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(you probably shouldn't try angel investing unless you think of yourself as rich) I think there is some legal definition of "rich" below which companies can't

by gcheong 18y ago

(you probably shouldn't try angel investing unless you think of yourself as rich) I think there is some legal definition of "rich" below which companies can't raise capital from individuals without issuing registered stock. Something like an individual must have at least $1m in assets or income of at least $200k/year I think.

tptacek 18y ago
You're thinking of the SEC "accredited investor" rule: http://www.law.uc.edu/CCL/33ActRls/rule501.html http://www.law.uc.edu/CCL/33ActRls/rule501.html I'm not an investor and have only moderate experience with funding, but I've brought this up in lots of HN threads about investing and haven't seen it shot down; I was also involved in a negotiation debacle that doubled the value of some options I held in a company that sold to another private company (I had left, had non-expiring options, and would thus have been a non-qualified outside investor had I exercised them, or some-such). The rule is basically: $1MM net, or $200k ($300k with your spouse) income for the last 2 years. Even corporations need to be accredited to buy, so you can't just start a consultancy and invest your profits into angel syndicates, unless the principals are themselves accredited or the business has a such a huge amount of net assets that the principals would certainly be accredited anyways. Again, I feel weird every time I bring this up, because what do I know? But this appears to be the rule.
- sachinag 18y ago
  This is correct.
- frig 18y ago
  Yeah, it's the rule, and it's relevant but not in the obvious way (like: you wake up at night and the SEC has kicked down your door and shot your dog b/c you're not an accredited investor but have investments that they think you need to be in order to make). The origins of the rule were partially in reaction to various scams that were not uncommon pre-great-depression: people would go around selling shares ("music-man" style) in companies that didn't exist, or were otherwise fraudulent, etc., to unsuspecting dupes (of which there were plenty, as is always the case). Thus the effect of the rule is mostly on the issuer of securities: the point was mostly to deter scammers, but not really to punish their victims. Currently, there are many categories of investment that either are 100% closed off to non-accredited investors or that "theoretically" are not closed off but are "practically" closed off (eg b/c the additional regulatory overhead and legal uncertainty and "bad juju" induced by having non-accredited investors as shareholders means no one sensible would willingly allow non-accredited investors to invest). Hence your experience: it's not "illegal" for you to be a non-accredited investor in a private company, but unless all the i's are dotted and t's crossed the private company might be in a bad way wrt regulation on account of having you as an investor (inadequate documentation of your informed consent, or failure to keep enough bookkeeping, etc.). Moreover, even if they were doing everything 100% correct wrt you the presence of your investment might scare off other parties (eg during due diligence for a round of funding). As a regulatory rule it's accomplished it's ostensible purpose -- the # of outright-fraudulent investment schemes is nothing like it was in the 20s, and the direct impact of the remaining schemes is mainly felt by those that mostly can afford the loss and ought to have known better (eg: Madoff's or Stanford's clients). One thing I'd like to see is some kind of relaxation in the accredited-investor regulations that'd make it easier for the smaller investor to make direct investments in private companies. This needn't be difficult to implement, as all it might take is eg a standardized waiver process that records: the terms of the investment, the investor's consent to the agreement, and lots of identifying information on the issuer (firm and specific individual making the offering); if necessary, restrict the sophistication of the allowed instruments (eg: direct equity purchase, simple options, and so on are ok; anything more complicated not ok for the "standard waiver"). Sadly I've not seen much mention of "proposals" like the above, but something like that would (I think) really open a lot of productive opportunities for a lot of people. Edit: this section is interesting reading: http://www.sec.gov/info/smallbus/qasbsec.htm#eod6 http://www.sec.gov/info/smallbus/qasbsec.htm#eod6 It's an informal discussion of various ways to sell securities in a private company. The interesting parts are: (1) the motivations behind the exemptions (eg: the intrastate rule; given the point was (originally) to keep traveling hucksters from defrauding suckers, the impetus for an exemption for a "local" business makes sense) (2) even in this informal summary note just how easy it is to fall out of grace wrt these "exemptions" (ie: if someone is supposed to buy "not for resale" then resells, you personally might have a breach of contract with that person but you might also now start worrying about being in breach of regulations)

