At least I didn't get trashed this time. And "swayed by Anne's good looks"! I like that!
In Angel Investor Video Pitch Trashed, I shared a comment left by David Rose, angel investor and founder of Angelsoft. He pointed out in detail the shortcomings of my angel investor video pitch. To quote comedian Dom Irrera, I'm sure he meant it in the nicest way.
Although I called it a "trashation," David Rose's comment actually included an expert guide to creating an angel investor video pitch.
David Rose has done it again. Becoming an Angel Investor describes what's required to become an accredited investor. In a comment he left, Rose shares reasons for the requirements. With thanks to Rose for his time and expertise, I share the whole of his comment here:
The reason that most angel groups require their members to be Accredited Investors is for the sake of the company, not the group itself.
Here's why: The SEC was set up in the aftermath of the Great Depression to protect people from being scammed with wild and crazy schemes floating their shares on the stock market and promising the moon. The result was a requirement that anyone selling equity (shares of a company) had to register with the Securities and Exchange Commission, and file a whole lot of detailed paperwork on the actual historic earnings of the company, the risk factors, background on the company management and owners, etc. etc. etc. That's what being a 'public company' is all about, and why your widowed Aunt Martha and your simpleton cousin Ferdinand are able to call up their stock broker and buy two shares of Google, for example.
BUT…the SEC realized that there were certain times when all that filing and paperwork wasn't necessarily required, so they established certain exemptions to the registration requirements. The exemptions are detailed, and cover several different categories (you can sell stock in Handshake 2.0 to Goldman Sachs, for example, or Kleiner Perkins), but the exemption that will typically be most appropriate for most entrepreneurs, as Ken [Maready] pointed out, is the asset/income test for individuals. The thinking is that someone who has that kind of money in the bank and/or continuous earning power, should be able to absorb the loss of the entire investment in your startup company if things go bad.
One of the other things about being an Accredited Investor is that you need to have business experience, so you can make a good case that you're not just throwing darts at a dartboard, or being swayed by Anne's good looks but that you really have made a considered decision to invest on the merits. (The test for "knowledgeable investor" is a bit more nebulous than the hard asset/income numbers, but get to the same point.)
SOOO…the bottom line here is that a company such as yours is exempt from all the public registration and filings when you sell your equity, but ONLY if everyone to whom you're selling falls under one of the specific exemptions laid out by the SEC. What happens, I hear you ask, if you fudge a little and sell to people who aren't accredited? Well, at some point in the future, when things get into trouble, they can turn around and accuse you of taking advantage of their poor, innocent, naivete, causing them to lose their hearth and home. And if a court upholds that claim, then not just THEIR purchase, but the entire ROUND in which they purchased equity can be unwound, with you having to give all the money back, with penalties. This is NOT something you want to do! And it's therefore why you, as the entrepreneur, want to make sure that you ONLY sell equity to Accredited Investors.
It is for THAT reason, to reassure you about taking their money, that angel groups require their members to meet those qualifications. All that said, the burden for ascertaining their investor status is, and remains on, the company. So part of the closing paperwork in every deal in which I've invested as an angel is what's called the Investor Questionnaire, often a six or seven page document wherein I tell the company exactly WHY selling to me is exempted from the SEC filing regs. This is something you keep with your closing documents, so that if things ever hit the fan, and I accuse you of taking advantage of me, you can whip out my signature and say "But David TOLD me that…and I relied on his representations."
In Becoming an Angel Investor, I wrote, "I want to be an angel investor. At least I want to know how an angel investor thinks." Thanks, David, for helping this happen. The more company founders understand about angel investing, the better deals we all can do.