Category: SEC

Accredited investor definition and SEC Review

Posted on by Scarlett Duarte

In this special article written by Laura Anthony from Securities Law Blog, we’ll learn more about recent matters regarding accredited investor definition and SEC Review.

Keep reading and discover more about this fundamental topic in the financial markets, especially when you’re looking to raise capital.

On December 15, 2023, the SEC issued a staff report on the accredited investor definition.  The report comes three years after the most recent amendments to the accredited investor definition (see HERE).

The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) requires the SEC to review the accredited investor definition, as relates to natural persons, at least once every four years to determine whether the definition should be modified or adjusted.  The last two reports can be read HERE and HERE.

The current report focuses on the composition of the accredited investor demographic, including since the last definition amendments; the extent to which accredited investors have the financial sophistication, ability to sustain the risk of loss of investment, and access to information that have traditionally been associated with an ability to fend for themselves; and accredited investor participation in exempt offerings.

I’ve included the complete current accredited investor definition at the end of this post.

Background

All offers and sales of securities must either be registered with the SEC under the Securities Act or be subject to an available exemption from registration. The ultimate purpose of registration is to provide investors and potential investors with full and fair disclosure to make an informed investment decision. The SEC does not pass on the merits of a particular deal or business model, only its disclosure. In setting up the registration and exemption requirements, Congress and the SEC recognize that not all investors need public registration protection and not all situations have a practical need for registration.

However, exempted offerings carry additional risks in that the level of required investor disclosure is much less than in a registered offering, the SEC does not review the offering documents, and there is no federal ongoing disclosure or reporting requirements.  The premise of allowing offering exemptions to accredited investors is that such investors are able to fend for themselves and, accordingly, do not need the protections afforded by the registration requirements under the Securities Act because they have access to the kind of information which registration would disclose (SEC v. Ralston Purina Co.).

Diving deeper: Definition of an accredited investor

The definition of an accredited investor has become a central component of exempt offerings, including Rules 506(b) and 506(c) of Regulation D.  Qualifying as an accredited investor allows an investor to participate in exempt offerings including offerings by private and public companies, certain hedge funds, private equity funds and venture capital funds.  Further accredited investors are not bound by the investor limitations set forth in Regulation Crowdfunding or Regulation A, and investors in a Regulation Crowdfunding offering are free to sell to accredited investors without complying with the one-year prohibition on resales.

The concept of “accredited investor” is not limited to exempt offerings but permeates the state and federal securities laws in general.  For instance, a company is required to register under Section 12(g) if as of the last day of its fiscal year the number of its record security holders is either 2,000 or greater worldwide, or 500 persons who are not accredited investors or greater worldwide.  Accordingly, companies must differentiate between record holders who are accredited investors and nonaccredited investors.  For more on Section 12(g) registration see HERE.

Most state securities statutes contain a definition of an accredited investor that either tracks the federal definition, or in some cases, contains higher thresholds for institutional investors ($10 million as opposed to $5 million).  Some states use the accredited investor definition to determine whether investment advisers to certain private funds are required to be registered. FINRA also uses the definition to determine the private placement document filing requirements for placement agents.

Accredited Investor Pool

The SEC has no real source of information on the number of natural persons that are accredited investors but rather must rely on assumptions and general information provided by, for example, the Federal Reserve Board’s Survey of Consumer Finances.  However, the SEC estimates that approximately 18.5% of U.S. households qualify as accredited investors based on income standards.   The SEC estimates that the number of accredited investors has grown steadily, attributing some of this growth to the fact that the definition has never been adjusted for inflation.  According to the SEC report, if the natural person accredited investor thresholds were adjusted to reflect inflation since their initial adoption through 2022 using CPI-U, the net worth threshold would increase from $1 million to $3,037,840, the individual income threshold would increase from $200,000 to $607,568, and the joint income threshold would increase from $300,000 to $911,352, which is s significant jump from the current definition.

The SEC also points out that its estimate does not include the indeterminate additional number of people that would qualify as accredited based on holding qualified professional licenses or being knowledgeable employees at private funds.  Same for the number of individuals that may qualify as a director, executive officer, or general partner of the issuer.

The SEC report delves into the composition of assets for most U.S. households concluding that a disproportionate amount of assets are held in retirements savings accounts and plans that are directed or controlled by individuals, who “may lack experience in building a portfolio that appropriately allocates risk and ongoing management of investments, including preparing for the illiquid nature of private company investments.”  Although the SEC admits there is limited information available to assess the financial sophistication of accredited investors, it still leans towards concluding, they are not sophisticated or protected.

The SEC points to this as a reason to question the continued utility of the current financial thresholds. I flat-out disagree.  Without side-by-side evidence of retirement losses, investors suffering from poor decision-making, investors suing for private investment losses, regulatory actions related to inappropriate private offerings involving retirement accounts, or any other reasonable metrics supporting the alleged inability of U.S. households to make their own investment decisions with their own money, I find this discussion lacking in evidentiary support.

Accredited Investor Participation in the Exempt Offering Market

The SEC has no proper methodology to estimate the participation of natural person accredited investors in the exempt offering market.  However, they do estimate that approximately $3.7 trillion of new capital was raised in exempt offerings in 2022.  Although clearly the vast majority of the investors are accredited, the breakdown between natural persons and institutions or entities is unknown.  The SEC spends several pages espousing statistics based on Form D filings but, as they indicate, many issuers do not file a Form D and even when they do, it may be at the beginning of an offering and contain no information about the offering results or investor composition.

Conclusion

Although the SEC report’s introduction explains that it will examine accredited investor demographics and investment habits, in actuality the SEC has no reliable or aggregated sources of information from which to obtain these facts.  Although I summarize some of the findings, the conclusion is that all information is a best guess and estimate.  With such a lack of information, the SEC chooses to err on the conservative side seemingly leaning towards suggesting raising the financial thresholds.  Laura has a different perspective, disagreeing with this approach.

In general, she considers that the report offered little useful information.

Current Definition of Accredited Investor

Accredited investor shall mean any person who comes within any of the following categories, or who the issuer reasonably believes comes within any of the following categories, at the time of the sale of the securities to that person:

(i) Any bank as defined in section 3(a)(2) of the Act, or any savings and loan association or other institution as defined in section 3(a)(5)(A) of the Act whether acting in its individual or fiduciary capacity; any broker or dealer registered pursuant to section 15 of the Securities Exchange Act of 1934; any investment adviser registered pursuant to section 203 of the Investment Advisers Act of 1940 or registered pursuant to the laws of a state; any investment adviser relying on the exemption from registering with the Commission under section 203(l) or (m) of the Investment Advisers Act of 1940; any insurance company as defined in section 2(a)(13) of the Act; any investment company registered under the Investment Company Act of 1940 or a business development company as defined in section 2(a)(48) of that act; any Small Business Investment Company licensed by the U.S. Small Business Administration under section 301(c) or (d) of the Small Business Investment Act of 1958; any Rural Business Investment Company as defined in section 384A of the Consolidated Farm and Rural Development Act; any plan established and maintained by a state, its political subdivisions, or any agency or instrumentality of a state or its political subdivisions, for the benefit of its employees, if such plan has total assets in excess of $5,000,000; any employee benefit plan within the meaning of the Employee Retirement Income Security Act of 1974 if the investment decision is made by a plan fiduciary, as defined in section 3(21) of such act, which is either a bank, savings and loan association, insurance company, or registered investment adviser, or if the employee benefit plan has total assets in excess of $5,000,000 or, if a self-directed plan, with investment decisions made solely by persons that are accredited investors;

(2) Any private business development company as defined in section 202(a)(22) of the Investment Advisers Act of 1940;

