Legislation intended to encourage investments in startups – the so-called JOBS Act – is undermined by new SEC financial disclosure rules for angel investors, the Angel Capital Association warns.

“Angel investors provide the fundamental source of start-up capital in our economy,” ACA Executive Director Marianne Hudson said Tuesday. “Not a single angel I have spoken with is willing to provide personal financial information to an issuer who is asking them for investment.

“This violation of privacy is untenable, especially for the angels who do multiple deals a year. If an issuer has information on total net worth or income of an investor, that provides vast information asymmetry. This would be like having your bank demand to know your net worth before you could open a bank account to put money in, or the stock market demanding to know your net income before you can trade securities.”

The SEC rules announced last week would require angels having to provide sensitive income information to entrepreneurs. The changes “ending the ban on general solicitation for companies seeking investment from accredited investors eliminates the ability of angels to self-certify their status, and will result in many angels refusing to participate in this type of investing,” the ACA said.

“With thousands fewer angels participating in this market, startups will have far less access to capital, the millions of jobs they create each year will disappear, and the economy will suffer,” Hudson noted. “This is the exact opposite of Congress’ intent in its near-unanimous passage of the JOBS Act.”

Startups soliciting funding must take “reasonable steps to verify” that its investors are accredited, meeting such requirements as income and net worth. Angels are required to provide such information as W-2s and Form 1040s or obtain a certified statement from a third party such as an accountant. 

“These SEC rules provide no safe harbor for our angel members, which effectively could kill most angel investment in this country,” added David Verrill, board chairman of ACA. “Our member angel groups have decades of history investing in startups while self-certifying their accredited status without one single iota of fraud. Our process works because angel groups know their members well, and focus on the education and skill needed to do this type of investing well. Angels do not have to invest in start-ups, but we are almost entirely the only ones who do so – some 90% of outside equity raised by start-ups comes from angel ranks.”

According to the ACA, angels are deeply involved in the startup industry. The group says:

  • Between 200,000 and 400,000 accredited investors participate in angel investing each year. In 2012, there were 234,000 accredited investors in Reg D offerings alone, of which 91,000 participated in non-financial offerings.
  • Angels invested nearly $23 Billion in more than 67,000 companies in 2012.
  • Almost 400 angel groups have invested in companies in every state.
  • Angels invest up to 90% of the outside equity that startups raise.
  • Angel investment is focused on innovative, high growth firms that create the most new jobs and are credited with creating all net new jobs in the US in any given year.

The ACA, which is based in Kansas City, represents more than 200 angel groups and 10,000 individual investors.