The new registration exemption in connection with Rule 506 offerings and crowdfunding portals significantly expand the scope of activity that non-broker-dealer registered entities may conduct.
Section 201(c) of the JOBS Act provides that in connection with securities offered and sold in compliance with Rule 506 of Regulation D certain intermediary parties will not be subject to broker-dealer registration. Parties that do not receive compensation in connection with the purchase/sale of the security, take possession of the customer funds in connection with such security, and are not subject to statutory disqualification, may now engage in a broad range of conduct previously unavailable to non-broker-dealer registered entities. Such parties may now maintain a platform or mechanism allowing for the offer, sale, purchase, or negotiation of securities and engage in general solicitation, advertisements, or related activity whether online or in person.
Section 304 of the JOBS Act also creates a new crowdfunding exemption. Section 304 amends the Exchange Act to allow issuers to raise no more than $1 million in a 12-month period via registered funding platforms provided that the offering is conducted via a funding portal that complies with certain requirements, the amount raised meets certain investor based limits, and the issuer meets certain requirements. Notably, unlike the Rule 506 Exemption, section 304 requires that such institutions must register with the SEC and FINRA as “funding portals” and not engage in investment advisement or management of investor funds or the solicitation of the purchase/sale/offer of securities.
The SEC has taken a lenient view towards the use of these JOBS Act Exemptions based on the notion that such firms receive carried interest as compensation in lieu of transaction-based compensation. On March 26, 2013, the SEC’s Division of Trading and Markets granted no-action relief to FundersClub Inc., an operator of an accredited investor online portal and its affiliate FundersClub Management, LLC, a manager of investment funds, marking the first successful use of the new JOBS Act Exemptions. Shortly thereafter, no-action relief was also granted to AngelList LLC and AngelList Advisors LLC permitting a registered investment adviser to operate a similar internet-based investment platform.
These new permissible activities mark a high watermark in the venture capital space and will be sure to lead to the funding of new innovative companies.