SEC Letters Give Nod of Approval to Online Venture Capital

Getting angel investment or venture capital has always been tough for entrepreneurs. One reason is that it’s simply hard to find investors willing to plunk down money on your company, unless they are family or friends.  The options are especially limited for startups based outside of venture meccas such as Silicon Valley.

But the legal door just opened a crack, to make it easier for investors and startups to find each other and come together — using online platforms.

Late last week the U.S. Securities and Exchange Commission (SEC) issued what is called “no action letters” to FundersClub and AngelList.  (More here.)  Both companies operate online venture capital or angel capital platforms.  Both companies had sought the SEC letters, to clarify their legal positions.

The upshot?  The letters give the nod of approval to online venture capital platforms and angel capital platforms — if they are set up exactly the way either FundersClub or AngelList are set up.

online venture capital

FundersClub CEO Alex Mittal is quoted at Techcrunch as saying this about the letter his company received:

“The letter is a win for accredited investors, startups, and the VC industry, and strong validation of the business model of FundersClub — to bring the transformational impact of the Internet to venture capital. It allows FundersClub to do something online that historically venture capital advisers have only done offline. Via the no-action letter, the SEC has officially recognized the legitimacy of online VC….”

Both AngelList and FundersClub list pre-screened startups seeking investment.  The sites accept applications from prospective investors.  The platforms facilitate investing relatively small amounts — as little as $1,000 — in exchange for equity. AngelList, for example, says on its home page that it has raised over $10 million for startups just this month.

AngelList and FundersClub accept accredited investors only, today.  Accredited investors are individuals who earn at least $200,000 annually or have a net worth of $1 million.

What The SEC Action Means, And What It Doesn’t

Both the FundersClub letter and the AngelList letter deal with highly complex legal issues (for just how complex, read one lawyer’s perspective).  On top of that, a “no action letter” is very narrow in scope. So let’s understand what the SEC letters mean — and don’t mean, in layman’s terms:

  • Not a sweeping endorsement of all crowdsourced venture capital.  A “No Action letter” from the SEC  simply means the SEC will take no action of enforcement against FundersClub and AngelList, provided they do precisely what is described in the letters.  The letters don’t say anything one way or the other about unrestricted crowdsourcing of venture capital — something that crowdfunding advocates have been pushing for.
  • Does not open the door to lower net worth or lower income individuals investing online. Traditionally, securities law has restricted venture investing to “accredited investors,” meaning those who are high net worth or high income.  This law is designed to protect financially-unsophisticated members of the public.   These letters don’t change that.  Both AngelList and FundersClub deal with accredited investors only.
  • Nothing to do with the JOBS (“Jumpstart Our Business Startups”) Act.  Under the JOBS Act passed in 2012 and taking effect this year, those with lower net-worth and lower incomes (i.e., not accredited investors) will be able to invest relatively small amounts.  However, the SEC has yet to issue regulations to fully implement the JOBS Act. Until that happens, don’t look for crowdfunded venture investment the way most people think of it, i.e., open to the masses to invest. These letters don’t invoke the JOBS Act at all.
  • Still, it’s a step closer to opening up equity investment to more investors.  For startups, it means a bigger pool of investors and potentially more startups able to get funded — especially if other online platforms pop up following the AngelList or FundersClub models.

Anita Campbell Anita Campbell is the Founder, CEO and Publisher of Small Business Trends and has been following trends in small businesses since 2003. She is the owner of BizSugar, a social media site for small businesses.

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