Cherrystone Angel Group is dedicated to the support of early stage companies and their entrepreneurs through education, mentoring and investment.
The Securities and Exchange Commission (SEC)’s Rule 506(c) requires that certain companies seeking to raise capital must take reasonable steps to verify that all purchasers of their securities are accredited investors. Cherrystone Angel Group cooperates with the companies we invest in by providing information necessary to facilitate compliance with applicable rules. Details are handled at the time of the investment.
Entrepreneurs seeking funding from our organization are advised to consult with legal counsel in connection with their efforts to secure funding from investors such as the Cherrystone Angel Group. The Angel Capital Association (ACA), of which we are a member, has provided guidance related to seeking funding from an Established Angel Group (EAG) such as Cherrystone Angel Group. Please find that guidance below:
GUIDANCE ON ACCREDITED INVESTOR VERIFICATION:
WHAT MEMBERSHIP IN AN ESTABLISHED ANGEL GROUP
SAYS ABOUT A PURCHASER
The Securities and Exchange Commission’s (SEC) Rule 506(c), effective on September 23, 2013, requires that a startup company or other issuer seeking to raise capital using general solicitation take reasonable steps to verify that all purchasers of its securities are accredited investors.* Rule 506(c) 1 employs a principles-based methodology, which relies on factors including the nature of the purchaser, the type of accredited investor the purchaser claims to be, and the amount and type of information that the company has about the purchaser.
Rule 506(c) ends the 80-year ban on general solicitation of private offerings, and represents a significant change in securities law. Much early public attention to the rule focused on four non-mandatory, non-exclusive verification methods (often called “safe harbors”) that are deemed to meet the verification requirement. However, the majority of the rule focused on the principles-based verification methodology, which provides for other reasonable steps for verifying investors are accredited. The Angel Capital Association (ACA) underscores the importance of the principles-based methodology that is a fundamental part of Rule 506(c), noting that the principles-based methodology is expected to lead to development of a broad range of cogent and reliable industry practices.
ACA is offering this guidance on Established Angel Groups in order to help issuers and their legal counsel better assess the nature, amount and type of information they have about a purchaser, as the result of an objective determination that the person is a member of an Established Angel Group.
An “Established Angel Group” meets the following criteria:
In all cases, an angel group that is a full member of ACA would qualify as an Established Angel Group. While the term “Established Angel Group” is new with this document, the practices identified above have long been in practice by angel investing groups.
Most or all of these factors bulleted above are material to a 506(c) verification inquiry. However, whether or not an objective determination that a purchaser is a member of an Established Angel Group will, by itself, satisfy the “reasonable steps” verification standard of Rule 506(c), depends on the facts and circumstances of the particular transaction. Issuers should always consult with legal counsel about how to apply the principles-based method of accredited investor verification in any transaction designed to rely upon the exemption under Rule 506(c).
If a startup or other issuer uses the principles-based method and concludes that the verification requirement is satisfied by objectively determining that a purchaser is a member of an Established Angel Group either on a stand-alone basis or in connection with other relevant information about the purchaser, it should not be necessary to use any of the four non-exclusive, non-mandatory methods of verification listed in Rule 506(c).
Issuers could verify Established Angel Group membership in a number of ways. Ordinarily an issuer will have verified that a natural person is a member of an Established Angel Group if it:
About ACA: ACA is the leading professional and trade association supporting the success of angel investors in high-growth, early-stage ventures. ACA is the largest organization of accredited investors in the world, with more than 200 member angel groups and 10,000 individual accredited investors. ACA provides professional development, industry voice, public policy advocacy and an array of benefits and resources to the angel investing community and the startups in which they invest. www.angelcapitalassociation.org; @ACAAngelCapital.
*The definition is available at www.sec.gov/answers/accred.htm.
1 SEC Release No. 33-9415 at 21. (www.sec.gov/rules/final/2013/33-9415.pdf)