Introduction

Launching a startup is no walk in the park. It’s like diving headfirst into a wild roller-coaster ride filled with ups, downs, and unexpected twists. It’s a path riddled with obstacles, risks, and often, daunting odds of failure. According to the Bureau of Labor and Statistics, a staggering 50% of new businesses fail to survive beyond their fifth year. Yep, it’s tough out there.

But, there’s a shining beacon of hope on the horizon, and it goes by the name of investment crowdfunding or equity crowdfunding or online capital formation. According to CCLEAR in “The Investment Crowdfunding 2024 Trends Report”, startups that get their funding through this method have a better shot at survival, with only about 17.8% of them crashing and burning.

Scroll down to dive deep into the world of equity crowdfunding. We’ll unpack what it’s all about and how it’s giving startups a fighting chance in this crazy entrepreneurial jungle.

Crowdfunding vs. traditional finance: Understanding the Landscape

Traditional Business Financing and Its Challenges

Traditionally, startups have relied on a mix of personal savings, bank loans, and venture capital to get off the ground. Each of these funding sources comes with its own set of challenges. Bank loans often require collateral and a proof of revenue, both of which new businesses might lack. Venture capital, while lucrative, is highly competitive and may demand significant control over the company’s direction.

The Rise of Investment Crowdfunding

On the other side is the investment through crowdfunding, a product of the digital age. This way of getting funds allows entrepreneurs to raise capital directly from the public through online platforms. We can say that crowdfunding democratizes the fundraising process, removing the barriers of traditional financing methods. And more, it allows startups to tap into a broader base of potential investors.

Analyzing the Statistics

General Business Survival Rates

The Bureau of Labor and Statistics’ report that 50% of all new businesses fail within 5 years. This is a sobering reminder of the volatile nature of entrepreneurship. The high rate can be attributed to different elements, including lack of market need, cash flow issues, and fierce competition.

Success in Investment Crowdfunding

However, the recent report by CCLEAR highlights that only 17.8% of companies that got capital through equity crowdfunding have gone out of business. This statistic suggests that equity crowdfunding doesn’t just offer a financial lifeline, but also contributes to a more sustainable business model for startups.

Why Equity Crowdfunding Works

Community and Engagement

One of the key strengths of equity crowdfunding is the community engagement it fosters. Investors are often customers or enthusiasts of the product or service, offering not just capital but also support, feedback, and word-of-mouth promotion. This engaged community can be a significant asset for a new business, driving its initial growth and establishing a loyal customer base.

Validation and Market Fit

Raising capital through crowdfunding also serves as a market validation. Successfully funded projects demonstrate a clear demand for the product or service. This allows businesses to adjust and refine their offerings based on real user feedback. It’s like a direct line to the market, which can help startups navigate the initial stages more effectively, reducing the risk of failure.

Flexibility and Control

Unlike traditional financing methods, crowdfunding provides startups with more control over their destiny. By setting their own terms for investment, businesses can maintain control over their direction and culture, which can be crucial for long-term success.

Challenges and Considerations

While investment crowdfunding presents a promising alternative to traditional financing methods, it has some challenges. Along the path, the entrepreneur will come across rigorous regulations to get permission to go live with their offer.  Another point that might be present is the pressure to deliver results to a large group of investors, but it’s not an exclusivity of the crowdfunding method to get money for your business. 

After all the sheer effort to get the documents and correspond to the regulatory obligations, there’s another big challenge. The choice of a reliable crowdfunding platform. This is a decisive point in every offer, because if the platform isn’t compliant or safe, all your efforts can go down the drain. So, since compliance is mandatory, it is essential to make a wise choice when it comes to finding a company to launch your offer. 

KoreConX powers the most trustworthy crowdfunding platforms in the market. Our secure, All-In-One Platform gives the private market ecosystem the ability to compliantly manage corporate records, captable, funding activities, shareholders, and investors —while efficiently taking advantage of innovative capital-raising opportunities. KoreConX’s processes and actions are led by one key value: TRUST.  It’s in the DNA of the company.

The contrast between the Bureau of Labor and Statistics’ general business survival rates and the success rate of businesses funded through investment crowdfunding is striking. It sheds light on the evolving landscape of startup financing, where investment crowdfunding emerges as a viable and potentially more sustainable option for entrepreneurs. By leveraging the power of community, market validation, and greater control, startups can significantly increase their chances of survival and success.

As the business world continues to evolve, it will be interesting to see how investment crowdfunding develops and what it means for the future of entrepreneurship. The journey is certainly not without its challenges, but for many startups, crowdfunding may just be the key to unlocking their full potential.

Bibliograpgy

* CCLEAR. “The Investment Crowdfunding 2024 Trends Report.” cclear.ai, 2024.

Understanding the regulations surrounding public offerings is crucial for both companies and investors. In this article written by Patrick Costello, from Bevilacqua PLLC, we’ll delve into Section 12(g) of the Securities Exchange Act. You’ll find insights on outlining the requirements for companies to register securities with the SEC. Also, Patrick sheds light on the factors triggering registration, including asset value and investor thresholds.

Keep reading and learn more about this important matter in the financial market.

Section 12(g) of the Securities Exchange Act of 1934 (the “Exchange Act”) (15 U.S.C § 78l(g)) mandates that a company register with the Securities and Exchange Commission (the “SEC”) a class of securities if:

1. the company has gross assets of more than $10 million; and

1. the securities of such class are held of record by more than (a) 2,000 persons or (b) 500 non-accredited investors (as defined under Securities Act Rule 501(a) (17 C.F.R. § 230.501(a))

These are referred to individually as the “Gross Assets Threshold” and the “Held of Record Threshold,” and, together, the “Thresholds.”

Issuers who cross the Thresholds must register the relevant class of securities with the SEC by filing a form 10-12G registration statement within 120 days of the last day of the fiscal year in which the issuer exceeds the Thresholds. After filing its 10-12(G) registration statement, an issuer will need to comply with the continuous reporting obligations under Exchange Act Section 13 as it relates to annual, quarterly, and periodic reports, and beneficial ownership reporting, Section 14 as it relates to proxy rules and Section 16 as it relates to insider transactions in a public company’s securities.

Absent future clarification from the SEC, Section 12(g)’s registration requirements are unavoidable once an issuer crosses the Thresholds under any circumstances. Registration under Section 12(g) is required even if an issuer crosses the Thresholds and subsequently complies with Section 12(g)’s requirements to terminate a registration statement under Section 12(g) (less than 300 holders of record) before the 120-day registration deadline. Further, an issuer who crosses the Thresholds inadvertently and then purposefully seeks to terminate their registration requirements under Section 12(g)(4) may be deemed to be engaging in a scheme to avoid the application of the federal securities laws, likely considered a violation of the anti-fraud rules.

Considering the consequences and difficulties associated with the above aspects of Section 12(g), issuers must engage in proper business planning to avoid an accidental crossing of the Thresholds. Thankfully, there are certain exemptions and definitional exclusions from Section 12(g) that can help issuers avoid crossing Section 12(g)’s Thresholds.

Calculating the Holders of Record

To determine the number of holders of record, an issuer should count (i) each person who is identified as the owner of the record at the company’s registrar for the class of securities and (ii) if the shareholders list was improperly maintained, each person who would have been a record holder had it been properly maintained (17 C.F.R. § 240.12g5-1). As stated above, there are a few exclusions and special rules that apply when calculating the Thresholds. For example, Exchange Act Rule 12g5-1 contains the following special rules:   

In addition to the above rules for calculating the Held of Record Threshold, two very important exemptions increase or alter the Thresholds for securities issued under Regulation Crowdfunding and Tier 2 of Regulation A. For Regulation Crowdfunding, Exchange Act Rule 12g-6 (17 C.F.R. § 240.12g-6) states that securities issued in a Regulation Crowdfunding offering will not be counted towards the Held of Record Threshold if:

1. the issuer is current in its ongoing annual reports;
2. has gross assets of $25 million or less as of the end of the most recently completed fiscal year; and
3. has engaged a transfer agent to serve as the transfer agent for the securities in question.

Additionally, there is a transition period for issuers who exceed $25 million in gross assets according to (b) above. Specifically, Rule 12g-6 states that a crowdfunding issuer can continue to exclude their securities from the holder of record calculation for a period ending on the day before the last day of their fiscal year, which is two years after the issuer’s total assets rose above $25 million; provided, however, that such issuer continues to comply with its ongoing reporting requirements during those two years. An issuer that does not comply with their ongoing reporting obligations must register the relevant class of securities under Section 12(g) within 120 days.

Likewise, for Regulation A,  Exchange Act Rule 12g5-1(a)(7) (17 C.F.R. § 240.12g5-1(a)(7)) states that companies may exclude securities issued in Tier 2 offerings from the Held of Record calculation if they:

1. are current in their annual, semiannual, and special financial reports as of the most recently completed fiscal year;
2. has engaged a transfer agent with respect to the class of securities at issue; and
3. Had (1) a public float of less than $75 million as of the last business day of its most recently completed semiannual period; or (2) if the public float is zero, then less than $50 million as of the most recently completed fiscal year.

As with Rule 12g-6 above, an issuer can continue to exclude such securities from the Held of Record Threshold for a period ending on the day before the last day of their fiscal year two years after they became ineligible for the Rule 12g5-1(a)(7) exemption. An issuer that does not comply with their ongoing reporting obligations must register the relevant class of securities under Section 12(g) within 120 days.

Conclusion

Section 12(g) represents a critical component of the U.S. securities regulatory framework, balancing investor protection with the practical needs of growing businesses. The evolution of its thresholds and conditions reflects a dynamic response to the changing economic landscape, particularly for startups and small businesses, and especially at a time when exempt capital financing is as accessible as it is today. Understanding these regulations is essential for companies seeking to comply with federal securities laws while capitalizing on opportunities for growth and investment. To do so, it is essential that these issuers engage with qualified securities attorneys who can assist them with compliance and navigation of the federal securities laws.

Stay tuned to our blog! We’re always bringing fresh content to keep you always updated.

Let’s talk about how capital is raised, especially about the myths that surround this matter.

For decades, the narrative around raising capital for private companies has been confined to a familiar sequence of chapters: family and friends, government grants, banks, angel groups, accelerators, and venture capital. This traditional pathway has painted a partial picture of the opportunities available to entrepreneurs, leaving many vital chapters unread and unexplored. However, the advent of the JOBS Act and the rise of online capital formation have added crucial new dimensions to this narrative, expanding the playbook for entrepreneurs seeking funding. We will debunk the myths surrounding capital raising, urging entrepreneurs to read beyond the first six chapters and explore the broader spectrum of options now at their disposal.

The Unread Chapters of Capital Raising

Raising capital is a nuanced art, steeped in tradition yet rapidly evolving with technology. Each of the nine chapters of capital raising—ranging from personal networks to sophisticated online platforms—has its own set of rules, expectations, and audience. Yet, at their core, they all share a common process: crafting a compelling pitch, valuing the business, and reaching out to potential investors. Whether through personal meetings, phone calls, or digital platforms, the essence of capital raising remains a quest to gather a crowd of supporters, investors, and advocates for your business.

Rewards Crowdfunding

Platforms like Kickstarter and Indiegogo have shown that product-based businesses can attract funding from customers and enthusiasts who believe in their vision. This model allows entrepreneurs to validate their market fit while securing the capital needed for production and scaling.

JOBS Act Regulations (RegCF, RegD, RegA+)

The JOBS Act has revolutionized access to capital by legalizing equity crowdfunding (RegCF), simplifying offerings to accredited investors (RegD), and expanding the ability to publicly solicit investments (RegA+). These regulations have democratized investment, making it accessible to a broader audience of both entrepreneurs and investors.  There is now over 2,500 platforms in the USA alone that cater to any of the such JOBS Act Regulations but Spark.Market and Red Crow are now becoming the new trend of online capital formation.  

Online Capital Formation

The digital transformation of capital raising has enabled platforms to streamline the investment process, making it more efficient and far-reaching. Online capital formation leverages technology to connect companies with a global pool of investors, transcending geographical and traditional barriers.  KoreIssuance sole purpose is to enable companies to utilize the JOBS Act regulations and to allow companies to raise capital on their own terms, and website.

