New legislation that has been passed by the House of Representatives will benefit startup companies seeking investors, according to Congressman Kevin Cramer.
H.R. 4498, the Helping Angels Lead Our Startups Act (HALOS Act), amends the Securities Act of 1933 to ensure that startup companies do not inadvertently violate Securities and Exchange Commission (SEC) regulations governing general solicitation of potential investors. The bill passed the House by a vote of 325-89 on April 28.
“There are so many barriers to entry for startups, it’s time to modernize the Securities Act of 1933,” Cramer said. “The HALOS Act amends the Securities Act to clarify that certain startup companies are able to give presentations about their company and host events like demo days, for example, without violating various SEC investment solicitation bans.”
Under the Securities Act of 1933, any offer to sell securities must either be registered with the SEC or meet an exemption. SEC Regulation D contains three general rules for providing exemptions from the registration requirements, allowing some companies to offer and sell their securities without having to register the securities with the SEC.
One such exemption is Rule 506 of Regulation D, which allows companies to offer securities for sale up to 35 non-accredited investors and an unlimited number of accredited investors, as long as the company does not market its securities through general solicitations or advertising.
Angel investors are generally wealthy individuals who are often actively involved in the startups they back, and are not typically professional investors. In 2014, angels invested approximately $24 billion in over 73,000 startups and are responsible for 90 percent of the equity investment that startups receive. Corporations like Amazon, Costco, Facebook, Google, and Starbucks were all first funded by angel investors.
The bill comes at a time when many startups, particularly in the Red River Valley, are thirsty for greater access to capital. Cramer believes that this bill will help create more deal-flow in the region.
“This bill knocks down some of the barriers to entry for startups and it is more than an appropriate rollback of some of the rules,” he said.