For Sale: NewSpace Private Company Stock

General Industry Trends
September 16, 2013
Author
Chad Anderson
September 16, 2013
Author
Chad Anderson

Investors will soon be able to read about NewSpace companies’ stock offerings in magazines, newspapers and websites. Will we start to see “add to cart” on the investor relations web pages of NSG 100s and NSG OTBs? Maybe. New SEC rules, mandated by the JOBS Act, go into effect on September 23 make public solicitation of investors legal, and companies are getting ready for what could be a revolution in how the media is used by NewSpace startups. Before we see TV commercials encouraging people to invest in the latest NewSpace startup, however, the new rules include some unwanted hurdles that could actually make raising money for startups even harder that it was before. While most pundits focus on the technologies of NSG-tracked companies, knowledge of this new law and its impact on potential 3rd Screen events is critical.

The United States has complex securities laws to protect investors and to regulate the purchase and sale of securities. For startups raising money and investors alike, the rules can be overwhelming, but understanding securities laws is critical to the success of any new company and thus an important consideration for investors. Under the Securities Act of 1933, any sale of stock must be registered with the U.S. Securities and Exchange Commission (SEC) unless the offering meets specific criteria exempting it from the complex and costly registration process (otherwise known as an initial public offering or IPO). The exemptions and the rules for meeting them are contained within Regulation D, and they include the definition of an Accredited Investor (Rule 501) and other restrictions on how companies can raise money and from whom.

Under the new SEC Rule 506(c) of “Reg D,” privately held companies – like the hundreds found on the NSG 100 and NSG OTB – will be permitted to advertise to the general public about their stock offerings. Previously, general solicitation for private placements was explicitly banned by the SEC, making media exposure of any kind related to raising capital taboo. The new rule still requires that all new investors are accredited1, but forthcoming equity crowdfunding rules – also mandated by the JOBS Act – will provide for further exemptions to raise money from non-accredited investors.

NewSpace as an industry has a proven track record of generating intense and lasting public interest, so this new ability to advertise for investors could disproportionately benefit NewSpace companies. For instance, NSG 100 Planetary Resources garnered over one billion media impressions from its recent $1.5Mln Kickstarter campaign to launch a private space telescope. Stephen Fleming, a Founding Member of Space Angels Network and an investor in PR, agrees. “I am an investor in a company that develops fleet management software for trucks. It’s a great company, but it’s nowhere near as sexy as a space telescope or microgravity research or rockets. People get excited about space, and NewSpace companies will now be able use the media to tap into this enthusiasm with all things space. I expect to see companies put a ‘buy stock here’ link on their homepage – that would get a lot of people’s attention in this industry.”

Fleming also warned that “the devil is in the details” when it comes to SEC regulations. “As long as the rules are reasonable, the impact will be very good.” One pitfall already identified in the new Rule 506(c) is a burden placed on companies to verify the accredited investor status of investors. In the past, investors could self-certify that they, in fact, met the standard for accredited investors.

With a 506(c) generally solicited offering, the SEC expects companies to do more to ensure only accredited investors participate.

The SEC advised that “we do not believe that an issuer will have taken reasonable steps to verify accredited investor status if it, or those acting on its behalf, required only that a person check a box in a questionnaire or sign a form, absent other information about the purchaser indicating accredited investor status.”

The Angel Capital Association (ACA) advised its members in a recent webinar that “reasonable steps” can be interpreted as completing one of the following verification tests for each investor:

1. Income Test – Verify the income of each investor by reviewing documents such as an IRS Form W-2, 1099, or 1040 and require a written representation from each investor that he/ she has a reasonable expectation of reaching the income level necessary to qualify in the current year; or

2. Net Worth Test – Verify a bank statement, asset valuation, tax assessment, or statement of securities holdings and require a written representation that all liabilities have been disclosed to provide an accurate representation of net worth. Documents must be dated within three months of the stock purchase; or

3. 3rd Party Verification – A written certification from a permitted third party (e.g. CPA, attorney, registered broker-dealer or investment advisor) attesting to the accredited status of the investor. Such third-party verifications are only valid for three months; or

4. Previous Purchase Test – If the investor has certified his/her accredited status for a previous stock purchase from the company, the company can require a written representation from the investor that they are still an accredited investor.

