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AngelList Receives SEC No-Action Letter Two Days After FundersClub

72 points by dmor 14y ago

rayiner 14y ago
I recommend actually reading the letter (it's only a few pages), specifically pages 3-4 which highlight the characteristics of the company the SEC considered important deciding to grant the no-action letter.
thinkcomp 14y ago
It's worth noting that these letters do not waive the requirements of applicable money transmission laws.
- ceejayoz 14y ago
  Is it really worth noting? Of course they don't waive other laws. AngelList doesn't have a pass for murder, either.
bradhe 14y ago
> While being first makes for great PR, FundersClub can expect AngelList will be the first of many competitors to emerge now that its business model has been validated. I'm fairly ignorant to the legalities of securities (for better or for worse), but how does this validate a business model? Doesn't this really just mean that one dynamic of the business model has been validated--i.e. the SEC thinks you're legit?
- bmelton 14y ago
  I read that as "Because FundersClub has validated the business model," not because of the SEC approval.
  - cabinguy 14y ago
    I have no idea if FundersClub is wildly profitable or not, but I thought that "validating a business model" meant the model was profitable, not just legal.
    - bmelton 14y ago
      In common terms, "validating the business model" can be as simple as other people going after the same idea as you. While that doesn't necessarily make it a profitable idea, it does make it feel more like an obvious idea whose time has come. Even in the case of copycats, if the idea has legs enough to spawn copycats, that may also speak to its viability. Groupon is a great example of this. Despite Groupon's own troubles, it has spawned a number of copycats that appear to be doing quite well. In short, validation doesn't necessarily mean profits. It could mean high signup rates with the later potential to monetize (ala Twitter), or it could mean copycats, or it could mean (of course) profits.
      - cabinguy 14y ago
        I'm not trying to have a back-and-forth but I think you are confusing business ideas and business models. Many potentially great businesses (high sign up rates, etc.) struggle to find a valid business model.
        bmelton 14y ago
        For what it's worth, I don't actually disagree. I was speaking hypothetically. The point was only that many people consider competition as a validation of a business model, and don't necessarily wait for profit (the only real validation) to act as that actual validation. In a lot of cases, this is valid. If you're a Venture Capitalist, for example, if you're waiting for a business to become profitable on its own, then you're not getting terms that are nearly as good as if you'd acted earlier. So even amongst those in the know, "validation" can be seen as something far less than absolute dollar terms, and may still be a valid rung on the ladder of decision making.
dmor 14y ago
I just received confirmation from Naval Ravikant, AngelList CEO, with the following statement: We didn't really announce this since a lot of it seems like behind-the-scenes inside baseball. It lets us know the legal boundaries of what's possible in the space and will inform our future products, but right now we're happy with the SecondMarket partnership - SM vets investors for sophistication, companies for background, and provides Broker-Dealer level protection and compliance. The /Invest feature on AngelList is working well so far. We do curate the opportunities to those with a high-quality lead investor, and to date we've announced 7 fundings, 14 are closed or in closing, 18 are currently open for Accrediteds, adding about one per day. We've received over $6M in commitments in the last Quarter in 915 separate transactions. We have 12,000 Accrediteds on AngelList, and via our SecondMarket Partnership, can reach another 20,000. Unlike others in the space, we don't think we can pick the winners - rather, it's a more open approach for any company with a high-quality lead investor. We also don't view it as a money-maker for AngelList - more of a community service. We also think it makes sense to augment it with our base service of introducing high-quality companies to sophisticated investors (VCs, Seed Funds, Professional Angels) - we currently drive 500-700 of those introductions per week, and drive about $10M / month there.
- DanielRibeiro 14y ago
  It is also important to note that the JOBS act, that will allow crowdfunding to be legal, was created largely due to Naval's work. He talked about this recently on an long-ish interview: https://www.youtube.com/watch?v=2htl-O1oDcI https://www.youtube.com/watch?v=2htl-O1oDcI The clip where he talks about it: https://www.youtube.com/watch?v=ugDyaVLPj3w https://www.youtube.com/watch?v=ugDyaVLPj3w
temphn 14y ago
How benevolent the authorities are! Can you imagine starting a business and then beseeching the SEC king David Blass to find out if your business is legal, and announcing with relief a "no action" letter? It cost Angellist and FundersClub a few tens of thousands of dollars in legal fees simply to find out what the ever-shifting law was. Worse, to be a CEO of a startup these days you need to be willing to risk jail time to launch a new product. For had Blass (unelected and likely unfirable due to "career status") ruled the other way, many would consider that a judgment on the legitimacy of the transactions at issue rather than a demonstration of the illegitimacy of the SEC. And FC/Angellist would have had to scramble away post-haste from crowdfunding for fear that disintermediating Blass' banksters meant being fitted for pinstripes. Go back and read the original TechCrunch article. People actually thought FundersClub might be facing jail time! What brass, what courage you need to start a business today in a regulated space. They took maximum risks, I wish them (and Angellist) maximum reward. I also hope that someday soon Blass is forced to cower in the corner waiting for a ruling by the people who actually produce something, hoping against hope for a "no action" letter, praying that he won't be thrown summarily in jail.
- natrius 14y ago
  I agree with most of what you're saying, but I don't know what your preferred alternative would be. What should've happened instead?
  - neurotech1 14y ago
    Theoretically, two other possibilities; 1) They act a certain way, and be prepared to defend civilly and criminally if necessary. That said even if what AngelList and FundersClub do is technically illegal, the fact they target accredited investors and don't promise insane returns, probably would tip the balance towards a civil action. IANAL and we're talking hypothetical action anyway. 2) Another possibility would be to obtain a declarative judgement that what they are doing is in fact legal. IANAL but this would be messy, expensive and a lengthy process.
  - temphn 14y ago
    Simple: the business should be able to deal with willing buyers and sellers. The SEC shouldn't exist. Pure caveat emptor, buyer beware. If you trust the SEC to "protect you" on your behalf you will (someday soon) find yourself Cyprused with no recourse. Cyprus has its equivalent of the SEC, and did absolutely nothing to prevent the complete collapse of the economy. The US became a world power before the alphabet soup of agencies that arose once the frontier closed. Regulation and bureaucracy can best be conceptualized as middle management that arises after a startup's early stages, parasites that a relatively strong organism/organization like the US can tolerate - but not indefinitely. The SEC's primary interest is increasing the SEC's budget and power, it has absolutely nothing to do with safeguarding your interests.
tyang 14y ago
Good piece Danielle.

