Using the Web to Match Private Companies and Potential Investors: SEC No Action Letters Open a Door, but Questions Remain
[Editor's Note: The following post is a Goodwin Proctor Alert, which relays regulatory and legislative developments.]
In a no action letter dated March 26, 2013 (the “FC Letter”), the staff of the U.S. Securities and Exchange Commission (the “SEC”) indicated that they would not recommend action against the operators of the FundersClub website (“FundersClub”) for failing to register as a broker/dealer under the U.S. Securities Exchange Act of 1934 (the “Exchange Act). Two days later, a similar letter (the “AL Letter”) was issued to the operators of the AngelList website (“AngelList”)
The Letters may remove one of the most significant obstacles to the development of a broad-scale, online business in which accredited investors are able to select and invest in private companies. However, the Letters are based upon a number of representations made by FundersClub and AngelList that may be difficult to defend or apply in practice. They also leave unaddressed a number of related legal issues. Thus, the Letters may represent only the beginning of a process in which entrepreneurs, investment managers, private companies, the Staff, the SEC and others explore and develop the rules and practices under which such a business may be operated.
This Client Alert briefly describes certain key issues and conclusions associated with the Letters and highlights some of the issues and risks that remain.
Click here to read the entire article.
[The Alert concludes that t]he Letters may be a key milestone in the development of a broad-based marketplace in which Web-based efficiencies are applied to matching (i) private companies seeking capital with (ii) accredited investors willing to provide it. Nevertheless, important open issues remain. In particular, the representations made by FundersClub and AngelList in obtaining the Letters may prove difficult to defend or apply in practice. Moreover, key questions (e.g., regarding general solicitation and the procedures by which investors may be verified as “accredited”) await further guidance from the SEC. Finally, other parties such as state regulators and various self-regulatory organizations have not yet weighed-in and may have a material impact.
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