An informal poll of Space Angels Network members indicated strong reluctance to sharing personal information with startups. Eric Anderson, co-founder of Space Adventures and Planetary Resources remarked that “investors would have to be crazy to hand over their bank statements and tax returns to a startup that might not be around in a year. What would happen to my information if the company folds? It just doesn’t make sense to take that additional risk on top of the financial risk already inherent in early stage investing.”

Verifying accredited investor status isn’t the only new rule. There are also new forms, strict deadlines for filing information with the SEC, mandated markings that must accompany any public solicitation and new harsh penalties for any non-compliance.

The headline on www.saveregd.org, created by a group hoping to amend the rules, reads “Is startup financing about to get a WHOLE LOT HARDER?” AngelList co-founder Naval Ravikant went as far as calling the new rules a “death sentence” for startups in an open letter to the SEC in August.

These restrictions and the inevitable back and forth with the SEC will undoubtedly temper the enthusiasm and the pace of companies using the media to advertise their stock offerings, but ambitious NewSpace entrepreneurs are poised to blaze the trail because of the outsized benefit that could result from the public’s fascination with NewSpace.

This article appeared in the September 2013 edition of NewSpace Global's Thruster market analysis report.

There’s never been a better time to get involved in commercial space. If you’re ready to start investing in private space companies, we invite you to apply for membership to Space Angels.

Investors will soon be able to read about NewSpace companies’ stock offerings in magazines, newspapers and websites. Will we start to see “add to cart” on the investor relations web pages of NSG 100s and NSG OTBs? Maybe. New SEC rules, mandated by the JOBS Act, go into effect on September 23 make public solicitation of investors legal, and companies are getting ready for what could be a revolution in how the media is used by NewSpace startups. Before we see TV commercials encouraging people to invest in the latest NewSpace startup, however, the new rules include some unwanted hurdles that could actually make raising money for startups even harder that it was before. While most pundits focus on the technologies of NSG-tracked companies, knowledge of this new law and its impact on potential 3rd Screen events is critical.

The United States has complex securities laws to protect investors and to regulate the purchase and sale of securities. For startups raising money and investors alike, the rules can be overwhelming, but understanding securities laws is critical to the success of any new company and thus an important consideration for investors. Under the Securities Act of 1933, any sale of stock must be registered with the U.S. Securities and Exchange Commission (SEC) unless the offering meets specific criteria exempting it from the complex and costly registration process (otherwise known as an initial public offering or IPO). The exemptions and the rules for meeting them are contained within Regulation D, and they include the definition of an Accredited Investor (Rule 501) and other restrictions on how companies can raise money and from whom.

Under the new SEC Rule 506(c) of “Reg D,” privately held companies – like the hundreds found on the NSG 100 and NSG OTB – will be permitted to advertise to the general public about their stock offerings. Previously, general solicitation for private placements was explicitly banned by the SEC, making media exposure of any kind related to raising capital taboo. The new rule still requires that all new investors are accredited1, but forthcoming equity crowdfunding rules – also mandated by the JOBS Act – will provide for further exemptions to raise money from non-accredited investors.

NewSpace as an industry has a proven track record of generating intense and lasting public interest, so this new ability to advertise for investors could disproportionately benefit NewSpace companies. For instance, NSG 100 Planetary Resources garnered over one billion media impressions from its recent $1.5Mln Kickstarter campaign to launch a private space telescope. Stephen Fleming, a Founding Member of Space Angels Network and an investor in PR, agrees. “I am an investor in a company that develops fleet management software for trucks. It’s a great company, but it’s nowhere near as sexy as a space telescope or microgravity research or rockets. People get excited about space, and NewSpace companies will now be able use the media to tap into this enthusiasm with all things space. I expect to see companies put a ‘buy stock here’ link on their homepage – that would get a lot of people’s attention in this industry.”