(3) Any organization described in section 501(c)(3) of the Internal Revenue Code, corporation, Massachusetts or similar business trust, partnership, or limited liability company, not formed for the specific purpose of acquiring the securities offered, with total assets in excess of $5,000,000;

(4) Any director, executive officer, or general partner of the issuer of the securities being offered or sold, or any director, executive officer, or general partner of a general partner of that issuer;

(5) Any natural person whose individual net worth, or joint net worth with that person’s spouse or spousal equivalent, exceeds $1,000,000 excluding such person’s primary residence (both on the asset and liability side except that indebtedness in excess of the fair market value of the primary residence shall be included as a liability);

(6) Any natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person’s spouse or spousal equivalent in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year;

(7) Any trust, with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the securities offered, whose purchase is directed by a sophisticated person as described in § 230.506(b)(2)(ii);

(8) Any entity in which all of the equity owners are accredited investors;

(9) Any entity, of a type not listed in paragraph (a)(1), (2), (3), (7), or (8), not formed for the specific purpose of acquiring the securities offered, owning investments in excess of $5,000,000;

(10) Any natural person holding in good standing one or more professional certifications or designations or credentials from an accredited educational institution that the SEC has designated as qualifying an individual for accredited investor status. Under this category the SEC designated persons holding the following licenses: (i) Series 7; (ii) Series 82; and (iii) Series 65.

(11) Any natural person who is a “knowledgeable employee,” as defined in rule 3c–5(a)(4) under the Investment Company Act of 1940, of the issuer of the securities being offered or sold where the issuer would be an investment company, as defined in section 3 of such act, but for the exclusion provided by either section 3(c)(1) or section 3(c)(7) of such act;

(12) Any “family office,” as defined in rule 202(a)(11)(G)–1 under the Investment Advisers Act of 1940:

(i) With assets under management in excess of $5,000,000,

              (ii) That is not formed for the specific purpose of acquiring the securities offered, and

             (iii) Whose prospective investment is directed by a person who has such knowledge and experience in financial and business matters that such family office is capable of evaluating the merits and risks of the prospective investment; and

(13) Any “family client,” as defined in rule 202(a)(11)(G)–1 under the Investment Advisers Act of 1940 , of a family office meeting the requirements in paragraph (a)(12) of this section and whose prospective investment in the issuer is directed by such family office pursuant to paragraph (a)(12)(iii).

 

* Disclaimer: The data presented in this article is based on the information available at the time of the publication. For updated data and specific questions, reach professional help.

RegD SEC Reporting Obligations

Posted on by Scarlett Duarte

RegD SEC reporting obligations is a theme that causes a lot of doubts, even concerns, among people who are thinking about raising capital. The compliance details required by Securities and Exchange Commission (SEC) have a lot of particularities, which demands attention of all potential issuers.

Regulation D (Reg D) offerings are exempt from the full SEC registration requirements but still require compliance with certain reporting obligations. The reporting requirements under Regulation D vary depending on the specific exemption used for the offering.

 

RegD SEC Reporting Obligations

In this short guide, we will explain practical details regarding SEC reporting for RegD.

Here’s an overview:

 

Rule 504 Offering (Regulation D, Rule 504):
Companies conducting offerings under Rule 504 are generally exempt from SEC registration requirements. However, there are no specific ongoing reporting requirements mandated by the SEC for Rule 504 offerings.

Rule 505 Offering (Regulation D, Rule 505):
Companies utilizing Rule 505 for their Reg D offerings are allowed to raise up to $5 million within a 12-month period.

While Rule 505 itself doesn’t impose ongoing reporting obligations to the SEC, individual states might have their reporting requirements for Rule 505 offerings.

Rule 506(b) Offering (Regulation D, Rule 506(b)):
Under Rule 506(b), companies can raise an unlimited amount of capital from an unlimited number of accredited investors and up to 35 non-accredited but sophisticated investors.

There are no specific ongoing reporting requirements to the SEC for Rule 506(b) offerings. However, if non-accredited investors are involved, some level of disclosure may be required to satisfy anti-fraud provisions.

Rule 506(c) Offering (Regulation D, Rule 506(c)):
Rule 506(c) allows companies to conduct offerings where they can generally solicit and advertise their offerings to the public but are limited to accepting investments only from accredited investors.

There are no specific ongoing reporting requirements to the SEC for Rule 506(c) offerings.

However, companies might need to file a Form D notice with the SEC within 15 days of the first sale of securities.

Take note!

While Regulation D exemptions typically do not impose explicit ongoing reporting requirements to the SEC, companies that conduct Reg D offerings are subject to anti-fraud provisions and should provide investors with all material information necessary to make an informed investment decision.

Additionally, states may have their reporting requirements for offerings made under Regulation D, so companies should consider state-specific regulations when conducting these offerings.

It’s important for companies utilizing Regulation D exemptions to consult legal and financial professionals to understand the specific reporting obligations, if any, and to ensure compliance with all relevant securities laws and regulations.

Subsidiaries using RegCF

Posted on by Sara Hanks

Subsidiaries using RegCF: introduction

This came up no less than three times last week, so I figured it was worth a blog post.

Subsidiaries can raise funds under Reg CF, even if they are subsidiaries of companies who cannot use Reg CF themselves, because they have a class of securities registered with the SEC, or they are not US companies. To determine eligibility, you look at the status of the potential issuer. Is it a US company? Have you confirmed it’s not an investment company? If it’s raised funds under Reg CF before, is it in compliance with ongoing reporting requirements?

We need to add another element to this determination: is the US sub genuinely the issuer under Reg CF, or is there a “co-issuer” in the picture? And if there is, is the co-issuer prevented from using Reg CF because it’s an SEC-registered or foreign company?

There’s no useful definition of “co-issuer” under securities law (and if you go looking for one, what you will find will only confuse you) but when faced with the issue, we often ask clients to take a step back and ask themselves: “Whose performance is the investor relying on when they make their investment?” If the funds raised are going to be used at the subsidiary level, and the subsidiary is a genuine operating company, with employees, and a business plan, then everything may be ok, even if some portion of the funds end up at the parent level; for instance, payments for contracted support functions, or as license payments. But if the US sub is being effectively used as a finance sub, has no employees, and the funds are sent upstream to the parent, then you probably have a co-issuer, who is subject to the same eligibility, financial statement, and disclosure requirements as its sub.

It’s always going to be a matter of judgement, and as the SEC loves to remind us, dependent on facts and circumstances. It is worth going through the above analysis with your counsel to determine if the subsidiary is eligible to raise funds under Reg CF.

 

 

* Subsidiaries using RegCF was originally published on Crowdcheck.

Communications and publicity by issuers prior to and during a Regulation CF (RegCF) Offering

Posted on by Sara Hanks

The idea behind crowdfunding is that the crowd — family, friends, and fans of a small or startup company, even if they are not rich or experienced investors — can invest in that company’s securities. For a traditionally risk-averse area of law, that’s a pretty revolutionary concept.  

In order to make this leap, Congress wanted to ensure that all potential investors had access to the same information. The solution that Congress came up in the JOBS Act with was that there had to be one centralized place that an investor could access that information — the website of the funding portal or broker-dealer that hosts the crowdfunding offering (going forward we will refer to both of these as “platforms”). 

This means (with some very limited exceptions that we’ll describe below) most communications about the offering can ONLY be found on the platform. On the platform, the company can use any form of communication it likes, and can give as much information as it likes (so long as it’s not misleading). Remember that the platforms are required to have a communication channel — basically a chat or Q&A function — a place where you can discuss the offering with investors and potential investors (though you must identify yourself). That gives you the ability to control much of your message. 

