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Government and Politics

New SEC guidelines could hurt companies relying on angel investors
Start-ups and investor groups are concerned about new requirements for accredited investors

New FEC regulations could stop the flow of cash from angel investors to companies like Juventas Therapeutics.
Courtesy of Nick Ares
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Start-up companies and investor groups are troubled over a proposal by the Securities and Exchange Commission. The SEC may raise requirements for accredited investors, people allowed by U.S. Securities law to invest in private companies. They say if the revised rules are approved, the ranks of angel investors could suffer.


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Rahul Aras is CEO of Juventas Therapeutics, a Cleveland biotech firm. 

Juventas made the front page of the Plain Dealer recently for its developing heart failure treatment, called JVS-100. Aras says medical progress does not come cheap.

“It’s quite costly," Aras says. "We’ve moved the drug through what are called Phase 2 clinical trials. The next step for us is going to be a Phase 3 clinical trial and those can cost upwards of $50 to 60 million.”

Hurting the angels
Aras’s company is a spinoff from the Cleveland Clinic, and has done well in its seven years. 

But Aras is concerned over the recent activity in Washington. As part of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the SEC has to revisit the definition of “accredited investor”.

Currently, it is someone with an annual income of $200,000 or with $1 million in net worth, not counting their home. 

The proposed standards would raise the income requirement to $500,000, and raise the net worth to $2.5 million.

This would likely affect “angels,” accredited investors who put money into start-up businesses. 

“A lot of our early investment came from angel investors, and a lot of our money even in the later runs, came from angel investors," Aras says. "So rewriting those definitions in any way, and limiting the pool of angel investors, is just going to make it harder for capital to be sourced at these early stages of development.”

Cathy Belk is also watching. She is chief operating officer at Jumpstart, an organization that helps entrepreneurs across the region get their companies funded and supported. 

She cites a Cleveland State study that illustrates the impact new, startup companies supported by JumpStart and its partners packed for the region last year. 

“Two-hundred-and-forty-five startups located here in Northeast Ohio generated $424 million in economic benefits for the state of Ohio," Belk says. "And it’s the money that they’re raising that enables them to hire people, to create salaries and jobs, and that is the very heart of the concern around any kind of legislation or rules, that might limit the amount of capital that these companies would potentially have access to.”

Keeping investors out of bad decisions
Meanwhile, backers of the SEC proposal, including the North American Securities Administrators Association, say they also want the SEC to help ensure that accredited investors are well-versed in investing to avoid making bad decisions.

But Frank Samuel disagrees with that notion. 

He is President of VentureOhio, a non-profit group aiming to increase entrepreneurship across the state. 

“Is this a real problem?" Samuel says. "I mean, what’s the evidence that investors with the current levels of requirements are making bad investments or suffering losses at an inordinately high rate? I mean, investment can be a risky business under the best of circumstances.” 

In VentureOhio’s latest survey, 176 Ohio companies said they will need more than $520 million by the end of 2015, to keep growing and contributing to their local economies. 

So the possibility that there might be a tightening of investor capital does not sit well with Samuel and others.

Educated investors
The other argument for the SEC’s push for educated investors, is that it can reduce people falling for fraudulent offerings. 

Clay Rankin of the North Coast Angel Fund, disagrees with that.

“Frankly, I don’t think regulations in and of themselves are going to solve the fraud problem," Rankin says. "And all you have to do is look at what happened with the Bernie Madoff scandal. You had a lot of very high, net-worth individuals backing Bernie Madoff. Fraud is gonna happen.”

Nationally, the Angel Capital Association has campaigned against the revision. 

The group claims that up to a fourth of its members may be struck from its rosters if the definition is approved. 

The SEC has indicated that it is open to other criteria. 

This could include someone’s investment experience and total liquid assets. 

But time is running out. Its review of the accredited investor definition has to be done by July 21st, the four-year anniversary of President Obama’s signing of the Dodd Frank bill. 

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