flowers to bloom – startups in all parts of the US will have access to capital. If not, we can hope that the SEC regulations will limit the amount of fraud.

Impact on Angels

The simple answer is none of us know exactly. But there are certain things I believe to be absolutely true.

First and foremost, Crowdfunding will only INCREASE the need for angel financing. Very few of our high growth companies will get by on just Crowdfunding. If this is a successful experiment, then more companies will need follow-on financing from Angels.

But, the question is “will angels be willing to invest in a company with potentially hundreds of new, unsophisticated shareholders?” Will the cap table be screwed up? Any good, sophisticated angel knows that valuation is a key to success. My biggest fear is the following scenario:

  • Company X at the concept stage has a charismatic CEO with a great vision. He posts a plan and video on a funding portal asking for $1M with a $20M post for common stock at $1 per share. (We all know that it is possible to write a business plan the justifies this!)
  • The company then spends the money and makes progress toward a product. It now seeks angel financing for $2M.
  • We assess the company, like its prospects, and agree that it is a worthy investment, but assess the appropriate pre-money valuation to be $2M (not $20M) for preferred stock.
  • The previous Crowdfunding investor now see their shares valued at less than 10 cents on the dollar. They are very angry.
  • This is widely reported in the press and the entire asset class takes a hit.

We have a lot of work to do on Crowdfunding.

Signing the JOBS (Jumpstart Our Business Startups) at the White House

It was much cooler than I thought – being in the Rose Garden at the White House for the signing of the JOBS Act. I was just a few feet from Obama. Surprised at how many people I knew there, including Tom Alberg (Madrona), Joe Schocken (Broadmark), Steve Case (former AOL), Sen. Scott Brown (R-MA), Bill Carleton (McNaul Ebel), etc. Pictures are below.

Attending the JOBS Act Signing – I will be there!

On Thursday afternoon, I will attend the JOBS Act signing ceremony in the Rose Garden at the White House. The Jumpstart Our Business Startup Act passed both the House and Senate with broad bi-partisan support. It is primarily a regulatory reform act and does not address tax policy issues.

For details on the JOBS Act, see my previous post: http://blog.drosenassoc.com/?p=87. This is not a perfect solution. The centerpiece of the legislation is Crowdfunding, which will take some time to implement and many (including me) worry might allow weakening of the security statutes and targeting of those investors who can least afford to lose the money they invest in these very risky startups.

But, the bill also makes many long-needed changes to security regulations that reflect the current market conditions, including changes to advertising and general solicitation and ability for smaller companies to access the IPO market without many of the unnecessary burden imposed by Sarbanes-Oxley and the Dodd financial reform legislation.

All of these changes raise the need for angel investors. Crowdfunding (once implemented) can help get companies going; it augments and replaces friends and family funding. It only gets companies so far. The ones that achieve their milestones will then require the next round of growth capital and this is where either Angels or VCs fit the bill.

I intend to post my observations on the White House event after I attend. And of course will continue to add my insights as appropriate.

JOBS Act

Here is a post that I helped author for the ACA:


ACA Public Policy Flash
March 27, 2012

Dear ACA Member –

Unless you’ve been on a vacation on a remote island, you have heard that the US House and Senate have each passed their own versions of the JOBS Act
(Jumpstart Our Business Startups Act,
HR 3606), aimed at making it easier for small businesses to raise capital and have positive exits and thereby creating jobs. We understand that the House just voted on the Senate bill today, and the bill is being sent to President Obama for signature immediately.

The JOBS Act is complicated, but we wanted to provide you with information about the bill. The main thing to understand about this bill is that it does not deal with any tax issues, which are very difficult to pass in this partisan environment in Congress. Instead, the leaders of the House and Senate have focused on those structural and regulatory issues that inhibit startup growth, but don’t directly impact government revenue.

Many angels are asking questions about it and we know opinions about part of the bill vary quite widely (crowdfunding, anyone?). Below is a quick summary, with an eye toward how angels are or might be affected, and also links to some more detailed resources. The bill covers multiple issues:

  • Allows equity-based crowdfunding – New businesses will be able raise up to $1 million in equity capital from unaccredited investors. The Senate version of the JOBS Act creates a number of restrictions, aimed at protecting investors. Among those restrictions are limiting individual investments to $10,000 or 10 percent of the investor’s annual income (whichever is less) and registration by intermediary platforms and issuers with the SEC. Federal law would preempt state regulations, meaning that issuers could raise funds from across the United States. The SEC has 180 days after the bill’s enactment to publish rules for crowdfunding.
  • Removes prohibitions on general solicitation of Regulation D offerings – Allows for advertising of Reg D 506 offerings, as long as advertisements are focused on accredited investors. Angels should especially note the “McHenry Amendment,” which clarifies that angel and incubator platforms that do not charge a fee connected to the purchase or sale of securities are exempt from broker-dealer registration. This is helpful for Web platforms such as AngelList or Gust and venture forums aimed at accredited investors, and also for some of your angel groups.
  • Creates an IPO “on ramp” – Reduces the cost of going public for “emerging growth companies” – those with annual revenues of less than $1 billion and after the IPO, less than $700 million in publicly traded shares. These companies receive a 5 year exemption from costly Sarbanes-Oxley 404(b) requirements such as hiring outside auditors, while still requiring some quarterly and annual SEC disclosures. A number of other related technical issues are included, many recommended by a study committee of the National Venture Capital Association.
  • Increases threshold for Regulation A “mini public offerings” – Regulation A currently allows companies to go public and be exempted from SEC registration for offerings up to $5 million. The JOBS Act increases the offering threshold for this little used exemption to $50 million, perhaps making it a more useful option for more angel-backed companies.
  • Raises cap on private shareholders from 500 to 2,000 – Many private companies are forced by regulations to file as a public company once they exceed 500 shareholders and $10 million in assets. The bill increases the shareholder limit to 2,000 accredited investors or 500 unaccredited investors. The updated cap allows for flexibility to Facebook in staying private or going public, and could also benefit secondary market platforms that can offer a more robust market for the shares of private companies.

