April 4, 2013

Crowdfunding: SEC Staff Says VC Sites Aren’t Broker-Dealers

As Dave Lynn notes in this Morrison & Foerster blog, the SEC’s Division of Trading & Markets has granted no-action relief to a site that helps start-ups raise funds. In this blog, Steve Quinlivan of Leonard Street notes: operates a really cool website. The publicly available page advertises “The best way to invest in startups. Insider access to pre-vetted startups. Low minimum investment sizes. Free membership. Join today.” Another publicly available page states “Investments are made in venture funds set up for the startups, and therefore, the minimum check sizes are 10-20 times smaller than typical angel investments – $1K-$5K typically, vs. $25K-$100K.” It’s a little hard to tell though whether the site is operational or in test mode, but I wasn’t going to part with money to find out. Footnote 19 to the incoming SEC letter says the first multi-company fund has closed, though, and single fund companies are possible.

You would almost think it was illegal, but the SEC just issued a no-action letter. A little further clicking indicates you have to certify you are an accredited investor before working your way into the site.

The no-action letter doesn’t address general solicitation issues, but instead addresses whether the is a broker dealer. They don’t earn commissions on the sale of securities, but apparently do take a carried interest. The carried interest only pays out if a fund returns its capital contributions. They also don’t propose to take a management fee. The SEC apparently blesses the argument that only receives money if they are successful in creating value. Or otherwise stated, traditional investment adviser compensation is not transaction based compensation earned by a broker-dealer.

Steve also blogs about similar no-action relief granted to AngelList (and here’s Anna Pinedo’s blog on this).

Crowdfunding: A Popular News Topic

With the JOBS Act having its first birthday tomorrow, crowdfunding remains a popular topic for the mass media and bloggers alike. Here is a sampling of pieces from over the past few months:

– Washington Post’s Jobs Act falls short of grand promises
– Washington Post’s For broker/dealers, crowdfunding presents new opportunity
– TechCrunch’s As Crowdfunding Takes Off, SEC Greenlights AngelList’s Investment Platform
– Keith Bishop’s Silver Hills May Tarnish Crowdfunding
– Keith Bishop’s Are There Silver Hills In Other States?
– Anna Pinedo’s State Securities Regulators Release their Legislative Agenda
– Forbes’ Happy First Birthday JOBS Act
–’s Waiting for the Crowd’s Cash
– Keith Bishop’s Is Crowdfunding Subject To The UCC?
– Huffington Post’s Clearing Up Confusion Around Crowdfunding
– Jay Brown’s The Promise and Risk of Crowdfunding: Inocente, Kickstarter, and the Oscars
– Keith Bishop’s Raising Money For A Film Project? DOC Says Don’t Forget The Securities Laws
– Gary Emanuel’s 5 Reasons Why Equity-Based Crowdfunding Under the JOBS Act Won’t Work
– Washington Post’s While waiting for SEC regulations, crowdfunding leaders focus on investor education
–’s Can Mature Firms Benefit from Crowdfunding?

Crowdfunding for Whistleblowers Too?

A few months ago, a Forbes columnist touted the “Whistleblower Forensic Opportunity Trust,” which is his RocketHub crowdfunding site seeking investors to support financial fraud whistleblowers.

What Might a Crowdfunding Ad Look Like?

More than a year ago, I blogged about the ability of federal agencies to remove comment letters that are offensive or otherwise problematic from their websites. As noted in this Bloomberg article from way back when, the SEC did so when it removed a comment letter that touted a “can’t miss investment” in its JOB’s Act comment portal. Here’s an excerpt from that removed comment letter:

Make 100 times your investment in 1-to-3 years and 1,000 times by holding
for 3-to-10 years by ending the Energy Industry and starting a Free Energy Era with
economy-changing proprietary advancements. Also, save total bubble losses from all
energy and energy-related investments.

– Broc Romanek