So with that background in mind, we wanted to go through what you can and cannot do regarding communications prior to and during the offering. Unfortunately, there are a lot of limitations. Securities law is a highly regulated area and this is not like doing a Kickstarter campaign. Also, bear in mind this is a changing regulatory environment. We put together this guide based on existing law, the SEC’s interpretations that it put out on May 13, and numerous conversations with the SEC Staff. As the industry develops, the Staff’s positions may evolve. 

We do understand that the restrictions are in many cases counter-intuitive and don’t reflect the way people communicate these days. The problems derive from the wording of the statute as passed by Congress. The JOBS Act crowdfunding provisions are pretty stringent with respect to publicity; the SEC has “interpreted” those provisions as much as possible to give startups and small businesses more flexibility. 

What you can say before you launch your offering 

US securities laws regulate both “offers” and sales of securities; whenever you make an offer or sale of securities, that offer or sale must comply with the SEC’s rules. The SEC interprets the term “offer” very broadly and it can include activity that “conditions the market” for the offering. “Conditioning the market” is any activity that raises public interest in your company, and could include suddenly heightened levels of advertising, although regular product and service information or advertising is ok (see discussion below). 

Under new rules which went into effect on March 15, 2021, companies considering making a crowdfunding offering may “test the waters” (TTW) in order to decide whether to commit to the time and 2 expense of making an offering.1 Prior to filing the Form C with the SEC, you may make oral or written communications to find out whether investors might be interested in investing in your offering. The way in which you make these communications (eg, email, Insta, posting on a crowdfunding portal site) and the content of those communications are not limited, but the communications must state that: 

  • No money or other consideration is being solicited, and if sent in response, will not be accepted; 
  • No offer to buy the securities can be accepted and no part of the purchase price can be received until the offering statement is filed and only though the platform of an intermediary (funding portal or broker-dealer); and 
  • A person’s indication of interest includes no obligation or commitment of any kind.2 

You can collect indications of interest from potential investors including name, address, phone number and/or email address. The rule does not address getting any further information, such as the manner of any potential payment. If you do make TTW communications, you must file any written communication or broadcast script as an exhibit to your Form C. And TTW communications are subject to the regular provisions of securities law that impose liability for misleading statements. 

Before the point at which you file your Form C with the SEC, the TTW process is the only way you can make any offers of securities, either publicly or privately. This would apply to meetings with potential investors, giving out any information on forums which offer “sneak peeks” or “first looks” at your offering, and public announcements about the offering. Discussions at a conference or a demo day about your intentions to do a crowdfunding offering must comply with the TTW rules and you should read out the information in the bullets above. Any non-compliant communication made prior to filing the Form C may be construed as an unregistered offer of securities made in violation of Section 5 of the Securities Act — a “Bad Act” that will prevent you from being able to use Regulation CF, Rule 506, or Regulation A in the future. 

Normal advertising of your product or service is permitted as the SEC knows you have a business to run. However, if just before the offering all of a sudden you produce five times the amount of advertising that you had previously done, the SEC might wonder whether you were doing this to stir up interest in investing in your company. If you plan to change your marketing around the time of your offering (or if you are launching your company at the same time as your RegCF offering, which often happens), it would be prudent to discuss this with your counsel so that you can confirm that your advertising is consistent with the SEC’s rules. 

Genuine conversations with friends or family about what you are planning to do and getting their help and input on your offering and how to structure it, are ok, even if those people invest later. You can’t be pitching to them as investors, though, except in compliance with the TTW rules. 

What you can say after you launch 

After you launch your offering by filing your Form C with the SEC, communications outside the platform fall into two categories: 

  • Communications that don’t mention the “terms of the offering”; and 1 We are talking here about Crowdfunding Regulation Rule 206. There is another new rule that permits testing the waters before deciding which type of exempt offering (eg, Regulation CF or Regulation A) to make, which does not preempt state regulation; using that rule may be complicated and require extensive legal advice. 2 We advise including the entirety of this wording as a legend or disclaimer in the communication in question. The convention in Regulation A is that “it it fits, the legend must be included” and if the legend doesn’t fit (eg, Twitter) the communication must include an active hyperlink to it. 3 
  • Communications that just contain “tombstone” information. 

Communications that don’t mention the terms of the offering 

We are calling these “non-terms” communications in this memo, although you can also think of them as “soft” communications. “Terms” in this context are the following: 

  • The amount of securities offered; 
  • The nature of the securities (i.e., whether they are debt or equity, common or preferred, etc.); 
  • The price of the securities; 
  • The closing date of the offering period; 
  • The use of proceeds; and 
  • The issuer’s progress towards meeting its funding target. 

There are two types of communication that fall into the non-terms category. 

First, regular communications and advertising. You can still continue to run your business as normal and there is nothing wrong with creating press releases, advertisements, newsletters and other publicity to help grow your business. If those communications don’t mention any of the terms of the offering, they are permitted. Once you’ve filed your Form C, you don’t need to worry about “conditioning the market.” You can ramp up your advertising and communications program as much as you like so long as they are genuine business advertising (e.g., typical business advertising would not mention financial performance). 

Second, and more interestingly, offering-related communications that don’t mention the terms of the offering. You can talk about the offering as long as you don’t mention the TERMS of the offering. Yes, we realize that sounds weird but it’s the way the statute (the JOBS Act) was drafted. Rather than restricting the discussion of the “offering,” which is what traditional securities lawyers would have expected, the statute restricts discussion of “terms,” and the SEC defined “terms” to mean only those six things discussed above. This means you can make any kind of communication or advertising in which you say you are doing an offering (although not WHAT you are offering; that would be a “term”) and include all sort of soft information about the company’s mission statement and how the CEO’s grandma’s work ethic inspired her drive and ambition. 

You can link to the platform’s website from such communications. But be careful about linking to any other site that contains the terms of the offering. A link (in the mind of the SEC) is an indirect communication of the terms. So linking to something that contains terms could mean that a non-terms communication becomes a tombstone communication (see below) that doesn’t comply with the tombstone rules. This applies to third-party created content as well. If a third-party journalist has written an article about how great your company is and includes terms of the offering, linking to that article is an implicit endorsement of the article and could become a statement of the company that doesn’t comply with the Tombstone rules. 

Whether you are identifying a “term” of the offering can be pretty subtle. While “We are making an offering so that all our fans can be co-owners,” might indirectly include a term because it’s hinting that you are offering equity, it’s probably ok. Try to avoid hints as to what you are offering, and just drive investors to the intermediary’s site to find out more. 

Even though non-terms communications can effectively include any information (other than terms) that you like, bear in mind that they are subject, like all communications, to the securities antifraud rules. So even though you are technically permitted to say that you anticipate launching your “Uber for Ferrets” in 4 November in a non-terms communication, if you don’t have a reasonable basis for saying that, you are in trouble for making a misleading statement. 

Tombstone communications 

A tombstone is what it sounds like — just the facts — and a very limited set of facts at that. Think of these communications as “hard” factual information. 

The specific rules under Regulation CF (RegCF) allow for “notices” limited to the following, which can be written or oral: 

  • A statement that the issuer is conducting an offering pursuant to Section 4(a)(6) of the Securities Act; 
  • The name of the intermediary through which the offering is being conducted and (in written communications) a link directing the potential investor to the intermediary’s platform; 
  • The terms of the offering (the amount of securities offered, the nature of the securities, the price of the securities, the closing date of the offering period, the intended use of proceeds, and progress made so far); and 
  • Factual information about the legal identity and business location of the issuer, limited to the name of the issuer of the security, the address, phone number, and website of the issuer, the e-mail address of a representative of the issuer and a brief description of the business of the issuer. 

