SEC Allows Private Equity Investment Platforms without BD Registration
The staff of the SEC’s Division of Trading and Markets has issued two no-action letters allowing private equity firms to raise capital from accredited investors without requiring registration as a broker dealer. The no-action positions require that (i) the internet-based platforms would be available exclusively to accredited investors, (ii) the sponsor, a registered investment adviser, would only receive compensation through carried interest in the underlying portfolio companies, and (iii) no employee of the sponsor receives any form of transaction-based compensation. One of the letters also prohibits solicitation of any investors aside from the website. One of the platforms involves an internet site matching angel investors to portfolio companies where the sponsor would create funds for investment in the underlying portfolio companies. The other platform would advise venture capital funds as defined in the Investment Advisers Act.
OUR TAKE: We are not sure these letters break new legal ground because they include long-followed conditions to avoid BD registration: no transaction-based compensation, no sales compensation to employees, and no solicitation. However, they do provide some comfort to internet-based private equity platforms following Dodd-Frank and the JOBS Act.