72 points by dmor 14y ago

I recommend actually reading the letter (it's only a few pages), specifically pages 3-4 which highlight the characteristics of the company the SEC considered important deciding to grant the no-action letter.

thinkcomp 14y ago

It's worth noting that these letters do not waive the requirements of applicable money transmission laws.

ceejayoz 14y ago
Is it really worth noting? Of course they don't waive other laws. AngelList doesn't have a pass for murder, either.

bradhe 14y ago

> While being first makes for great PR, FundersClub can expect AngelList will be the first of many competitors to emerge now that its business model has been validated. I'm fairly ignorant to the legalities of securities (for better or for worse), but how does this validate a business model? Doesn't this really just mean that one dynamic of the business model has been validated--i.e. the SEC thinks you're legit?

bmelton 14y ago
I read that as "Because FundersClub has validated the business model," not because of the SEC approval.
- cabinguy 14y ago
  I have no idea if FundersClub is wildly profitable or not, but I thought that "validating a business model" meant the model was profitable, not just legal.
  - bmelton 14y ago
    In common terms, "validating the business model" can be as simple as other people going after the same idea as you. While that doesn't necessarily make it a profitable idea, it does make it feel more like an obvious idea whose time has come. Even in the case of copycats, if the idea has legs enough to spawn copycats, that may also speak to its viability. Groupon is a great example of this. Despite Groupon's own troubles, it has spawned a number of copycats that appear to be doing quite well. In short, validation doesn't necessarily mean profits. It could mean high signup rates with the later potential to monetize (ala Twitter), or it could mean copycats, or it could mean (of course) profits.
    - cabinguy 14y ago
      I'm not trying to have a back-and-forth but I think you are confusing business ideas and business models. Many potentially great businesses (high sign up rates, etc.) struggle to find a valid business model.
      - bmelton 14y ago
        For what it's worth, I don't actually disagree. I was speaking hypothetically. The point was only that many people consider competition as a validation of a business model, and don't necessarily wait for profit (the only real validation) to act as that actual validation. In a lot of cases, this is valid. If you're a Venture Capitalist, for example, if you're waiting for a business to become profitable on its own, then you're not getting terms that are nearly as good as if you'd acted earlier. So even amongst those in the know, "validation" can be seen as something far less than absolute dollar terms, and may still be a valid rung on the ladder of decision making.

