On March 26, 2013, the SEC's Division of Trading and Markets granted no-action relief to FundersClub Inc., an operator of a membership-only web portal limited to accredited investors, and FundersClub Management LLC, the manager of investment funds formed to invest in start-up companies. The letter advises that, subject to certain conditions, the staff of the Division will not recommend enforcement action against the FundersClub entities, which currently appear to be complying with an exemption from broker-dealer registration established by Title II of the JOBS Act.

The letter follows the Division's release in February of a series of frequently asked questions providing guidance on the exemption from broker-dealer registration, codified in Section 4(b) of the Securities Act and available to entities providing certain services in the context of securities sold under Rule 506 of Regulation D.

The request for no-action relief explains that FundersClub Inc. operates a web portal that includes information on selected start-up companies. The FundersClub entities enter into a non-binding agreement with each start-up specifying a target amount of funding it is seeking. To get access to the identities of, and other information about, the start-ups on the portal, potential investors must go through a verification process of their accredited investor status (after which they become "members" of the portal). Members may offer non-binding indications of interest in the start-ups. If there is enough interest in a particular start-up, following a process of additional verifications and negotiations, and involving third-party intermediaries that handle all cash, members invest in a fund managed by FundersClub Management. Investments in the fund are exempt from registration under Rule 506. That fund in turn invests in the start-up. Practitioners should note that this description is only a brief summary, and they should refer to the no-action materials for additional important information.

Citing guidance included in Question 5 of the February FAQs, in the no-action letter, the staff notes that FundersClub's activities currently appear to comply with the Section 4(b) exemption from broker-dealer registration only because FundersClub does not receive any "compensation (or the promise of future compensation) in connection with the purchase and sale of securities." The request for no-action relief describes FundersClub's plans to receive compensation in the form of carried interest in the future, and discusses principles from existing investment adviser and broker-dealer law to support the idea these proposed activities should not trigger the requirement to register as a broker-dealer.

Industry participants and members of the securities bar have referred to portals like the one described in the FundersClub request as "accredited crowdfunding platforms" because of certain similarities to the funding portals contemplated by Title III of the JOBS Act (crowdfunding). Practitioners should note that the SEC has not yet adopted crowdfunding rules, and therefore Title III's exemptions from the securities laws are not yet available.

For more on Title II of the JOBS Act and the Division's February FAQs, see Practice Note, JOBS Act: Regulation D and Rule 144A General Solicitation Summary.