AngelList Receives SEC No-Action Letter Two Days After FundersClub
daniellemorrill.com
daniellemorrill.com
Go back and read the original TechCrunch article. People actually thought FundersClub might be facing jail time! What brass, what courage you need to start a business today in a regulated space. They took maximum risks, I wish them (and Angellist) maximum reward. I also hope that someday soon Blass is forced to cower in the corner waiting for a ruling by the people who actually produce something, hoping against hope for a "no action" letter, praying that he won't be thrown summarily in jail.
1) They act a certain way, and be prepared to defend civilly and criminally if necessary. That said even if what AngelList and FundersClub do is technically illegal, the fact they target accredited investors and don't promise insane returns, probably would tip the balance towards a civil action. IANAL and we're talking hypothetical action anyway.
2) Another possibility would be to obtain a declarative judgement that what they are doing is in fact legal. IANAL but this would be messy, expensive and a lengthy process.
The US became a world power before the alphabet soup of agencies that arose once the frontier closed. Regulation and bureaucracy can best be conceptualized as middle management that arises after a startup's early stages, parasites that a relatively strong organism/organization like the US can tolerate - but not indefinitely. The SEC's primary interest is increasing the SEC's budget and power, it has absolutely nothing to do with safeguarding your interests.
The SEC exists for a reason. That reason is that the 1920's demonstrated that the financial industry couldn't be trusted to completely regulate itself, and would use information asymmetries to its advantage to bilk investors out of their money. Similar lessons have been learned with regards to the food industry, drug industry, manufacturing industries, etc.
A no-action letter is essentially just a declaratory judgment from the SEC offering an opinion of the legality of a novel course of action. It exists not because the law is ever-shifting, but because the financial industry it regulates is ever-shifting.
For better or worse, engaging in commerce with the public is not a right in the U.S., it's a privilege, and that is by design. That may not be consistent with libertarian capitalist ideology, but it's not libertarian capitalist ideology that's encoded into the Constitution. Rather, the Constitution grants Congress broad power to regulate commerce, and in this case Congress has decided, over and over, that financial services must be regulated and has empowered the SEC to enforce compliance with those regulations.
As an aside, it should be noted that at least in the U.S., the government has always regulated pretty much everything that was commercial in nature and affected more than a handful of people. At the time of the founding, the government (state and federal), regulated land ownership, navigation by water, joint stock corporations, and imports/exports, which were at the time everything that was worth regulating in a country where most people still grew their own food and made their own clothes. They regulated the railroads as they spread and became important, they regulated business trusts by the end of the 19th century, they regulated TV and radio as it became prevalent, and as the corporate entity of choice shifted from business trusts to publicly traded companies, they regulated those too. One can imagine a world where none of these things ever happened, but so far the history of the U.S. has been one where important economic activity has been regulated.
The culture surrounding HN is such that a fair number of commenters find themselves on the wrong side of government regulation, and government regulation often seems (and sometimes is) oblique, arbitrary, and manipulated by special interests.
It's always worth considering the circumstances that have led to regulation (and specifically edge cases) as regulation is often a direct response to an actual problem. Even when regulation is outdated or wrong, it is rarely completely wrong.
Given the central role brokers have occupied as critical intermediaries in securities transactions, it's not really hard to see what precipitated their regulation. Who knows, maybe modern technology will make such intermediaries obsolete and consequently make §15(a) obsolete. We're not there yet, and in the meantime I don't see anything particularly morally outrageous about having to ask the SEC for permission to not adhere to the various broker-dealer requirements in situations where you are arguably functioning as an intermediary.
As an aside, regulations are very often oblique, arbitrary, and manipulated by special interests. But have you ever read the CORBA spec? At a certain level its a phenomenon of large-scale human interaction that you have to make peace with. That doesn't mean you shouldn't fight it when it's wrong (we seem to have replaced CORBA with SOAP and JSON and whatnot) but it's useful to understand why things in the world evolve to look the way they do.
Could not be more different. Has nothing to do with complexity and everything to with the unchecked exercise of power. If executives were free to fire or imprison one regulator every year the situation might be slightly more symmetric. As it is you have a caste of individuals employed for life with the ability to unilaterally order raids, fines, and seizures. Obviously, CORBA's advocates never had power like that -- and that is why CORBA was actually replaced via innovation.
