While much of the startup community is fretting over a new rule requiring that accredited investors have their status verified by a third party, AngelList CEO Naval Ravikant says that what is more important to him is that his investors are “sophisticated.”
Ravikant says he is focused on making sure investors are informed and educated about very real risks that come with investing in a startup. “You don’t want to be the first place where a person gets educated in the idea of losing money. They are going to hate you forever,” he says.
The concern over how best to protect investors has been especially top of mind in the startup community this week given the 80-year ban on general solicitation that lifted on Monday. The lifting of the ban means that where startups were previously unable to advertise their efforts to raise money, they can now email, Tweet, blog and Facebook-message about it. That ostensibly means more people will be aware of opportunities to invest, so long as they meet the requirements for accreditation.
AngelList, an online platform for startups and investors to connect, has been a frontrunner in the conversation on how to implement the lift of the ban on general solicitation. The company, which just this week announced a $24 million raise, plans to take proactive measures to be sure that not only are investors accredited, but that they understand the nature of the risk.
“If an investor does not seem to understand the nature of the startup market, then AngelList will educate that individual,” says Ravikant. “And then if they are somewhat unaware, then we will run them through an educational process and we will reject the ones who didn’t seem to get how risky all of this is.”
As a beginning threshold, Ravikant does not have issues with the requirement that investors be accredited and that the status be reasonably verified. He does, however, think that some of the reporting requirements ought to be less onerous. “The really good investors are not going to want to share their tax forms and credit reports. It would be nice to have streamlined ways of doing it, or letting third parties, like ourselves, do it. And I think the SEC is listening on that regard,” says Ravikant.
Meanwhile, other rules determining how often paperwork will be have to be filed surrounding general solicitation are not yet finalized. The startup community is worried the paperwork requirements will be burdensome. Last month, Ravikant sent a strongly-worded letter to the SEC expressing his concerns that these filing rules could create ‘disastrous unintended consequences’ for the startup community. “The proposed rules appear to be tailored to how Wall Street raises funds, not the startup community,” he wrote.
While the new SEC regulations are historic, Ravikant says that for people who are already very well connected and embedded in the investor community, fundraising will likely continue to operate largely as it has been. “A lot of startups used to inadvertently violate the gag order anyways. If you ask most startup founders, they don’t even know what general solicitation ban is until their lawyer tells them after the fact once they tweeted something,” he says. What the law does do, he says, is make communication more efficient, allowing startups outside of New York and Silicon Valley to more easily identify and communicate with investors.
A bigger potential change for the industry is likely to be the entrance of unaccredited investors into the market. The industry is waiting on the SEC to hand down rules for Title 3 of the Jumpstart Our Business Startups Act, or JOBS Act, signed into law in April last year. That particular provision of the legislation would allow businesses to give away pieces of their company to unaccredited investors in exchange for cash, or equity crowdfunding.
Because unaccredited investors are likely less aware of the risks associated with investing in startups, the potential for fraud and loss is that much greater.
Ravikant is glad he is not the SEC. “Unfortunately, the SEC is put in this nearly impossible task of, ‘Hey, do the right thing for investors, do the right thing for startups, stay within a whole set of rules that were made in a political process that may not apply to the real world, and by the way, make sure there are no losses and no fraud.’ That is an impossible situation. I just don’t know how they thread that needle.”