Seeking Seed Capital from Colorado Angel Investors

Often entrepreneurs require outside financial assistance in starting their company. When the bank does not come through and friends and family are unable to make the investment, the thought often turns to sophisticated, wealthy investors or "angels" to provide some of the initial funding or "seed capital." Entrepreneurs sometimes do not have the contacts with angels. They want to engage in general advertising to locate them. This article provides a very general overview of the legal parameters for those entrepreneurs seeking seed capital for a start-up business from angel investors located in Colorado using general advertising or solicitation.

Federal Law

The sale of the company's securities must comply with both federal and state law. Rule 504 of Regulation D promulgated under the Securities Act of 1933 allows general solicitation in certain qualifying offerings. In order to qualify, the offering must meet the following requirements:

• The offering must be made according to a state law exemption that permits general solicitation and general advertising so long as sales are made only to accredited investors. (See discussion below.)
• The offering price may not exceed $1,000,000, less the offering price of certain other securities sold within the prior twelve months.
• The company issuing the securities cannot be an investment company, be subject to the periodic reporting requirements of the Securities Exchange of 1934 by virtue of having its securities publicly traded, or be a development stage company with no business plan or whose purpose is to engage in a merger or acquisition with an unidentified company.
• No specific disclosure is mandated under Rule 504. However, disclosure must be made "to the extent material to an understanding of the issuer, its business and the securities being offered." The type and degree of disclosure required may vary and is beyond the scope of this article. The persons making disclosure are subject to anti-fraud laws and regulations.
• A Form D must be filed with the Securities and Exchange Commission within 15 days after the first sale. Subsequent notices may be required if the offering is amended.

Colorado Law

In addition to federal law, offers and sales of securities must comply with state law. Colorado law provides an exemption for transactions exempt under federal law and which are consistent with regulations adopted by the Colorado Division of Securities. Rule 51-3.13 of the Colorado Division of Securities provides that in connection with offers and sales of securities made in reliance on Rule 504 of Regulation D, general solicitation and advertising is permissible, if the following requirements are satisfied:

1. The securities may only be sold only to accredited investors.
2. A general announcement may be made, if it follows the requirements set forth under the next subheading below.
3. Following the general announcement, the company, in connection with an offer, may provide information in addition to the general announcement, if such information is delivered only to accredited investors. All such information should, in addition to other information and legends, set forth the following legend:
   • This information is distributed pursuant to an exemption for small offerings under the rules of the Colorado Securities Division. The Securities Division and the United States Securities and Exchange Commission have neither reviewed nor approved its form or content. The securities described may only be purchased by "accredited investors" as defined by Rule 501 of SEC Regulation D and the rules of the Colorado Securities Division.
4. No telephone solicitation is permitted unless prior to placing the call, the company reasonably believes that the prospective purchaser to be solicited is an accredited investor.
5. The company must file or cause to filed with the Commissioner a Form D, a copy of any general announcement, and the prescribed fee, as provided in Rule 51-3.7, all within 15 days after the first sale in Colorado.
6. All purchasers must purchase for investment and not with the view to or for sale in connection with a distribution of the security.
7. Written records must be maintained for at least two years following the date of sale establishing the accredited status of each purchaser.
8. The exemption is not available if the company, any of the company's predecessors, any affiliated company, any of the company's directors, officers, general partners, beneficial owners of 10% or more of any class of its equity securities, any of the company's promoters presently connected with the company in any capacity, any underwriter of the securities to be offered, or any partner, director or officer of such underwriter has had certain securities law problems within the last five years (so called "bad-boy provisions").

Requirements for General Announcement

A general announcement of the proposed offering may be made by any means and shall include only the following information:

1. The name, address, and telephone number of the company of the securities;
2. The name, a brief description and price (if known) of any security to be issued;
3. A brief description of the business of the company in 25 words or less;
4. The type, number and aggregate amount of securities being offered;
5. The name, address and telephone number of the person to contact for additional information; and
6. A legend providing substantially as follows:

This is a general announcement. No money or other consideration is being solicited or will be accepted by way of this general announcement. This information is distributed pursuant to an exemption for small offerings under the rules of the Colorado Securities Division. The Securities Division and the United States Securities and Exchange Commission have neither reviewed nor approved its form or content. The securities described may only be purchased by "accredited investors" as defined by Rule 501 of SEC Regulation D and the rules of the Colorado Securities Division. The securities have not been registered with or approved by the Colorado Securities Division or the Securities and Exchange Commission and are being offered and sold pursuant to an exemption from registration.

Accredited Investors

Accredited investor shall mean any person who comes within any of the following categories, or who the issuer reasonably believes comes within any of the following categories, at the time of the sale of the securities to that person:

1. Any bank as defined in section 3(a)(2) of the Act, or any savings and loan association or other institution as defined in section 3(a)(5)(A) of the Act whether acting in its individual or fiduciary capacity; any broker or dealer registered pursuant to section 15 of the Securities Exchange Act of 1934; any insurance company as defined in section 2(13) of the Act; any investment company registered under the Investment Company Act of 1940 or a business development company as defined in section 2(a)(48) of that Act; any Small Business Investment Company licensed by the U.S. Small Business Administration under section 301(c) or (d) of the Small Business Investment Act of 1958; any plan established and maintained by a state, its political subdivisions, or any agency or instrumentality of a state or its political subdivisions, for the benefit of its employees, if such plan has total assets in excess of $5,000,000; any employee benefit plan within the meaning of the Employee Retirement Income Security Act of 1974 if the investment decision is made by a plan fiduciary, as defined in section 3(21) of such act, which is either a bank, savings and loan association, insurance company, or registered investment adviser, or if the employee benefit plan has total assets in excess of $5,000,000 or, if a self-directed plan, with investment decisions made solely by persons that are accredited investors;
2. Any private business development company as defined in section 202(a)22 of the Investment Advisers Act of 1940;
3. Any organization described in section 501(c)3 of the Internal Revenue Code, corporation, Massachusetts or similar business trust, or partnership, not formed for the specific purpose of acquiring the securities offered, with total assets in excess of $5,000,000;
4. Any director, executive officer, or general partner of the issuer of the securities being offered or sold, or any director, executive officer, or general partner of a general partner of that issuer;
5. Any natural person whose individual net worth, or joint net worth with that person's spouse, at the time of his purchase exceeds $1,000,000;
6. Any natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person's spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year;
7. Any trust, with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the securities offered, whose purchase is directed by a sophisticated person as described in Rule 506(b)(2)(ii) and
8. Any entity in which all of the equity owners are accredited investors.

*article courtesy of Paul J. Hanley