by gcheong 18y ago

tptacek 18y ago

You're thinking of the SEC "accredited investor" rule: http://www.law.uc.edu/CCL/33ActRls/rule501.html http://www.law.uc.edu/CCL/33ActRls/rule501.html I'm not an investor and have only moderate experience with funding, but I've brought this up in lots of HN threads about investing and haven't seen it shot down; I was also involved in a negotiation debacle that doubled the value of some options I held in a company that sold to another private company (I had left, had non-expiring options, and would thus have been a non-qualified outside investor had I exercised them, or some-such). The rule is basically: $1MM net, or $200k ($300k with your spouse) income for the last 2 years. Even corporations need to be accredited to buy, so you can't just start a consultancy and invest your profits into angel syndicates, unless the principals are themselves accredited or the business has a such a huge amount of net assets that the principals would certainly be accredited anyways. Again, I feel weird every time I bring this up, because what do I know? But this appears to be the rule.

sachinag 18y ago
This is correct.
frig 18y ago
Yeah, it's the rule, and it's relevant but not in the obvious way (like: you wake up at night and the SEC has kicked down your door and shot your dog b/c you're not an accredited investor but have investments that they think you need to be in order to make). The origins of the rule were partially in reaction to various scams that were not uncommon pre-great-depression: people would go around selling shares ("music-man" style) in companies that didn't exist, or were otherwise fraudulent, etc., to unsuspecting dupes (of which there were plenty, as is always the case). Thus the effect of the rule is mostly on the issuer of securities: the point was mostly to deter scammers, but not really to punish their victims. Currently, there are many categories of investment that either are 100% closed off to non-accredited investors or that "theoretically" are not closed off but are "practically" closed off (eg b/c the additional regulatory overhead and legal uncertainty and "bad juju" induced by having non-accredited investors as shareholders means no one sensible would willingly allow non-accredited investors to invest). Hence your experience: it's not "illegal" for you to be a non-accredited investor in a private company, but unless all the i's are dotted and t's crossed the private company might be in a bad way wrt regulation on account of having you as an investor (inadequate documentation of your informed consent, or failure to keep enough bookkeeping, etc.). Moreover, even if they were doing everything 100% correct wrt you the presence of your investment might scare off other parties (eg during due diligence for a round of funding). As a regulatory rule it's accomplished it's ostensible purpose -- the # of outright-fraudulent investment schemes is nothing like it was in the 20s, and the direct impact of the remaining schemes is mainly felt by those that mostly can afford the loss and ought to have known better (eg: Madoff's or Stanford's clients). One thing I'd like to see is some kind of relaxation in the accredited-investor regulations that'd make it easier for the smaller investor to make direct investments in private companies. This needn't be difficult to implement, as all it might take is eg a standardized waiver process that records: the terms of the investment, the investor's consent to the agreement, and lots of identifying information on the issuer (firm and specific individual making the offering); if necessary, restrict the sophistication of the allowed instruments (eg: direct equity purchase, simple options, and so on are ok; anything more complicated not ok for the "standard waiver"). Sadly I've not seen much mention of "proposals" like the above, but something like that would (I think) really open a lot of productive opportunities for a lot of people. Edit: this section is interesting reading: http://www.sec.gov/info/smallbus/qasbsec.htm#eod6 http://www.sec.gov/info/smallbus/qasbsec.htm#eod6 It's an informal discussion of various ways to sell securities in a private company. The interesting parts are: (1) the motivations behind the exemptions (eg: the intrastate rule; given the point was (originally) to keep traveling hucksters from defrauding suckers, the impetus for an exemption for a "local" business makes sense) (2) even in this informal summary note just how easy it is to fall out of grace wrt these "exemptions" (ie: if someone is supposed to buy "not for resale" then resells, you personally might have a breach of contract with that person but you might also now start worrying about being in breach of regulations)