This just in: FundersClub has received a "no-action" letter from SEC staff.
You may recall that FundersClub is the Y Combinator graduated startup that seeks to offer, in the words of the company's promotional copy, "insider access to pre-vetted startup opportunities that are otherwise difficult to access."
Last year on GeekWire, I expressed skepticism, and published questions, about the FundersClub model. As far as I know, FundersClub never answered Todd Bishop's invitation to comment on the GeekWire post. But this week's no-action letter, a public document, does now largely address my questions.
Basically, FundersClub is shaping its business within what appear to be the permissible contours of existing law for "venture capital fund advisers," as well as within the compensation restraints of the new angel platform exemption under Section 201(c) of the JOBS Act.
In the process of requesting assurance from SEC staff, FundersClub's lawyers also indicate how FundersClub, itself a startup venture looking to monetize its business, intends to make money within - again, for emphasis – the constraints of the angel platform exemption's prohibition on transaction – based compensation.
For FundersClub, the prospective solution to the compensation conundrum, reviewed in an earlier VCExpert's Buzz, seems to be: borrow the VC carried interest mechanism, but ditch the VC management fee.
The following is from the lawyer's letter on behalf of FundersClub (part of the pdf accessible on the SEC site), requesting the no-action assurance:
"As discussed above FC Inc. and FC Management currently do not receive any compensation for their activities in organizing and managing the investment funds. FC Inc. and FC Management propose that, in connection with future investment funds, FC Management would earn 'carried interest' in connection with its role in organizing and managing the investment funds& . We anticipate that [the] amount of carried interest in most cases would be 20% or less of the profits of the investment fund, but in no event would the amount of carried interest exceed 30%. FC Inc. and FC Management would not receive any additional annual management fee in addition to the carried interest. This fact distinguishes the compensation contemplated by FC Inc. and FC Management from that received by many venture capital fund advisors & which typically receive an annual management fee (typically 2% of the value fund) in addition to carried interest (typically 20% of the value of any profits of the fund) (collectively, a fee structure often referred to as '2 and 20')."
In short, FundersClub is proposing to drop the VC management fee, keep the carry, and maybe in some cases amplify the carry.
This no-action letter is a very big development in the emerging world of accredited crowdfunding. By studying the FundersClub no-action letter, other angel platforms might refine their approaches to the transaction-based compensation restriction under the angel platform exemption of Section 201(c) of the JOBS Act. Some may consider imitating FundersClub's innovative take on imitating a venture capital firm.
Much more in this no-action letter to discuss – such as strategies to pass along a platform's third party fees, and what feels like the increasing irrelevance of any analysis of general solicitation – so we'll be back.