Technology’s Role in Accessing Capital

The transition to online platforms has not only modernized the capital raising process but also expanded its potential. Digital platforms offer a cost-effective, efficient way to reach investors, turning the erstwhile daunting task of fundraising into a more manageable, even rewarding endeavor. This shift towards online capital formation fosters a more inclusive ecosystem, where businesses can attract not just investors but also future customers, partners, and champions of their brand.  The entire process is done online with such infrastructure created by KoreConX, which provides the infrastructure for all participants (investors, companies, issuers, lawyers, auditors, IA firms, Broker-Dealers, SEC-Transfer Agents, ATS, OMS, Banks, Payment Rails) this is the key to allow democratization.  In this new world, people can invest as low as $5.00 and it can be done cost effective and 100% compliantly.

Challenges Beyond Chapter 6

Venturing into the realms of rewards crowdfunding, JOBS Act regulations, and online capital formation presents its own set of challenges. Entrepreneurs may encounter skepticism from traditionalists who view these methods as less prestigious or viable. However, the success stories emerging from these avenues are dispelling such myths, proving that these “new chapters” are not just viable but also potentially more aligned with the modern entrepreneurial journey.

Keep in mind the skepticism they demonstrate is a reaction to how threatening this way of capital raising is competing with them.  You will hear remarks like, “dumb money”, “they bring no value”, “not sophisticated” and much more.  This tells you when something is working when money (investors) have choices and they are selection you rather than going to a fund.

Embracing the Full Spectrum of Capital Raising

Educate Yourself: Understand the nuances and requirements of each capital-raising avenue.

Build a Comprehensive Pitch: Tailor your pitch to suit different platforms and investor expectations.

Leverage Technology: Use online platforms to streamline the fundraising process and reach a broader audience.  Working with KoreIssuance can be the difference of success and failure.

Engage Your Network: Tap into your personal and professional networks for initial support and validation.

Explore All Avenues: Don’t limit yourself to traditional funding sources; explore crowdfunding, online platforms, and JOBS Act opportunities.

Compliance and Transparency: Ensure your fundraising efforts comply with legal requirements and maintain transparency with potential investors.  Trusted partners is essential to any type of successful capital raise.

Value Beyond Capital: Look for investors and platforms that offer value beyond just funding, such as mentorship, networking, and market access.

Continuous Learning: Stay informed about evolving regulations and emerging platforms to maximize your fundraising potential.

The landscape of capital raising is broader and more diverse than ever before. Entrepreneurs today have the opportunity to explore a multitude of chapters beyond the traditional six, each offering unique benefits and access to a wider range of investors. By embracing the JOBS Act regulations and leveraging online capital formation, startups can navigate the fundraising process more effectively, tapping into a vast pool of potential supporters. Educating oneself about these opportunities, working with trusted advisors, and adopting a strategic approach to capital raising are essential steps toward securing the necessary funding. In the ever-evolving narrative of entrepreneurship, understanding and utilizing the full spectrum of funding options available is not just an advantage—it’s a necessity.

Introduction: Regulation S vs Rule 144

Regulation S and Rule 144 are pivotal components of the United States securities law framework, each facilitating different aspects of the capital markets, particularly in the context of private offerings and the sale of securities to non-U.S. investors. Understanding the nuances between these two regulations is essential for issuers, investors, and intermediaries navigating the private capital markets.

Regulation S

Regulation S provides a safe harbor that exempts securities offerings from the registration requirements of Section 5 of the Securities Act of 1933, as long as the offering is conducted outside the United States. Most people are not aware that is particular regulation was named after Sara Hanks when she was at the SEC.  This regulation is designed to facilitate the sale of securities to non-U.S. residents in offshore transactions, without the stringent disclosures and registration processes required for public offerings in the U.S.

Key Features of Regulation S:

• Offshore Transactions: Regulation S applies only to offers and sales of securities that occur outside the U.S. and to non-U.S. persons. The issuer must ensure that the offering cannot be deemed to have been made to a person in the United States.  The offering must be gated and block all U.S. persons, one other major factor is that a company must follow local securities laws to make sure they are compliant when offering their securities in offshore markets.
• Category System: Regulation S categorizes offerings to determine the level of restrictions required to prevent the securities from flowing back into the U.S. market. These categories help in defining the resale limitations and distribution compliance period for the securities.
• No Directed Selling Efforts: Issuers and distributors must not engage in any directed selling efforts within the United States, ensuring the offering is genuinely foreign and not targeting U.S. investors indirectly.

Rule 144

Purpose and Application: Rule 144 provides a safe harbor for the public resale of restricted and controlled securities in the U.S. market, without requiring SEC registration. This rule is crucial for investors looking to sell their holdings of restricted securities (typically acquired through private placements or as compensation) and for affiliates of the issuer who hold control securities.  This very common with RegD 506b and 506c offerings.

Key Features:

• Holding Period: Sellers must adhere to a specific holding period before restricted securities can be sold on the public market—six months for securities of a reporting company and one year for a non-reporting company.
• Volume Limitations: There are limits on the volume of securities that can be sold within a three-month period, which helps prevent market manipulation and protect investors.
• Manner of Sale and Information Requirements: Rule 144 imposes conditions on how sales can be made and requires that adequate current information about the issuer is publicly available.

Differences Between Regulation S and Rule 144

• Geographical Focus: Regulation S deals exclusively with offers and sales of securities conducted outside the United States to non-U.S. persons. In contrast, Rule 144 applies to the resale of restricted and controlled securities within the U.S. market.
• Targeted Securities and Sellers: Regulation S can be applied by issuers, distributors, or their affiliates for initial sales to non-U.S. persons. Rule 144 is used by shareholders (both affiliates and non-affiliates) who seek to sell their restricted or controlled securities in the U.S. market.
• Conditions and Restrictions: While both set forth conditions to prevent the improper flow of securities, Regulation S focuses on ensuring that the securities are offered and sold outside the U.S. without directed selling efforts to U.S. persons. Rule 144 establishes criteria related to holding periods, volume limitations, and disclosure to facilitate the safe resale of securities in the U.S.
• Purpose: The fundamental purpose of Regulation S is to exempt international securities transactions from U.S. registration requirements, promoting global capital formation. Rule 144, however, aims to provide liquidity for holders of restricted and controlled securities by enabling a pathway to public resale under certain conditions.

Regulation S and Rule 144 address different needs within the securities market, reflecting the SEC’s efforts to accommodate the complexities of global capital flows while protecting investors. Regulation S facilitates the international offering of securities by U.S. and foreign issuers, whereas Rule 144 allows investors to sell restricted and controlled securities in the U.S. Understanding these regulations is crucial for conducting compliant securities transactions, whether operating within the U.S. or on a global scale.

It’s always important when using either of these regulations to speak to your securities lawyer to ensure your company is using the regulations compliantly.

In today’s fast-paced business environment, private companies face a myriad of challenges as they scale and seek capital. A crucial, yet often overlooked aspect of their growth trajectory is effective entity management.

This blog post covers the essence of entity management and distinguishes between cap table management and equity management, highlighting the significance of each for private companies.

Entity Management: What does it mean?

Basically, entity management simplifies how organizations track, organize, and manage all details related to their business entities. An effective process helps to ensure compliance and streamline operations, impacting positively in decision-making.

In the next sections, we’ll explore the role of robust entity management software, underscore the potential pitfalls of neglecting this area, and provide insights into selecting a reliable technology partner. Our aim is to equip you with the knowledge to navigate the complexities of entity management, ensuring compliance and facilitating your company’s growth and success.

The Role of Entity Management Software

As private companies expand, particularly those leveraging the JOBS Act Regulations for capital raising, the complexity of regulatory compliance and entity management escalates. Strong entity management involves not just the maintenance of corporate records but ensuring that these entities meet all regulatory requirements timely. This is where the adoption of a comprehensive entity management software becomes invaluable. A technology partner who is adept at understanding the growth dynamics and regulatory landscape can be a linchpin in maintaining compliance, thereby avoiding the repercussions of missed filings or non-compliance.

The Challenges of Inadequate Entity Management

The consequences of not employing effective entity management software can be dire. Missed filings or regulatory non-compliance can severely impact a company’s ability to raise capital, pursue mergers and acquisitions (M&A), or even go public. For sectors like real estate, which typically involves managing multiple entities for various projects, the ripple effects of non-compliance can be even more pronounced. These challenges underscore the necessity of a vigilant approach to entity management.

Choosing a Trusted Entity Management Software Partner

The importance of selecting a trusted software partner cannot be overstated. This partner should not only possess a comprehensive understanding of managing multiple entities but also ensure their software facilitates time and cost savings while keeping up with regulatory deadlines. Here are three red flags to watch out for when choosing an entity management software partner:

Compliance Assurance: Ensure the partner operates with end-to-end compliance. The lack of a robust compliance framework is a major red flag.

Understanding Private Company Challenges: The partner must have a proven track record of understanding and addressing the unique challenges faced by private companies. Lack of expertise in dealing with private company-specific issues is a significant concern.

Reputation and Reliability: Investigate the partner’s reputation and reliability. A partner lacking in trusted testimonials or case studies may not be able to provide the level of service your company requires.

The process of finding a trustworthy company may take some time, but is essential in different aspects of the business. So it’s worth to spend time

Cap Table Management vs. Equity Management

Distinguishing between cap table management and equity management is essential for private companies. Cap table management involves tracking the ownership stakes, types of equity owned, and the dilution effects of future funding rounds. It is a snapshot of who owns what in the company. Equity management, on the other hand, encompasses a broader scope, including managing equity compensation, issuing new shares, and ensuring compliance with tax laws and regulations. Both are critical for effectively managing a company’s equity and ensuring stakeholders are correctly accounted for and rewarded.

Effective entity management is not merely a compliance requirement; it is a strategic imperative for growing private companies. Understanding the nuances between cap table management and equity management, and the importance of each, is crucial. Equally important is the selection of a robust entity management software partner that understands the unique challenges faced by your company and can ensure compliance and efficiency.

Educating yourself on the key considerations and red flags in choosing a technology partner will empower you to make informed decisions. Ultimately this facilitates your company’s growth and success in the complex landscape of private capital markets. Remember, the right questions lead to the right partner, ensuring your company’s entity management is in capable hands.

Overview of the Digital Assets Ecosystem

In an era where digital assets are redefining the boundaries of technology and finance, understanding the complex landscape of the digital assets ecosystem becomes paramount for companies aiming to leverage these innovations.  We will dive into the critical importance of aligning with a compliant and trusted digital assets ecosystem, offering insights into its transformative potential for private companies in the capital markets.

We explore the historical challenges faced by digital assets, emphasize the necessity of a compliant regulatory framework, and provide practical steps for selecting the right ecosystem. Through anecdotes and expert analysis, we aim to educate and guide you towards making informed decisions in this rapidly evolving sector.

Why Ecosystems for Digital Assets Are Essential

The journey of digital assets in the marketplace is a tale of innovation, ambition, and, unfortunately, a learning curve steeped in regulatory missteps. The initial excitement surrounding Initial Coin Offerings (ICOs) gave way to disillusionment as scams proliferated. Similarly, the Non-Fungible Token (NFT) phase, while showcasing the potential for unique asset ownership on the blockchain, also faced its challenges in market acceptance and regulatory clarity. These historical lessons underscore the imperative need for a robust compliance ecosystem from the outset of any digital asset venture.

For private companies venturing into the private capital markets through digital assets, the right ecosystem is not just an advantage—it’s a necessity. This ecosystem must strike a delicate balance between advanced technological frameworks and stringent regulatory compliance.

Practical examples

Also, a good digital ecosystem should encompass a comprehensive regulatory framework, partnerships with legal experts, collaboration with FINRA Broker-Dealers, and blockchain technology that has been vetted and qualified by regulatory bodies.

A prime example of such diligence is KoreChain, which stands out as a pioneering entity that has navigated its blockchain infrastructure through SEC scrutiny, achieving a qualified status under the JOBS Act. This milestone not only highlights KoreChain’s commitment to regulatory compliance but also sets a precedent for what constitutes a trustworthy digital assets ecosystem.

Regulatory frameworks

The digital assets sector faces unique challenges, primarily due to its turbulent history and the evolving regulatory landscape. The shift from ICOs to NFTs and now to a new, regulated phase illustrates the sector’s dynamic nature. The clear message from regulators like the SEC is uncompromising: engagement in digital assets must be 100% compliant. This underscores the critical need for companies to align with digital assets ecosystems that have not only embraced but have been validated by regulatory frameworks. The onus is on companies to rigorously vet potential ecosystems, ensuring they do not fall foul of regulatory mandates.

Collaborating with a trusted digital assets ecosystem instills confidence that your offerings are compliant and that your partners are fully versed in securities law. Such ecosystems prioritize regulatory compliance and include all necessary intermediaries to ensure adherence to securities law.