These are the outer limits of what you can say. You don’t have to include all or any of the terms. You could just say “Company X has an equity crowdfunding campaign on SuperPortal — Go to www.SuperPortal.com/CompanyX to find out more.” The platform’s address is compulsory.

“Brief description of the business of the issuer” does mean brief. The rule that applies when companies are doing Initial Public Offerings (IPOs), which is the only guidance we have in this area, lets those companies describe their general business, principal products or services, and the industry segment (e.g.,for manufacturing companies, the general type of manufacturing, the principal products or classes of products and the segments in which the company conducts business). The brief description does not allow for inclusion of details about how the product works or the overall addressable market for it, and certainly not any customer endorsements. 

“Limited time and availability”-type statements may be acceptable as part of the “terms of the offering.” For example, the company might state that the offering is “only” open until the termination date, or explain that the amount of securities available is limited to the oversubscription amount. 

A few “context” or filler words might be acceptable in a tombstone notice, depending on that context. For example, the company might state that it is “pleased” to be making an offering under the newly- adopted Regulation Crowdfunding, or even refer to the fact that this is a “historic” event. Such additional wording will generally be a matter of judgement. “Check out our offering on [link]” or “Check out progress of our offering on [link]” are OK. “Our offering is making great progress on [link]” is not. Words that imply growth, success or progress (whether referring to the company or the offering) are always problematic. If you want to use a lot of additional context information, that information can be put in a “non-terms” communication that goes out at the same time and through the same means as a tombstone communication. 

The only links that can be included on a tombstone communication are links to the platform. No links to 5 reviews of the offering on Kingscrowd. No links to any press stories on Crowdfund Insider or CrowdFundBeat. No links to the company’s website. The implicit endorsement principle applies here just as with non-terms communications, meaning that anything you link to becomes a communication by the company. 

An important point with respect to tombstone notices is that while content is severely limited, medium is not. Thus, notices containing tombstone information can be posted on social media, published in newspapers, broadcast on TV, slotted into Google Ads, etc. Craft breweries might wish to publish notices on their beer coasters, and donut shops might wish to have specially printed napkins. 

What constitutes a “notice” 

It is important to note that (until we hear otherwise from the SEC) the “notice” is supposed to be a standalone communication. It can’t be attached to or embedded in other communications. That means you cannot include it on your website (as all the information on your website will probably be deemed to be part of the “notice” and it will likely fail the tombstone rule) and you cannot include it in announcements about new products — again, it will fail the tombstone rule. 

We have listed some examples of permissible communications in Exhibit A. 

Websites 

It’s a bad idea to include ANY information about the terms of the offering on your website. However, some issuers have found a clever solution: you can create a landing page that sits in front of your regular website. The landing page can include the tombstone information and two options: either investors can continue to your company’s regular webpage OR they can go to the platform to find out more about the offering on the platform. We have attached sample text for landing pages on Exhibit A. 

“Invest now” buttons 

Under the SEC’s current interpretations as we understand them, having an “invest now” button on your website with a link to the platform hosting your offering is fine although you should not mention any terms of the offering on your website unless your ENTIRE website complies with the tombstone rule. Most of them don’t. 

Social Media 

As we mention above, the medium of communication is not limited at all, even for tombstone communications. Companies can use social media to draw attention to their offerings as soon as they have filed their Form C with the SEC. Social media are subject to the same restrictions as any other communications: either don’t mention the offering terms at all or limit content to the tombstone information. 

Emails 

“Blast” emails that go out to everyone on your mailing list are subject to the same rules as social media: either don’t mention the offering terms at all or limit content to the tombstone information. Personalized emails to people you know will probably not be deemed to be advertising the terms of the offering, so you can send them, but be careful you don’t give your friends any more information than is on the platform — remember the rule about giving everyone access to the same information. 

Images 

Images are permitted in tombstone communications. However, these images also have to fit within the “tombstone” parameters. So brevity is required. Publishing a few pictures that show what the company does and how it does it is fine. An online coffee table book with hundreds of moodily-lit photos, not so much. Also, a picture tells a thousand words and those words better not be misleading. So use images only of real products actually currently produced by the company (or in planning, so long as you clearly indicate that), actual employees hard at work, genuine workspace, etc. No cash registers, or images of dollar bills or graphics showing (or implying) increase in revenues or stock price. And don’t use images you don’t have the right to use! (Also, we never thought we’d need to say this, but don’t use the SEC’s logo anywhere on your notice, or anywhere else.) 

While the “brevity” requirement doesn’t apply to non-terms communications, the rules about images not being misleading do. 

Videos 

Videos are permitted. You could have the CEO saying the tombstone information, together with video images of the company’s operations, but as with images in general, the video must comport with the tombstone rules. So “Gone with the Wind” length opuses will not work under the tombstone rule, although they are fine with non-terms communications. 

Updates and communications to alert investors that important information is available on the platform 

Updates can and should be found on the crowdfunding platform. You can use communications that don’t mention the terms of the offering, to drive readers to the platform’s site to learn about updates and things like webinars hosted on the platform. They may include links to the platform. 

Press releases 

Yes, they are permitted, but they can’t contain very much. Press releases are also laden with potential pitfalls, as we discuss below. Press releases that mention the offering terms are limited to the same “tombstone” content restrictions that apply to all notices. Companies may say that they are pleased (or even thrilled) to announce that they are making a crowdfunding offering but the usual quotes from company officers can’t be included (unless those quotes are along the lines of “ I am thrilled that Company will be making a crowdfunding offering,” or “Company is a software-as-a-service provider with offices in six states”). The “about the company” section in press releases is subject to the same restrictions and if the press release is put together by a PR outfit, watch out for any non-permitted language in the “about the PR outfit” section of the press release (nothing like “Publicity Hound Agency is happy to help companies seeking crowdfunding from everyday investors who now have the opportunity to invest in the next Facebook”). 

You could also issue non-terms press releases that state you are doing an offering (and you can identify or link to the platform) but don’t include terms and still include all the soft info, including quotes, mission statements and deep backgrounds. It’s likely, though, that journalists would call asking “So what are you offering, then?” and if you answer, you are going to make your non-terms communication into communication that fails the tombstone rule. 

Press interviews and articles 

Interviews with the media can be thorny because participation with a journalist makes the resulting 7 article a communication of the company. In fact, the SEC Staff have stated that they don’t see how interviews can easily be conducted, because even if the company personnel stick to the tombstone information (which would make for a pretty weird interview), the journalist could add non-tombstone information later, which would result in the article being a notice that didn’t comply with the tombstone rule. 

The same thing could happen with interviews where the company tries to keep the interview on a nonterms basis. The company personnel could refrain from mentioning any terms (again, it’s going to be pretty odd saying, “Yes, we are making an offering of securities but I can’t say what we are offering”), but the first thing the journalist is going to do is get the detailed terms from the company’s campaign page on the platform’s site, and again the result is that the article becomes a non-complying notice. 

These rules apply to all articles that the company “participates in.” This means that if you (or your publicists) tell the press, “Hey, take a look at the Company X crowdfunding campaign” any resulting article is probably going to result in a violation of the rules. By you. 

Links to press articles are subject to all the same rules discussed in this memo. If you link to an article, you are adopting and incorporating all the information in that article. If the article mentions the terms of the offering then you can’t link to it from a non-terms communication (such as your website) and if it includes soft non-terms information, then you can’t link to it from a tombstone communication. And if it includes misleading statements, you are now making those statements. 

