3 Comments

Summary:

FundersClub, a website that lets investors back start-ups for as little as $1000, cleared an important regulatory hurdle when the SEC said its model is legal, in part because it is consistent with the Jobs Act.

The prospects of a new era of crowd-funded startups took another jump forward today as the Securities and Exchange Commission told FundersClub, a website that lists new companies seeking funding, that its business model doesn’t violate federal securities rules.

FundersClub, which promises “insider access to pre-vetted startups,” faced legal uncertainty because it lets investors make investments as low as $1,000 in exchange for equity, even though it’s not a registered broker. Instead, the company, which is itself a start-up that grew out of the Y-Combinator incubator, holds itself out as a venture-capital adviser that does not take transaction-based commissions but instead takes management fees from accredited investors.

To verify its legal status, FundersClub wrote the SEC to request formal validation of its business model. In a letter, reported by TechCrunch, the SEC stated that it would not pursue enforcement action against the company.

In a significant footnote in the SEC letter, the Commission notes that FundersClub’s model is consistent with the Jobs Act, a recent law intended to make it easier for start-ups to raise money without regulatory headaches:

The Staff notes that FundersClub’s and FC Management’s current activities appear to comply with Section 201 of the Jumpstart Our Businesses Act of2012 (“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.

The Jobs Act, passed a year ago, is only partially in effect as the SEC is still devising rules to facilite “crowd funding” from hundreds of small investors. FundersClub participants must still meet the definition of an “accredited investor,” which means they have an annual income of over $200,000 or a net worth of $1 million.

Clarification: the last paragraph of this story was changed on Friday to say “accredited investor” instead of “institutional investor.”

You’re subscribed! If you like, you can update your settings

  1. Do I understand the article to mean that the SEC is approving startup funding by ordinary people who are enthusiastic about some project (great!), but only if they are milliionaires (that just killed it)?

  2. Michael Sinsheimer Friday, March 29, 2013

    The two advantages of this from an entrepreneur’s perspective is that this is a bundling effort which will result in only one shareholder for the entity being funded which helps in managing investors and the other advantage obviously is another source of capital.

  3. Robin Solis Monday, April 1, 2013

    The accredited investor thing is a disclaimer.

Comments have been disabled for this post