Trustworthiness in digital assets ecosystem

It is essential for companies to demand evidence of compliance before engaging in any digital assets ecosystem, thereby safeguarding their operations and reputation.

Selecting the right digital assets ecosystem involves a meticulous approach:

As we can see, navigating the digital assets landscape requires a well-informed approach, prioritizing regulatory compliance above all. The lessons learned from the ICO and NFT phases highlight the perils of overlooking regulatory requirements.

Digital Assets Ecosystem: Key Takeaways

As we venture into a new, regulated era of digital assets, the selection of your digital assets ecosystem should be guided by rigorous scrutiny of its regulatory standing, technological robustness, and the support network it offers.

Educating oneself on these aspects is not just advisable; it’s essential for success and compliance in the dynamic world of digital assets.

Remember, starting with technology without a clear understanding of regulatory requirements is a pathway to failure. Instead, choose wisely, ensuring your digital assets journey is both innovative and compliant.

Loan Alternatives for Startups

Getting money to start a business is a critical issue that entrepreneurs have to deal. Sometimes the landscape seems so uncertain that a lot of them think of paying astronomical taxes to get the capital and get the idea off the drawing board.

But beyond traditional bank loans, there are a lot of loan alternatives for startups waiting to be explored. This guide will show you different funding options, empowering you with more knowledge to unfoggy the landscape.  Therefore, you’ll have more resources to think about which alternative may fit your business.

From innovative crowdfunding to strategic partnerships with angel investors, we’ll delve into the diverse funding ecosystem, equipping you with the knowledge to make informed decisions.

For startups and companies looking to get money to fund their business, there are many different options. While not every option may be best suited for every company, understanding each will help to choose which one is best for them. 

Family and friends

In the early stages of seeking loan alternatives for Startups, investment from family and friends can be both a simple and safe solution. Since family members and friends likely want to see you succeed, they are potential sources of funding.

Unlike traditional investors, family and friends do not need to register as an investor to donate. It is also likely that through this method, founders may not have to give up some of their equity. This allows them to retain control over their company. 

Angel investors

Angel investors and angel groups can also be a source of getting capital to fund your business.  Angel investors can be either non-accredited and accredited investors, for accredited investors there is an additional step to meet SEC regulations to make sure they have been verified. Angel groups are multiple angel investors who have pooled their money together to invest in startups. Typically, angel investors invest capital in exchange for equity and may play a role as a mentor, anticipating a return on their investment. 

Venture capital

Venture capital investors are SEC-regulated and invest in exchange for equity in the company. However, they are not investing their own money, rather investing other people’s. Since venture capital investors are trying to make money from their investments, they typically prefer to have some say in the company’s management, likely reducing the founders’ control. 

Strategic investors

Strategic investors may also be an option for companies. Typically owned by larger corporations, strategic investors invest in companies that will strengthen the corporate investor or that will help both parties grow. Strategic investors usually make available their connections or provide other resources that the company may need. This makes them our forth alternative to loans for startups.

Startup accelerator programs

Another way to get money for your business without getting a loan, is through startup accelerator programs

For some companies, crowdfunding may be useful for raising money. With this method, companies can either offer equity or rewards to investors, the latter allowing the company to raise the money they need without giving up control of the company. 

Getting capital to fund your business: Regulations for crowdfunding

Through the JOBS Act, the SEC passed Regulation A+ crowdfunding, which allows entities to raise up to $75 million in capital from both accredited and non-accredited investors. Crowdfunding gives access to a wider pool of potential investors, making it possible to secure the funding they need through this method. 

Alternatively, Regulation CF may be a better fit. Through RegCF, companies can raise up to $5 million, during a 12-month, period from anyone looking to invest. This gives an important opportunity to turn their loyal customers into shareholders as well. These types of offerings must be done online through an SEC-registered intermediary, like a funding portal or broker-dealer.

In the March 2021 update to the regulation, investment limits for accredited investors were removed and investment limits for non-accredited investors were revised to be $2,500 or 5% of the greater of annual income or net worth. It is also important to note that now, issuers (those seeking funding) can now “test the waters” to gauge interest before registering the offering with the SEC. Additionally, the use of special purpose vehicles (SPVs) within RegCF offerings was permitted.

Regulation D is another method that private companies can use to raise capital. Through RegD, some companies are allowed to sell securities without registering the offering with the SEC. However, if you choose to raise capital through RegD, you must electronically file the SEC’s “Form D.” By meeting either RegD exemptions 506(b) or 506(c), issuers can raise an unlimited amount of capital. To meet the requirements of the 506(b) exemption, companies must not use general solicitation to advertise securities, can raise money from an unlimited number of accredited investors and up to 35 other sophisticated investors, and must determine the information to provide investors while adhering to anti-fraud securities laws. For 506(c) exemptions, companies can solicit and advertise an offering but all investors must be accredited. In this case, the company must reasonably verify that the investor meet the SEC’s accredited investor requirements  

Direct offerings

Another loan alternative is to utilize direct offerings to raise money. Through a direct offering, companies can issue shares to the company directly to investors, without having to undergo an initial public offering (IPO). Since a direct offering is typically cheaper than an IPO, companies can raise funding without having major expenses. Since trading of shares bought through a direct offering is typically more difficult than those bought in an IPO, investors may request higher equity before they decide to invest. 

Security tokens

Companies can offer security tokens to investors through an issuance platform. Companies should be aware that these securities are required to follow SEC regulations. It is becoming more common for companies to offer securities through an issuance platform, as it allows them to reach a larger audience than traditional methods. This is also attractive to investors, as securities can be traded in a secondary market, providing them with more options and liquidity for their shares. 

Getting funds with a broker-dealer assistance

Additionally, companies looking to raise capital can do so with the help of a broker-dealer. Broker-dealers are SEC-registered entities that deal with transactions related to securities, as well as buying and selling securities for their own account or those of their customers. Plus, certain states require issuers to work with a broker-dealer to offer securities, so working with a broker-dealer allows issuers to maintain compliance with the SEC and other regulatory entities. This makes it likely that a company raising capital already has an established relationship with a broker-dealer. 

Funding through website

Lastly, companies looking to raise capital can do it directly through their website. With the KoreConX all-in-one platform, companies can raise capital at their website, maintaining their brand experience. The platform allows companies to place an “invest now” button on their site throughout their RegA, RegCF, RegD, or other offerings so that potential investors can easily invest. 

Whichever loan alternatives for startups you choose, it must make sure that it aligns with the company’s goals. Without understanding each method, it is possible that founders may end up being asked to give up too much equity and lose control of the company they have worked hard to build. Companies should approach the process of raising capital with a strategy already in place so that they can be satisfied with the outcome. 

*Disclaimer: This article was last reviewed in January 2024. Please note that regulatory landscapes and requirements are subject to rapid changes. The information provided here is reflective of the early part of 2024.

We are diving into the world of FINRA Broker-Dealers – a crucial component in maintaining the integrity and trustworthiness of the private capital markets. We’ll explore their role, significance, and the technology that powers them, providing an overview of the challenges they face and their importance in safeguarding investors, companies, and intermediaries. 

We’ll also offer practical steps for those interested in becoming a FINRA Broker-Dealer, highlighting the ongoing responsibilities and the necessity of understanding the compliance landscape.

What is a broker-dealer?

Basically, a broker-dealer is a critical player in the financial landscape, serving as an intermediary that buys and sells securities for both clients and their own accounts. In essence, they facilitate the flow of capital by connecting investors with opportunities.

For people aiming to raise capital or just wanting to deep their knowledge, understanding the function and value of broker-dealers is important. As we’ll see in the next section, broker-dealers not only ensure transactions are executed efficiently but also uphold regulatory compliance, safeguarding the integrity of the capital markets and enhancing investor confidence.

Roles of a Broker-Dealer

Imagine you’re planning to climb a challenging mountain. Would you go alone or with an experienced guide? In the world of capital raising, FINRA Broker-Dealers are akin to these indispensable guides.

Therefore, one of major roles of a broker-dealer is to bring expertise and trustworthiness, ensuring that companies operate in compliance with regulations while securing capital.

An excellent example is when a startup, brimming with innovative ideas but new to the regulatory landscape, partners with a FINRA Broker-Dealer. This partnership not only enhances the credibility of the startup in the eyes of investors but also ensures adherence to the stringent regulatory framework, building a foundation of trust and reliability.  

The Pillars of the Private Capital Market

With over 3,000 registered FINRA Broker-Dealers in the USA, these entities are not just numerous; they are vital cogs in the financial ecosystem. They play a critical role in ensuring that capital markets operate smoothly, efficiently, and, most importantly, within the boundaries of securities law. Their presence bolsters investor confidence, knowing that there’s a regulatory watchguard ensuring fair and transparent transactions.

At KoreConX we only work with registered FINRA Broker-Dealers to utilize our infrastructure to make sure we provide and end to end compliant transactions for all participants in the transaction.

Broker-Dealer Compliance

The advent of the JOBS Act brought about a seismic shift in how private capital is raised, particularly for startups and small businesses. FINRA Broker-Dealers have been at the forefront of adopting technology to leverage these regulations efficiently. They use sophisticated platforms from KoreConX for tasks like conducting due diligence, monitoring transactions, and ensuring compliance with the JOBS Act and crowdfunding regulations. This technological integration not only streamlines processes but also enhances the accuracy and effectiveness of compliance measures.

Navigating Current Challenges

Despite their expertise and technological prowess, FINRA Broker-Dealers face an evolving landscape of challenges. The rapid pace of regulatory changes, the increasing complexity of financial products, and the need for advanced cybersecurity measures to protect sensitive data are just a few of the hurdles. Adapting to these changes while maintaining the highest standards of compliance and investor protection is a balancing act that requires constant vigilance and adaptability.

Safeguarding the Capital Market Ecosystem

The role of a FINRA Broker-Dealer transcends mere compliance. They are the guardians of market integrity, playing a pivotal role in ensuring a safe and fair environment for all participants – investors, companies, and intermediaries. Their work upholds the principles of transparency and fairness, which are fundamental to the health and stability of the private capital markets.

How to become a FINRA Broker-Dealer: Step-by-Step

1. Understand the Regulatory Framework: Before embarking on this journey, it’s crucial to have a thorough understanding of the FINRA rules, SEC regulations, and other relevant laws. This knowledge is the foundation upon which your Broker-Dealer operations will be built.
2. Obtain the Necessary Licenses: Register with FINRA, pass the required exams (like the Series 7 and Series 63), and meet the net capital requirements. This step is about more than just fulfilling legal obligations; it’s about equipping yourself with the tools and knowledge necessary for effective compliance and operation.  Once you have the people the firm also needs to add business line items such as RegCF, RegA+, digital securities to be able to transact in the private capital markets.
3. Implement Robust Compliance and Technological Systems: Set up systems for ongoing compliance, including technology for record-keeping, reporting, and monitoring transactions. Remember, becoming a Broker-Dealer is not just about starting; it’s about maintaining and continuously improving your operations and compliance posture.  FINRA has requirements where information can be hosted that FINRA Broker-Dealers must follow, we are KoreConX follow these guidelines so FINRA Broker-Dealers can transact with confidence.

Educating for a Better Financial Future

Embarking on the journey to become a FINRA Broker-Dealer is not just about fulfilling a regulatory role; it’s about committing to the ongoing responsibility of maintaining licenses, staying abreast of regulatory changes, and undertaking permissible activities. This role is crucial in safeguarding the interests of all parties involved in the private capital markets, thereby ensuring a stable, transparent, and fair financial ecosystem.

Understanding the requirements and responsibilities of being a FINRA Broker-Dealer is vital for anyone considering this path. It’s a commitment to excellence, continuous learning, and an unwavering dedication to maintaining the integrity of the capital markets. As we navigate the ever-evolving landscape of private investing, the role of the FINRA Broker-Dealer remains more important than ever, acting as a beacon of trust, compliance, and stability in the dynamic world of finance.

When it comes to investments, people like a clear sky rather than clouds of uncertainty. That’s where the Blue Sky Laws come in – a set of state regulations and rules to maintain a clear and safe financial atmosphere. From registration requirements to anti-fraud measures, these laws have a big impact on investor protection.

Keep reading and learn all the details.

Table of Contents

• What are blue sky laws?
• Ensuring investor protection
• Blue sky laws vs. regulations
• Your Shield Against Investment Fraud

What are blue sky laws?

