Should it be Easier for Startups to Pitch Their Plans to Angel Investors? (H.R. 79)

What is H.R. 79?

(Updated October 5, 2018)

This bill would make it easier for startup businesses to attract investments from angel investors  under the Securities and Exchange Commission’s (SEC) Regulation D. 

It would allow small companies looking to raise funds through the sale of equity or debt securities (like stocks or bonds) to be exempt from advertising requirements at pitch events sponsored by angel investor groups where:

• Presentations or communications are made by or on behalf of the issuing company;

• The advertising doesn’t refer to any specific offering of securities;

• The sponsor doesn’t offer investment recommendations or advice to attendees;

• The sponsor doesn’t receive compensation for the event, which would require them to register as a broker or dealer or as an investment advisor;

• No specific information related to a securities offering is communicated (other than information about the number and type of securities to be offered).

Regulation D governs private placements, which are the sale of securities to a select number of accredited investors, and exempts small companies from having to register their securities with the SEC. It looks to restrict participation in private placements to accredited or sophisticated investors who meet requirements related to net worth, income, and business or investment experience that gives the investor financial awareness of the risks associated with their investment.

This legislation would only affect Regulation D with respect to presentations and communications with prospective investors, but not purchases or sales of securities.

Argument in favor

For startups to grow and create jobs they need access to capital early in the process. This bill would accomplish that by making it easier for them to connect with investors through a commonsense, bipartisan reform.

Argument opposed

This bill muddies the waters surrounding the SEC’s definition of accredited investors, and as a result it diminishes important investor protections. Plus the SEC already allows an exemption for certain pitch events.

Impact

Startup companies; potential investors, particularly angel investor groups; and the SEC.

Cost of H.R. 79

The CBO estimated in the 114th Congress that enacting this bill would cost less than $1 million, which would be offset by the collection of fees so the net effect on the federal budget would be negligible.

Additional Info

In-Depth: Sponsoring Rep. Steve Chabot (R-OH) introduced this bill to allow startups to showcase their business plans and connect with potential investors at events that are currently restricted:

“When entrepreneurs are looking for ways to access the capital they need to get started, they look at every avenue available to them. If we’re going to help open doors for the next generation, we need to take the same approach. Clarifying the law to give entrepreneurs and investors more certainty and opportunity is a step in the right direction.”

In the 114th Congress, this legislation was passed by the House Financial Services Committee by a vote of 44-13 and has the bipartisan support of 11 cosponsors — including seven Republicans and four Democrats. The House as a whole passed it 325-89 in late April 2016, but the Senate never  considered it.

Speaking for the lawmakers who opposed this bill was Rep. Maxine Waters (D-CA), who wrote that it may undermine investor protections related to the “verification of accredited investor status” for purchasers of the securities being discussed.

Of Note: In 2014, a total of 316,600 angel investors funded 73,400 companies to the tune of $24.1 billion in the U.S. alone, creating over 264,000 jobs.

Media:

• House Small Business Committee Press Release (Previous Version)
• CBO Cost Estimate (Previous Version)
• Crowdfund Insider
• Small Business Trends