Fleming also warned that “the devil is in the details” when it comes to SEC regulations. “As long as the rules are reasonable, the impact will be very good.” One pitfall already identified in the new Rule 506(c) is a burden placed on companies to verify the accredited investor status of investors. In the past, investors could self-certify that they, in fact, met the standard for accredited investors.

With a 506(c) generally solicited offering, the SEC expects companies to do more to ensure only accredited investors participate.

The SEC advised that “we do not believe that an issuer will have taken reasonable steps to verify accredited investor status if it, or those acting on its behalf, required only that a person check a box in a questionnaire or sign a form, absent other information about the purchaser indicating accredited investor status.”

The Angel Capital Association (ACA) advised its members in a recent webinar that “reasonable steps” can be interpreted as completing one of the following verification tests for each investor:

1. Income Test – Verify the income of each investor by reviewing documents such as an IRS Form W-2, 1099, or 1040 and require a written representation from each investor that he/ she has a reasonable expectation of reaching the income level necessary to qualify in the current year; or

2. Net Worth Test – Verify a bank statement, asset valuation, tax assessment, or statement of securities holdings and require a written representation that all liabilities have been disclosed to provide an accurate representation of net worth. Documents must be dated within three months of the stock purchase; or

3. 3rd Party Verification – A written certification from a permitted third party (e.g. CPA, attorney, registered broker-dealer or investment advisor) attesting to the accredited status of the investor. Such third-party verifications are only valid for three months; or

4. Previous Purchase Test – If the investor has certified his/her accredited status for a previous stock purchase from the company, the company can require a written representation from the investor that they are still an accredited investor.

An informal poll of Space Angels Network members indicated strong reluctance to sharing personal information with startups. Eric Anderson, co-founder of Space Adventures and Planetary Resources remarked that “investors would have to be crazy to hand over their bank statements and tax returns to a startup that might not be around in a year. What would happen to my information if the company folds? It just doesn’t make sense to take that additional risk on top of the financial risk already inherent in early stage investing.”

Verifying accredited investor status isn’t the only new rule. There are also new forms, strict deadlines for filing information with the SEC, mandated markings that must accompany any public solicitation and new harsh penalties for any non-compliance.

The headline on www.saveregd.org, created by a group hoping to amend the rules, reads “Is startup financing about to get a WHOLE LOT HARDER?” AngelList co-founder Naval Ravikant went as far as calling the new rules a “death sentence” for startups in an open letter to the SEC in August.

These restrictions and the inevitable back and forth with the SEC will undoubtedly temper the enthusiasm and the pace of companies using the media to advertise their stock offerings, but ambitious NewSpace entrepreneurs are poised to blaze the trail because of the outsized benefit that could result from the public’s fascination with NewSpace.

This article appeared in the September 2013 edition of NewSpace Global's Thruster market analysis report.

There’s never been a better time to get involved in commercial space. If you’re ready to start investing in private space companies, we invite you to apply for membership to Space Angels.

Investors will soon be able to read about NewSpace companies’ stock offerings in magazines, newspapers and websites. Will we start to see “add to cart” on the investor relations web pages of NSG 100s and NSG OTBs? Maybe. New SEC rules, mandated by the JOBS Act, go into effect on September 23 make public solicitation of investors legal, and companies are getting ready for what could be a revolution in how the media is used by NewSpace startups. Before we see TV commercials encouraging people to invest in the latest NewSpace startup, however, the new rules include some unwanted hurdles that could actually make raising money for startups even harder that it was before. While most pundits focus on the technologies of NSG-tracked companies, knowledge of this new law and its impact on potential 3rd Screen events is critical.

The United States has complex securities laws to protect investors and to regulate the purchase and sale of securities. For startups raising money and investors alike, the rules can be overwhelming, but understanding securities laws is critical to the success of any new company and thus an important consideration for investors. Under the Securities Act of 1933, any sale of stock must be registered with the U.S. Securities and Exchange Commission (SEC) unless the offering meets specific criteria exempting it from the complex and costly registration process (otherwise known as an initial public offering or IPO). The exemptions and the rules for meeting them are contained within Regulation D, and they include the definition of an Accredited Investor (Rule 501) and other restrictions on how companies can raise money and from whom.