Basically, Blue Sky Laws are state regulations made to safeguard investors from fraudulent securities activities. This legislation controls the sale of securities, such as stocks and bonds, within a specific state. Overall, it refers to a key instrument for ensuring transparency and protecting investors in the market.

Originating in the aftermath of the Great Depression, “blue sky laws” were made possible by the Uniform Securities Act of 1956. Leading up to the stock market crash of 1929, the SEC did not exist to regulate offerings and many investment deals offered great profits to increase their sale.

Today, this legislation plays a central role in regulating offerings and safeguarding investors against fraud. For companies offering securities to investors, understanding the role they play will be key to a successful offering. 

The purpose of the Uniform Securities Act was to provide individual states the ability to implement their own securities laws. As some securities may not be covered at the federal level, giving states the power to enact blue sky laws to protect investors .

Today, 40 out of the 50 states have implemented blue sky laws based on the Uniform Securities Act.

Ensuring investor protection

The blue sky laws also create provisions for liability and may allow investors to bring lawsuits against issuers in the event of fraud.

Since the blue sky laws were established to protect investors, the laws enacted by each affect the registration of securities, registration of issuer and brokers, as well as the state’s ability to regulate and enforce restrictions.

Companies must register securities in both their home state and any other state in which it intends to do business. However, laws can vary between states; while the language they use can be similar, the interpretations may vary.

For issuers, this is an important fact to note, as they must meet each state’s requirement for each state they intend to sell securities in. 

Blue sky laws vs. regulations

In 1996, Congress passed the National Securities Market Improvement Act which exempts certain securities from state regulation and returns the regulation of broker-dealer registration to federal control. As a reaction to transactions being more difficult for companies because of the requirement to comply with blue sky laws, the Act reduced the power of individual states to regulate securities. 

While the federal government plays a major role in securities regulation, understanding the laws in each state which a company intends to sell securities is still essential.

For companies looking to raise money through Reg A+, Tier I offerings must be reviewed and registered with both the SEC and state governments.

Tier II offerings do not need to be reviewed by the state for them to be sold. In both cases, states retain the ability to investigate and charge issuers with fraud, so maintaining compliance will promote not only investor protection but will protect the company too.

Additionally, issuers and brokers must still adhere to notice and filing requirements set for each state. 

Your Shield Against Investment Fraud

With an understanding of blue sky laws, companies can plan for a successful offering by following regulations set in place by each state. Failure to comply with the laws can result in severe consequences and penalties.

While it may seem like an overwhelming task, state securities regulators can be contacted to ensure that your offering meets their requirements or better yet reach out to your securities lawyer who will guide you through depending on what regulation your company wants to use for its offering such as RegCF or RegD or RegA+, each one will have different provisions that you will need to follow to make sure you are compliant with your offering.

Investing online is easier, faster, and safer with the new KoreID Mobile App For Online Investments. Launched by KoreConX, this first-of-its-kind mobile online passport for investments works on iOS and Android and is 100% free. All a user needs is an account on the KoreConX All-In-One Platform and their mobile number to enable the 2-factor authentication.

How it works

All current shareholders will receive an email guiding them to download the KoreID Mobile App. After they download it and log in with their email and password, a 2-factor authentication key will be texted to their mobile phone. They will have immediate in-hand access to their personal dashboard and their whole portfolio, including their individual or company’s pending investments, reports, and updates, allowing them to:

• Manage current investments.
• Manage pending investments.
• Re-Invest in companies when an offering is open.
• View company news releases, reports, meetings, messages
• Manage personal information.

Technology for financial services

“We are continually working to strengthen the trust and compliance infrastructure in private capital markets. This capability forges a new era in shareholder-company relationships, offering both parties the ability to communicate and allowing shareholders to reinvest in companies in a secure and compliant way,” explains Dr. Kiran Garimella, Chief Scientist and Technology Officer at KoreConX.

The KoreID Mobile App for online investments is now available in app stores. All users must have the 2-factor authentication security feature enabled in order to log in. You can download using the QR Code in the image. You can also look for it in Play Store, for Android, or for iOS, App Store.

Are you a crypto investor? The market for digital assets is growing by leaps and bounds every day. But is the crypto winter almost over? Oscar Jofre, CEO at KoreConX, is a blockchain expert, and he is weekly on Fintech.TV to share everything we need to know about crypto and digital assets. He knows all there is to know about this market and how it works, so you can be confident that you’re making the right investment decisions.

Before the JOBS Act, companies in the private capital market had very few options to raise the capital they needed to grow. Many sought venture capital, which has an unfortunately low success rate. On average, fewer than 6.5% of small businesses succeed with this funding route.  In contrast, 60% of companies using RegCF have enjoyed success using the JOBS Act exemption, which offers issuers a way to crowdfund and get their mission across to more investors. Still, 40% of the companies turning to RegCF are unable to find success. So what goes wrong? 

There are several reasons why companies fail at RegCF offerings, but the most common reason is a lack of commitment. This can manifest itself in a few different ways, failure to comply with regulations, a failure to budget appropriately, or failure to market appropriately. Let’s take a closer look at each of these reasons.

Complying with Regulations

One of the most important aspects of a RegCF offering is compliance with SEC regulations. These regulations are designed to protect investors and ensure that companies are providing accurate information about their business and the risks involved in investing. Cutting corners is not a solution to save time and money; failing to comply can jeopardize the raise altogether. Failing to comply with regulatory requirements can result in harsh consequences if undergoing an audit or raise the risk of being sued by an investor. Compliance requires a wholehearted commitment to the regulations from day one to protect the company in the long term and raise the likelihood of a successful raise.

Budgeting Appropriately

Another critical aspect of a RegCF offering is budgeting appropriately for the costs associated with the offering. These costs can include legal fees, accounting fees, and marketing expenses. Without a proper budget, companies may find themselves unable to cover all the necessary expenses and being forced to cut corners to make ends meet. Creating an appropriate budget helps to ensure that there is an adequate amount of funding to market the offering, engage with the right professionals, and adhere to regulatory requirements without making sacrifices.

Marketing the Offering

Without investors, a RegCF raise cannot be successful. This requires issuers to market their offering in a way that attracts the most appropriate investors. For RegCF, companies can take advantage of affinity marketing to bring in potential investors that align with the company’s values and mission. This can do more than creating shareholders, it can build brand ambassadors who are equally as passionate about what you’re building.

How to Avoid These Pitfalls

The best way to avoid these pitfalls is to commit to the process from start to finish. This means being willing to invest the time and resources necessary, complying with regulations, budgeting appropriately for the offering, and assembling a team of experienced professionals. While this cannot guarantee success, it gives companies a significant advantage over those who are not committed to the capital raising process. By being willing to invest the time and resources necessary, companies can increase their chances of success and avoid the pitfalls that have led to the failure of other RegCF offerings.

As the healthcare landscape continues to change rapidly, private equity firms are taking note and getting involved in the healthcare sector. Private equity firms are now the owners of a growing number of physician groups in the U.S. A study published in JAMA Health Forum suggests that these private-equity-owned practices are linked to increased healthcare spending and patient utilization. The study found that private-equity-owned practices showed a consistent rise in spending through eight quarters after an acquisition, with the average charge per claim increasing 20% and the average allowed amount per claim up 11%. The private equity acquired practices saw visits by new patients increase by 38% and total visit volume rise by 16%, compared to the control group, with a 9.4% increase in the share of office visits for established patients that were billed as longer than 30 minutes.

While it’s still unclear why private equity-owned practices are associated with higher spending, one possibility is that private equity firms could be making significant changes in terms of management, operating hours, or improved branding and referrals. Private equity firms typically seek annual returns exceeding 20%, so they need to generate higher revenue or reduce costs. 

Why Private Equity for Physicians and Healthcare Companies?

Given the current state of the healthcare industry, it’s no surprise that private equity firms are taking an interest in physician groups and the healthcare industry as a whole. In recent years, we’ve seen a rapid increase in the cost of healthcare, and this trend is likely to continue. At the same time, the Affordable Care Act has put pressure on hospitals and physicians to provide high-quality care at a lower cost. As a result, many physician groups are struggling to remain profitable. Private equity firms can provide the capital and resources that these physician groups need to survive and thrive in this landscape. 

For those in the general healthcare field, private equity creates a rise in new inventions and treatments for the medical field that can save and improve lives. New companies are constantly being born from the minds of those with interests in improving healthcare. These people have ideas to make treatments more affordable or to create new ones altogether and even design technology that improves the processes of those working in healthcare. However, they are often restricted by a lack of funding. That is where private equity comes in to play an important role in expanding the industry. This type of investment allows these new companies to have the start-up capital they need to succeed. In return, the investors are rewarded with a return on their investment if the company goes public or is sold, all while helping fund a medical solution that can help others.

We’re beginning to see private funding options, like those outlined by the JOBS Act, be utilized by medtech companies. However, will physician groups also explore this route as well opposed to traditional private equity funding?

Regardless, one thing is clear. Private equity-owned physician groups continue to grow, it will directly impact the care patients receive. Do these groups raise their prices to generate a return for the private equity firm or cut costs and pass that on to the patient? While there are some concerns about how these firms will impact healthcare spending, it’s still too early to tell. We’ll need to wait and see how things play out before we can make any definitive conclusions. 

With the availability of the JOBS Act, capital-raising organizations can now seek out new investors and gain the resources they need to grow and compete in this rapidly changing landscape privately. By empowering themselves through education, healthcare practices can stay ahead of the curve, avoid common mistakes and pitfalls, and position themselves for success when raising private capital. 

You can view recaps from the recent KoreSummit event on raising capital for Medtech companies to learn more about how healthcare and life science-based companies can utilize the JOBS Act exemptions.

Across the world, there are an estimated 4.7 billion people with the means to invest in the private capital market. While this may be a rough estimate, it provides a good starting point for understanding the reach of potential investors worldwide. And, thanks to the rise of online crowdfunding platforms, it is easier than ever for these potential investors to make their investments. Through these platforms, both retail and accredited investors can invest small sums of money in startups looking to raise capital through the JOBS Act exemptions. 

This can be risky, but it can also be very rewarding if the startup is successful. The general principle of investment risk is to never invest more than you can afford to lose. But, with smaller individual investors, people who can only afford to lose a little are no longer excluded from these opportunities. However, any reputable equity crowdfunding platform has strict compliance standards that ensure that the companies being funded are legitimate and compliant with all securities laws, thus, reducing some risks to the investors. When both funding portals and issuers adhere to all compliance requirements, the risks of losing money to fraud or incompetence. Still, investors must keep in mind that regulations are unable to protect them from changes in the market.

The Landscape of Funding Platforms

In the United States, there are over 70 FINRA-regulated crowdfunding platforms that companies can choose to utilize for their offerings. Being a FINRA-registered platform ensures that funding portals are following FINRA regulatory oversight and reporting requirements, introducing a layer of protection for investors against fraud. Before choosing to invest, potential investors should check with FINRA to ensure the funding portal is regulated. 

Equity crowdfunding is a relatively new phenomenon, but it has already impacted the startup ecosystem and companies have already raised more than $1 billion using RegCF alone since the JOBS Act was enacted in 2012. By allowing companies to raise capital without an IPO while allowing investors to leverage the power of the Internet to capitalize on up-and-coming companies, everybody wins.

In 2021 alone, equity crowdfunding raised over $500 million for companies. This means that businesses have a wide range of short- and long-term investment sources to choose from seeking capital to grow and support their business objectives. With equity crowdfunding, various industries can benefit from improved access to capital, while investors can prosper from getting in with a company on the ground floor.

Since the JOBS Act was passed in 2012, RegA+ has evolved tremendously. With companies able to raise up to $75 million and utilize methods of online capital formation, the market continues to grow as more companies turn to the exemption to fund growth. Yet, the need for improved liquidity for this asset class has been given little attention by lawmakers and the Securities and Exchange Commission.

Without secondary trading, investors are left with few options. Traditionally, private securities only provide an off-ramp for investors in the event of a merger, acquisition, or IPO. The unfortunate reality is that while a fragmented regulatory environment does allow for some secondary market transactions, issuers are not pre-empted from state securities regulations. As a member of the Small Business Capital Formation Advisory Committee, Sara Hanks recently spoke to highlight the challenges issuers face. “The end result is it becomes very difficult to trade companies,” said Sara, founder of Crowdcheck. And for the companies that she works with, it does not generally work for them.

