Venture firm tries telling others how to invest in private companies
By Sarah McBride
SAN FRANCISCO (Reuters) - A Washington, D.C.-area company that invests in startup companies is moving into a new line of business: advising others on how they too can invest in startups.
Disruption Corp., which runs the Crystal Tech Fund in Crystal City, Virginia, said Tuesday that regulators had licensed it to provide investment guidance. It is licensed by the state of Virginia and appears on the Securities and Exchange Commission’s list of registered advisors.
The move is an unusual one, say securities lawyers, as most venture funds like the relative lack of regulation they are entitled to under securities law. Registering as an investment advisor brings a new layer of complex reporting requirements.
Also, the venture funds could open themselves up to charges of conflict of interest if they end up recommending some of the same companies the funds already invest in, potentially driving up the companies’ and the funds’ values, the lawyers say.
But Paul Singh, who founded Disruption Corp. last year, said he felt compelled to embrace the advisory business to give ordinary investors a chance at private companies, an investment category normally reserved for big investors like endowments.
“Private companies represent the last true wealth generation for the average person,” he said in an interview. “What other avenue has the possibility of big returns, maybe returning 10 or 100 times on that money?”
Disruption plans to offer services such as individual reports on private companies or sectors; custom research; portfolio reviews; and access to an online research tool. Fees will start at $300.
The company will have to make sure the advice it dispenses is suitable for each client with the result that most will be wealthy given the high risks involved.
The move comes at a time when private-company investing is starting to open up to the public.
Since last year, the SEC has allowed private companies to advertise for investments as long as the investors they find are worth $1 million or more, not including their homes.
Large numbers of organizations have embraced the changes, including AngelList, a web site that connects startups with investors. Syndicates led by well-known investors have become extraordinarily popular since last year's rule changes.
“People are coming up with all new types of business models around startups, whether it’s an accelerator or crowdfunding platform,” said Douglas Ellenoff, a lawyer at Ellenoff Grossman & Schole. He said rather than avoid conflicts, the new entrants should be open about when and where they arise.
In filings, Disruption notes several potential conflicts, including cases where Disruption might favor its Crystal Tech Fund over client accounts.
It also says it will institute procedures to protect its investors from conflicts of interest, much as banks with brokerage arms run those businesses separately.
Richard Levin, a lawyer at Baker & Hostetler, said he expected similar efforts from many funds that backed early-stage companies. He is currently representing a venture fund like Crystal Tech that is also seeking advisor status, he said.
(Reporting by Sarah McBride)
