In two recent no action letters, the Securities and Exchange Commission (the “SEC”) granted no action relief for two venture capital online funding platforms, the FundersClub, Inc. (“FundersClub”) and AngelList, LLC (“AngelList”), allowing them to avoid registering as broker-dealers under the Securities Exchange Act of 1934 (the “Exchange Act”) even though their affiliates will receive some compensation in the form of a carried interest. The new letters indicate that running a platform that connects investors with private funds and qualifying investors as accredited investors for private placements will not, in and of itself, require broker-dealer registration so long as there are no other broker-dealer indicia like transaction-based compensation or handling of customer funds or securities. The letters also confirm the SEC’s position that carried interest compensation for advisory services in a private equity fund, such as a venture capital fund, is not, in and of itself, transaction-based compensation for broker-dealer registration purposes. Significantly, both funding platforms are limited to accredited investors only and the offerings relate to investments in special purpose investment vehicles and not direct investments in the underlying portfolio companies. The no action letters do not provide standards for platforms that may want to provide direct investments into portfolio companies.
The FundersClub Model -
FundersClub qualifies potential investors through an “online process.” Once an investor’s accredited status is confirmed, that investor may access a FundersClub website listing investment opportunities and information provided by various start-up companies seeking investment capital. Upon gaining access to the site, the potential investor may submit nonbinding indications of interests for the various opportunities, and once a certain threshold of investor interest is met, FundersClub will close the indication of interest process for a particular investment opportunity and reconfirm each interested investor’s accredited status.
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