Many believe the SEC should allow pre-emption for securities issued under Tier 2 of RegA+, supporting secondary market trading. The consensus of the committee was that the SEC should act on this recommendation and make secondary trading available for securities issued under Reg A+. Otherwise, small businesses will continue to suffer, and investors will be faced with limited opportunities for liquidity.

The committee also said it would be worthwhile for the SEC to consider harmonizing rules between Reg A+ and crowdfunding offerings to provide more clarity and simplicity for companies that rely on both forms of funding. If a solution to secondary trading is not found, it could limit the amount of money raised under Reg A+ and make it harder for small businesses to get the funding they need to grow. 

Based on the recommendation of the Small Business Capital Formation Advisory Committee, the SEC should allow pre-emption for securities issued under Tier 2 of Reg A+. Pre-emption would enable small businesses to access the capital they need to grow and thrive.

Dawson Russell is the Managing Partner and CEO of Capital Raise Agency, a full-service investor acquisition, and creative agency. Capital Raise Agency has helped over 100 clients build their brands and tell their stories to the right audience, specializing in creative storytelling in the realm of JOBS Act raises such as Reg A+, Regulation D, and S. 

Dawson is excited about the potential RegA+ is poised to unlock for MedTech companies and believes that the partnership with KoreConX is the perfect fit for his company. We were excited to recently sit down with Dawson Russell to talk to him about his thoughts on the industry and what he is looking forward to in the industry’s future.

Q: Why did you become involved in the industry? 

A: This is a part of our story that we always love to tell issuers. This is not an industry that we picked out as a “niche” we were going to market into. We fell into it naturally. I started working with my father’s financial advisory firm for about 16 years. The story goes, I walked in and saw their new marketing materials that were sitting on the conference room table and said, “this is awful.” I didn’t realize they had just dropped a lot of their marketing budget on these new “updated” materials. So my father and his business partner looked at each other and said, “well, fix it then.”

After other advisors and broker-dealers started to see their design and marketing, the agency snowballed by referral. Over ten years ago, the first Reg D offering reached out to us to help them re-brand and tell their story in the broker-dealer and advisor marketplace. We helped them raise $60 million, and since then, we have helped 100+ clients build their brands and tell their stories to the right audience.

Q: What services does your company provide for Reg A offerings? 

A: We are a full-service investor acquisition and creative agency, in that we provide everything from full-scale branding, marketing strategy, audience selection, website design and development, video production, lead generation, social media, email, native ad campaign management, and more. We always tell our issuers that we really want you to see us as the marketing director down the hallway. Even though we are remote, we want it to feel like we are on your team and not just a third-party vendor. If something creative or marketing-related needs to be accomplished, chances are we have done and can do it for our issuers. 

Q: What are your unique areas of expertise? 

A: I believe the most unique area we bring to the table is our creativity in storytelling. It all comes down to how you can tell your story to your prospects and investors creatively and relatively. So our unique ability comes from meeting with our clients and understanding who they are, what they are doing, and why that is important to the investor, and then putting the creative elements in place to tell that story in a captivating way.

Q: What excites you about this industry? 

A: One of the things we love about this industry is how much it feels like all the vendors, from legal to tech, to investor acquisition, to managing broker-dealers, truly feel like we are in this together. It feels more like we are a part of a giant team, all pushing for the same goal; to help our issuers succeed in their journey through the capital raise process. 

Q: What opportunities do you see RegA+ unlocking for MedTech companies? 

A: While we only have a handful of experience with MedTech companies in this space, we have heard an overwhelming, repetitive theme that venture capital firms take so much of a MedTech company that it leaves the founders with hardly any ownership of what they dreamed up and created in the first place. RegA+ unlocks the potential to keep their company in their hands and build a genuine following and investor distribution channel that they can reach out to repeatedly as they grow and need to continue to raise capital. 

Q: How is the partnership with KoreConX the right fit for your company? 

A: We love KoreConX because of the ability it gives an issuer to really brand their entire process from start to finish (from lead to investor) as their own. There are no random KoreConX logos that appear through the investment process, and it makes it such a smooth and easy user experience for the investor from the landing page to opt-in to start the investment process.

This post was originally written by our KorePartners at CrowdCheck. View the original article here. 

The Theranos jury’s fraud convictions of Elizabeth Holmes, former CEO and founder of the now defunct Theranos, Inc., should give pause to startups seeking to build their reputation by touting their relationships with other companies.  In the press to find financing, it can be tempting to use the logos of other companies, especially those that command market attention, to persuade investors to come on board.  In the case of Theranos, Ms. Holmes placed the logos of Pfizer and Schering-Plough on Theranos reports without receiving permission from those companies.  In her testimony, Ms. Holmes stated that she did not mean to deceive investors or business partners.  However, the jury disagreed.  In a Wall Street Journal article, Susanna Stefanek, also known as Juror No. 8, was quoted as saying that the unauthorized use of the logos was “the first smoking gun ….”  “Jury in Elizabeth Holmes Trial Seized on Two ‘Smoking Guns’ to Convict Theranos Found, Juror Says,” Jan. 6, 2022.

Startups should view this as a warning that using the logos of other companies to boost their profile and make their technology, services or products appear more developed than they actually are may be found fraudulent.  Startups and their founders should protect themselves by obtaining written authorization from other companies before displaying their logos for investors, including on their website, campaign page and marketing materials.  Even if a smaller company has a written agreement with a larger company, it is best practice to obtain the larger company’s permission to use its logo.  First, the use of the larger company’s logo may appear to be an endorsement of the startup and its technology, which may exceed the scope of the agreement between the companies.  Second, from the perspective of the larger company, this type of endorsement may cause it to become entangled in any materially misleading statements made by the startup and its founders – a risk assessment management of the larger company may need to undertake before giving authorization.

Further, companies should carefully consider the context in which they use other companies’ logos.  For example, displaying such logos for the purpose of touting certain companies as “potential partners” or “potential customers” might be perceived as misleading in light of the Theranos case.  In that instance, Theranos had engaged in discussions with Pfizer and Schering-Plough, but neither company had further contact with Theranos.  By subsequently adding the logos to the investor materials, Ms. Holmes was viewed by the jury as falsely representing the relationships between the companies.

Although not at issue in the Theranos case, displaying the logos of companies that happen to employ certain people who choose to invest in the startup could also be viewed as misleading.  Unless those investors did so on behalf of their employer, then the investment was made on an individual basis and the startup should not display the employer’s logo.

If Ms. Holmes decides to appeal her case, there is always the possibility that one or more convictions may be overturned.  Until that day, however, companies are on notice and should carefully consider how, when, and in what context, they display the logos of other companies.

This post was originally written by our KorePartners at CrowdCheck. View the original article here. 

For some reason, this issue has been coming up a lot lately. Our usual response to the question “Can non-US issuers make a Reg A or Reg CF offering?” is to point to the rules:

• Rule 251(b)(1) says Reg A can only be used by “an entity organized under the laws of the United States or Canada, or any State, Province, Territory or possession thereof, or the District of Columbia, with its principal place of business in the United States or Canada.”
• Reg CF Rule 100(b) says Reg CF may not be used by any issuer that “is not organized under, and subject to, the laws of a State or territory of the United States or the District of Columbia.”

Slightly different formulations, as you can see, and note that Reg CF doesn’t say that the company needs to have its primary place of business here. But both exclude non-US or Canadian companies.

But we are getting a lot of pushback and “what if?” questions, so here are responses to a few of the most common:

• What if we redomicile to the US? Well ok, that might work for Reg CF. It might work for Reg A too, if your management changes their domicile too (you need a bona fide principal place of business here). However, have you considered the tax consequences in your original home jurisdiction? Also, note that you’ll still need two years audited or reviewed financial statements, in US GAAP and audited or reviewed in accordance with US auditing requirements (US GAAS).
• What if we form a subsidiary and it makes the offering? Yes, you can form a subsidiary here (it’ll have to have its principal place of business here too, for Reg A) and it can raise money under Reg CF. But the money it raises here has to be legit used for the sub’s own purposes. It can’t be upstreamed to the parent, because that would likely make the parent a “co-issuer” that needs to also file a Form C or 1-A and can’t. So the sub needs to be planning to undertake its genuine own business. Even then, if it’s not a new business but just taking over some part of the parent’s business, then the sub might need to produce financials (again, using US GAAP and US GAAS) from the parent’s business or the part of business it’s taking over, because that’s a “predecessor.”
• What if we create a holding company in the US? Yes, although the same issues come up. If using Reg A, you need to move your principal place of business here. For either exemption, the foreign company that is now your subsidiary will be the “predecessor” company and so again we have the need for two years’ audited or reviewed financials using US GAAP and US GAAS.
• What if we create a new company that licenses the foreign company’s product or service? This may be the most promising option, but it’s really going to depend on facts and circumstances. Proceeds of the offering have to be used for the new company’s operations, in the case of Reg A the company’s primary place of business has to be here, and you’ll have to look carefully at whether there are any predecessor issues.

This article was originally written by our KorePartner Jamie Ostrow at CrowdCheck Law. View the original post here. 

If you work with us, you will hear it many times that we strongly advise against financial projections …  as they can get you in trouble. However, companies always seem to want to include projections that start from zero, and grow exponentially. This type of financial projection that is untethered to reality is a primary driver of what will cause investors to sue for being misled because investors expect companies to believe that those projected results are attainable.

One such commonly used financial projection is the hockey stick graph, as in the example below:

CrowdCheck Law’s projected legal revenues. (FYI, the size of the entire global legal market is anticipated for 2026 to be $1.1T)

This example is pure bunk, because this is not the type of service that can grow exponentially. Maybe you believe that your company can achieve these types of results, and we appreciate that potential competitors may have used these types of projections when presenting to the institutional investor market. However, when done correctly, those numbers are reviewed by industry insiders who understand all the assumptions and trends that underlie these charts, along with the factors that will make these projections speculative.

Another common area where companies’ enthusiasm can run afoul of anti-fraud rules is potential market share. While we appreciate your enthusiasm, if you are a guy or a gal in a garage, you probably do not have a rational basis for assuming you will compete with multinational companies and have a 25% market share in the next couple years (or really at all).

A third of the many ways to be sued is absolute statements about future revenues that have conditions over which the company has no control.  For instance, in the Elizabeth Holmes trial (Theranos), one of the two “smoking guns” was financial projections of $40 million a year. Maybe Theranos could have reached those future revenues, but only if the science worked and the FDA cleared the product. Without qualifying statements of future potential revenue with what needs to happen to get there, the company, and Elizabeth Holmes, was found liable.

This is only a small sample of what can get a company sued. The universe of possibilities is only limited by the fury of disgruntled investors.

This article was written by Erin Holloway, KorePartner from Prime Trust. It was originally published on Crowdfund Insider, view the original article here.

Investment crowdfunding took off when the JOBS Act regulation went into effect back in 2016 and has become a booming industry in short order. We saw some significant regulatory changes in March of this year, with the Securities and Exchange Commission (SEC) confirming capital formation increases for Reg A+ and Reg CF. These increases solidified just how impactful this type of crowdfunding can be.

Equity crowdfunding has garnered trust and legitimacy from issuers, investors, broker-dealers, transfer agents, and lawyers—and raised $239 million via Reg CF and $1.6 billion via Reg A+ in the first half of 2021. Today, there’s nearly $800 million invested across 64 FINRA-licensed Reg CF funding portals.

As the new generation of investors is looking for high growth and quick yield, they are increasingly unwilling to wait for value stocks and dividends to slowly build. The diverse investment opportunities that crowdfunding offers are exactly what these investors are looking for as they develop their portfolios.

These numbers are impossible to ignore: equity crowdfunding is here to say. But what comes next for this exciting space?

Here are three key equity crowdfunding trends that we anticipate to thrive in 2022 based on our work helping crowdfunding platforms and portals raise game-changing capital online.

Significant, positive economic ripple effects from equity crowdfunding

When it comes down to it, what 2020 and 2021 have clearly shown us is that investors want to participate in and support small businesses.

At my firm, we’ve seen 4,000+ issuers to date, including startups, small businesses, and medium-sized businesses. These SMEs are choosing equity crowdfunding instead of traditional, bank-led financing because they can control their offering and financing needs. No longer beholden to the mercy of a single small business banker with specific credit appetites, or a venture capital firm with narrow funding parameters, these entrepreneurs are now in the driver’s seat and their customers and supporters are riding shotgun alongside them.

