FundersClub is now the the first SEC-approved online venture capital platform. The company now has the legal green light as it received its “no-action” letter at the end of March. The online platform’s legality came into question based on its identity as either a broker-dealer or advising company. The distinction was key because FundersClub is not registered as a broker-dealer; instead, it argued in its response to the SEC that it was it was merely an entity advising on venture capital matters based online rather than offline.

The SEC agreed with FundersClub, opening up a new avenue for funding throughout the venture capital industry at a time when creative funding sources are more in demand than ever. It should probably come as no surprise that crowdsourcing would find its way into the venture capital arena; it is, after all, permeating most other areas of business today. FundersClub insists that it is not a crowdsourcing company. While at first blush it may seem like it is basically crowdsourcing, FundersClub is a bit different.

What the platform does is act as a vetting and curating agent to connect investors and early-stage startups. FundersClub ensures that its investors are all accredited before they can invest, which for them means they have a minimum net worth of $1 million and have answered a detailed questionnaire to the satisfaction of the business. They also select only early-stage startups that have strong, promising plans to ensure that their investors have solid choices with less risk. The bottom line is that FundersClub, a single entity, acts as the curator for what it selects as the best quality investors and startups.

Investors have a natural suspicion for situations that call for paying out high dollar amounts without any personal relationships in place. Traditional venture capital models rely upon networking and referrals. After all, would you want to invest millions in the company of someone you knew nothing about without checking him out?

But the reality is that these kinds of sentiments are changing. This kind of personal work is time-consuming, and there is no hard and fast set of reasons why it can’t be done by a contractor. In fact, as the need for a diverse portfolio grows as the number of investment options multiplies, the work of vetting investment options becomes complicated enough to warrant a specialist.

Will FundersClub remain a one of a kind online service? Don’t count on it. With the nod from the SEC and membership with the National Venture Capital Association in its corner, FundersClub is set up to be the next big thing on the venture capital scene. Inevitably, other online companies will follow its example. Whether other legal issues will arise is a better question. This writer thinks one likely issue to come will concern quality of investors; high quality investors or proper vetting will remain crucial, and this “no-action” letter is by no means a complete endorsement of all online venture capital services.

About the author

Karla Lant

Karla Lant is an Adjunct Professor for Northern Arizona University and a freelance writer. A former trial attorney in major felony criminal defense, her areas of legal expertise include forensic science, intellectual property, biotechnology, and constitutional law. Lant also focuses on tech trends, science and education in her work.

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