The U.S. House of Representatives recently passed the Helping Angels Lead Our Startups (HALOS) Act.
The goal of the legislation is to remove regulatory roadblocks that may prevent start-ups from securing funds from angel investors by clarifying what types of communications constitute a general solicitation and subsequently trigger the verification procedures needed to confirm that investors are “accredited.”
General Solicitation Ban Lifted
Companies seeking to raise capital through the issuance of securities must either register the securities with the SEC or rely on an exemption from registration, most commonly Rule 506 of Regulation D (Reg D). In 2013, the SEC amended Reg D to eliminate the prohibition against general solicitation and general advertising, so long as the issuer takes reasonable steps to verify that all investors are accredited.
The new rules, which were mandated under the JOBS Act, offer significant marketing opportunities for startups and other private issuers. However, the SEC has also raised the bar when it comes to verifying an investor’s “accredited” status. Many of the verification methods approved by the agency generally require the provision of sensitive financial information, which raises privacy and compliance concerns among both issuers and investors.
Proposed Changes Under the HALOS Act
The HALOS Act is intended to address concerns that the amendments to Rule 506 may have imposed an unintentional difficulty on fundraising by startups and other businesses. The proposed legislation would allow startups to make presentations to prospective investors at events, such as demo days sponsored by angel investors and other venture capital groups, without running afoul of Reg D.
“The HALOS Act will directly help startups who face the highest risks, but also have the greatest potential,” House Majority Leader Kevin McCarthy stated. “By removing arbitrary rules and allowing angel investors to play a bigger role in funding startups, we give potentially transformative startups more opportunity to get the capital they need early on to stay afloat, grow, and perhaps one day change the world.”
HALOS Act Would Clarify Definition of General Solicitation
Sponsored by federal, state, or local government; a college or university; non-profit; established angel group; venture forum, venture capital association or trade association; or any other group approved by the SEC
Whose advertising does not make any specific investment offerings
Whose sponsor does not make investment recommendations, provide investment advice to attendees, engage in investment negotiations, or charge any entrance fees other than what covers the administrative cost of the event
Where no specific information regarding investments is communicated by the issuer other than that they are offering securities, the type and amount of securities being offered, the amount of securities still available, and the intended use of the funding.
The House passed the Halos Act in its last session; however, the legislation failed to advance in the Senate. Now that the Republicans are in control, the legislation arguably has a much greater chance of becoming law. We will be closely following the status of this legislation and will post updates as they become available. We have recently suggested some improvements needed to resolve issues hampering crowdfunding that also arise from rules promulgated pursuant to the JOBS Act. We encourage business owners to check back for updates on the HALOS Act and other bills that may impact your startup.
Do you have any questions? Would you like to discuss the matter further? If so, please contact me, Dan Brecher, at 201-806-3364.
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