Currently, the top five industries for issuers are software, distilleries and breweries, restaurants, internet and e-commerce, and movies, according to research from Crowdfund Capital Advisors. Ironically, all industries are significantly impacted by COVID. But investors in these spaces are eager to participate in crowdfunding for their favorite businesses, and in 2020 venture capital was particularly difficult to come by. The world watched as so many of our favorite restaurants, venues, and small businesses closed because they didn’t have the financial ability to stay afloat. But equity crowdfunding presents a chance for those businesses to get back in the game.

As we forge ahead into 2022, the impact of equity crowdfunding for COVID-affected small businesses will play out with positive ramifications in local economies by creating not only capital for businesses, but creating jobs as well.

Many types of businesses are being served by equity crowdfunding, meaning there is innovation across industries and greater competition—which in turn means more options for consumers and new jobs being created.

Ultimately, 120,000 local jobs have been created so far in 2021 as a result of successful Reg CF offerings, reported Crowdfund Capital Advisors. These salaries support government taxes, consumer spending, savings, and more. They’re supporting our communities and keeping food on our neighbors’ tables.

The rise of ATS

ATSs, or alternative trading systems, aren’t new. These are broker-dealers that have filed under Reg ATS to provide an electronic marketplace that creates an order book and matches sellers with buyers. ATSs have been around for a while, but are getting a renewed sense of interest—one we anticipate will carry well into 2022 and beyond.

ATSs, like tZERO ATS and StartEngine Secondary, enable investors to continue supporting issuing companies by giving them opportunities for liquidity. They’re the logical next step and the future of the crowdfunding industry.

The idea that you can invest from your phone while wearing your pajamas through a six-step widget is compelling for investors. ATSs offer a way for investors to stay in the investment ecosystem, liquidate their assets at a reasonable point, and reinvest as they choose. They open up the opportunities traditionally reserved for institutional investors to everyone.

What we are seeing is a cycle that benefits all parties. The ability to liquidate private securities increases the appeal of buying private securities. ATSs provide the financial breathing room that investors want to more easily buy and sell non-listed securities. In the same manner that one does trades with a large exchange, the secondary market is providing easier than ever access to investors who want to move in and out of private equity.

The industry has more support than ever from regulators, and we’re seeing a huge influx of interest to facilitate the ATS process. This will absolutely be a space to watch in 2022.

Accessible crowdfunding for all

At this moment, we’re defining the financial future — and that future needs to include more accessibility.

As we move into 2022, the equity crowdfunding industry will continue to build a foundation for underserved people to gain access to the financial system in terms of meaningful investments. Anyone—regardless of social status or annual income—should be able to begin investing in companies that hold meaning for them. It’s about radical accessibility and execution. Looking to the future, we’re building a system that allows for more equal access for both the issuer and the investor.

Whereas only 1.2 percent of the venture capital invested in U.S. startups in H1 2021 went to Black founders, and just 2.3 percent to women in 2020, women and people of color make up 40 percent of issuers using Reg CF.

These numbers point to a gap of businesses not receiving capital and offer incredible insight into the power of crowdfunding and the hope it can provide. We hope to see that 40 percent figure grows in 2022.

Final Thoughts

As an industry, we have a duty to provide a service and product to an underserved market of people that may otherwise never gain access to these opportunities. We have great hope for the future and in 2022, we believe we’ll see equity crowdfunding have a positive impact on the economy and the job market. We’ll continue working to make the world of finance and crowdfunding more accessible to all. And ATSs will play a huge role.

Is it only ATSs? Absolutely not. ATSs are just one of the possibilities to keep growing and offering new solutions that benefit all the parties involved in equity crowdfunding. It’s so important that we continue to be innovative and pioneers in this space. Push boundaries. Knock on doors.

As members of this industry, the onus is on all of us to continue pushing into new frontiers so that we can be better and do better—for ourselves, for our industry, and for our communities.

When companies begin the capital raising journey, it is no longer about going public or simply getting a company’s product in front of venture capitalists. To be successful in our current capital raising landscape with Regulations A+ and CF, organizations must build a community of investors. This not only brings life to your business, but companies are also now able to leverage this network to find success in capital raising activities. 

A Different Spin on Community

One of the most valuable parts of Regulation Crowdfunding and capital raising with Regulation A+ is that you can talk about your offering everywhere instead of keeping information confidential. This one fact has made building a community of investors vital to all companies looking to raise capital. RegCF platforms like WeFunder allows companies to raise millions of dollars by getting the investment opportunity in front of potential investors. Because of the many investors that can be brought and board and told about your investment opportunities, investment crowdfunding is not just an excellent way to raise capital but a way to build an army of brand ambassadors and customers.

Instead of just offering a means for investment, JOBS Act crowdfunding regulations create a new way to take investors on the journey of building your company. Regulations like A and CF provide a way to tap into customers who already care about your brand and bring them on the capital raising journey by making them part of your team as investors. Fostering this relationship with customers and investors is perhaps one of the most important things a company can do.

Creating a Crowd of Investors

While creating a crowd of investors can seem daunting, especially for smaller, less-established businesses, the crowdfunding journey starts from within. Start with your personal network and try to gain momentum there. Not only are you gaining investors, but if your offering doesn’t stick with your inner circle, then it probably needs some refinement before a larger community of potential investors accepts it. Many crowdfunding offerings have a lead investor who helps negotiate the terms of the offering and put their own money in the deal to ensure your valuation is in a place that will attract investors, not deter them. 

By offering a compelling opportunity and being open and honest with the customer and potential investors, you can begin building the community that will help you reach your capital-raising goals. While your inner circle is a great place to start with your capital raising effort, you also need to have a balanced mix of investors for potential success.

Channeling Investors 

There are a variety of different capital-raising regulations which utilize community building in various ways. Regulation CF offers lots of capital raising upside for those who leverage communities with the ability to publicly promote and get the word out about your investment to attract a larger community of potential investors. With Reg A+, issuers can raise up to $75 million through a similar crowd of accredited and nonaccredited investors. However, this comes with a lot of responsibility. Issuers must know how to nurture these relationships beyond just investing money. It is a privilege to allow these investors to invest in a company, something which must be remembered when building communities.

This need for the community makes things like media attention less of a metric to measure success on. You can put a campaign in front of a large audience, but without the support of a community and the drive of a fascinating company, it will not necessarily succeed. By building your community of investors, you can better capitalize on capital raising and brand awareness opportunities.

Whether you’ve raised capital in the past or are preparing for your first round, being properly prepared will help your company secure the funding it needs. Proper preparation will make investors confident that you are ready for their investments and have a foundation in place for the growth and development of your company. So if you’re looking to raise money, what must you do to be ready for raising capital?

From the start, any company should keep track of shareholders in its capitalization table (commonly referred to as the cap table). Even if you have not yet raised any funds, equity distributed amongst founders and key team members should be accurately recorded. With this information kept up-to-date and readily available, negotiations with investors will be smoother, as it will be clear how much equity can be given to potential shareholders. If this information is unclear, deals will likely come with frustrations and delays.

Researching and having knowledge of each investor type will also help prepare your company to raise money. Will an angel investor, venture capital firm, crowdfunding, or other investment method be suited best for the money that is being raised? Having a clear answer to this question will help you better understand the investors you’re trying to reach and will help you prepare a backup option if needed.

Once your target investors have been decided and you have a firm grasp on the equity you’re able to offer, preparing to pitch your company to them will be a key step. Having a pitch deck containing information relevant to your company and its industry will allow you to convince investors why your business is worth investing in. Additionally, preparing for any questions that they may ask will ensure investors that you are knowledgeable and have done the research to tackle difficult problems.

Before committing to raising capital, you should make sure that your company has an established business model. Investors want to see that you have a market for your product and are progressing. If investors are not confident that the product you’re marketing has a demand, it will be less likely they will invest. Investors will also want proof that the company is heading in the right direction and the money they invest will help it get there faster.

Once you have determined that your company is ready for investors, managing the investments and issuing securities will be essential. To streamline the process and keep all necessary documents in one location, KoreConX’s all-in-one platform allows companies to manage the investment process and give investors access to their securities and a secondary market after the funding is completed. With cap table management, the all-in-one platform will help companies keep track of shareholders and is updated in real-time, ensuring accuracy as securities are sold.

Ensuring that your company has prepared before raising capital will help the process go smoothly, with fewer headaches and frustrations than if you went into it unprepared. Investors want to know that their money is going to the right place, so allowing them to be confident in their investments will ensure your company gets the funding that it needs to be a success.

Rule 12(g) is a crucial rule that affects all issuers, but many issuers don’t start with it in mind. The rule began with the 1934 Exchange Act, and it states the threshold at when an issuer must register securities with the SEC. Read further to learn what rule 12(g) does and why it’s essential.

What is Rule 12(g)?

Section 12(g) of the 1934 Securities Exchange Act was updated alongside the JOBS Act. These amendments, including 12(g)-1 through 12(g)-4 and 12h-3, govern registration and reporting by private companies that have issued equity securities. 

These JOBS Act amendments resulted in issuers that are not a bank, bank holding, or savings and loan companies no longer needing to register if they did not exceed certain investor threshold rules. This includes:

• Companies with less than $10 million in assets; and
• when securities are ‘held of record’ by less than 2,000 individuals or 500 non-accredited investors

However, for companies using Regulation A+ and complying with ongoing reporting requirements, issuers under RegA+ don’t count towards the shareholder limits imposed by rule 12(g).

Why is this Important to issuers?

Before the JOBS Act, the private capital market was a different landscape. With Reg A+ and Reg CF, securities have become available to a larger audience of investors than ever without an IPO. With vast improvements to the potential for raising capital, private companies sought a way to circumvent 12(g) to remain unregistered with the SEC, based on the number of investors. JOBS Act exemptions like Reg D don’t fall under this exemption from registration. However, since Reg D primarily attracts larger investors, this is typically of less concern to issuers.

Understanding rule 12(g) and exemption from shareholder thresholds are essential for issuers to avoid registering their securities with the SEC. Especially as RegA+ allows companies to attract increasing numbers of private investors, these limits are not conducive to raising capital in this fashion. 

For many pre-revenue companies, especially started by first-time entrepreneurs, capital comes from sources like personal savings, credit card debt, friends, or family. However, when it comes to raising a significant amount of capital for growth, they might not have the market validation needed to secure funding from traditional sources. With Regulation A+ equity crowdfunding, these companies can realize incredible access to capital, in turn helping the company grow so that it can create jobs and return money back into local economies. Since passing as part of the JOBS Act in 2012, Reg A+ has raised billions, assisting pre-revenue companies in reaching their business goals while scaling their company for the future.

Raise Millions as a Pre-Revenue Company with Reg A+

RegA+ can help pre-revenue companies raise up to $75 million from accredited and unaccredited investors. This is powerful because it allows smaller companies to leverage their loyal fans to raise capital and make these loyal followers part of your company as investors. This has expanded opportunities for many private companies by allowing them to raise millions in capital while keeping control of significant decisions.

One of these opportunities is a larger pool of investors that can be tapped with Reg A+. Pre-revenue companies can often find it challenging to raise money from venture capital or private equity, so raising money from a wider assortment of investors can be helpful. Reg A+ allows companies to keep control of major decisions, helping pre-revenue companies remain competitive and flexible while keeping to their vision of company operations.

Reg A+ makes it more accessible than ever to raise capital for your organization by allowing a company to raise capital without going public. This means that the company can avoid the costs and regulatory requirements of being publicly traded while accessing similar benefits. Plus, investors under Reg A+ are still protected by the transparency and compliance requirements, giving them confidence in their ability to invest and help pre-revenue companies scale their company in a way they may not have been able to if faced with the hurdles of going public.

Increasing the Amount of Successful Capital Raises 

A pre-revenue company is typically in the early stages of development and hasn’t generated any revenue yet. This means the company is at a higher risk of failure since it has yet to establish a track record of success. For this reason, other capital raising methods such as angel investing and venture capital might be impractical for pre-revenue companies. RegA+ is an excellent way for pre-revenue companies to raise capital because the cost of compliance is considerably less.

Plus, companies raising capital through Regulation A+ can also attract investors by offering liquidity options through a secondary market. Unlike traditional private investments, where the only chance of a return is when the company goes public or has an exit, a secondary market allows investors to monetize their investments if there is interest in the shares so they can sell. This is a compelling possibility for investors that pre-revenue companies should utilize when constructing their offering. 

A company looking to raise money through Reg A+ must first file a Form 1-A with the SEC. This document includes important information about the company, including its business plan and financial projections. After filing form 1-A, the company will need to wait for SEC approval. This can take months, and this is a great time to focus on your community and prime potential investors. Once the SEC has approved the company’s filing, it will be able to start raising money from investors. 

