FundersClub, from YC S12, is a web service that pools money from many individuals and institutions to make aggregated investments in startups. This business model makes it easier for startups to raise money by allowing individual investors to make smaller investments (as low as $1,000). As VentureBeat reports, FundersClub recently won a significant victory as the U.S. Securities and Exchange Commission issued a “no-action letter” recognizing FundersClub as an investment advisor rather than a broker-dealer.
The distinction between broker-dealer and investment advisor is important. Federal law requires brokers and dealers to be registered with the SEC. A broker-dealer takes money from individual investors and forwards it to the recipient company, collecting various transaction fees in the process. In contrast, the way FundersClub works is by pre-screening potential companies that are looking for capital and then pooling money from multiple investors into a single LLC that invests on its own behalf. FundersClub is therefore legally an investment adviser because its services are to advise investors and manage venture capital funds on investors’ behalf. FundersClub is not a broker-dealer because FundersClub’s compensation is not transaction-based, explains securities attorney Stephen Quinlivan. The implicit effect of the SEC’s no-action letter is that FundersClub is the first legally-recognized online venture capital firm.
FundersClub is currently available only to accredited investors. However, the JOBS Act signed by President Obama last year will eventually bring new investment opportunities to the general public. Innovative changes to fundraising like these result in new technology and create new jobs. FundersClub’ website indicate its portfolio already consists of companies that have collectively raised over $25 million dollars, with over $3.9 million invested by FundersClub itself.