dmor 14y ago

I just received confirmation from Naval Ravikant, AngelList CEO, with the following statement: We didn't really announce this since a lot of it seems like behind-the-scenes inside baseball. It lets us know the legal boundaries of what's possible in the space and will inform our future products, but right now we're happy with the SecondMarket partnership - SM vets investors for sophistication, companies for background, and provides Broker-Dealer level protection and compliance. The /Invest feature on AngelList is working well so far. We do curate the opportunities to those with a high-quality lead investor, and to date we've announced 7 fundings, 14 are closed or in closing, 18 are currently open for Accrediteds, adding about one per day. We've received over $6M in commitments in the last Quarter in 915 separate transactions. We have 12,000 Accrediteds on AngelList, and via our SecondMarket Partnership, can reach another 20,000. Unlike others in the space, we don't think we can pick the winners - rather, it's a more open approach for any company with a high-quality lead investor. We also don't view it as a money-maker for AngelList - more of a community service. We also think it makes sense to augment it with our base service of introducing high-quality companies to sophisticated investors (VCs, Seed Funds, Professional Angels) - we currently drive 500-700 of those introductions per week, and drive about $10M / month there.

DanielRibeiro 14y ago
It is also important to note that the JOBS act, that will allow crowdfunding to be legal, was created largely due to Naval's work. He talked about this recently on an long-ish interview: https://www.youtube.com/watch?v=2htl-O1oDcI https://www.youtube.com/watch?v=2htl-O1oDcI The clip where he talks about it: https://www.youtube.com/watch?v=ugDyaVLPj3w https://www.youtube.com/watch?v=ugDyaVLPj3w

temphn 14y ago

How benevolent the authorities are! Can you imagine starting a business and then beseeching the SEC king David Blass to find out if your business is legal, and announcing with relief a "no action" letter? It cost Angellist and FundersClub a few tens of thousands of dollars in legal fees simply to find out what the ever-shifting law was. Worse, to be a CEO of a startup these days you need to be willing to risk jail time to launch a new product. For had Blass (unelected and likely unfirable due to "career status") ruled the other way, many would consider that a judgment on the legitimacy of the transactions at issue rather than a demonstration of the illegitimacy of the SEC. And FC/Angellist would have had to scramble away post-haste from crowdfunding for fear that disintermediating Blass' banksters meant being fitted for pinstripes. Go back and read the original TechCrunch article. People actually thought FundersClub might be facing jail time! What brass, what courage you need to start a business today in a regulated space. They took maximum risks, I wish them (and Angellist) maximum reward. I also hope that someday soon Blass is forced to cower in the corner waiting for a ruling by the people who actually produce something, hoping against hope for a "no action" letter, praying that he won't be thrown summarily in jail.

natrius 14y ago
I agree with most of what you're saying, but I don't know what your preferred alternative would be. What should've happened instead?
- neurotech1 14y ago
  Theoretically, two other possibilities; 1) They act a certain way, and be prepared to defend civilly and criminally if necessary. That said even if what AngelList and FundersClub do is technically illegal, the fact they target accredited investors and don't promise insane returns, probably would tip the balance towards a civil action. IANAL and we're talking hypothetical action anyway. 2) Another possibility would be to obtain a declarative judgement that what they are doing is in fact legal. IANAL but this would be messy, expensive and a lengthy process.
- temphn 14y ago
  Simple: the business should be able to deal with willing buyers and sellers. The SEC shouldn't exist. Pure caveat emptor, buyer beware. If you trust the SEC to "protect you" on your behalf you will (someday soon) find yourself Cyprused with no recourse. Cyprus has its equivalent of the SEC, and did absolutely nothing to prevent the complete collapse of the economy. The US became a world power before the alphabet soup of agencies that arose once the frontier closed. Regulation and bureaucracy can best be conceptualized as middle management that arises after a startup's early stages, parasites that a relatively strong organism/organization like the US can tolerate - but not indefinitely. The SEC's primary interest is increasing the SEC's budget and power, it has absolutely nothing to do with safeguarding your interests.

tyang 14y ago

Good piece Danielle.