AngelList’s Ravikant makes urgent plea for changes in new crowdfunding rules

Vicki Thompson

Naval Ravikant grew AngelList into the world’s™s foremost meeting place for founders and funders. Now he is laying plans to broaden its mission and make money.

AngelList co-founder and CEO Naval Ravikant sees potential disaster in proposed new crowdfunding regulations and is urging others on his founders and funders networking site to speak up.

In a letter to the Securities and Exchange Commission this week and an interview with me on Friday, Ravikant warned that the agency’s new Form D filing rules set to take effect on Sept. 23 could bring “disastrous unintended consequences for the startup community,”

“The proposed rules appear to be tailored to how Wall Street raises funds, not the startup community,”Ravikant said in his letter.

“My sense is that the SEC knows that this is an issue and is not going to put into effect some of these rules,” he told me in an interview late on Friday.

The agency last month voted to allow startups and private investment groups to openly solicit money, with restrictions that Ravikant and others in the angel investor community are very unhappy about. Ravikant’s letter was sent when the agency solicited feedback before enacting the new rules.

One of Ravikant’s biggest concerns centers around the proposed penalties. He worries that proposed sanctions may be too draconian, resulting in severe punishment for unintended violations. He notes that violating the rules could result in startups being banned from fundraising for a year and that AngelList could get swept up in those penalties.

“Rules that may be easy for Wall Street are a death sentence for startups. They are easy to break accidentally and the penalty for noncompliance is severe,” Ravikant wrote.

Businesses like AngelList, incubators, and VCs that surround startups are built to avoid getting in the way of a startup’s autonomy, Ravikant wrote. “they should not be penalized for activities that a startup undertakes on their own that the business can’t control.”

He also urges the SEC not to reduce the costs of compliance and keep filings confidential.

“Startups often want to control the timing of their financing announcement and prefer not to reveal amounts raised for competitive reasons,” he wrote. “If more of the Form D information was confidential rather than public, compliance rates would jump dramatically.”

Ravikant proposes that third parties like AngelList be allowed to make SEC filings on behalf of startups and serve as a repository where startups can update information about their fundraising.

The Angel Capital Association, which represents 200 investor groups and 10,000 accredited investors across the country, last month also strongly protested the new rules.

AngelList has 100,000 startups and about 20,000 accredited investors on its platform and Ravikant’s views are quite influential among them.

The new rules are coming to implement the federal JOBS Act, which was passed and signed into law more than a year ago.

They retain the requirement that only accredited investors (those with a liquid net worth of more than $1 million) can make equity investments in private companies. They also require private companies and funds to document that their investors meet that net worth standard.

The new rules also require anybody doing a general solicitation to file a Form D with the SEC at least 15 days before starting their campaign. They must file a followup within 30 days of ending the solicitation.

Ravikant wrote in his letter that the requirements probably won’t hinder startups that can afford the bankers and lawyers that will be needed to comply.

But, he warns that “the same rules applied to early stage startups will prevent them from forming. Since young companies are responsible for most of the job growth in the US, we believe this is against the spirit of the JOBS Act.”

“Startups are constantly raising money, sometimes before they have even hired a lawyer,” Ravikant told me. “With tech startups, it’s all loose-goosie. You raise money as you go, often from friends, family and investors. These companies will trip all over these rules and break them left and right.”

Ravikant’s specific complaints:

1” “The requirement to file a Form D 15 days prior to the financing, or at the close of financing even if a financing doesn’t close, is meaningless in our world. Startups are always financing.”

2” “The requirement to formally file all written materials provided to investors with the SEC is not feasible in a world where the materials are updated continuously.”

3” “The requirement to include disclosures every time you mention a financing doesn’t™t work for most places those appear (try tweeting boilerplate legal text in 140 characters, or requiring reporters to include it in stories).”

4” “These technical legal requirements place burdens on startups at a stage before they may have legal advice, and the very severe penalty for non-compliance (not fundraising for a year) is a death penalty for a not-yet-profitable business.”

Click here to read the profile of Naval Ravikant and AngelList that was the July 26 cover story in the Silicon Valley Business Journal.

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Cromwell Schubarth is the Senior Technology Reporter at the Business Journal. His phone number is 408.299.1823.

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