"Transaction-based compensation" in the angel platform contextBy http://profile.typepad.com/1237764140s22740 // April 1, 2013 in Angel platforms
My first analysis of AngelList no-action letter will come in the context of an exclusive piece later this week for Crowdsourcing.org. In that post, I will address the AngelList and the FundersClub no-action letters as companions. UPDATE 04/03/13: here is a link to that Crowdsourcing.org post, What the SEC letters to FundersClub and AngelList mean for investment crowdfunding.
Meantime, I want to briefly mark a key issue implicated by these letters, which is how SEC staff interpret the scope of compensation, fees, reimbursement, what-have-you (collectively, "money") angel platforms may charge or recoup under Section 201(c) of the JOBS Act, the "angel platform exemption."
The FundersClub no action letter in footnote 1 seems to suggest that a carry would be transaction-based compensation, and ergo a no-no under the angel platform exemption.
"The Staff notes that FundersClub's and FC Management's current activities appear to comply with Section 201 of the Jumpstart Our Businesses Act of2012 ('JOBS Act') in part because they and each person associated with them receive no compensation (or the promise of future compensation) in connection with the purchase or sale of securities. See also Frequently Asked Questions About the Exemption from BrokerDealer Registration in Title II ofthe JOBS Act (Feb. 5, 2013), http://www. sec. gov/ divisions/marketreg/ exemption-broker -dealer-registration-jobs-act-fag .htm. However, once FundersClub, FC Management or persons associated with them receive compensation or the promise of future compensation, as described in their incoming letter, they will no longer be able to rely on Section 201 of the JOBS Act."
One might readily assume, particularly after consulting the (troublesome) FAQ referenced, that the reason a carry blows the angel platform exemption was that it falls within the category of "transaction-based compensation."
But consider this interesting bullet point in the AngelList no-action letter:
"AngelList Advisors and any Lead Angel (if applicable), will receive compensation equal to a portion of the increase in value, if any, of the investment as calculated at the termination of the investment in the Investment Vehicle (i.e., carried interest), and will not receive any transaction-based compensation."
The implication of this statement would seem to be that a carry is something other than "transaction-based compensation."
Of more interest to the general follower of the startup scene: it looks like AngelList will be iterating its model, as the letter requesting no-action relief lays out a plan that involves startup-specific investment vehicles (LLCs or limited partnerships) and a carry to be paid to an AngelList affiliate that will register as an investment adviser. (By the way, FundersClub has registered as an investment adviser; this is something pointed out this morning by Doug Cornelius on his blog.)
I know this is April 1, but the news in this post is real.