The SEC just delivered a big gift to the nascent crowdfunding market by announcing that it would not pursue legal action against FundersClub, even though, technically, maybe, it’s breaking the law.
FundersClub lets accredited investors put as little as $1,000 into startups, which list themselves on its website. FundersClub looks an awful lot like an investment advisory firm, but it’s not registered as such and thus isn’t making the same kind of disclosures that a normal broker-dealer would.
FundersClub argues that it doesn’t actually provide any investment advice and never actually touches the money, merely acting as a middleman between investors and startups that lets them source their deals more efficiently.
In a letter explaining its decision not to pursue action, the SEC noted that its reasoning was based in part on the fact that management of FundersClub didn’t directly touch money invested and didn’t receive any compensation per funding, limiting their incentive to cheat.
Crowdfunding, the practice of letting companies raise money by taking a little from a lot of small investors rather than raising a lot from one or two big ones, is being touted by many as the next big thing in early stage financing.
FundersClub founders Alex Mittal and Boris Silver say that what it does isn’t crowdfunding since it only works with accredited investors, not the general public. But the mechanism it has set up could easily be adjusted to allow non-accredited investors in if and when the SEC allows that.
The trouble is, there are a lot of other organizations trying to do crowdfunding that are actually operating in a legal gray area where they might possibly run afoul of rules put in place decades ago to protect less-sophisticated investors from getting fleeced by scam artists.
Those rules will be relaxed significantly when the JOBS Act goes into effect. Despite being signed into law last April, the act is still in limbo while the SEC decides how to implement its changes.
Source: Silicon Valley Business Journal – Jon Xavier
By Samuel S. Guzik, CrowdFundBeat special guest editor, Guzik & Associate The Securities and Exchange Commission has announced that it will…