Under the new SEC Rule 506(c) of “Reg D,” privately held companies – like the hundreds found on the NSG 100 and NSG OTB – will be permitted to advertise to the general public about their stock offerings. Previously, general solicitation for private placements was explicitly banned by the SEC, making media exposure of any kind related to raising capital taboo. The new rule still requires that all new investors are accredited1, but forthcoming equity crowdfunding rules – also mandated by the JOBS Act – will provide for further exemptions to raise money from non-accredited investors.

NewSpace as an industry has a proven track record of generating intense and lasting public interest, so this new ability to advertise for investors could disproportionately benefit NewSpace companies. For instance, NSG 100 Planetary Resources garnered over one billion media impressions from its recent $1.5Mln Kickstarter campaign to launch a private space telescope. Stephen Fleming, a Founding Member of Space Angels Network and an investor in PR, agrees. “I am an investor in a company that develops fleet management software for trucks. It’s a great company, but it’s nowhere near as sexy as a space telescope or microgravity research or rockets. People get excited about space, and NewSpace companies will now be able use the media to tap into this enthusiasm with all things space. I expect to see companies put a ‘buy stock here’ link on their homepage – that would get a lot of people’s attention in this industry.”

Fleming also warned that “the devil is in the details” when it comes to SEC regulations. “As long as the rules are reasonable, the impact will be very good.” One pitfall already identified in the new Rule 506(c) is a burden placed on companies to verify the accredited investor status of investors. In the past, investors could self-certify that they, in fact, met the standard for accredited investors.

With a 506(c) generally solicited offering, the SEC expects companies to do more to ensure only accredited investors participate.

The SEC advised that “we do not believe that an issuer will have taken reasonable steps to verify accredited investor status if it, or those acting on its behalf, required only that a person check a box in a questionnaire or sign a form, absent other information about the purchaser indicating accredited investor status.”

The Angel Capital Association (ACA) advised its members in a recent webinar that “reasonable steps” can be interpreted as completing one of the following verification tests for each investor:

1. Income Test – Verify the income of each investor by reviewing documents such as an IRS Form W-2, 1099, or 1040 and require a written representation from each investor that he/ she has a reasonable expectation of reaching the income level necessary to qualify in the current year; or

2. Net Worth Test – Verify a bank statement, asset valuation, tax assessment, or statement of securities holdings and require a written representation that all liabilities have been disclosed to provide an accurate representation of net worth. Documents must be dated within three months of the stock purchase; or

3. 3rd Party Verification – A written certification from a permitted third party (e.g. CPA, attorney, registered broker-dealer or investment advisor) attesting to the accredited status of the investor. Such third-party verifications are only valid for three months; or

4. Previous Purchase Test – If the investor has certified his/her accredited status for a previous stock purchase from the company, the company can require a written representation from the investor that they are still an accredited investor.

An informal poll of Space Angels Network members indicated strong reluctance to sharing personal information with startups. Eric Anderson, co-founder of Space Adventures and Planetary Resources remarked that “investors would have to be crazy to hand over their bank statements and tax returns to a startup that might not be around in a year. What would happen to my information if the company folds? It just doesn’t make sense to take that additional risk on top of the financial risk already inherent in early stage investing.”

Verifying accredited investor status isn’t the only new rule. There are also new forms, strict deadlines for filing information with the SEC, mandated markings that must accompany any public solicitation and new harsh penalties for any non-compliance.

The headline on www.saveregd.org, created by a group hoping to amend the rules, reads “Is startup financing about to get a WHOLE LOT HARDER?” AngelList co-founder Naval Ravikant went as far as calling the new rules a “death sentence” for startups in an open letter to the SEC in August.

These restrictions and the inevitable back and forth with the SEC will undoubtedly temper the enthusiasm and the pace of companies using the media to advertise their stock offerings, but ambitious NewSpace entrepreneurs are poised to blaze the trail because of the outsized benefit that could result from the public’s fascination with NewSpace.

This article appeared in the September 2013 edition of NewSpace Global's Thruster market analysis report.

