Angel Investors – Can I invest through others/syndicates in equity crowdfunding?Posted by Orett on April 21, 2020 at 11:25 am
If I gave 5 people 2,200 and told them to invest on my behalf on the syndicate( ex. republic) would that illegal? Is that acceptable? I would split the ROI. Do you know if that would be a problem with SEC?
AdministratorApril 22, 2020 at 10:15 am
I’ll start with a disclaimer that I’m not a securities lawyer or anything in this area, so make sure to do your own research. None of this should be construed as legal advice, just my personal thinking on the matter.
Without giving an explicit answer in terms of legality, here are some hypothetical questions that I would ask myself to perhaps help better understand the situation.
And one quick clarification – when you say syndicate here, I’m assuming you mean Reg CF funding portal (such as Republic, WeFunder, StartEngine, etc.).
Am I an accredited investor?
Most of the current regulations and securities exemptions have different requirements depending on whether or not you are an accredited investor (make $200k/year for the past two years or $300k/year joint annual income with spouse, OR have a $1 million or greater net worth, excluding primary residence). I would first figure out whether I meet that requirement, so then I can figure out whether or not accredited investor rules apply.
Check out our Reg CF calculator here, which will also help you determine if you meet the definition of an accredited investor.
How is the relationship between me and the person I’m giving money to structured?
Is the person I’m giving money to an individual? Are they a Registered Investment Advisor (RIA) or have other licenses and/or certifications? What is the legal contract and/or agreement between us look like? e.g. Is the exchange of money structured as a partnership, such as an LLC, perhaps investing through a Special Purpose Vehicle (SPV)?
FYI – under current Reg CF regulations, SPVs are not permitted; however, the SEC’s recent proposal would allow a new, specific type of SPV called a crowdfunding vehicle.
Angel investors who meet accredited investor requirements do this type of thing all the time by investing through syndicates. AngelList and Jason Calacanis’ Syndicate are popular examples of this. The benefit of only allowing accredited investors to invest in syndicates allows them to raise under Rule 506(b) of Reg D, meaning there are no limits as to the number of accredited investors who invest. Rule 506(b) does allow up to 35 non-accredited investors to invest, but each of those non-accredited investors is legally required to receive extensive disclosure documents, so small businesses typically avoid this by only allowing accredited investors. Plus, if non-accredited investors are only committing say $100-$1,000 each for up to 35 investors, it’s probably not worth the effort for all the extra trouble and requirements.
For the small amounts of money that crowdfunding investors invest (say, under a few thousand dollars), and the limitations on the number of non-accredited (and overall) investors that can invest without requiring burdensome and costly registration with the SEC (such as with 3(c)1 funds), I would suspect that the legal costs and management fees to operate something like this as a fraction of the overall fund size would far outweigh the benefits of doing this.
All this being said, I’m not saying it’s either a good or bad idea, legal or illegal, practical or impractical, as it depends on a lot of things.
AdministratorApril 22, 2020 at 11:03 am
Orett – also, realizing that you are asking about giving a specific amount ($2,200, which happens to be the Reg CF minimum 12-month investor limit) to investors, another question to ask is – what is your personal 12-month Reg CF investment limit, and does this exceed that amount?
See our Reg CF limit calculator here.
If your question is more around the legality of trying to circumvent the Reg CF investment limits for each investor, then you also need to take your Reg CF investment limitations under consideration. Reg CF investment limits are designed to protect investors – so technically, while you may be able to do this and not have anyone (such as the SEC) easily notice, it could potentially get the company and/or the funding portal in trouble for violating Reg CF rules.
If you did this, opened up the funding portal and/or issuer to liability and they somehow went bust as a result, there is the possibility that you could then be sued for fraud in some manner by these parties and other investors for being the cause of the whole situation.
Again, Reg CF limitations are something currently under review by the SEC and may be changing; but we’d always recommend that you comply with the limits and regulations as they are today.