A "no action letter" does not have the force of law.
An individual or entity who is not certain whether a particular product, service, or action would constitute a violation of the federal securities law may request a "no-action" letter from the SEC staff. Most no-action letters describe the request, analyze the particular facts and circumstances involved, discuss applicable laws and rules, and, if the staff grants the request for no action, concludes that the SEC staff would not recommend that the Commission take enforcement action against the requester based on the facts and representations described in the individual’s or entity's original letter.
It is important to note, however, that these letters do not have the force of law and might, when tested in a court, be overturned or ignored when applied to a specific set of facts.
What are the services and the investment structures with respect to which AngelList sought no action relief?There are two deal structures proposed by AngelList: "Angel Followed Deals" and "Angel Advised Deals". Both deal structures start with forming AngelList Advisors ("Advisors") and both envision a LLC or partnership under Advisors.
- Each interested Investor will submit, through the platform, a non-binding request for information ("RFI") to Advisors specifying the Portfolio Company about which the Investor is seeking information and the investment amount the Investor is considering.
- In order to submit an RFI each Investor must:
- complete a detailed questionnaire certifying that he or she is an Accredited Investor, a qualified client, and if necessary, a qualified purchaser;
- wait at least thirty days from the time he or she submits the questionnaire before he or she closes on the investment;
- if relevant, provide AngelList with any supplemental information that may be necessary to identify the type of investments in which the Investor might wish to participate.
- Each Investor will have the right withdraw an RFI at any time prior to the Investor's binding agreement to invest in the Investment Vehicle.
- Upon submission of an RFI, a potential Investor will receive the following information with respect to the Portfolio Company from Advisors electronically over Advisors platform:
- the private placement memorandum or similar offering document from the Portfolio Company;
- a supplemental memorandum that provides pertinent information about the Investment Vehicle, AngelList Advisors, the Lead Angel (if applicable), the general risks of investing in angel and venture companies, and conflicts of interest in connection with the Investment Vehicle; and
- any relevant addendum to the private placement memorandum reflecting the terms of the investment.
- Advisors will not close on an Investment Vehicle for at least 3 business days following the later of the distribution of the supplemental memorandum or the addendum to the supplemental memorandum.
- If Advisors receives a sufficient amount of investment interest (in the judgment of Advisors) to proceed with the investment, Advisors will close the Investment Vehicle and collect a Subscription Agreement from each participating Investor.
- Advisors will be responsible for reviewing the completed Subscription Agreements and determining whether each potential Investor meets the applicable qualification criteria for the particular investment.
- Upon acceptance by Advisors and the Portfolio Company of his Subscription Agreement, each Investor will be instructed to forward his capital contribution directly to a bank or other financial institution at which the Investment Vehicle maintains an account. Such funds will then be contributed to the Portfolio Company. Neither the Lead Angel nor Advisors will handle Investor funds or securities.
What are the important assumptions presented by AngelList and relied upon by the SEC staff?
- Advisors will be a registered investment adviser with the Commission or one or more states.
- Advisors will operate an internet-based platform that will be exclusively available to accredited investors.
- Investments in each Investment Vehicle will be offered and sold in compliance with Rule 506 of Regulation D. This means that, until the prohibition on general solicitation and advertising is lifted, there will be no "general solicitation or general advertising".
- Advisors and any Lead Angel (if applicable), will receive compensation only in the form of carried interest and will not receive any transaction-based compensation. No officer, director or employee of Advisors or any Lead Angel will receive any transaction-based compensation in connection with interest in any Investment Vehicle or any Portfolio Company.
- Neither Advisors nor any Lead Angel will handle any customer funds or securities.
- Neither Advisors nor any Lead Angel will solicit Investors, aside from the website itself
Key takeaways from AngelList's letter
- AngelList has referred customers to SecondMarket and seems to assume this will continue in the future.
- AngelList will select the Portfolio Companies and the Lead Angels.
- Recouping the costs incurred by Advisors in setting up the Investment Vehicle will not be considered transaction related compensation.
- The period between when an interested Investor requests an RFI and the close of any investment by that interested Investor must be at least 30 days. This is, in part, to avoid issues with general solicitation/advertising.
- Advisors will not:
- Receive any transaction related compensation (only carried interest);
- Participate in any negotiations between the Portfolio Companies and the Investors;
- Directly assist Investors in completing a transaction;
- Hold itself out as providing securities related services other than a listing or matching service.
- AngelList does not intend to carry out activities or provide services that would lead to the requirement to register as a broker-dealer.
What are the services and the investment structures with respect to which FundersClub sought no action relief?
