On March 26, 2013, the SEC's Division of Trading and Markets provided no-action relief to FundersClub Inc. and FundersClub Management LLC, indicating that the Division would not recommend enforcement action under Section 15(a)(1) of the Exchange Act if FundersClub and FundersClub Management LLC operated a platform through which its members could participate in Rule 506 offerings. FundersClub identifies start-up companies in which its affiliated fund will invest, and then posts information about the start-up companies on its website so that the information is only available to FundersClub members, who are all accredited investors. The FundersClub members may submit non-binding indications of interest in an investment fund, which is relying on Rule 506 of Regulation D to conduct the offering. When a target level of capital is reached, the indication of interest process is closed and FundersClub reconfirms investors' interest and accredited investor status, and negotiates the final terms of the investment fund's investment in the start-up company. Members may withdraw their indications of interest at any time. In this process, FundersClub and FundersClub Management do not receive any compensation, however some administrative fees are charged. FundersClub and FundersClub Management intend to be compensated through their role in organizing and managing the investment funds (at a rate of 20% or less of the profits of the investment fund, but never exceeding 30%).
The SEC Staff notes in the no-action letter that FundersClub's and FundersClub Management's current activities appear to comply with Section 201 of the JOBS Act, in part because they and each person associated with them receive no compensation (or the promise of future compensation) in connection with the purchase or sale of securities. However, once FundersClub, FundersClub Management or persons associated with them receive compensation or the promise of future compensation, as described in their incoming letter, they will no longer be able to rely on Section 201 of the JOBS Act.
This no-action letter is notable because it is the first relief from broker-dealer registration for a platform that provides investors with a means to invest in start-up companies following the enactment of the JOBS Act, but in many ways the relief follows a well-established path that developed over the years prior to enactment of the JOBS Act. The letter does not in any way address the JOBS Act's crowdfunding exemption, or the ability to conduct a Rule 506 offering using general solicitation, neither of which avenues are currently available to issuers as we await SEC rulemaking.
Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
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