No Action Letter, Private Placements, & Citizen.VC

Last month the SEC issued a no action letter to Citizen.VC, Inc.  A startup based in Palo Alto, California aimed at simplifying the investment process by giving accredited investors direct access to private offerings from early stage startups by conducting 506(b) private placements online. The Company was founded by Zain Kahn and raised $5.6 million of venture funding from undisclosed investors in March of 2014. 

The no action letter says that the company's proposed online platform for company and investor matchmaking does not amount to general solicitation within the meaning of Rule 502(C) of Regulation D. Which apparently has no "bright-line" test and the SEC has maintained that what constitutes General Solicitation is a matter of particular facts and circumstances. 

The SEC no action letter states that the proposed platform would give the ability of Citizen.VC to establish a "“substantive relationship[s]” with would be investors because the platform would help establish   "We note your representation that CVC's policies and procedures are designed to evaluate the prospective investor's sophistication, financial circumstances and ability to understand the nature and risks of the securities to be offered. We also agree that there is no specific duration of time or particular short form accreditation questionnaire that can be relied upon solely to create such a relationship."

Takeaway: Under this new guidance, businesses could find it easier to match investors to investments via a online platform. However they would need to be careful to observe the guidelines spelled out in the Citizen VC no-action letter.

Specifically: 

• That a prospective Member is not presented with any investment opportunity when being qualified to join the platform.
• Any investment opportunity would only be presented after the prospective investor becomes a Member
• That CVC creates SPVs for investment in particular Portfolio Companies and not as blind pools for a later investment opportunity.

In addition businesses cannot accept transaction?based compensation on any deals so as not to be labeled broker-dealers under Exchange Act Section 15(a).

Disclaimer: This is not legal advice. I'm not a lawyer.