The Securities and Exchange Commission is making way for a number of startups and online investment platforms to enable startups to crowdsource investment. Early last week, Y Combinator-backed FundersClub received notice from the SEC that the agency would not pursue action against its crowdfunding platform. But it wasn’t alone: a few days later, AngelList received a similar letter from the SEC. [hat tip to Danielle Morrill]
The regulatory response came after AngelList requested its own assurance from the SEC that the agency wouldn’t pursue enforcement action against its investment platform, AngelList Invest.
In its letter to the agency, AngelList noted that it was going to form a limited liability corporation that would serve as investment advisors, and would operate a platform through which accredited investors would be able to put money into startups. Like other crowdfunding investment platforms that are popping up, under AngelList’s plan, the company would introduce individual investment vehicles for each portfolio company that its users invested in.
According to the filing, AngelList Advisors would determine whether to create an investment vehicle for particular startups, then negotiate the terms of the investment for the larger pool. It would also exercise all voting rights for the investment vehicle and decide on whether it should distribute cash and marketable securities to investors, subject to any lock-up agreements or similar restrictions.
Already, AngelList is being used to help raise funds for some companies and funds, through its investing tool. Open only to accredited investors, the tool lets users put as little as $1,000 each into startup companies that it’s created an investment vehicle for.
The whole idea is to allow a larger number of individual investors to make small investments in interesting startups, but to do so in a way that reduces the friction of most funding rounds today. Under current SEC rules, startups can’t advertise or announce that they’re raising funding, which means that investors might not even know that they can put money into a certain company. And, in a sense, to increase the efficiency with which startups can get funded.
According to a filing from the SEC last week, AngelList has gotten the green light to operate this online investment platform. You can read the full letter here, but it all comes down to this paragraph:
“Based on the facts and representations set forth in your letter, and without necessarily agreeing with your conclusions and analysis, the Staff will not recommend enforcement action against AngelList, AngelList Advisors or any Lead Angel to the Commission under Section 15(a) of the Exchange Act, ifthe parties engage in the activities described herein without registering as a broker or dealer in accordance with Section 15(b) ofthe Exchange Act.”
With both AngelList and FundersClub receiving the blessings of the SEC, we can expect more platforms for crowdfunding investment in startups to take off. A few weeks ago, for instance, another Y Combinator-backed startup called WeFunder launched with its own crowdfunding platform for startup investing.
These letters are also being sent in the wake of the passage of the JOBS Act, which is expected to go into effect by the end of the year. That act will make it easier for non-accredited investors to make investments in non-public companies, while also enabling startups to publicize that they are raising funds.
We’ve requested comment from AngeList and will update when we hear back.
Source: TechCrunch – RYAN LAWLER