Finding the right investors and investment opportunities can be difficult as a pre-revenue company. However, with Reg A+, you can increase your potential for capital raising success. Reg A+ allows companies to offer securities to the general public and accredited investors, widening the pool of potential investors.

This post was originally written by our KorePartners at Capital Raise Agency. View the original post here.

There are a lot of questions we get from potential clients or people that hire us for consulting on their fund around Reg A offerings but one of the main ones is what type of fund should I use to raise capital for my offering?

It really depends on a couple of things;

1. The amount you are wanting to raise
2. How you want to raise it (broker dealer channel, RIAs, high net-worth individuals, etc)
3. Do you want to do general solicitation? (advertise to non-accredited investors)

The answers to these questions really will help determine if you should do a 506c offering, Reg CF, or Reg A (or Reg A+).

If you want to raise less than $5,000,000 a Reg CF is probably the best option for you – however, if you want to raise more than $50mm a Reg A or Reg A+ is going to be the best fit.

Our personal favorite for the larger raise is the Reg A or Reg A+ because it allows you to market to non-accredited investors, and run ads, and do creative marketing campaigns that is often not allowed through your normal Reg D or Private Placement offering.

If you have already started the process of building out your Reg A or Reg A+ offering you can contact us for a quick brand audit, where we just check and see how everything is looking and give honest feedback on what you need to adjust or update going forward.

Reg A offerings allow people to go out and raise capital that use to only be seen by the big players.

If you have a dream and an idea that requires capital; a Reg A offering is a great place to start.

With the recent launch of the KoreConX all-in-one platform, KoreConX is happy to feature the partners contributing to its ecosystem. 

Companies are burdened by high costs when raising capital through traditional public routes. In the private markets, raising capital in inefficient yet undiscovered markets is vital for newer industries to connect their investment opportunity with compatible investors.

Intro-act realizes that Wall Street resources overly cover large pensions, mutual funds, and hedge funds. At the same time, many family offices and RIAs do not have access to or are unwilling to spend a large amount of money needed to garner attention from more prominent brokers. Intro-act specializes in connecting compatible investors with various markets like SPACs, health care, industrials, finance, technology, consumer services, and energy to provide investors with monthly trackers and weekly newsletters in multiple industries to ensure investors and companies are on the same page. Some segments include AI, IoT, telemedicine, 3D printing, and cryptocurrencies.

Intro-act’s wide range of clients is connected with capital through three steps. Intro-acts identifies compatible investors, then educates them through research and access events, and finally engages with investors that engage the content. Intro-act clients are typically “diamonds in the rough” and are found by starting in the right mine. For Intro-act, this means mapping segments of each emerging industry that requires the latest capital and will soon become a focus of broker-dealers. The firm has found RegA+ offerings to be great starting places to identify these progressive industries and companies.

Through the JOBS Act exemptions, private companies can access a wider pool of potential investors to fund their business ventures. With many diverse investor types available, it is essential to know who they are and how they work to reap their benefits. Here is our breakdown of the different investment types and their fit into the market.

Non-Accredited Investors: A non-accredited investor is anyone who does not meet income or net worth requirements stipulated by the SEC. These investors have a net worth of less than $1 million and make less than $200,000 annually. The term is also usually used interchangeably with “retail investor.” These investors are the majority of Americans, meaning that far more non-accredited investors exist than accredited ones. Non-accredited investors can participate in private markets, but there are some restrictions. Private companies can only have 35 non-accredited investors who can provide funding under Regulation D, for example. In addition, raises through RegA+ and RegCF limit the amount non-accredited investors can invest within a 12-month period.

Accredited Investors: An accredited investor is an individual or business that can invest in private securities not registered with the SEC. These individuals or entities must meet net worth guidelines to qualify, allowing accredited investors to invest in unregistered securities because they have been deemed to have the financial knowledge (and can take on the financial risk) to do so without SEC protection. In 2020 it was estimated there were 13,665,475 accredited investor households in America.

Angel Investors: These investors fund private startup companies in exchange for a piece of their business, often royalties or equity. Angel investors can be accredited or non-accredited if they have a high enough net worth or income. Angel investors can be business professionals, company executives, or even retail investors. Angel investors often invest while a company is still in its seed phase and contribution levels can vary significantly based on the company. There were around 334,680 angel investors and $25.3 billion funded by them in 2020.

Venture Capital: Venture capital investors, often known as VC, provide a large amount of capital to private companies in exchange for an equity stake in the venture. They often target companies with high growth potential. Typically, venture capital firms manage investments into companies in their early stages in exchange for equity and say in company decisions. In 2020, more than 10,000 companies received funding from nearly 2,000 VC firms that manage $548 billion in assets.

Family Office: A family office is an advisory firm that caters to high-net-worth individuals and can be either single or multi-family. Family offices provide wealth management, planning, and other comprehensive services, providing a broad spectrum of options. Because they are unregistered, data on family offices is often challenging to come by. Still, trends suggest that they have a growing ability to make substantial investments on par with large companies and private equity.

Qualified Institutional Buyer: Sometimes called a QIB, a qualified institutional investor is a security purchaser that regulators legally recognize as requiring less protection than most public investors. Large QIBs own a minimum of $100 million of securities, not counting those issued by affiliates. This threshold is less for registered broker-dealers at $10 million, and banks need $25 million to be considered a QIB. The SEC allows only QIBs to trade restricted and controlled securities under rule 144A.

Institutional Investors: Often organizations or companies, institutional investors buy and sell with others money in blocks of bonds, stocks, and other securities. Mutual funds, hedge funds, and endowments are examples of institutional investors in the market. Because of their ability to invest the money of others in large quantities, institutional investors are one of the primary funders of private companies. The only type of investor that can officially call itself institutional files a 13F with SEC.

Private Equity: Private equity is an alternative investment class consisting of capital not listed on public markets. Investing funds directly into private companies, these private equity funds consist of limited partners who own 99% of fund shares and general partners who own 1%. Private equity can come in several forms, like venture capital and leveraged buyouts.

For many, an issue with cryptocurrency is the intense volatility that persists. For example, the prices of Bitcoin hit a record high on October 20th before dropping over $6,000 in value per coin. Because of this volatility, it is not helpful for everyday use and makes some wary about their investments being tied to such a volatile asset. However, there is an alternative; the stable coin.

Unlike cryptocurrencies like Bitcoin, stable coins are stabilized by being backed by the US dollar or a commodity like gold. This price stability is a feature many cryptocurrencies lack. Stable coins are, therefore, more suitable for everyday use or even applications like issuing securities through Regulation A+ exemptions.

RegA+ is highly protected by compliance actives, broker-dealers, the SEC, filings, etc. The uncertainty behind a stable coin for RegA+ goes away because there is transparency and allows people to transact more efficiently with these assets. When it comes to RegA+ and stable coins, the security is pegged to a stable coin created with a smart contract to ensure stability from a technology perspective. With stable coins, especially those received when investing in a company, shareholders can use them in secondary market transactions that are FINRA-registered and fully compliant with securities regulations.

Still, stable coins are largely in their infancy. There will continue to be developments as to what types of assets or currency they are backed by. Because it is stable, it will have a far more practical use when compared to other cryptocurrencies. However, the main thing is that the infrastructure and engineering for stable coins already exists; it’s more of a matter of how quickly their use grows.

Through the JOBS Act, issuers can access new sources of capital to fund their business, create jobs, and provide new investment opportunities for everyday investors. Through the legislation, there are various options to choose from depending on which type of raise is best for a particular company. These different modes of fundraising are referred to as Title II, Title III, and Title IV crowdfunding. 

Title II Crowdfunding

Through Regulation D, Rule 506(c), issuers can conduct what is referred to as Title II crowdfunding. This offering places no maximum limit on the amount raised, but only accredited investors can invest in Title II offerings. Similarly, there is no limit placed on individual investors. The process is to launch this type of offering is typically very quick, requiring no audited financial statements. However, there is a maximum of 2,000 shareholders placed on these offerings. Issuers can sell Title II offerings through a regulated portal, but it is not a requirement for shares to be sold. 

Title III Crowdfunding

Title III crowdfunding is most commonly referred to as Regulation CF (Reg CF). In these offerings, issuers can raise up to $5 million every 12 months from non-accredited and accredited investors. For non-accredited investors, they are limited to investments of $2,200 or 5% of the greater of their annual income or net worth. Accredited investors face no such limitations. These issuances must be sold through an online crowdfunding platform. Similarly, the process from start to having a live offering is pretty fast.

Title IV Crowdfunding

Title IV Crowdfunding often goes by its more well-known name, Regulation A+. Of the three options for crowdfunding, Reg A+ allows companies to raise the most, up to $75 million every 12 months. Just like Reg CF, investors can be either accredited or non-accredited. For non-accredited investors, they are limited to the greater of 10% of their annual income or net worth. Accredited investors have no limitations as to the amount they can invest in these offerings. The cost to launch a Reg A+ offering is more than that of Reg D or Reg CF, but far less than a traditional IPO and allows company leaders to retain more control over their company than traditional venture capital or private equity routes.

The Similarities

While the differences are listed above, there are some similarities between each crowdfunding option. All three allow issuers to “test the waters,” which means that they can test the market themselves to see if there is enough investor interest in the raise. All three options allow non-US investors to participate as well and can use a portal for the offering. 

Additionally, neither Reg A+ nor Reg CF offerings limit the number of investors an issuer can have.

Depending on where your company is in its life cycle, there are various options available to raising capital. It is even possible for raises like Reg D or Reg CF to serve as a stepping stone for later Reg A+ raises. If going this route, the less expensive raises can help raise the necessary capital to afford the various costs associated with Reg A+ raises. 

For more information, KorePartner Mark Roderick from Lex Nova Law shared a very helpful guide to the differences (and similarities) between these different forms of raising capital. 

When it comes to supporting a business, whether public or private, there are many ways to go about accomplishing it. There is the public stock market, common knowledge for anyone in the United States, and a central component in many discussions about the economy, and there is the private market. The private market was opened to everyday people through the JOBS Act in 2012 and its subsequent updates, allowing more and more people to invest without being accredited investors.

Although there are many ways to support a business, there is a difference between being a shareholder and an investor. There are cases in which a person can be both. This can best be described by a square being a rectangle, but not all rectangles are squares. A shareholder, in general, is an investor, as they are looking for their investment in their share of the company to grant them a financial gain. But, by this logic, an investor is not always a shareholder, as they can invest in a company and not gain shares. 

The difference has to do with the relationship between the person or entity who invests in a company. For instance, a share represents ownership of the company. The amount of ownership is dependent on how many shares are owned by the individual. The owner of a share is always invested in the company, as the financial gain that this stock represents is dependent on the company’s success or failure. The relationship between a shareholder and company also establishes rights for that shareholder to vote in meetings and the right to inspect documents, within a reasonable limit, among other rights depending on the share and company. This relationship is regulated by the United States Securities and Exchange Commission (SEC) to protect the rights of the shareholder and make sure that these owners of stock can exercise them. 

In this regard, an investor invests money into a company without the exchange of shares. The investor can lend money to a company that can be returned in the form of securities. However, they can remain just an investor by not receiving shares and receiving something like a bond that represents the loan. Both parties are independently regulated by the SEC, but the relationship does not guarantee shareholder rights. The relationship between an investor, like a venture capital firm, angel investor, or a private equity firm, and the corporation is determined between the two parties. 

Though it is subtle, and the terms investor and shareholder are often used interchangeably, there is still a difference between them. It has to do with the relationship between the two parties involved and how they handle the financial relationship.  

With the recent launch of the KoreConX all-in-one platform, KoreConX is happy to feature the partners contributing to its ecosystem.

As an investment banker, attorney, securities analyst, entrepreneur, and consultant, Sean Levine has a wealth of experience in the private capital markets. He began his career as a lawyer, and subsequently worked with a broker-dealer until the financial crisis, earning four securities licenses during that period. Sean then transitioned to the financial publishing industry, serving as the director of research at a large publishing house. In his last year in that role, the company had launched a newsletter on private deals as Regulation A and CF grew more popular, generating massive interest from retail investors. 