ACA has been working with our Public Policy Advisory Council to better understand many of these issues and to keep you all accurately informed. Thanks go particularly to Joe Bartlett, Bill Carleton, Dan Hansen, and Lori Smith.

The SEC will have 90 days to publish rules on most of these items, with 180 days to set the crowdfunding rules. ACA will be in contact with the SEC to provide feedback on the rules for many of these issues to ensure the best possible environment for healthy angel investment. In addition, we are currently working with VC Experts to hold a Webinar on the JOBS Act in April – before the rules are set – to catch you up on the details and to get ACA member feedback.

ACA is supportive of the JOBS Act, acknowledging its complexity and differences of opinions on the impact of crowdfunding on sophisticated angel investing and startups. We continue to generally support the concept, as we wrote you in December, while also noting some concerns about fraud and other issues. We will also point Congress to the need to catalyze angel investment – through tax credits and extension of the 100% exemption of gains on Qualified Small Business Stock – so that the companies that raise capital through crowdfunding have access to the excellent angel investment they will need to survive and grow.

We will stay in touch with you as the rules and details for the JOBS Act concepts are set. If you have questions or suggestions, please do not hesitate to contact us.

Regards,

Dan Rosen,Chair, ACA Policy Committee
Marianne Hudson, ACA Executive Director


For more information about JOBS Act:

Crowdfunding and Angel Investing

My friend, Bill Carleton, posted a very thoughtful blog on Crowdfunding and angel investing: http://www.geekwire.com/2012/angels-crowds

Bill has teed up some excellent questions. See my response.

While you should definitely read the entire post, here is brief excerpt:

Crowding out angels from startup financings?

March 3, 2012 at 1:52 pm by William Carleton

As early as next week, we may know whether Congress will change US securities laws to permit startups to sell stock to the general public over the internet.

You know how, today, companies raise money on Kickstarter by offering products, t-shirts, and other bennies? Imagine those same companies selling stock to investors over a Kickstarter-like platform. If the law changes – and this is something that one chamber of Congress has already passed and that President Obama supports – entrepreneurs seeking capital will have one more alternative to angel investors and venture capital firms.

Sound too good to be true? There is a catch. The proposed law (known as a “crowdfunding exemption”) would apply only to offerings that place strict limits on how much money can be raised and how much an individual investor may invest. For example, the new crowdfunding exemption might say that the startup may raise no more than $1,000,000 in a given year. And that each investor may invest no more than $1,000 per deal. (Actual limits are still being debated in Congress.)

My reply to his blog:

Bill – as always, great and thoughtful post. The original intent of the Crowdfunding bill (as drafted by Scott Brown) was to help replace Friends & Family money that has dried up with real estate prices. (Gone are the days when an entrepreneur could take out a mortgage on their home!)

As every professional angel knows, angel investing is not for the faint of heart. Many deals (even ones that seem like a sure thing) go to zero. Some are successful, but take a very long time. Almost every deal will take multiple rounds. (There is a reason for the “accredited investor” rule!) I don’t think anyone believes that a company can be funded from inception to exit by Crowdfunding.

And, angels provide much more than capital – they provide knowledge and assistance.

One historical perspective: in the early days of angel investing, VCs often would not invest in angel deals. Less experienced angels (particularly those not in groups) would screw up the valuation and terms, so VCs wouldn’t want to take the time to fix them up. As you highlight, Crowdfunded deals might follow the same path – the terms might just not be right to incent angels to invest. And cleaning up the deal for angels to follow might be a great deal of work, especially at a time like this where there are a lot of deals vying for our attention.

This next year will tell a lot about how this will play out. It’s going to be interesting!

Angel Investing on NPR

NPR ran a great story on Angels and entrepreneurs in Milwaukee. Worth hearing. http://www.npr.org/2012/02/10/146697508/angel-investors-and-startups-mingle-in-milwaukee

This is another example of government beginning to understand the impact of the benefits of high-growth startups backed by angels. It is good public policy to encourage angels to help create companies through extension of the zero percent capital gains (Extension of 100% gains exemption on Qualified Small Business Stock (Sec 1202) – Current Senate bill 2050, Small Business Tax Extenders Act of 2012) and a 25% tax credit for investing in these businesses (Current Senate bill 256, American Opportunities Act, which would provide a 25 percent tax credit for investments in innovative startups).