Remember that prior to the launch of the offering you should not be talking about your campaign with the press (or publicly with anyone else). If you are asked about whether you are doing a campaign priorto launch you should respond with either a “no comment” or “you know companies aren’t allowed to discuss these matters.” No winking (either real or emoji-style.) 

Press articles that the company did not participate in 

In general, if you (or your publicists) didn’t participate in or suggest to a journalist that he or she write an article, it’s not your problem. You aren’t required to monitor the media or correct mistakes. However, if you were to circulate an article (or place it or a link to it on your website), then that would be subject to the rules we discuss in this memo. You can’t do indirectly what you can’t do directly. 

Also, if you add (or link to) press coverage to your campaign page on the platform’s site, you are now adopting that content, so it had better not be misleading. 

Demo Days 

Demo days and industry conferences are subject to many of the same constraints that apply to press interviews. In theory, you could limit your remarks to a statement that you are raising funds through crowdfunding, but in reality people are going to ask what you are selling. You could say “I can’t talk about that; go to SuperPortal.com,” but that would lead to more follow-up questions. And following the tombstone rules means you can’t say too much about your product, which rather undermines the whole purpose of a demo day. 

Demo days might be easier to manage when you are still in the testing-the-waters phase. 

“Ask Me Anythings” 

The only place you can do an “Ask Me Anything” (AMA) that references the terms of the offering is on the 8 platform where your offering is hosted. You can’t do AMAs on Reddit. Unless you limit the AMA to nonterms communications or tombstone information. In which case, people aren’t going to be able to ask you “anything.” 

Product and service advertising 

As we mentioned above, once you’ve filed your Form C, ordinary advertising or other communications (such as putting out an informational newsletter) can continue and can even be ramped up. Most advertising by its nature would constitute non-terms communication, so it couldn’t include references to the terms of the offering. So don’t include information about your offering in your supermarket mailer coupons. 

What about side by side communications? 

You are doubtless wondering whether you could do a non-terms Tweet and follow it immediately with a tombstone Tweet. It appears, at least for the moment, that this works. There is the possibility that if you tried to put a non-terms advertisement right next to a tombstone advertisement in print media or online, the SEC might view them collectively as one single (non-complying) “notice”. It is unclear how much time or space would need to separate communications to avoid this problem, or even whether it is a problem. 

“Can I still talk to my friends?”

Yes, you can still talk to your friends face to face at the pub (we are talking real friends, not Facebook friends, here) and even tell them that you are doing a crowdfunding offering, even before you file with the SEC. You aren’t limited to the tombstone information (man, would that be a weird conversation). After you’ve launched the offering, you can ask your friends to help spread the word (that’s the point of social media) but please do not pay them, even in beer or donuts, because that would make them paid “stock touts.” Don’t ask them to make favorable comments on the platform’s chat board either, unless they say on the chat board that they are doing so because you asked them to. If they are journalists, don’t ask them to write a favorable piece about your offering. 

“What if people email me personally with questions?” 

Best practice would be to respond “That’s a great question, Freddie. I’ve answered it here on the SuperPortal chat site [link]”. Remember the Congressional intent of having all investors have access tothe same information. 

Links 

As we’ve seen from the discussion above, you can’t link from a communication that does comply with the rule you are trying to comply with to something that doesn’t. So for example, you can’t link from a Tweet that doesn’t mention the offering terms to something that does and you can’t link from a tombstone communication to anything other than the platform’s website. 

Emoji 

Emoji are subject to antifraud provisions in exactly the same way as text or images are. The current limited range of emoji and their inability to do nuance means that the chance of emoji being misleading is heightened. Seriously people, you need to use your words. 

 

After the offering 

These limitations only last until the offering is closed. Once that happens you are free to speak freely again, so long as you don’t make any misleading statements. 

And what about platforms? 

The rules for publicity by platforms are different, and also depend on whether the platform is a broker or a portal. We have published a separate memo for them. CrowdCheck is not a law firm, the foregoing is not legal advice, and even more than usual, it is subject to change as regulatory positions evolve and the SEC Staff provide guidance in newly-adopted rules. Please contact your lawyer with respect to any of the matters discussed here. 

 

Exhibit A Sample Tombstones: 

  • Company X, Inc. 

[Company Logo] 

 

Company X is a large widget company based in Anywhere, U.S.A. and incorporated on July 4, 1776. We make widgets and they come in red, white, and blue. Our widgets are designed to spread patriotic cheer. 

 

We are selling common shares in our company at $17.76 a share. The minimum amount is $13,000 and the maximum amount is $50,000. The offering will remain open until July 4, 2021. 

 

This offering is being made pursuant to Section 4(a)(6) of the Securities Act. 

For additional information please visit: https://www.SuperPortal.com/companyx or Invest Button URL Link direct

  • Freddy’s Ferret Food Company is making a Regulation CF Offering of Preferred Shares on FundCrowdFund.com. Freddy’s Ferret Food Company was incorporated in Delaware in 2006 and has its principal office in Los Angeles, California. Freddy’s Ferret Food Company makes ferret food out of its four manufacturing plants located in Trenton, New Jersey. Freddy’s Ferret Food is offering up to 500,000 shares of Preferred Stock at $2 a share and the offering will remain open until February 2, 2021. For more information on the offering please go to www.fundcrowdfund.com/freddysferretfoodcompany. 

 

Sample “non-terms” communications 

  • We are doing a crowdfunding offering! We planning to Make America Great Again by selling a million extra large red hats and extra small red gloves with logos on them, and to bring jobs back to Big Bug Creek, Arizona. The more stuff we make, the greater our profits will be. We think we are poised for significant growth. Already we’ve received orders from 100,000 people in Cleveland. Invest in us TODAY, while you still can and Make Capitalism Great Again! [LINK TO PLATFORM]. 
  • Feel the “Burn”! We are making a crowdfunding offering on SuperPortal.com to raise funds to expand our hot sauce factory. Be a part of history. Small investors have been screwed for years.This is your chance to Stick it to the Man and buy securities in a business that has grown consistently for the last five years. 

 

Sample Communications on Social Media:
Note all these communications will have a link to the platform. 

 

  • Company Y has launched its crowdfunding campaign; click here to find out more. 

 

  • Interested in investing in Company Y? Click here. 

 

Sample Landing Page: 

Thanks to Regulation CF, now everyone can own shares in our company. 

 

[Button] Invest in our Company 

[Button] Continue to our Website

 

CrowdCheck is not a law firm, the foregoing is not legal advice, and even more than usual, it is subject to change as regulatory positions evolve and the SEC Staff provide guidance in newly-adopted rules. Please contact your lawyer with respect to any of the matters discussed here.

Private Capital Market Regulations – 10 RegA+ Issuers Penalized for SEC Violation: What Can We Learn?

Posted on by Oscar Jofre

The Importance of Compliance in Private Capital Market Regulations

We’ve discussed compliance at length and how it’s essential for building trust within the private capital markets. But what happens when you’re not compliant?

The SEC will eventually find out and impose penalties to issuers that fail to meet securities regulations, as ten Regulation A+ (RegA+) issuers recently learned.

These recent violations can serve as a cautionary tale to issuers about the importance of adhering to Private Capital Market Regulations.

Regulation A+ and the SEC’s Oversight

Companies selling securities to raise capital generally have to register with the SEC and comply with other rules that can be expensive and onerous for smaller companies, so RegA+ allows exemptions from registration, provided certain other conditions are met. In its press release, the SEC announced that 10 RegA+ issuers failed to comply with these conditions, highlighting the challenges within Private Capital Market Regulations. The SEC reported that each issuer was previously qualified to sell securities under RegA+, but subsequently made significant changes to the offering so that it no longer met exemption requirements. These changes included “improperly increasing the number of shares offered, improperly increasing or decreasing the price of shares offered, failing to file updated financial statements at least annually for ongoing offerings, engaging in prohibited at the market offerings, or engaging in prohibited delayed offerings.”

