
AngelList Receives SEC No-Action Letter Two Days After FundersClub - dmor
http://www.daniellemorrill.com/2013/03/angellist-receives-sec-no-action-letter-days-after-fundersclub/
======
temphn
How benevolent the authorities are! Can you imagine starting a business and
then beseeching the SEC king David Blass to find out if your business is
legal, and announcing with relief a "no action" letter? It cost Angellist and
FundersClub a few tens of thousands of dollars in legal fees simply to find
out what the ever-shifting law was. Worse, to be a CEO of a startup these days
you need to be willing to risk jail time to launch a new product. For had
Blass (unelected and likely unfirable due to "career status") ruled the other
way, many would consider that a judgment on the legitimacy of the transactions
at issue _rather than_ a demonstration of the illegitimacy of the SEC. And
FC/Angellist would have had to scramble away post-haste from crowdfunding for
fear that disintermediating Blass' banksters meant being fitted for
pinstripes.

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.

~~~
rayiner
What a load...

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.

~~~
temphn
Unfortunately there are so many inaccuracies in your comment that almost every
sentence is false or embeds an erroneous assumption. I don't have the time to
go line by line, but just take this:

    
    
      It exists not because the law is ever-shifting, but because 
      the financial industry it regulates is ever-shifting.
    

But the law is indeed ever-shifting. Sarbanes-Oxley? Dodd-Frank? The JOBS act?
And those are just the Congressionally authorized ones. The toughest part of
dealing with the federal government is the fact that you can't simply read the
law to find out what is legal or not. You need to pay a lawyer to determine
what interpretations are in vogue with the current batch of regulators, and
what's being enforced and what isn't.

    
    
      For better or worse, engaging in commerce with the public 
      is not a right in the U.S., it's a privilege
    

Trading is a basic human right. The government exists at our sufferance. And
prior to Lochner this was the common understanding. The mission of our time is
to escape from people who believe a man's right to engage in commerce is a
"privilege" to be "granted" by some unelected regulator.

~~~
rayiner
> Jaw-droppingly ahistorical. The Wild West was not characterized by
> regulation!

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.

~~~
temphn

      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.
    

Career status means _lifetime tenure_. It also means (as you acknowledge) you
can work three years at the federal government, leave, and always come back to
get a fedguv job without competitive examination, even after _25 years_ out of
the service. This is a bug, not a feature - after decades out of a job,
federal law nevertheless stipulates that you must be rehired without a serious
interview:

<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.
    

As for the fact of lifetime employment, don't take my word for it; note the
distinction here between "at-will" (characteristic of the private sector) and
"career" (in the federal government):

<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.”
    

And what does "career" mean?

    
    
      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. 
    

It means "tenure":

    
    
      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.
    

Ever heard of the Douglas Factors, CFR Part 432, or CFR Part 752? These
basically make it impossible to fire someone as you need to (a) prepare a
"Proposal Notice to Remove", (b) wait 90 days or more for the employee's
response, and (c) are subject to having your firing decision "mitigated" by
the Douglas Factors (i.e. overturned). This doesn't include (d) the
substantial ostracism you yourself will face within the federal government for
the capital crime of trying to actually fire a tenured employee.

    
    
      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.
    

Wow, six reasons that "commonly cause delay" and 90 days for the employee to
"respond" when you try to terminate them. That response invariably involves
mitigation via the Douglas Factors:

    
    
      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.
    

And your HR office will also tell you that the Douglas Factors make it
essentially impossible to fire someone. So that SEC bureaucrat has lifetime
employment while they watch porn.

[http://voices.washingtonpost.com/federal-
eye/2010/04/new_sec...](http://voices.washingtonpost.com/federal-
eye/2010/04/new_sec_porn_bust_details_rele_1.html)

    
    
      None of the Securities and Exchange Commission employees 
      caught using government computers to view pornographic 
      images has been fired, according to the agency.
    

I give you the SEC, ladies and gentlemen! Perhaps now you may start to realize
that the SEC is just safety theater, that no one can "protect" you from bad
investments other than yourself.

    
    
      They're real economic concepts and are the reason 
      regulatory states exist. 
    

The reason regulatory states exist is given by public choice theory. So long
as we're talking economists, I give you Nobel Laureates Gordon Tullock,
Friedrich Hayek, Milton Friedman, and James Buchanan. Principal/agent problems
and misaligned incentives systematically bedevil all public regulation; only
private systems (e.g. Google rankings, eBay reputation, Amazon reviews)
actually work.

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
    

No, we don't. The details matter. What fraction of people who think
regulations are good in the abstract can name a single federal regulation? How
many of them know that regulators can't be fired? How many of them have
actually run a business in a regulated industry? Regulatory agencies are
solely PR. They are about scaring people into the extraordinarily
counterintuitive idea that some guy 3000 miles away in DC who surfs porn at
work actually has Warren-Buffett-level judgment about the market, and is
protecting you from making bad investments. Think for yourself.

------
dmor
I just received confirmation from Naval Ravikant, AngelList CEO, with the
following statement:

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.

~~~
DanielRibeiro
It is also important to note that the JOBS act, that will allow crowdfunding
to be legal, was created largely due to Naval's work.

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>

------
rayiner
I recommend actually reading the letter (it's only a few pages), specifically
pages 3-4 which highlight the characteristics of the company the SEC
considered important deciding to grant the no-action letter.

------
bradhe
> While being first makes for great PR, FundersClub can expect AngelList will
> be the first of many competitors to emerge now that its business model has
> been validated.

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?

~~~
bmelton
I read that as "Because FundersClub has validated the business model," not
because of the SEC approval.

~~~
cabinguy
I have no idea if FundersClub is wildly profitable or not, but I thought that
"validating a business model" meant the model was profitable, not just legal.

~~~
bmelton
In common terms, "validating the business model" can be as simple as other
people going after the same idea as you. While that doesn't necessarily make
it a profitable idea, it does make it feel more like an obvious idea whose
time has come.

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.

~~~
cabinguy
I'm not trying to have a back-and-forth but I think you are confusing business
ideas and business models. Many potentially great businesses (high sign up
rates, etc.) struggle to find a valid business model.

~~~
bmelton
For what it's worth, I don't actually disagree. I was speaking hypothetically.
The point was only that many people consider competition as a validation of a
business model, and don't necessarily wait for profit (the only _real_
validation) to act as that actual validation.

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.

------
thinkcomp
It's worth noting that these letters do not waive the requirements of
applicable money transmission laws.

~~~
ceejayoz
Is it really worth noting? Of course they don't waive other laws. AngelList
doesn't have a pass for murder, either.

------
tyang
Good piece Danielle.