There’s never been a better time to get involved in commercial space. If you’re ready to start investing in private space companies, we invite you to apply for membership to Space Angels.

Investors will soon be able to read about NewSpace companies’ stock offerings in magazines, newspapers and websites. Will we start to see “add to cart” on the investor relations web pages of NSG 100s and NSG OTBs? Maybe. New SEC rules, mandated by the JOBS Act, go into effect on September 23 make public solicitation of investors legal, and companies are getting ready for what could be a revolution in how the media is used by NewSpace startups. Before we see TV commercials encouraging people to invest in the latest NewSpace startup, however, the new rules include some unwanted hurdles that could actually make raising money for startups even harder that it was before. While most pundits focus on the technologies of NSG-tracked companies, knowledge of this new law and its impact on potential 3rd Screen events is critical.

The United States has complex securities laws to protect investors and to regulate the purchase and sale of securities. For startups raising money and investors alike, the rules can be overwhelming, but understanding securities laws is critical to the success of any new company and thus an important consideration for investors. Under the Securities Act of 1933, any sale of stock must be registered with the U.S. Securities and Exchange Commission (SEC) unless the offering meets specific criteria exempting it from the complex and costly registration process (otherwise known as an initial public offering or IPO). The exemptions and the rules for meeting them are contained within Regulation D, and they include the definition of an Accredited Investor (Rule 501) and other restrictions on how companies can raise money and from whom.

Under the new SEC Rule 506(c) of “Reg D,” privately held companies – like the hundreds found on the NSG 100 and NSG OTB – will be permitted to advertise to the general public about their stock offerings. Previously, general solicitation for private placements was explicitly banned by the SEC, making media exposure of any kind related to raising capital taboo. The new rule still requires that all new investors are accredited1, but forthcoming equity crowdfunding rules – also mandated by the JOBS Act – will provide for further exemptions to raise money from non-accredited investors.

NewSpace as an industry has a proven track record of generating intense and lasting public interest, so this new ability to advertise for investors could disproportionately benefit NewSpace companies. For instance, NSG 100 Planetary Resources garnered over one billion media impressions from its recent $1.5Mln Kickstarter campaign to launch a private space telescope. Stephen Fleming, a Founding Member of Space Angels Network and an investor in PR, agrees. “I am an investor in a company that develops fleet management software for trucks. It’s a great company, but it’s nowhere near as sexy as a space telescope or microgravity research or rockets. People get excited about space, and NewSpace companies will now be able use the media to tap into this enthusiasm with all things space. I expect to see companies put a ‘buy stock here’ link on their homepage – that would get a lot of people’s attention in this industry.”

Fleming also warned that “the devil is in the details” when it comes to SEC regulations. “As long as the rules are reasonable, the impact will be very good.” One pitfall already identified in the new Rule 506(c) is a burden placed on companies to verify the accredited investor status of investors. In the past, investors could self-certify that they, in fact, met the standard for accredited investors.

With a 506(c) generally solicited offering, the SEC expects companies to do more to ensure only accredited investors participate.

The SEC advised that “we do not believe that an issuer will have taken reasonable steps to verify accredited investor status if it, or those acting on its behalf, required only that a person check a box in a questionnaire or sign a form, absent other information about the purchaser indicating accredited investor status.”

The Angel Capital Association (ACA) advised its members in a recent webinar that “reasonable steps” can be interpreted as completing one of the following verification tests for each investor:

1. Income Test – Verify the income of each investor by reviewing documents such as an IRS Form W-2, 1099, or 1040 and require a written representation from each investor that he/ she has a reasonable expectation of reaching the income level necessary to qualify in the current year; or

2. Net Worth Test – Verify a bank statement, asset valuation, tax assessment, or statement of securities holdings and require a written representation that all liabilities have been disclosed to provide an accurate representation of net worth. Documents must be dated within three months of the stock purchase; or

3. 3rd Party Verification – A written certification from a permitted third party (e.g. CPA, attorney, registered broker-dealer or investment advisor) attesting to the accredited status of the investor. Such third-party verifications are only valid for three months; or

4. Previous Purchase Test – If the investor has certified his/her accredited status for a previous stock purchase from the company, the company can require a written representation from the investor that they are still an accredited investor.

