As we covered here eleven months ago, the JOBS Act contains an exemption from federal broker dealer registration requirements for angel platforms that syndicate deals, where participation is limited to accredited investors.
One might fairly characterize this new law, contained in Title II of the JOBS Act, as the foundation of accredited crowdfunding.
What's more, unlike the implementation of the lifting of the ban on general solicitation in Rule 506 offerings where purchasers are limited to accredited investors, Congress did not require the SEC to engage in rulemaking before this reform took effect.
In short, angel platforms are free to crowdfund, today, and, unlike JOBS Act Title III investment crowdfunding platforms open to all, need not wait on the SEC to draft regulations.
But wait: the SEC staff have something to say about the Title II exemption from broker dealer registration!
In FAQs posted last week, SEC staff took a narrower view of the federal exemption than those of us in the startup and emerging company financing ecosystem would prefer.
In particular, the SEC staff seem to believe that almost any kind of compensation can blow the exemption.
Here's what the legislation says in pertinent part:
"The exemption provided … shall apply to any person … if … such person and each person associated with that person receives no compensation in connection the purchase or sale of such security.…"
Elsewhere, the legislation says that it's okay for persons covered by the exemption to conduct due diligence services in connection with sales of securities on the platform, "so long as such services do not include, for separate compensation, investment advice or recommendations to issuers or investors."
Hang on to that phrase, "for separate compensation," in particular. There's an implication there, isn't there, that compensation for at least some activities or services is okay, isn't there, even if no commission on sales is allowed?
But the staff FAQs don't read the statute that way:
"Congress conditioned the exemption on a person and its associated persons not receiving any 'compensation' in connection with the purchase or sale of such security.' Congress did not limit the condition to transaction-based compensation. The staff interprets the term 'compensation' broadly, to include any direct or indirect economic benefit to the person or any of its associated persons.…
" … Any salary paid to a person for engaging in … activities [to promote, offer, or sell shares of privately offered funds] is compensation to that person in connection with the purchase or sale of securities. As a result, that person would not be able to rely on the exemption from registration as a broker-dealer.…"
The SEC staff FAQs do not have the force of law, or even necessarily the approval of the SEC. But these interpretations are troubling. We will have to take some time to sort through them and figure out the implications for angel platform best practices.