An angel investor is an individualinvestor—often a high net worth individual—who providescapitalfor emerging growth companies, typically in exchange for either ownership equity or convertibledebt.Angel investments often represent the round of financing between the initial seed funding stage (which is where an amount of money is used to fund research or start a business, etc.) obtained from the entrepreneurs’ family and friends and the more robust financing acquired through venture capital. These investments can also prove crucial for entrepreneurs who struggle to secure cheaper sources of financing such as bank loans. Angel investors typicallyinvesttheir own funds—in contrast to venture capitalists, private equity investors that invest others’ pooled funds.An angel investor is also referred to as a private investor, seed investor, business angel, or informal investor.
Federal law dictates that securities cannot be sold unless they are registered or if there is an exception. For instance, anaccredited investoris an exemption.Generally, angel investors are consideredaccredited investors; however, that is not always the case.Rule 501 of Regulation Dof theSecurities Act of 1933defines “accredited investors” as an individual with: (1) a net worth of $1,000,000 in assets;or(2) having earned $200,000 in income for the previous two years;or(3) having a combined income of $300,000 for married couples.
Historically, angel investors have made their investments in their unregistered, private offerings under eitherSection 4(a)(2) of the Securities Actor underRule 506(b) of Regulation D.Section 4(a)(2) exempts from registration transactions by an issuer not involving a public offering while Rule 506(b) of Regulation D is asafe harborunder Section 4(a)(2). President Obama’s 2012 Jumpstart Our Business Startups Act (JOBS Act) proposed an expansion of Rule 506 which was later adopted by the SEC in July 2013.Although a cardinal rule of federal securities law is that there may not be a “general solicitation” in private offerings, the SEC’snew 506(c) exemptionpermits entrepreneurial ventures to engage in general solicitation to offersecuritiesas long as: (1) thesecuritiesare sold only to accredited investors;and(2) theissuertakes “reasonable steps to verify” the purchaser’s accredited status.
[Last updated in June of 2022 by the Wex Definitions Team]
