They don’t use leverage, engage in high-speed trading, profit from inside information, rig market indices or strip assets from their portfolio companies.
What they do is select the most promising start-ups in the world, invest in them at an early stage and help make America the commercial creator that it is.
Compared to almost everyone else in financial services, venture capitalists are the “angels” who deserve to be recognized for their integrity and good works.
And now they are.
Unlike hedge fund managers or private equity firms, VCs don’t have to register with the SEC as investment advisers regardless of how much money they run. They were specifically exempted by Dodd-Frank in 2010.
This March, two VC managers – FundersClub and AngelList – achieved another breakthrough by obtaining permission from the SEC to market interests in their funds over their websites without having to register as securities brokers.
Neither hedge funds nor private equity funds would likely get similar relief from the SEC under existing private placement regulations, and the SEC’s final advertising rules pursuant to the JOBS Act are still nowhere in sight (see Are Hedge Funds Going Public?). Strangely, the no-action letters to FundersClub and AngelList are silent on the question of whether their online portals can be publicly promoted.
To avoid broker registration, the VCs cannot be compensated for capital-raising. They may only advise venture capital funds and only “accredited investors” may access their websites and invest in their funds. They must also custody all capital contributions with independent banks or trust companies, control the shares of their portfolio companies and provide portfolio company management with the strategic support expected of VCs. They may not use long-term leverage in their funds and each fund must limit non-qualified investments to no more than 20% of its aggregate capital commitments.
The websites of the two online VCs host profiles of start-ups seeking capital which the VCs have agreed to promote. The profiles are succinct, easy-to-navigate and lively. Some contain video presentations by company founders. A fund may consist of one or more portfolio companies, and investors can get into it for as little as $1,000. Interestingly, FundersClub caps investments at $250,000.
For their services, the VCs earn no management fees but receive 20-30% carried interests in their portfolio companies after investors have recovered their investments. For each fund, the VC carry and any out-of-pocket fees paid by the funds to third-parties must be disclosed on the VC websites.
That’s it. No power-point presentation, no private placement memorandum, no due diligence.