Private Capital Market Regulations: Protecting Investors and Market Integrity

These regulations are not just arbitrary demands by the SEC; they exist to protect investors and the integrity of the system as a whole. For example, changing the offering price without getting those changes cleared by the SEC is a concern because it could be a vector for fraud or money laundering; issuing securities for a different price conceals the actual amount of money changing hands. Similarly, making unsanctioned changes to offering terms can erode investor confidence. Ideally, each investor conducted their own due diligence before investing – they felt comfortable with the terms listed in offering documents qualified by the SEC. Changing these terms without notifying investors and having changes approved by the SEC just isn’t fair play, and underscores the critical role of Private Capital Market Regulations.

The Consequences of Non-Compliance

The ten issuers cited by the SEC violated these principles, and got caught. Each company agreed to stop violating the Securities Act, and to pay civil penalties that ranged from $5,000 to $90,000. In the press release, Daniel R. Gregus, Director of the SEC’s Chicago Regional Office was quoted saying: “Companies that choose to benefit from Regulation A as a cost-effective way to raise capital must meet its requirements,” reinforcing the significance of compliance with Private Capital Market Regulations.

These penalties serve as a reminder that issuers must be careful when making changes to their offering after qualification. Working with an experienced team can help to mitigate some of this risk, but ultimately, it is the issuer’s responsibility to meet all securities regulations, including those pertaining to Private Capital Market Regulations. And as with most things, 90% of the job is preparation.

How not to fall into the wrong with the regulators checklist

  • Always check with your securities lawyer and FINRA Broker-Dealer who did your RegA+ filing before making any public statements, news releases, or announcements related to investment in your company, as these might be construed as offerings subject to SEC rules and Private Capital Market Regulations;
  • Track all your activities date, time, where distributed
  • Be thoroughly familiar with your company, its business, and how it is structured.
  • Have a clear idea of your company’s funding needs, how much capital you need to raise, what kind of equity or control you are prepared to give up in return
  • Seek advice from qualified experts: securities lawyers, broker-dealers, accountants; being familiar with your own company will help you answer their questions and get better advice.
  • Choose the right capital-raising route for your needs, whether it be a bank loan, remortgaging your house, or using one of the JOBS Act exemptions.
  • READ THE REGULATIONS! Seriously, read the regulations, and any explanatory notes from the SEC on how they apply and what you need to do to comply.
  • Make notes about the parts you’re not sure about, and ask your experts how they apply to you.

It may turn out that the exemption you initially chose isn’t the right one for your needs, so be prepared to go back and change your plans. It’s much easier to change plans before they’re implemented than it is to have to fix something that’s gone wrong with the implementation.

Once you’re satisfied with the regulation you’ve chosen, make a list of all the things you’ll need to do to carry out a compliant and successful raise. You might do this yourself, or with the assistance of your experts, but in any event you should have your experts review it to see if you’ve got anything wrong or left anything out. Execute the plan. You may need to delegate some of the items on the list to others, but ensure that there is always someone accountable to sign off on the completion of every requirement. Maintain a paper trail of who did what and when, not so much to know whom to blame but to be able to identify where something went wrong and how to fix it. Don’t panic. Mistakes happen.

What is a CIK Number?

Posted on by Oscar Jofre

Recently, we received a question from an issuer who asked what a CIK number is. If you have ever filed a form with the Securities and Exchange Commission (SEC), you have probably come across the term Central Index Key (CIK). The CIK number is a unique identifier used by the SEC’s computer systems to distinguish corporations, funds, and individuals who have filed disclosures with the SEC. 

 

A CIK number is a 10-digit code that is an essential part of the SEC’s EDGAR (Electronic Data Gathering, Analysis, and Retrieval) system, which allows the SEC to collect, analyze and distribute financial information about companies and individuals. CIK numbers are assigned by the SEC and must be included in all filings made with the Commission. This allows the SEC’s computer system to quickly and efficiently identify companies and individuals and analyze their filings. It also helps to ensure that filings made by a particular company or individual are accurate and complete.

 

The easiest way to find a company’s CIK number is by using the SEC’s online database. You can search for CIK numbers using keywords such as the company name or ticker symbol. The search results will provide a list of entities matching your search criteria and their CIK numbers. Keep in mind, the entity’s name may be listed differently than expected.

 

It is also important to note that not all companies that offer stock for sale are required to file disclosures with the SEC, such as some companies raising capital through Regulation D. Small companies may be granted exemptions from regular SEC reporting and, therefore, may not have a CIK number. However, a CIK number is mandatory for companies that file disclosures.

 

CIK numbers are essential for the SEC to monitor and regulate the financial markets. By requiring companies and individuals to use CIK numbers when filing disclosures, the SEC can efficiently identify companies and detect potential fraud or other illegal activities to take appropriate action.

 

CIK numbers are also important for investors and other stakeholders. By providing a unique identifier for each company and individual, CIK numbers allow stakeholders to easily access relevant filings, financial data, and other information. This makes it easier for investors to make informed decisions and for regulators to enforce the rules and regulations that govern the financial markets.

 

In conclusion, CIK numbers are a critical component of the SEC’s regulatory framework. They are used to track and monitor companies and individuals that file disclosures with the SEC, and they enable investors and other stakeholders to access important financial data and other information. 

 

We believe that education is an essential part of the capital-raising process, so don’t hesitate to reach out to our team with any other questions that could help you along your capital-raising journey.

Approaching the 11th Anniversary of the JOBS Act

Posted on by Oscar Jofre

Eleven years ago, the Jumpstart Our Business Startups (JOBS) Act was signed into law in a White House Rose Garden ceremony. Looking back on this landmark legislation, we see its impact has been far-reaching. From increased access to capital for small businesses to the rise of new markets for investment opportunities, the JOBS Act has reshaped how companies raise funds and spur economic growth. In 2022, $150.9 B was raised through Regulations A+, CF, and D, showcasing the tremendous power of these regulations for companies. As we mark the 11th anniversary of this game-changing law, let’s look at what it has accomplished and how it is (still) changing the capital formation landscape.

 

David Wield: The Father of the JOBS Act

 

David Weild IV is a veteran Wall Street executive and advisor to U.S. and international capital markets. He has become well known as a champion of small business as the “Father of the JOBS Act”. Signed into law by President Barack Obama in April 2012, the Jumpstart Our Business Startups (JOBS) Act has opened up access to capital markets, giving small businesses and startups the ability to raise money from a much larger pool of investors. Wield has remarked that this was not a political action; it was signed in “an incredibly bipartisan fashion, which is really a departure from what we’ve generally seen. It actually increases economic activity. It’s good for poor people, good for rich people. And it adds to the US Treasury”.

 

As such, Weild is seen as a leading figure in the JOBS Act movement, inspiring the startup community to break down barriers and build the future. He has helped make it easier for companies to become public, empowering a new generation of entrepreneurs looking to start or grow their businesses. Furthermore, Weild’s efforts have allowed more investors to participate in capital markets.

 

Benefitting from the JOBS Act

 

At the inception of the JOBS Act in 2012, non-accredited investors were only allowed to invest up to $2,000 or 5% of their net worth per year. This was designed to protect non-accredited investors from taking on too much risk by investing in startups, as these investments would likely be high risk and high reward. Since then, the JOBS Act has expanded to allow non-accredited investors to invest up to 10% of their net worth or $107,000 per year in startups and private placements.  

