Re: Angels in the infrastructure, spinning in infinity...

From: Antoun Nabhan (
Date: Tue Jan 02 2001 - 20:06:48 PST

At 11:00 AM 1/2/01 -0800, Strata Rose Chalup wrote:

>"Angels on the Internet: The Elusive Promise of "Technological
>Disintermediation" for Unregistered Offerings of Securities
> by Donald C.

Langevoort is a well-known scholar in securities law regulation, and a lot
of this article covers useful ground. But I'm just not sure that he comes
to the right conclusions here:

"On balance, I would be willing to deregulate in the area of general
solicitations. Any form of general solicitation should be permissible so
long as the offering is made available only to accredited investors. Given
my concerns about the financial acumen of many accredited investors,
however, I would use a test the waters approach--allowing contacts, but
imposing some cooling off period between the initial solicitation and the
ultimate sales, as well as facilitating the kind of risk warning disclosure
suggested above.(94) Within this framework, of course, there would be no
need to retain the IPOnet concept that offerings be made available to
accredited investors only if they were posted after the prequalification of
the investor in question. With respect to sales to non-accredited
investors, I would allow for more restrained water testing along the lines
of that found in Regulation A, with the same cooling-off time to assure
that the required disclosure would be meaningful. "

He may be "deregulating" by eliminating the two-step procedure of 1)
qualifying a pool of investors, then 2) presenting investors with the
opportunity or opportunities, but he's actually increasing the overall
transaction cost by imposing a cooling-off period that mandatorily slows
the whole damn process down. If there's one thing that entrepreneurs need,
it's speed in the deal. I'm trying to imagine a world where Series A rounds
had the same kind of no-marketing-or-recruiting-allowed quiet periods that
IPO filings require, and it's not pretty.

His suggestion about "textured" risk disclosure statements also tend to cut
against what he's trying to accomplish - take a look at the frequently
hilariously fraidy-cat risk statements in the S-1 documents that companies
file for their IPOs and tell me how easy those are to draft correctly. (A
personal favorite: "Management may use the capital raised in this offering
in ways you do not agree with and may not like.") That's a greater barrier
to entry than the prohibition against general solicitation that he thinks
is so problematic. It's even a greater barrier to capital-market entry than
the disclosure requirements currently rolled into Rule 506. 506 generally
gets interpreted as a requirement to give the investors everything the
entrepreneur knows, which is a long way away from everything the
entrepreneur would ideally know, and even a fair bit different from what a
"reasonably diligent" entrepreneur would know.

Take a look at, which creates a web-accessible community of
pre-qualified investors. Transaction costs are relatively low and it fully
conforms with the current Rule D framework. What adds is
intermediation that pre-screens investors for not only their accredited
status under Reg D, but also their investment acumen. For entrepreneurs,
who tend to really need some help planning and managing their new ventures,
this is a welcome screening.

I also suspect that the logic of the SEC's definition of "accredited
investor" isn't that millionaires possess financial acumen, but that they
have the ability to lose the money they're investing without starving to
death. It's "caveat emptor" with a little safety net for the
non-millionaires in the house.

Anyhow, I'm procrastinating again when I should be sending documents to
certain accredited investors!


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