An informal poll of Space Angels Network members indicated strong reluctance to sharing personal information with startups. Eric Anderson, co-founder of Space Adventures and Planetary Resources remarked that “investors would have to be crazy to hand over their bank statements and tax returns to a startup that might not be around in a year. What would happen to my information if the company folds? It just doesn’t make sense to take that additional risk on top of the financial risk already inherent in early stage investing.”

Verifying accredited investor status isn’t the only new rule. There are also new forms, strict deadlines for filing information with the SEC, mandated markings that must accompany any public solicitation and new harsh penalties for any non-compliance.

The headline on www.saveregd.org, created by a group hoping to amend the rules, reads “Is startup financing about to get a WHOLE LOT HARDER?” AngelList co-founder Naval Ravikant went as far as calling the new rules a “death sentence” for startups in an open letter to the SEC in August.

These restrictions and the inevitable back and forth with the SEC will undoubtedly temper the enthusiasm and the pace of companies using the media to advertise their stock offerings, but ambitious NewSpace entrepreneurs are poised to blaze the trail because of the outsized benefit that could result from the public’s fascination with NewSpace.

This article appeared in the September 2013 edition of NewSpace Global's Thruster market analysis report.

There’s never been a better time to get involved in commercial space. If you’re ready to start investing in private space companies, we invite you to apply for membership to Space Angels.

For Sale: NewSpace Private Company Stock
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Investors will soon be able to read about NewSpace companies’ stock offerings in magazines, newspapers and websites. Will we start to see “add to cart” on the investor relations web pages of NSG 100s and NSG OTBs? Maybe. New SEC rules, mandated by the JOBS Act, go into effect on September 23 make public solicitation of investors legal, and companies are getting ready for what could be a revolution in how the media is used by NewSpace startups. Before we see TV commercials encouraging people to invest in the latest NewSpace startup, however, the new rules include some unwanted hurdles that could actually make raising money for startups even harder that it was before. While most pundits focus on the technologies of NSG-tracked companies, knowledge of this new law and its impact on potential 3rd Screen events is critical.

The United States has complex securities laws to protect investors and to regulate the purchase and sale of securities. For startups raising money and investors alike, the rules can be overwhelming, but understanding securities laws is critical to the success of any new company and thus an important consideration for investors. Under the Securities Act of 1933, any sale of stock must be registered with the U.S. Securities and Exchange Commission (SEC) unless the offering meets specific criteria exempting it from the complex and costly registration process (otherwise known as an initial public offering or IPO). The exemptions and the rules for meeting them are contained within Regulation D, and they include the definition of an Accredited Investor (Rule 501) and other restrictions on how companies can raise money and from whom.

Under the new SEC Rule 506(c) of “Reg D,” privately held companies – like the hundreds found on the NSG 100 and NSG OTB – will be permitted to advertise to the general public about their stock offerings. Previously, general solicitation for private placements was explicitly banned by the SEC, making media exposure of any kind related to raising capital taboo. The new rule still requires that all new investors are accredited1, but forthcoming equity crowdfunding rules – also mandated by the JOBS Act – will provide for further exemptions to raise money from non-accredited investors.

NewSpace as an industry has a proven track record of generating intense and lasting public interest, so this new ability to advertise for investors could disproportionately benefit NewSpace companies. For instance, NSG 100 Planetary Resources garnered over one billion media impressions from its recent $1.5Mln Kickstarter campaign to launch a private space telescope. Stephen Fleming, a Founding Member of Space Angels Network and an investor in PR, agrees. “I am an investor in a company that develops fleet management software for trucks. It’s a great company, but it’s nowhere near as sexy as a space telescope or microgravity research or rockets. People get excited about space, and NewSpace companies will now be able use the media to tap into this enthusiasm with all things space. I expect to see companies put a ‘buy stock here’ link on their homepage – that would get a lot of people’s attention in this industry.”

