The House of Representatives passed the Helping Angels Lead Our Startups Act (“HALOS Act”) (H.R. 79). The Act purports to “clarify the definition of general solicitation under Federal securities law” as it relates to certain communications by “angel investor groups.”
The HALOS Act defines an “angel investor group” as any group that (i) is “composed of accredited investors interested in investing personal capital in early-stage companies,” (ii) meets regularly and has established processes for making investment decisions, and (iii) is neither associated nor affiliated with broker-dealers or investment advisers.
The HALOS Act requires the SEC to revise Regulation D to specify that the prohibition against general solicitation (CFR Title 17, Section 230.502(c)) does not apply to a presentation or other communication by an issuer or their representative at an event:
- that is sponsored by the United States government, an institution of higher education, a nonprofit organization, an angel investor group, a venture forum or trade association, or any other entity determined to be applicable by the SEC;
- where advertising does not specify any securities offerings by the issuer;
- that is sponsored by entities that do not offer investment recommendations or advice to attendees, engage in investment negotiations between the issuers and investors at the event, or charge event attendees any fees and receive compensation for the event that would require broker-dealer or investment advisor registration; and
- where no specific information concerning securities offerings by the issuer is relayed by or on behalf of the issuer, subject to certain conditions.
Lofchie Comment: It is to be expected that the new Congress will look for ways to facilitate private firms’ ability to raise capital. The HALOS Act seems a reasonable step. One reason that the JOBS Act has not been more successful is because many of its exemptive provisions (particularly regarding qualification as an “accredited investor”) have raised sufficient uncertainty, or imposed enough burdensome conditions, for market participants to be reluctant to rely on the exemptions. The HALOS Act may suffer from some of the same deficiencies. Here are a few examples:
Under the HALOS Act, an angel investor group must (i) invest “personal capital” (what about money held in a trust, LLC or family-owned fund?), (ii) hold “regular meetings” (does “regular” mean on a constant or frequent schedule?), (iii) have “defined processes and procedures” (how defined should they be? Is it enough to say that a group gets together and votes?), and (iv) not be affiliated with a broker-dealer or adviser (what if a group includes the employees of a broker-dealer or adviser?). How can an issuer possibly know whether an angel investor group meets these qualifications?
None of these or similar requirements under the HALOS Act seems material to protecting investors or germane to enabling firms to raise capital. If the Act is going to serve its intended purpose, then Congress must (i) revise the requirements to include only those that will serve to protect investors demonstrably, and (ii) draft those requirements clearly enough to allow issuers to know they are safe in relying on the exemption.