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The JOBS Act: Rule 506 Platforms (Crowdfunding for Angels)

William Carleton, Contributing Editor, VCExperts


Pop quiz: what part of the JOBS Act was sponsored by Representative Patrick McHenry of North Carolina?

The equity crowdfunding exemption, Title III, right?

No! Though McHenry steered a crowdfunding exemption through the House, with White House support, his signature bill was gutted by the Senate. Title III is the one and only title in the JOBS Act that is not in the form of the bill as first packaged and passed by the House.

The answer to the quiz is: McHenry sponsored a safe harbor from federal broker-dealer registration, contained in Title II of the JOBS Act. The safe harbor means to protect online angel platforms and incubators from activities they undertake in the course of matching startup companies with accredited investors.

To date, I've called McHenry's amendment the "angel platform and incubator amendment," but this article by Joe Bartlett on VC Experts (disclosure; I've recently become a contributing editor to VCExperts) makes me reconsider. Joe envisions a much more robust role for the online platforms "blessed" by Title II of the JOBS Act. He coins the term, "Super Platform," and ascribes to it the function of infrastructure, bridging startups from angels on one shore to investment bankers on the other.

Part of what's going on here is that Joe can see past the limitations and strictures put on the Title II safe harbor to make new cloth from the strands left loose. For instance, while Title II says that such platforms must not receive "compensation in connection with the purchase or sale of such security," it does expressly permit co-investment by the platform or its associates.

Here's Joe describing how permissive affiliation might work:

"Each Super Platform may affiliate, through a minority investment, with one or more investment banks (explicitly not controlled by any of the same) in order that the bank(s) and the Gazelles can get to know one another during and after the closing of the Platform round in anticipation of the fact that the ultimate exit/liquidation event, for example, will necessitate banking services."

("Gazelles" are Joe's term for the startups and emerging companies hungry for growth capital.)

Keep an eye on the angel platform and incubator amendment. It could be the Super Platform amendment, should Joe be right and the legislation end up enabling something new, something more than a retroactive blessing of what angel platforms and incubators do today. In the meantime, perhaps call it the Rule 506 platform amendment. That name draws an appropriate distinction with the much more highly regulated "funding platforms" under the equity crowdfunding exemption.

Photo: Marcel Marchon / Flickr.


William Carleton

Bill is a member of McNaul Ebel Nawrot & Helgren PLLC, a Seattle law firm. He blogs every day at http://wac6.com.