Since the inception of the internet, the Securities and Exchange Commission (SEC) has been providing clarifying guidance as to what activities constitute broker-dealer activities under the Securities Exchange Act of 1934, as amended ( the "Exchange Act"), and how those principles are applied to Internet based investment platforms. Under the Exchange Act, a "broker" is defined as any person that is "engaged in the business of effecting transactions in securities for the account of others." With respect to the meaning of "effecting transactions in securities," the SEC has interpreted it to have occurred when a person participates in such transactions 'in key points of the chain of distribution.' A person "engaged in the business of" may be established if the person receives transaction-based compensation and holds itself out "as a broker, as executing trades, or as assisting others in completing securities transactions." While transaction based compensation is deemed the hallmark of broker-dealer activity, it is but one element in a complex facts and circumstances analysis.

The Matchmaking Model

Matchmaking platforms connect potential investors with companies that are considering or actively raising capital. These platforms may be public facing - with unrestricted access for viewing, or they may exist behind protective walls, requiring users to register before being granted access to the contents of the site. Key considerations for matchmaking platforms include, but are not limited to:

• Whether the activities conducted on the platform require it to register as a broker-dealer
• Whether the activities conducted on the platform require it to register as an investment adviser under the Advisers Act. See Rule 206(4)-1(a)(1) relating to social media use.
• How it will restrict the activities of its personnel to ensure ongoing compliance
• How fees will be earned by the platform
• Whether it is intending to operate a Regulation D Rule 506(b) or Regulation D Rule 506(c) platform
• Whether it should integrate with an accredited investor verification vendor for the benefit of the companies fundraising on its site
• Whether to restrict access by non-U.S. persons
• Integration with third-party vendors who will handle investor funds, returns, document e-signing, AML/KYC and other services.

A Journey through Time

Guidance before the JOBS Act of 2012

Before the Jumpstart Our Business Startups Act (JOBS Act), the SEC staff issued a series of no-action letter to matchmaking sites. The conditions established in these letters created a framework wherein matchmaking sites could legally operate, provided that the scope of their activities were extremely limited, particularly with respect to their involvement in any aspect of the capital raise that touched the securities.

The JOBS Act of 2012

Section 201 of the JOBS Act created an exemption from broker-dealer registration, in Title II of the JOBS Act, for matchmaking platforms facilitating Regulation D, Rule 506 offerings.

Section 201(c) of the JOBS Act adds new paragraph (b) to Section 4 of the Securities Act. Section 4(b) of the Securities Act states that:

(1) With respect to securities offered and sold in compliance with Rule 506 of Regulation D under [the Securities Act], no person who meets the conditions set forth in paragraph (2) shall be subject to registration as a broker or dealer pursuant to section 15(a)(1) of this title, solely because—

• (A) that person maintains a platform or mechanism that permits the offer, sale, purchase, or negotiation of or with respect to securities, or permits general solicitation, general advertisements, or similar or related activities by issuers of such securities, whether online, in person, or through other means;
• (B) that person or any person associated with that person co-invests in such securities; or
• (C) that person or any person associated with that person provides ancillary services with respect to such securities.

(2) The exemption provided in paragraph (1) shall apply to any person described in such paragraph if—

• (A) such person and each person associated with that person receives no compensation in connection the purchase or sale of such security;
• (B) such person and each person associated with that person does not have possession of customer funds or securities in connection with the purchase or sale of such security; and
• (C) such person is not subject to a statutory disqualification as defined in section 3(a)(39) of this title and does not have any person associated with that person to such a statutory disqualification.

(3) For the purposes of this subsection, the term ‘ancillary services’ means—

• (A) the provision of due diligence services, in connection with the offer, sale, purchase, or negotiation of such security, so long as such services do not include, for separate compensation, investment advice or recommendations to issuers or investors; and
• (B) the provision of standardized documents to the issuers and investors, so long as such person or entity does not negotiate the terms of the issuance for and on behalf of third parties and issuers are not required to use the standardized documents as a condition of using the service.

SEC FAQs

On February 5, 2013, the SEC provided additional guidance relating to matchmaking sites via its Frequently Asked Questions ("FAQs").

• Importantly, the SEC clarified that the exemption provide in Section 4(b) is available only when securities are offered and sold under Rule 506 of Regulation D - not other exemptions.
• Moreover, the SEC clarified that Congressional intent for this exemption to capture social media and Internet websites as beneficiaries.

SEC No Action Relief

Subsequent to the promulgation of the JOBS Act, the SEC granted a series of no-action letters for online investment platforms seeking relief from registration of broker-dealers. In the two hallmark letters, FundersClub Inc. and FundersClub Management LLC and the AngelList LLC, the SEC indicated that the subject matchmaking websites would be exempt from registration as a broker-dealer, subject to the respective requirements outlined in their respective letters being adhered to, including the non-receipt of transaction-based compensation.