In 2019, Sean became affiliated with Entoro. At that point, Entoro had created a listing site for Regulation D 506(c) offerings that resembles a crowdfunding portal’s listing page. In part due to Sean’s leadership, the firm has since grown its practice to include Regulation A and CF clients, as well. In addition to the fact that few broker-dealers have a network of thousands of accredited investors to market their offerings, Entoro plugs its issuers into unmatched retail distribution through its ecosystem partners. The team also provides issuers access to OfferBoard, the company’s listing platform, and manages compliance efforts including KYC-AML. In addition, Entoro operates Clear Rating, a third-party valuation service that helps companies and investors understand the value of their investments. Lastly, they have established a network of preferred service providers especially suited to these exemptions, as many attorneys and other relevant professionals don’t have a comprehensive knowledge of Regulation A or CF. Entoro is registered in all 50 states and the District of Columbia.

Being a banker (recently earning a fifth securities license) and an attorney, Sean has the expert knowledge to efficiently navigate the complexities of capital raising. With the continued growth of investment opportunities through exemptions like Regulation A and CF, Sean is excited about the benefits to everyday investors. He said: “It’s sad that regular investors feel that the industry is so against them. These kinds of deals, A and CF, are a huge opportunity for regular investors to get in before it gets to [the point of an IPO].”

In working with KoreConX, Sean has seen how the company’s investor funnel streamlines the process. Plus, in some instances, it is more beneficial for issuers to offer their securities through a standalone platform, which is where KoreConX comes in. 

When it comes to raising capital for your business, there is some confusion between rules in the United States and Canada. Can Canadian companies file for Regulation A+ like a United States company? Yes, but with some important caveats. The important thing that separates the two North American countries are some simple but distinct differences in securities law.

With the 2012 JOBS Act (and its subsequent additions), Rule 251(b)(1) says Regulation A can only be used by: “an entity organized under the laws of the United States or Canada, or any State, Province, Territory or possession thereof, or the District of Columbia, with its principal place of business in the United States or Canada.” The United States, through the SEC regulation, has allowed Canadian companies to file the same as US companies, but the rules of law in Canada still apply. You have to follow the rules established by the SEC or any federal law, as there are significant ramifications if you are not compliant.

Broker-Dealers

The best thing about having a broker-dealer is that they can act as an insurance policy. Some companies expect that they can handle the offerings for a Reg A+ on their own, which is possible, but it will ultimately end up costing you more money in the end. This means that for several states in the US, you have to be a FINRA licensed broker-dealer, who is registered as a broker-dealer in that state, to sell securities. If you ignore this rule, it only takes one complaint to have a state securities regulator coming down on you.

Essentially if this were to happen, you would need to give all the money raised back and pay a fine, but most importantly, they would bar you from ever raising capital in that state. Now, as a bad actor in one state, you may not be able to raise capital in any state. There are huge repercussions to doing this wrong when you can pay a broker-dealer to handle this for you. This is the same for a US company as well as a Canadian company.

The beauty of the SEC and FINRA is that it forces transparency and accountability. While this is a safeguard for the investors more than for the company, it is still an important step to doing this process correctly.

Lawyers

As the system is created, in the United States, a lawyer can practice law in a state and federal law in all 50 states without needing a license in each state. However, if a US lawyer is licensed to practice in Florida, they cannot give legal advice in another state about state law. Instead, you would have to involve a licensed lawyer from that state if issues arise there. The difference here is that in Canada, this is not the same. If you have a lawyer in Alberta, they cannot provide you with advice in British Columbia or Ontario.

Securities

One of the many differences between the United States and Canada is the number of citizens. Within the US, the current population is nearly 333 million. In contrast, the Canadian population is just over 38 million. When you raise capital through Reg A+, you want to have access to as many potential investors as possible. You will most likely end up spending the same amount of money in either country, as the Reg A+ laws make it easier to file than it used to in the US.

The main difference you will see is in the rules about offering to US citizens and Canadian citizens. The American investor can freely trade securities in a secondary market, while the Canadian investor can do nothing but hold it. The primary raise is one set of laws, but the secondary rules in Canada are different.

Auditing

When it comes to Reg A+, the financials of a company need to be audited before filing and they need to qualify. First, an important note is every company attempting a Reg A+ needs two years of audited financials if they’ve been in business for two years. If they’ve been in business one year, they need one year. Even if they are a startup, they still need to provide audited financial statements, even if there is not much to show. The difference here comes from the agency they can file with. In the United States, it is US GAAP and US GAAS. In Canada, they have the option of using IFRS.

When it comes to raising capital in either jurisdiction, there are notable differences in securities laws that need to be met. Whether you are a US or Canadian company looking to use the exemptions like Regulation A+, building a team of experienced broker-dealer and legal partners will ensure a successful and compliant capital raise.

With the recent launch of the KoreConX all-in-one platform, KoreConX is happy to feature the partners that contribute to its ecosystem.

For over two decades, Douglas Ruark has been involved in the corporate finance world specifically focused on SEC-exempt securities offerings.  In 1992, he co-founded Heritage Financial, a company specializing in sourcing commercial real estate and corporate debt financing for commercial borrowers, which later merged with the investment banking firm InvestCap Partners in 1994. Five years later, Douglas served as the primary founder of Regulation D Resources, a company founded to advise corporate clients on the preparation and execution of Regulation D private placement offerings. Since the company’s formation in 1999, Regulation D Resources has provided advisory services for over 5,000 securities offerings. The company currently provides securities preparation and execution services for Regulation D, Regulation CF, and Regulation A+ exempt offerings.

Douglas and his expert team work with their clients to structure the offering, draft offering documents and SEC filings, advise on key metrics, and in Regulation A+ offerings convert and submit such filings for SEC qualification.  The Regulation D Resources team also provides compliance support once the client is ready to market their offering to ensure the client is properly supported through the close of the offering. The firm handles offering clients across a wide array of industries including real estate (which is one of the top sectors they work with), energy, technology, and manufacturing. 

One of the factors setting Douglas and Regulation D Resources apart is the 22 years of experience in the securities industry, an unblemished compliance track record, and the significant transactional experience developed in that timeframe.  Beyond his experience, Douglas is genuinely excited to be in this space. He says: “I love seeing what entrepreneurs have developed. The fun deals are companies that have developed technology that can have a big impact on an industry or be a game-changer.  Assisting them in raising funding to advance their dream and capitalize future corporate success is truly rewarding.”   

Douglas enjoys his partnership with KoreConX, sharing the same drive and vision regarding the application of technology to streamline processes. In addition, the responsiveness of the KoreConX team, he feels, has been great.  As soon as he was interested in learning more about the KoreConX platform, “Oscar reached out and set up a call introducing the services.  We instantly connected as our firm’s focus has been furthering the ability of small and medium-sized companies to access private capital and democratizing that access via SEC-exempt offerings.  Oscar’s work in streamlining processes and keeping costs contained for entrepreneurs aligned perfectly with the mission at Regulation D Resources.”  

In recent years we have seen exponential growth in the issuance of private capital to companies in the US, nearly doubling the amount of money raised by public companies through Initial Public Offerings. The private capital market has dramatically changed in the last ten years as more investors have entered the playing field. This shift was made possible by the 2012 JOBS Act (which has recently expanded) and significantly impacted the private investment market.

Previously, before the Jumpstart Our Business Startups Act (JOBS Act), it was more challenging to raise capital as a private company, as there were fewer overall players in the market. It was mostly limited to venture capital firms, wealthy investors, and hedge funds. However, this is no longer the case as the barrier for entry for investment into private companies has been lowered and allows lower-wealth individuals to invest a percentage of their income. 

Now, with the JOBS act adding in options like Regulation A+ and Regulation CF, a private company can raise close to $80 million in 12 months without having to enter the public market. With Regulation CF, anyone can invest in the offering. No longer is it an opportunity limited to wealthy participants. Investors with either a net worth or annual income less than $107,000 can invest $2,200 or 5% of the greater of their annual income or net worth into RegCF offerings. 

While the $5 million that a company can raise from this investment opportunity may not seem like much in the grand scheme things (Regulation A+ allows up to $75 million), this new rule has opened the floodgates to new investors and new capital for the private market. In 2020, 358,000 investors participated in Reg CF campaigns. That is 358,000 people that have added their money into the private capital market, which if each person invested only invested $2,200, that means there was $787 million added to the private market. That is significant.

For companies that are scaling fast, staying private longer is an advantage as they can spend more time increasing their valuation and their eventual share price if they were to go public. By raising this private capital, they are not only proving the concept is viable and that there is a market for what they are selling, but they are also able to operate without the same scrutiny as public companies. They will have to open up their books and meetings to the private investors as that is their right, but it is certainly less intrusive or time-consuming. 

Focusing on your business as you scale and grow is an incredible advantage for you as a business owner and your investors. The more valuable your company is by the time you go public, the better it will be for your investors. So, if you weigh the options for capital raising options, don’t forget that there is a thriving private market. 

When it comes to business executives with acronyms, there are a few that come to mind fairly quickly: CEO (Chief Executive Officer), COO (Chief Operations Officer), and CFO (Chief Financial Officer). These are the well-known names, but there is one that has as recently as 2000 entered the business executive lexicon outside of the heavily regulated industries, like healthcare and financial services, and that is the CCO (Chief Compliance Officer). Historically, there are two reasons for a CCO to be a part of your business: Government regulations or security regulations. It is the role of the COO to lead their compliance officers in managing compliance risk so the business passes audits by the government or security audits.

The CCO role is generally on the executive level and who they report to is up to the company, but they play a very important role in the health of the company. They evaluate the company’s compliance issues and take steps to ensure that they do not become long-term problems. The CCO learns the laws and regulations that govern the company, which is essential as increases in regulations have made it necessary for an executive with a sophisticated skillset, so the rest of the company can focus on the business. The role of the CCO differs between public and private companies.

Many public companies (i.e. traded on the stock market) following the scandals of Enron and WorldCom in the early 2000s and the Sarbanes-Oxley Act of 2002, created a position for a CCO and filled it. Basically, the United States Government required businesses to have a Chief Compliance Officer so that the companies would be compliant with the law the SEC created to regulate accounting in public businesses. 

In a private company, it is more likely that a CCO will be acting to prepare and manage the acquisition of security clearances like SOC 2 or ISO 27001. Security clearances are incredibly important to businesses looking to expand into servicing industries with sensitive material that require higher levels of security. For the CCO, Something like SOC 2 would be on their to-do list; they would create policies and manage the processes needed to pass the AICPA’s (American Institute of CPAs) Trust Service Criteria of Security, Availability, Confidentiality, and Privacy. This ensures that the consumer’s information is protected while still being available to use and disposed of properly. 

At the same time, CCOs for private companies must also ensure that if choosing to raise money, they meet all SEC requirements for their raise. Choosing to use financing methods such as Regulation A, Regulation CF, or Regulation D requires that companies follow the requirements set by the SEC, such as enforcing investor limits and ensuring that Blue Sky laws are met in each state the raise is taking place. Failure to comply with regulations can result in severe penalties and may require the company to refund investors.

Whether you are a part of a public or private company, a Chief Compliance Officer is a valuable part of your team. They are focused on making sure the company is compliant with compliance, government, or security regulations so the rest of the company can focus on their day-to-day functions without worry.

KoreConX is proud to announce the upcoming KoreSummit event, “There is a Market for Your Private Securities.” The event, co-hosted with Rialto Markets, CrowdCheck, and Fintech.TV continues our mission of powering private markets with a half-day event dedicated to enhancing education on the availability and potential of the secondary market for private companies.

On Wednesday, June 9, 2021, join KoreConX, Rialto Markets, CrowdCheck, and other KorePartners to learn everything you need to know about a secondary market for private companies. Kicking off at 12:30 PM EST, the event begins with keynote speaker David Weild IV, Father of the JOBS Act. 

The opening session is followed by five panels featuring industry experts and thought leaders to bring you the most up-to-date information and insights into secondary markets. The first panel begins at 12:45 PM, titled: “What is Secondary Market Trading and How Does it Work?” This panel covers topics like blue sky laws, securities manuals, and ATS listings. 

Beginning at 1:45 PM is the second panel, “Building the Network: Diversifying Customer Acquisition.” This session covers strategies for successful and diverse customer acquisition. 

“Price Discovery & Research in Secondary Markets” is the third panel starting at 2:45 PM. The fourth session follows at 3:45 PM and is titled “What Companies Want to Know About Secondary Markets.” The event closes with the fifth and final panel at 4:15 PM, “Rialto Secondary Market for Companies, Investors, and Broker-Dealers.”

Join us for the KoreSummit event, There is a Market for Your Private Securities, starting at 12:30 PM EST on Wednesday, June 9, 2021. The event is free to attend and 100% online. You can register for attendance at: http://koresummit.io/