 

For companies they were initially allowed to raise:

 

  • Up to $50 million in RegA+ offerings
  • $1 million through crowdfunding (RegCF)
  • Unlimited capital from accredited investors under RegD

 

These numbers have grown significantly since 2012, with:

 

  • Reg A allowing $75 million to be raised
  • Reg CF allowing $5 million to be raised

 

These rules have opened the door for startups to access large amounts of capital that otherwise may not have been available to them. This has allowed more companies to grow, innovate and create jobs in the U.S.

 

How Much has Been Raised with JOBS Act Regulations?

 

The JOBS Act regulations have revolutionized how capital is raised by companies and how investors access new markets. According to Crowdfund Insider, companies have raised:

 

  • $1.8 Billion from July 2021 to June 2022 with RegA+
  • $2.3 trillion with RegD 506(B)
  • $148 trillion with RegD 506(C)
  • $506.7 million with RegCF

 

Since its formation in 2012, the JOBS Act has opened up a variety of avenues for entrepreneurs to access capital. The exempt offering ecosystem has allowed innovators to raise large sums of money with relatively fewer requirements than a traditional public offering, while still requiring compliance and offering investors protection. This has enabled companies to stay in business and grow, allowing the US economy to remain competitive on the global stage.

 

Insights from Industry Leaders

 

Expanding the discussion about capital formation, KoreConX launched its podcast series, KoreTalkX in April 2022. Through this platform, we’ve hosted many thought leaders and experts to share their insights on capital-raising strategies and compliance regulations. Guests have included renowned thought leaders including David Weild, Jason Fishman, Shari Noonan, Joel Steinmetz, Jonny Price, Douglas Ruark, Sara Hanks, and many others. Each of these episodes has explored topics in-depth to provide entrepreneurs with the tools they need to be successful when raising capital from investors.

Reforms to RegD

Posted on by Oscar Jofre

With Regulation D (RegD) offerings, companies are exempt from registering securities with the SEC. Under RegD, companies can raise capital from accredited investors (and a limited number of nonaccredited investors in some cases) to support the growth of their business. This has become a popular method for private companies to raise capital, and can often be a starting point for larger capital raises under Regulation CF or Regulation A+. This popularity and the minimal disclosure requirements of RegD have prompted SEC Commissioner Caroline A. Crenshaw to propose changes to RegD disclosure requirements in January. Let’s see about these reforms to RegD.

 

Current Regulations Under RegD

 

The objective of RegD was to enable small and medium-sized businesses to seek capital-raising opportunities, without the cost-prohibitive disclosure requirements of a public offering. Under current regulation, companies may make private offerings of securities without having to register with the SEC, provided that they comply with certain disclosure requirements. These include filing Form D (which provides information about a company’s executives and its financial condition) and providing investors with a private placement memorandum outlining the terms of the offering. However, as this method of capital raising has been leveraged by multi-billion-dollar companies for whom it was not originally intended, the SEC is looking to update the disclosure requirements.

 

Commissioner Crenshaw’s Proposed Reforms

 

Commissioner Crenshaw has proposed a two-tiered framework, similar to Regulation A (RegA) which also provides an exemption from SEC registration requirements. Under the proposed reforms, companies offering securities through RegD would be required to provide more disclosure than is currently required, with the burden of disclosure increasing based on company size. Smaller companies (up to a threshold) would only need to provide basic information about their business operations such as management, operational updates, and financial statements. Larger companies (over the threshold) would be required to provide additional, heightened financial disclosures similar to those that are required under an S-1 filing. 

 

This reform could have far-reaching implications for small and medium businesses that wish to access capital markets and would largely depend on where the threshold is set. It remains to be seen whether these proposed reforms will move forward, but it’s clear that Commissioner Crenshaw is interested in modernizing and streamlining the process of raising capital.  

 

Effects of These Changes

 

The SEC’s proposed reforms would require issuers to provide more extensive disclosure and adhere to certain standards that are typically only associated with public offerings. This could potentially be a costly endeavor, as it would involve additional filing fees, legal expenses, and accounting costs.

 

The proposed reforms could also limit the ability of small businesses to access capital through Regulation D, as the costs associated with meeting the new requirements may be too high for some companies. For example, smaller companies may find it difficult to pay for the necessary accounting and legal fees, or they may not be able to generate enough interest from investors due to the higher thresholds that must be met to qualify for RegD. Small start-ups trying to raise only $250,000, these companies may not have the money to prepare the audited financials and Form 1A level disclosures.

The SEC’s proposed reforms of Regulation D are a step in the right direction toward protecting investors and ensuring that issuers adhere to certain standards. However, these reforms could potentially be harmful to small businesses seeking to raise capital through RegD offerings. The SEC needs to consider the potential effects of its proposed reforms and ensure that they are not overly burdensome on companies whose access to capital is already limited.

 

5 Tips for Frictionless Capital Raising

Posted on by Oscar Jofre

Raising capital can be a tricky process. Fortunately, with the JOBS Act and its exemptions from SEC registration under RegA+, RegCF, or RegD, entrepreneurs can now access capital raising 24/7/365. Here are five tips to help you make the most of this opportunity and enjoy frictionless capital raising.

Use Mobile Apps for Online Investments

Mobile apps are becoming an increasingly popular way to access capital markets and make investments online. When a company raises capital under a JOBS Act exemption, a mobile app can streamline the investment process for investors. For example, the KoreID Mobile App allows investors to manage current and pending investments and reinvest with ease. KoreID allows investors to securely manage their personal information so that they don’t have to reenter the same information each time they go to invest.

Utilize Affinity Marketing

What better way to raise capital than to leverage your existing network of customers? Customers that align with your company’s mission and values can become powerful brand ambassadors when they invest. This type of marketing also helps give potential investors a sense of trust and familiarity, which can be invaluable when it comes to securing investments. By utilizing affinity marketing, you can easily create an affinity network and unlock new capital-raising opportunities.

Seek the Crowd

Over the last year, the amount of venture capital funding has dropped significantly. Instead, online capital formation facilitated by the JOBS Act has become a powerful player in the private capital market. RegA+ and RegCF allow companies to raise capital from the general public, creating a wider pool of potential investors. And, since online capital raising is open 24/7/365, these sources of capital can be a valuable alternative to traditional funding routes.

Have a Plan and Tailor Your Pitch

Before you even consider approaching potential investors, you should always have an airtight business plan in place. This includes your stated objectives, financial projections, and any other details that provide an in-depth look into your venture. Once you’ve mapped out the specifics of your venture, it’s time to start crafting a tailored pitch that resonates with potential investors. Creating a compelling presentation with the right balance of facts, figures, and storytelling can help draw investors in and establish trust. Think about the investors you are pitching to and tailor your pitch accordingly. Are they venture capitalists and angel investors? Or are you targeting family and friends or seeking equity crowdfunding? Each type of investor has different requirements, so it’s key to understand who you are pitching to and adjust your strategy accordingly. Regardless of who you’re targeting, it’s vital that you fully understand your business plan, because investors will ask you questions that a memorized sales pitch might not answer adequately. By doing this, you can ensure that the capital-raising process is as seamless as possible.

Prioritize Compliance

When raising capital, adhering to securities regulations is essential for success. While there are many components to compliance, using a broker-dealer is one of the first things that any company should consider when raising capital. Broker-dealers can also help you navigate the complexities of securities regulations. By selecting an experienced and reliable broker-dealer, you’ll have peace of mind knowing that the process is compliant and secure. With these raises sometimes having thousands of investors on a cap table, you want to be sure that your investors are managed properly and that your raise is in compliance with the law.