Fleming also warned that “the devil is in the details” when it comes to SEC regulations. “As long as the rules are reasonable, the impact will be very good.” One pitfall already identified in the new Rule 506(c) is a burden placed on companies to verify the accredited investor status of investors. In the past, investors could self-certify that they, in fact, met the standard for accredited investors.

With a 506(c) generally solicited offering, the SEC expects companies to do more to ensure only accredited investors participate.

The SEC advised that “we do not believe that an issuer will have taken reasonable steps to verify accredited investor status if it, or those acting on its behalf, required only that a person check a box in a questionnaire or sign a form, absent other information about the purchaser indicating accredited investor status.”

The Angel Capital Association (ACA) advised its members in a recent webinar that “reasonable steps” can be interpreted as completing one of the following verification tests for each investor:

1. Income Test – Verify the income of each investor by reviewing documents such as an IRS Form W-2, 1099, or 1040 and require a written representation from each investor that he/ she has a reasonable expectation of reaching the income level necessary to qualify in the current year; or

2. Net Worth Test – Verify a bank statement, asset valuation, tax assessment, or statement of securities holdings and require a written representation that all liabilities have been disclosed to provide an accurate representation of net worth. Documents must be dated within three months of the stock purchase; or

3. 3rd Party Verification – A written certification from a permitted third party (e.g. CPA, attorney, registered broker-dealer or investment advisor) attesting to the accredited status of the investor. Such third-party verifications are only valid for three months; or

4. Previous Purchase Test – If the investor has certified his/her accredited status for a previous stock purchase from the company, the company can require a written representation from the investor that they are still an accredited investor.

An informal poll of Space Angels Network members indicated strong reluctance to sharing personal information with startups. Eric Anderson, co-founder of Space Adventures and Planetary Resources remarked that “investors would have to be crazy to hand over their bank statements and tax returns to a startup that might not be around in a year. What would happen to my information if the company folds? It just doesn’t make sense to take that additional risk on top of the financial risk already inherent in early stage investing.”

Verifying accredited investor status isn’t the only new rule. There are also new forms, strict deadlines for filing information with the SEC, mandated markings that must accompany any public solicitation and new harsh penalties for any non-compliance.

The headline on www.saveregd.org, created by a group hoping to amend the rules, reads “Is startup financing about to get a WHOLE LOT HARDER?” AngelList co-founder Naval Ravikant went as far as calling the new rules a “death sentence” for startups in an open letter to the SEC in August.

These restrictions and the inevitable back and forth with the SEC will undoubtedly temper the enthusiasm and the pace of companies using the media to advertise their stock offerings, but ambitious NewSpace entrepreneurs are poised to blaze the trail because of the outsized benefit that could result from the public’s fascination with NewSpace.

This article appeared in the September 2013 edition of NewSpace Global's Thruster market analysis report.

There’s never been a better time to get involved in commercial space. If you’re ready to start investing in private space companies, we invite you to apply for membership to Space Angels.

Investors will soon be able to read about NewSpace companies’ stock offerings in magazines, newspapers and websites. Will we start to see “add to cart” on the investor relations web pages of NSG 100s and NSG OTBs? Maybe. New SEC rules, mandated by the JOBS Act, go into effect on September 23 make public solicitation of investors legal, and companies are getting ready for what could be a revolution in how the media is used by NewSpace startups. Before we see TV commercials encouraging people to invest in the latest NewSpace startup, however, the new rules include some unwanted hurdles that could actually make raising money for startups even harder that it was before. While most pundits focus on the technologies of NSG-tracked companies, knowledge of this new law and its impact on potential 3rd Screen events is critical.

The United States has complex securities laws to protect investors and to regulate the purchase and sale of securities. For startups raising money and investors alike, the rules can be overwhelming, but understanding securities laws is critical to the success of any new company and thus an important consideration for investors. Under the Securities Act of 1933, any sale of stock must be registered with the U.S. Securities and Exchange Commission (SEC) unless the offering meets specific criteria exempting it from the complex and costly registration process (otherwise known as an initial public offering or IPO). The exemptions and the rules for meeting them are contained within Regulation D, and they include the definition of an Accredited Investor (Rule 501) and other restrictions on how companies can raise money and from whom.