FundersClub Inc. ("FC Inc.") is venture capital fund adviser that solely advises venture capital funds. FundersClub Management LLC ("FC Management") is a wholly owned subsidiary of FC Inc. and is also a venture capital fund adviser. FC Inc. and PC Management identify and perform due diligence on start-ups for which FC Management may wish to form investment funds.
- Start-up identified and diligenced by FC Inc. and FC Management.
- FC Management enters into a non-binding term-sheet with the Portfolio Company with target amount of capital that would be invested.
- FC Inc. then posts information about that Portfolio Company, provided by the Portfolio Company, on its thefundersclub.com website. The name of and information about a start-up company is available online only to FundersClub members who have already been qualified as accredited investors
- FC Inc. members offer non-binding indications of interest.
- FC Inc. provides those members who express indications of interest in an investment fund with standardized legal documentation through which they will invest in that investment fund.
- When an investment fund reaches indications of interest sufficient to fund the target amount originally agreed upon between FC Inc . and the Portfolio Company (or if the company agrees to increase the target level of capital), then FC Inc. closes the indication of interest process.
- FC Inc. then reconfirms the indication of interest with each member who has offered the indication of interest and reconfirms the accredited investor status of each of those members. Simultaneously, FC Inc. negotiates the final terms of the investment fund's investment with the Portfolio Company.
- FC Inc. obtains signed agreements from the members who had provided non-binding indications of interest concerning that investment fund, but until the investment fund closes (as discussed below), the members can withdraw their indications of interest without penalty at any time. When FC Management has reached a definitive agreement with the start-up company on the terms of the investment by the investment fund, FC Management then signs the limited liability company agreements with the investors and closes the transaction.
- Investors in an investment fund provide funds for their investment in the investment fund directly or indirectly to a custody account. The custodian bank or trust company serves as custodian for the life of the investment fund.
- An investment fund's investment in a start-up company is funded directly from the custodian bank or trust company account to the account specified by the start-up company.
- The custodian bank or trust company provides periodic statements for the investment fund directly to each of the fund investors, or indirectly through a fund administrator.
What are the important assumptions presented by FundersClub and relied upon by the SEC staff?
- FundersClub and FC Management are advisers solely to venture capital funds as defined in Rule 203(1)-( 1) under the Investment Advisers Act of 1940.
- FC Management's management services include: exercising any rights negotiated with the start-up company; providing the start-up company with strategic advice and networking assistance; voting investment fund shares; offering or selling its securities in the start-up company; deciding on any tender offers; and winding up the investment funds.
- FundersClub and FC Management receive compensation (i.e., carried interest) for their services, the nature of which are traditional advisory and consulting services, and not transaction-based compensation.
- The officers, directors and employees of FundersClub and FC Management personally do not receive transaction-based compensation for their efforts in raising investments for the investment funds.
- Any portion of the administrative fee remaining in the custody account at the time a fund is wound up will be distributed to investors along with the other assets of the fund.
- Neither FundersClub nor FC Management is able to withdraw any deposited funds from the custody account for its own use, and while an investor's funds will pass through an escrow account or similar account established for the benefit of the investor, the only permitted withdrawals from such account are either to an investment fund's custody account to purchase fund interests for the investor or back to the investor if a proposed investment fund does not close.
- FC Inc. and FC Management do not handle customer funds or securities for the investment funds or the investors in the investment funds.
Key takeaways from FundersClub's letter
- FundersClub stated that it expects to take between 20%-30% carried interest in any given investment.
- The focus here is on the ability of venture capital funds to bring their fundraising online.
- As with AngelList, FundersClub does not intend to carry out activities that would lead to the requirement to register with the SEC or FINRA as a broker-dealer.
Although the no action letters discussed above represent a small step forward in online investing, the letters also illustrate the limits of the current crowdfunding market. Both AngelList and FundersClub go a long way to avoid designation as a broker dealer and although the models are interesting for accredited investors, these "no action" letters likely represent just one step in the evolution of equity crowdfunding in the United States.
Dan is a U.S. trained and qualified lawyer (New York) with extensive experience in capital markets and M&A transactions in the United States, Europe, Asia and Africa. This background has provided extensive exposure to rules, regulations and regulators (including the SEC and FINRA) governing many forms of capital raising in the United States. With this foundation in the traditional capital markets space, Dan is seeking to help grow the crowdfunding market in the United States in a manner that encourages capital formation, protects investors and meets the extensive requirements of the nation’s regulators.
Born and raised in Cleveland, Ohio, Dan has worked and lived throughout the United States, in London and elsewhere in Europe. In his spare time, Dan has contributed a significant amount of pro bono work to a number of organizations, including the Clinton Health Access Initiative, and enjoys suffering as he watches Cleveland’s consistently terrible sports teams lose.