As the Securities and Exchange Commission has been dragging its feet on new crowdfunding regulations, companies are finding a way to crowdfund using the current rules. The biggest challenge is dealing with the broker-dealer registration requirements. If you sell securities on a transaction basis, you are likelya broker-dealer and need to deal with the registration requirements. The other limitation is dealing with the current ban on general solicitation and advertising.
One company that appears to be successfully employing a crowdfunding strategy is Solar Mosaic. The company is selling interests directly in its own projects so it avoids the broker-dealer requirements. It uses a Rule 504 exemption instead of Rule 506 exemption under Regulation D. Rule 504 exempt offerings are not subject to the ban on advertising that impedes Rule 506 offerings, but are subject to a $1 million limit on capital raised. I even invested a small amount of cash in a Solar Mosaic project.
I have seen a few other platforms, like Circle Up, that partner with a broker-dealer. Effectively, the web crowdfunding platform sits on top of the broker-dealer’s regulatory platform.
The latest crowdfunding approach to catch my eye is FundersClub. They even obtained a no-action letter from the Securities and Exchange Commission blessing their approach. (I should disclose that Mrs. Doug works at the law firm that requested the no-action letter.)
FundersClub acts as a venture capital fund manager and registered as a venture capital fund manager with California. It starts a separate private fund for each company that it funds.
The compensation it tricky. According to the SEC no-action letter and the FundersClub FAQ, the company charges an administrative fee to cover out of pocket costs. None of that fee goes to salaries or personnel. That lack of transaction compensation and operations was enough to keep the company away from broker-dealer registration.
FundersClub does take a promote on the performance of the investment fund. It has a long road ahead for compensation to come in, but is aligned with the investors.
I decided to try out the platform. Signing up is straightforward.
As for vetting users as accredited investors, the platform does a better job than others. It asks for your income, joint income and net worth. Other platforms just have a check button exactly tied to the right answers for those questions. With FundersClub, you need to know your income or know the right answers to be accredited.
It does have one simple check for knowledge:
By checking this box, you represent that you have such knowledge and experience in financial and business matters that you are capable of evaluating the merits and risks of investment opportunities in private companies generally, and you are able to bear the economic risk of such investments including the risk of complete loss.
After passing the entrance hurdle, there are several investment opportunities in the works.
The current regulatory environment for crowdfunding is tricky, but navigable for accredited investors. Non-accredited investors are left out, so maybe crowdfunding is not the right term. I’m skeptical that the JOBS Act mandate for new crowdfunding regulations is going to truly open the floodgates to non-accredited investors.
Sources:
- FundersClub No-Action letter (.pdf)
- FundersClub Investment Adviser Registration
- SEC Greenlights One Style Of Equity Crowdfunding For Startups by Josh Constine in TechCrunch
- Solar panel project crowdfunding by William Carleton
UPDATED: To clean up more than my usual collection of typos.
Doug, I love how you check some of these new platforms out by simply signing up for them.
Looks like AngelList has its own no-action letter now, too.
Interesting that the basis for “no action” is not squarely within 201(c) of the JOBS Act. That is a trail for another platform to lay, I guess.
As for the Venture Capital Fund Adviser registration in California, the third paragraph in the no-action letter uses that term of art. So I searched the investment adviser registration database for FundersClub: http://http://adviserinfo.sec.gov/
I think the Advisers Act registration process is easier to deal with than the Broker-Dealer registration process. I think it’s easier operationally as well.
The VC adviser registration is a lighter version of the advisers registration requirement in Dodd-Frank.
see: https://www.compliancebuilding.com/2011/08/22/what-is-a-venture-capital-fund/
https://www.compliancebuilding.com/2010/06/17/regulation-of-advisers-to-private-funds/
Sorry about the typos in an earlier version of this story. That was more than usual for me.
Doug, You mentioned that Rule 504 offerings are not subject to the ban on general solicitation, but that only is true if the offering is registered on the state level. I looked at their site, and from my brief review, it did not appear that they have a state registered offering. So how did Solar Mosaic do it?
My statement on the Rule 504 offerings not being subject to a ban is too broad. You are right to point out that the issuer will have to jump through some hoops to advertise.
I’m not sure anyone has quite figured out their full position on how Mosaic meets all of the regulatory hurdles.
I think they could take the position that they are not engaged in general solicitation and advertising. You need to register on the site before being able to see an offering.
They could also be relying on state level exemptions for sales to accredited investors. The platform clearly limits your investment options by your state of residence.
They newest and biggest offering is limited to California residents, meeting the intra-state exemption from the Securities Act.