As an aside, it should be noted that at least in the U.S.,
the government has always regulated pretty much everything
that was commercial in nature
http://www.businessinsider.com/history-of-the-free-bank-era-...
For a quarter of a century, America's states and
territories, and the institutions within them, began
circulating their own currency, as the agrarian mistrust of
centralized banking eventually climaxed in the destruction
of the Second Bank of the United States in 1832.
Now to your main contention:
The SEC exists for a reason. That reason is that the 1920's
demonstrated that the financial industry couldn't be
trusted to completely regulate itself
http://www.cnn.com/2010/POLITICS/04/23/sec.porn/index.html
SEC staffers watched porn as economy crashed. As the
country was sinking into its worst financial crisis in more
than 70 years, Security and Exchange Commission employees
and contractors cruised porn sites and viewed sexually
explicit pictures using government computers, according to
an agency report obtained by CNN. More than half of the
workers made between $99,000 and $223,000. All the cases
took place over the past five years.
and would use information asymmetries to its advantage to
bilk investors out of their money.
http://online.wsj.com/article/SB1000142405311190359690457651...
There are other disturbing questions related to the timing
and the target of this federal civil prosecution. S&P's
attorney Floyd Abrams tells us that "things seemed to rev
up in terms of the intensity" of the federal investigation
after S&P's historic downgrade of United States credit
following Washington's debt-limit fight in 2011. Meanwhile,
a McClatchy Newspapers report says that it was around that
time that Moody's, which did not downgrade the government,
was dropped from the federal investigation. Ask any
investor and he'll likely tell you that Moody's was equally
awful in forecasting the mortgage debacle.
Similar lessons have been learned with regards to the food
industry, drug industry, manufacturing industries, etc.
http://dealbook.nytimes.com/2012/03/05/ex-f-d-a-chemist-sent...
Ex-F.D.A. Chemist Sentenced to 5 Years in Insider Case
A federal judge sentenced a longtime chemist with theFood
and Drug Administration to five years in prison for using
confidential information about drug applications pending
with the agency to make nearly $4 million in illegal
trading profits.
Dr. Smith stood to profit from his accusations: he and
other disgruntled F.D.A. scientists had filed a lawsuit,
kept secret under court seal by law, against manufacturers
of imaging devices. After discovering the suit, F.D.A.
officials began to suspect his motives. Those suspicions
intensified when they learned that he had filed similar
whistle-blowing lawsuits against two previous employers,
Yale and Cornell.
Source of Tip on ImClone Drug Is Identified
Greenwood said he understood that Turner was formally
representing Bristol-Myers Squibb Co., ImClone's partner on
Erbitux, at the time he passed along the FDA information.
If that is true, the FDA official who gave Turner the
information, Richard Pazdur, almost certainly had a legal
right to do so, and Turner would have had a right to
receive it.
But that does not mean people who received Turner's
information had the right to sell shares ahead of the bad
news. Some members of Congress have said the FDA "leak" was
unwise at best. And it has fed investor suspicions of other
leaks at the FDA that are being used to earn unfair
securities trading profits. "Short sellers," investors who
bet a stock will fall, made millions late last year by
placing bets against ImClone's shares in the weeks before
the FDA rejected Erbitux.
It exists not because the law is ever-shifting, but because
the financial industry it regulates is ever-shifting.
For better or worse, engaging in commerce with the public
is not a right in the U.S., it's a privilege
What is the flaw in your reading comprehension? I didn't say "everything" I said "everything" commercial worth regulating. Central to my point is the changing scope and nature of the American economy, which seems to go completely over your head in the paragraphs that follow.
> For one thing, the de facto repeal of the Tenth Amendment and expansion of the Commerce Clause limiting the federal government had not yet happened in the early US.
The 10th amendment never created limits to the exercise of federal power. All it says is that in the cession of powers by the states represented by the Constitutional agreement, the states retained those they hadn't ceded. If a federal action can, e.g., be justified by any other clause in the Constitution, it is by definition one of the powers that have been ceded.
There has also been no real expansion of the Commerce Clause (Wickard aside--which is best understood as a World War II case). The definition of the Commerce Power post-Lopez is more or less the same as it was defined in Gibbons v. Ogden in 1824. What's changed is the nature of the economy.
