Is Funder’s Club in violation of current securities laws with their investment-based crowdfunding model?

Although I don't know all the specifics of how they structure everything, since I was asked to answer, I will put in my two cents based upon what I know about their company/structure (like most frustrating attorney answers, the jist of it is "it depends").

The use of only accredited investors has to do with which securities exemption they are claiming to rely upon in the offer and/or sale of securities to avoid registration and other requirements (usually under Reg D).  You lose certain exemptions if you use unaccredited, so you can have some unaccredited under some exemptions, it is usually safer to stick to all accredited, which is probably why they are using that requirement.  It is too complex to get into here, but the different exemptions relied upon address issues like number of certain types of investors, exemption/raise amount within a period of time, and disclosure requirements.  It appears they are selling securities in a fund setup to invest in specific companies (or group of companies in the same industry).  The offer and sale of the securities in the fund must fall under an exemption from registration or be registered with the SEC (and possibly receive state approval or clearance).  They discuss the funds being LLCs, so the units or interests in the individual fund's LLC are the security being sold.

Currently (Pre-JOBS Act full implementation), there are some limited ways to solicit and offer securities privately or provide certain general public information that may not be considered a solicitation or offer to sell.  They may or may not be going beyond what may be allowed for such private offering of unregistered securities, but post-JOBS they will have much more leeway to structure offerings as a web funding portal.  As David mentions, they are not soliciting or offering to sell a specific fund or security (at least on the initial pages), they are describing the process.  I assume once you get into the process further, the review and decision to invest in a specific fund would get into some specific offering materials or disclosures.  They may have gotten there without a pre-existing relationship, but then it is a matter of source or form over substance on whether there was general solicitation and offer versus pre-existing/private relationship for a private placement. 

If you put up a website that tells people about your new LLC startup, its business plans, and in order to execute on its business plan, it projects it will need $500,000 from some source that could include through investors, that may not be considered an offer to sell LLC units as a security through general advertisement or solicitation.  The problem is that there are grey areas that I think this company is in where any zealous SEC staff may decide they want to fight for more investor protections and claim what they are doing violates securities laws. 

As with many laws, you may not know or be sure that you are breaking it until after a prosecutor decides to go after you, you are convicted, and an appeals court interprets the law to say you broke the law.

The biggest problem I see is the broker-dealer issue.  Obviously they will get paid at some point and I can see a clear case of showing how the money trail leads back to the sale of the security/LLC fund investment.  Unless they are registered broker/dealers or register under post-JOBS implementation as a funding portal, I think there is a lot of potential liability as an unlicensed broker/dealer, basically a finder getting a commission or success fee, even if it is through a pass-through type entity and down the road.  Perhaps they have thought through all these issues and are willing to assume the potential risk, but I can't see how this does not bring a slight risk of being a public offer to sell or unlicensed broker/dealer activity.  If they use proper exemptions and the website process is not determined to be a general solicitation of securities in their fund LLCs, they may be compliant.

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