SEC Division of Trading and Markets Issues No-Action Letter for Certain IAs from Broker-Dealer Registration Provisions

The SEC's Division of Trading and Markets issued a no-action letter to FundersClub Inc. and FundersClub Management LLC from the broker-dealer registration provisions of Exchange Act Section 15(a)(1). The FundersClub entities function as venture capital fund advisers that solely advise venture capital funds as defined in Advisers ActRule 203(l)-(1) ("Venture Capital Fund Defined"). As compensation for their advisory activities, the FundersClub entities may receive carried interest, i.e., a percentage of any profit realized upon liquidation of an advised fund. Applicable conditions include:

• Neither the FundersClub entities nor any officer, director, or employee thereof receives transaction-based compensation for their efforts in raising investments for the venture capital fund;
• While the funds may be charged an administrative fee which is used to reimburse third-party expenses of the funds, no part of such fee is paid to the FundersClub entities or any officer, director or employee thereof; and
• The FundersClub entities are unable to withdraw any funds deposited by an investor for investment in a fund.

The no-action request notes that the SEC Staff has recognized, in a series of no-action letters, that it is not necessary for an investment adviser to register as a broker-dealer merely on account of the receipt by the investment adviser of "investment adviser-style compensation" in connection with advising a fund. The request reflects a belief that the Staff's advice in this regard is based upon a recognition that the regulatory scheme specifically tailored for investment advisers in the Investment Advisers Act makes the imposition of a broker-dealer registration requirement unnecessary and redundant. The request states that the failure to extend such relief to venture capital fund advisers would be contrary to the intent of Congress, as expressed in Dodd-Frank Section 407 ("Exemption of Venture Capital Fund Advisers"), in exempting such advisers from investment adviser registration requirements.

Click here to view letter in full (links externally to SEC website).See generally: Lofchie's Guide to Broker-Dealer Regulation;Registration Chapter.