> America's defining characteristic from 1776 to 1860 or so was extraordinarily low levels of government intervention
America's defining characteristic from 1776 to 1860 was extraordinarily low levels of commercial activity that affected any significant number of people. The vast majority of the country was engaged in agrarian activities--what economists would today call the "household economy." What commercial activity that did exist was regulated. Trade via navigable waterways and international trade were the major types of commercial activity that existed, and they were regulated by the federal government from the beginning. Joint stock companies were charted and regulated by the states from before the time of the founding.
The government (between the federal and state governments), taxed what was important at the time: land, international trade, trade in various goods people couldn't make for themselves: sugar, etc.
> You do also realize that there wasn't even an income tax till 1913
You also realize that the income tax as it's currently defined wouldn't even reach most of the economic activity that existed in early America? Income taxes reach market transactions, but before industrialization people didn't depend solely on the market for their daily necessities like we do today. Even today, to the extent that production and consumption happen within a household, no "income" accrues to be taxed. What's happened isn't so much that th
> Can the SEC be trusted to regulate itself?
It doesn't have to be. It's a federal agency, answerable to elected officials.
> You do know what career status is, right?
Do you know what career status is? It allows you to re-enter federal service without taking the necessary civil service exams, and allows you to apply for internal job openings even if you're not currently working with the government. It doesn't do any of the things you claim it does.
> We can trust the SEC to harass Bitcoin, Paypal, and startups. We can also trust the SEC to be bribed or captured out of “regulating” the financial markets.
The SEC, like most agencies, exists as a conservative force. They want to preserve the status quo until new things have proven themselves. This is not a bad thing.
> Given the events of the last five years, it is only extraordinary ignorance or chutzpah that could lead someone to claim that the SEC protects investors.
It's incredible how people who hold fringe minority viewpoints can convince themselves that everyone else is either ignorant or lying.
> No. This is just a rehash of the conventional wisdom. Without FDR’s regulatory state we would ostensibly be victims of those evil businesses, as we are incapable of judging product quality on our own.
Information asymmetries, negative externalities, etc, aren't just things I made up. They're real economic concepts and are the reason regulatory states exist. I don't feel compelled to argue with you on positions supported by the large majority of economists in the field.
> Only someone who either (a) profits from the complexity of the regulatory state or (b) is completely unfamiliar with its workings could fail to be appalled by the level of corruption and incompetence that is its defining characteristic.
I got news for you: we all profit from the existence of the regulatory state. My father left a country that had no regulation. It was a libertarian paradise! Get yourself out in the rural areas and pretty much everyone will leave you alone. It sucked. I challenge you to go live in one of these places that has little to no regulation. If you can't find one that is that way but also has an acceptably high standard of living for someone coming from the states, I'll assert that it's not a coincidence.
Do you know what career status is? It allows you to re-
enter federal service without taking the necessary civil
service exams, and allows you to apply for internal job
openings even if you're not currently working with the
government. It doesn't do any of the things you claim it
does.
http://www.hhs.gov/careers/jobs/keyterms/index.html
After serving three years of substantially continuous
creditable service, a career conditional employee becomes a
career employee and gains career tenure. Employees with
career tenure have permanent reinstatement eligibility and
may be considered for positions without having to take
another competitive civil service examination.
http://www.federalhandbooks.com/fedbooks/Personnel.pdf
As an employer, the Federal government is unique. In the
private sector, there are generally two types of
“appointments” – the “at will” appointment and the
“contract” appointment. The vast majority of private sector
employees hired by a company or firm are hired as “at will”
employees. ... Appointments within the Federal sector,
however, are a little more complex. When hiring a new
employee, a Federal department or agency must classify the
employee’s appointment as “career,” “career conditional,”
“temporary,” or “term.”
Permanent employees are generally hired into the Federal
government under a career-conditional appointment. A
career-conditional employee must complete three years of
substantially continuous service before becoming a full
career employee. This 3-year period is used to determine
whether or not the Government is able to offer the employee
a career.
Service Requirement for Career Tenure
An employee must have 3 years of substantially continuous
creditable service to become a career employee, i.e. obtain
career tenure.
