Legal Definitions - angel investor

An angel investor is a wealthy individual who invests their own money in emerging companies in exchange for ownership equity or convertible debt. They typically provide funding between the initial seed funding stage and venture capital financing. Angel investors are also known as private investors, seed investors, business angels, or informal investors.

Angel investors are often crucial for entrepreneurs who struggle to secure cheaper sources of financing such as bank loans. They invest their own funds, unlike venture capitalists who invest others' pooled funds. Angel investors are usually considered accredited investors, meaning they meet certain financial criteria set by federal law.

For example, an angel investor might provide $100,000 to a startup company in exchange for a 10% ownership stake. This investment helps the company grow and develop, and the angel investor hopes to make a profit when the company becomes successful.

Historically, angel investors have made their investments in unregistered, private offerings under either Section 4(a)(2) of the Securities Act or under Rule 506(b) of Regulation D. However, the SEC's new 506(c) exemption permits entrepreneurial ventures to engage in general solicitation to offer securities as long as the securities are sold only to accredited investors and the issuer takes "reasonable steps to verify" the purchaser's accredited status.