AngelList vs. the SEC over general solicitation

Naval’s new campaign against the SEC proposed rules regulating general solicitation is the news of the week. It’s a political mistake.

The problem to be solved is a lack of trust between us and DC bureaucrats, not overly restrictive rules. The rules themselves could be workable if we trusted in their implementation.

First off, since the 1929 crash, private investment has been restricted to those with a certain level of net worth—called accredited investors—determined to protect the average person from investing without expert advice (brokers) and scams and the economy as a whole from lemming-like bubbles. Further, startups have been restricted in their communications during periods of raises, especially regarding sharing key information about their raises and traction metrics.

The JOBS Act allowed for more open communications—called general solicitation—but the new rules say if you screw up, you can face a year ban from further fundraising, which would kill startups.

If you’re a bad actor, such bans protect the pool; if you’re an honest startup, identified as a bad actor by the bureaucrats, you’ve just entered the deadpool. Naval and others don’t trust the bureaucrats to tell the difference or to understand the costs of compliance, especially out on the bleeding edge. Judging from the startup immigration experiences I’ve been part of second-hand (“oh, so you sell software? let’s see the CDs” “uh… cloud?”), Naval et al. are right to be skeptical.

But politically, it’s a mistake. Consumer protection and existing securities interests have long been opposed to the JOBS Act and are quiet causes for many of the delays, as we have mostly ignored implementation after the bill passed. At this point, we’re in a hole, having been disengaged this past year and change. To come in shouting now comes across as usual tech-in-politics arrogance.

Aside from dislike of the ban, the rest of Naval’s proposed fixes can be implemented in practice, such as opening up APIs to allow submission of required forms, rather than needing to be codified in the regulations. Broadly, his memo comes down to “we don’t trust you not to screw this up,” since how can you trust someone to provide accurate oversight when they don’t know the difference between a pitch deck and term sheets?

We don’t build trust by making demands, yet obviously DC won’t understand our proposed tech-driven solutions to the problems their well-intentioned rules seek to solve. What would be a better solution?

Since we can no longer turn back the clock to put more pressure on DC to implement the regulations called for in the JOBS Act, the best approach would be for Naval to organize a hackathon with attendance from DC staff to explain what an API is or how it could be used to automate information transfer from startups to investors or government agencies.

The consumer protection and securities interest groups have spent this past year raising fears about the JOBS Act, and a single big push by us will do more to drive away regulators than make them understand our fears. We need an ongoing dialogue, not a “rush to the barricade” moment.

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3 Responses to AngelList vs. the SEC over general solicitation

  1. Hi Craig,

    A few thoughts on the post:
    • You’re right in that we and the tech community should be engaged constantly, not at the moment of truth.
    • Your hackathon idea is a great one. Want to work with us to set that up?
    • It’s unfortunate that the press is treating this sensationally as (“AngelList v the SEC” ;-)) etc – The goal here is not to attack the SEC. They’re just trying to balance investor protection v. increased access to capital. Rather, it’s to put the tech community on notice that it’s do or die time to explain our part of the world and how it operates to the SEC. I’m sure they’ll take it into consideration when drafting the final rules. Note that many of the comments coming into the SEC have been substantive.

  2. Pingback: CyberBuzzer - Plug Yourself! » AngelList pushes back against proposed SEC rules: Vital action, bad politics …

  3. Pingback: AngelList pushes back against proposed SEC rules: Vital action, bad politics … | CyberBuzzer

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