Proposal Notice to Remove
Each agency has a "culture" that defines the amount of
information and documentation that will go into a proposal
notice. At a minimum, your notice will state which
regulation the action is being taken under, specify what
critical performance element(s) the employee failed to
meet, cite the evidence of unacceptable performance, and
discuss the opportunity period (or the lack of one). The
notice will also explain to the employee the time allowed
for a written and/or oral response. Ask your human
resources specialist for some samples of other performance-
based notices to get a sense of what your agency requires.
The regulations require that an employee receive a decision
in Part 432 actions within 30 days of the expiration of the
30-day notice period. This provision automatically gives
you a 60-day period of time in which to work. Additionally,
the Office of Personnel Management has issued regulations
that give agencies the discretion to extend the initial 30-
day notice period by another 30 days, so you are actually
working within a 90-day timeframe. However, there are
always those situations where even more time will be
needed, perhaps because the employee has asked for a
lengthy extension to prepare a response or the deciding
official cannot gather and analyze all the information
needed within the 90 days allowed. 5 CFR Part 432 lists six
reasons that commonly cause delay and allows agencies to
extend the notice period if those conditions exist.
However, reduction in the agency-selected penalty, known as
mitigation, is a possibility in any action taken under Part
752. Therefore, you will need to explain in any decision
notice, and possibly in a proposal notice as well, what
factors led you to believe that your chosen action
(suspension, demotion, or removal) was the right one. Most
supervisors who have taken any kind of adverse action
against an employee have been told about the Douglas
factors. This is a reference to a decision by the Merit
Systems Protection Board that listed 12 factors that might
be taken into consideration when deciding on the
appropriate penalty in any adverse action. Your human
resources office will be able to provide you with a copy of
these factors.
http://voices.washingtonpost.com/federal-eye/2010/04/new_sec...
None of the Securities and Exchange Commission employees
caught using government computers to view pornographic
images has been fired, according to the agency.
They're real economic concepts and are the reason
regulatory states exist.
I thought it was important to show that career status does indeed mean tenure, and I don't have time to do this kind of exegesis on all your other statements here, but as for this:
we all profit from the existence of the regulatory state
We didn't really announce this since a lot of it seems like behind-the-scenes inside baseball. It lets us know the legal boundaries of what's possible in the space and will inform our future products, but right now we're happy with the SecondMarket partnership - SM vets investors for sophistication, companies for background, and provides Broker-Dealer level protection and compliance.
The /Invest feature on AngelList is working well so far. We do curate the opportunities to those with a high-quality lead investor, and to date we've announced 7 fundings, 14 are closed or in closing, 18 are currently open for Accrediteds, adding about one per day. We've received over $6M in commitments in the last Quarter in 915 separate transactions. We have 12,000 Accrediteds on AngelList, and via our SecondMarket Partnership, can reach another 20,000.
Unlike others in the space, we don't think we can pick the winners - rather, it's a more open approach for any company with a high-quality lead investor. We also don't view it as a money-maker for AngelList - more of a community service. We also think it makes sense to augment it with our base service of introducing high-quality companies to sophisticated investors (VCs, Seed Funds, Professional Angels) - we currently drive 500-700 of those introductions per week, and drive about $10M / month there.
He talked about this recently on an long-ish interview: https://www.youtube.com/watch?v=2htl-O1oDcI
The clip where he talks about it: https://www.youtube.com/watch?v=ugDyaVLPj3w
I'm fairly ignorant to the legalities of securities (for better or for worse), but how does this validate a business model? Doesn't this really just mean that one dynamic of the business model has been validated--i.e. the SEC thinks you're legit?
Even in the case of copycats, if the idea has legs enough to spawn copycats, that may also speak to its viability. Groupon is a great example of this. Despite Groupon's own troubles, it has spawned a number of copycats that appear to be doing quite well.
In short, validation doesn't necessarily mean profits. It could mean high signup rates with the later potential to monetize (ala Twitter), or it could mean copycats, or it could mean (of course) profits.
In a lot of cases, this is valid. If you're a Venture Capitalist, for example, if you're waiting for a business to become profitable on its own, then you're not getting terms that are nearly as good as if you'd acted earlier. So even amongst those in the know, "validation" can be seen as something far less than absolute dollar terms, and may still be a valid rung on the ladder of decision making.