Under the new SEC Rule 506(c) of “Reg D,” privately held companies – like the hundreds found on the NSG 100 and NSG OTB – will be permitted to advertise to the general public about their stock offerings. Previously, general solicitation for private placements was explicitly banned by the SEC, making media exposure of any kind related to raising capital taboo. The new rule still requires that all new investors are accredited1, but forthcoming equity crowdfunding rules – also mandated by the JOBS Act – will provide for further exemptions to raise money from non-accredited investors.

NewSpace as an industry has a proven track record of generating intense and lasting public interest, so this new ability to advertise for investors could disproportionately benefit NewSpace companies. For instance, NSG 100 Planetary Resources garnered over one billion media impressions from its recent $1.5Mln Kickstarter campaign to launch a private space telescope. Stephen Fleming, a Founding Member of Space Angels Network and an investor in PR, agrees. “I am an investor in a company that develops fleet management software for trucks. It’s a great company, but it’s nowhere near as sexy as a space telescope or microgravity research or rockets. People get excited about space, and NewSpace companies will now be able use the media to tap into this enthusiasm with all things space. I expect to see companies put a ‘buy stock here’ link on their homepage – that would get a lot of people’s attention in this industry.”

Fleming also warned that “the devil is in the details” when it comes to SEC regulations. “As long as the rules are reasonable, the impact will be very good.” One pitfall already identified in the new Rule 506(c) is a burden placed on companies to verify the accredited investor status of investors. In the past, investors could self-certify that they, in fact, met the standard for accredited investors.

With a 506(c) generally solicited offering, the SEC expects companies to do more to ensure only accredited investors participate.

The SEC advised that “we do not believe that an issuer will have taken reasonable steps to verify accredited investor status if it, or those acting on its behalf, required only that a person check a box in a questionnaire or sign a form, absent other information about the purchaser indicating accredited investor status.”

The Angel Capital Association (ACA) advised its members in a recent webinar that “reasonable steps” can be interpreted as completing one of the following verification tests for each investor:

1. Income Test – Verify the income of each investor by reviewing documents such as an IRS Form W-2, 1099, or 1040 and require a written representation from each investor that he/ she has a reasonable expectation of reaching the income level necessary to qualify in the current year; or

2. Net Worth Test – Verify a bank statement, asset valuation, tax assessment, or statement of securities holdings and require a written representation that all liabilities have been disclosed to provide an accurate representation of net worth. Documents must be dated within three months of the stock purchase; or

3. 3rd Party Verification – A written certification from a permitted third party (e.g. CPA, attorney, registered broker-dealer or investment advisor) attesting to the accredited status of the investor. Such third-party verifications are only valid for three months; or

4. Previous Purchase Test – If the investor has certified his/her accredited status for a previous stock purchase from the company, the company can require a written representation from the investor that they are still an accredited investor.

An informal poll of Space Angels Network members indicated strong reluctance to sharing personal information with startups. Eric Anderson, co-founder of Space Adventures and Planetary Resources remarked that “investors would have to be crazy to hand over their bank statements and tax returns to a startup that might not be around in a year. What would happen to my information if the company folds? It just doesn’t make sense to take that additional risk on top of the financial risk already inherent in early stage investing.”

Verifying accredited investor status isn’t the only new rule. There are also new forms, strict deadlines for filing information with the SEC, mandated markings that must accompany any public solicitation and new harsh penalties for any non-compliance.

The headline on www.saveregd.org, created by a group hoping to amend the rules, reads “Is startup financing about to get a WHOLE LOT HARDER?” AngelList co-founder Naval Ravikant went as far as calling the new rules a “death sentence” for startups in an open letter to the SEC in August.

These restrictions and the inevitable back and forth with the SEC will undoubtedly temper the enthusiasm and the pace of companies using the media to advertise their stock offerings, but ambitious NewSpace entrepreneurs are poised to blaze the trail because of the outsized benefit that could result from the public’s fascination with NewSpace.

This article appeared in the September 2013 edition of NewSpace Global's Thruster market analysis report.

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