Why the Jobs Act is great for Angel List (it's not what you think)

When you raise from angel investors, they need to be 'accredited' investors. That means they make $200,000 / year or have over $1 million in net worth. If you have a spouse, that's $300,000 / year. [1]

Previously, the investor would just have to self-represent as an angel investor. There was no obligation on the company to investigate or confirm their claims. 

Under the new law, it's now the company's obligation to verify that someone is an accredited investor. One way to do that is to ask for an investor's tax returns. Not only is that difficult to ask, it will increase the time to raise, plus the due diligence process, which also increases legal fees. Imagine getting the tax returns from 20 people while trying to close your round. Naval, CEO of Angel List, has a great post on the implications of the Jobs Act. 

Note, you can chose to keep your fundraising private, which allows you do to verify accreditation the old way. However, it's now unclear if events like Demo Day, a post on Facebook or other pitch events would count as 'general solicitation'. You don't want to run afoul of the SEC.

These regulations will significantly increase the value of platforms like AngelList, which is now offering verify all investors on its platform for free. Even if you don't need AngelList to source investors, I can imagine a future where you visit their site to verify whether an investor is accredited. That is an incredible value add. If they decide to keep the information on who's accredited private, I could imagine another company offering accreditation verification. 

In the meantime, founders outside of fundraising platforms will have some extra confusion, diligence and process when they raise and there will be another reason to use a company like AngelList. Hopefully the SEC sorts this out. 


[1] SEC rules on accredited investors: http://www.sec.gov/answers/accred.htm
6 responses
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Companies are already popping up to verify accreditation status of investors. Most, however, have an team of lawyers inhouse and still require tax returns from investors. There are companies like Crowdentials (http://www.crowdentials.com) that will go through the process without tax returns.
Not positive, but I think AngelList actually uses Secondmarket for this.
I was thinking about that a few days ago. Basically Angellist could offer a more rigid accreditation process that will potentially cover the requirements of the SEC and indemnify the entrepreneurs. This is not something that Angellist is doing right now since everyone can become an accredited investor with just a click of a button (and a few checkboxes). I imagine for them to do such accreditation it will require significant manual work on their hand. Regarding the general solicitation rule and demo days, having been through the latest batch of 500startups, I know they are trying really hard to make sure only investors attend the event. However having the press there and uploading the decks to slideshare later on (where most of the startups still have the slide of the amount of money they're raising) could possibly trigger the general solicitation and it'll be interesting to see how this play out.
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