Raising capital for your venture doesn’t have to be a daunting task. By following these five tips for frictionless capital raising, you can make the process as smooth as possible so you can be well on your way to securing the funds needed for growth. 

 

SEC Amends Broker-Dealer Record-keeping Requirements

Posted on by Oscar Jofre

The SEC’s long-time policy for broker-dealers is to keep records of their business activities in a non-rewritable, non-erasable format – otherwise known as WORM (Write Once Read Many). But with new amendments to Rule 17a-4, broker-dealers are provided an audit trail alternative to keeping data in WORM format. Beginning May 3, 2023, firms will be required to comply with the new record-keeping regulations.

 

The final amendments grant flexibility to broker-dealers when meeting these requirements. They can choose to either: (1) preserve documents in WORM format, or (2) preserve electronic records in a system that maintains a timestamped audit trail. These can take the form of cloud-based systems, distributed ledger technology, or other emerging technologies.

 

This rule can be interpreted in a few different ways. First, firms can retain some electronic records with an audit trail and preserve other records with the WORM requirement. Second, firms may use an electronic recordkeeping system that meets the audit trail and WORM requirements. Either way, broker-dealers should ensure their programs are compliant as of May 3rd, 2023, or face the stiff penalties associated with non-compliance.

 

With the compliance date approaching, broker-dealers should review their record retention practices and expand the review beyond WORM vs Audit Trail alternatives. By proactively evaluating existing record retention practices and identifying any gaps before the compliance date, broker-dealers can ensure that their records are up-to-date and compliant with the new regulations.

 

What is Rule 145?

Posted on by Oscar Jofre

The Securities Act, passed in 1933, was created to protect investors following the stock market crash in 1929. It offers protection by ensuring more transparency and creating laws against fraud in the capital market. The Securities Act also requires companies to be registered with the SEC to sell securities to investors. At the same time, the SEC has introduced certain exemptions like Regulation A+ and Regulation CF, which allow private companies to raise capital without having to go through the process of SEC registration.

 

Another exemption is Rule 145, which “registered transactions in connection with reclassifications of securities, mergers or consolidations, or transfers of assets”. This is an especially important rule to be aware of for startups, as possible exit opportunities could include an acquisition. 

 

Ultimately, the rule says that if shareholders vote to accept or reject a merger proposal, it is considered an investment decision with respect to the offer of the acquiring company’s shares. When a company wants to purchase another company that has investors from previous rounds of crowdfunding, it must register its offering under the Securities Act or comply with one of its exemptions such as Regulation A, Regulation D, or Regulation CF. 

 

In addition, Rule 145 requires that all shareholders must approve the merger and receive full disclosure about the terms of the deal before they vote. Some states may also require shareholders with non-voting rights to cast their votes, as they are awarded certain inalienable voting rights in some scenarios. 

 

If the acquirer is not a public company, registration of securities is typically a costly process. However, they can utilize Reg A+ if they have an offering active that can be amended. Regulation D is typically not utilized because investors from a Reg CF raise are likely to include many nonaccredited investors. Alternatively, some companies may opt to use Regulation CF. However, this option will not work if there are already more than $5 million worth of crowdfunding investments from previous rounds. Ultimately, these considerations must be made well in advance so that all shareholders are given proper notice and have enough time to make an informed decision about whether or not to approve the merger agreement before it takes effect.

 

And in some cases, the acquiring company was unable to offer shares to crowdfunding investors, requiring them to cash out these investors. However, many investors believed in the company’s vision and were interested in the long-term progress of the company, so a cash-out can be disappointing. At the same time, a cash-out may be difficult for companies without the available funds. 

 

For companies exploring an acquisition for a potential exit after previous rounds of crowdfunding, these are some of the things that need to be taken into consideration. Just as a securities lawyer can help with initial offerings, they can also help you navigate these types of exits so you can do so compliantly. 

What You Need to Know About RegCF

Posted on by Oscar Jofre

Raising capital is always a challenge, especially in the startup sector, which means that it’s vital to understand all the options available and how they can help you attain your goals. We will discuss Regulation Crowdfunding (RegCF), which has proved to be an increasingly popular method among early-stage companies looking for funds due to its exemption from SEC registration and access to a vast pool of potential investors, in addition to being cost-effective. This blog post will outline some essential things you need to know before taking advantage of RegCF as a form of raising capital. Understanding what challenges you may face along the way and what resources are at your disposal will hopefully give you greater insight into whether this capital option is right for your business.

 

What is RegCF?

 

  • RegCF refers to equity-based crowdfunding.
  • This type of financing method raises money through small individual investments from many people.
  • Startups and early-stage businesses can use RegCF to offer and sell securities to the investing public.
  • Anyone can invest in a Regulation Crowdfunding offering, but there are limits based on annual income and net worth for investors who are not accredited.

 

What do you need to know about RegCF?

 

RegCF is a type of securities-based crowdfunding that allows startups and early-stage businesses to offer and sell securities to the investing public. This type of financing method raises money through small individual investments from many people, and it has seen a surge in popularity since its enactment in 2012. In 2019, the SEC passed amendments to RegCF, making it even easier for companies to raise capital, such as increasing the offering limit to $5 million. As of 2021, over $1.1 billion has been raised through RegCF.

 

Who can invest in a Regulation Crowdfunding offering?

 

Any person can invest in a Regulation Crowdfunding offering. However, there are certain restrictions based on annual income and net worth for those who are not accredited investors. According to the SEC, an individual will be considered an accredited investor if they have earned income that exceeded $200,000 ($300,000 together with a spouse or spousal equivalent) in each of the prior two years and reasonably expects the same for the current year, have a net worth over $1 million (excluding the value of their primary residence), or hold certain professional certifications.

 

What are the investment limits for non-accredited investors?

 

For non-accredited investors, the amount they can invest in a RegCF offering depends on their net worth and annual income. If an individual’s annual income or net worth is less than $124,000, then during any 12 months, they can invest up to the greater of either $2,500 or 5% of the greater of their annual income or net worth. If their annual income and net worth are equal to or more than $124,000, then during any 12 months, they can invest up to 10% of annual income or net worth, whichever is greater, but not to exceed $124,000.

 

What Are the Benefits of RegCF?

 

Any startup or early-stage business can use RegCF to raise capital. This financing is beneficial for companies that do not have the resources or connections to access traditional forms of financing, such as venture capital or bank loans. RegCF also provides an alternative to Initial Public Offerings (IPOs) for companies that are too small for a public offering.

 

RegCF is an excellent way for startups and early-stage businesses to access capital. It offers increased access to capital and no restrictions on who can invest. RegCF is expected to reach $5 billion in raises in the future, and with the popularity of this financing only growing, it’s clear that RegCF is here to stay. By understanding the basics of Regulation Crowdfunding, startups and small businesses can make informed decisions about when and how to raise capital to achieve their business goals.

What You Need to Know About RegA+

Posted on by Oscar Jofre

If you are an entrepreneur looking to raise funds, you may have heard of Regulation A+, often referred to simply as Reg A+. This alternative to traditional venture capital, private equity, or other funding sources allows companies to sell securities to the public without going through the lengthy and costly process of registering with the SEC. Since it was expanded in 2012 with the JOBS Act, Reg A+ continues to evolve, facilitating increased capital formation for companies within the private capital market.

 

What is Reg A+?

 

The goal of Reg A+ is to make it easier and less expensive for small businesses to access capital while still providing investors with the protection of an SEC-qualified offering. The offering is exempt from complete SEC registration, allowing companies to raise up to $75 million in capital, with certain restrictions and requirements. To qualify for this exemption, a company must file an offering statement (Form 1-A) with the SEC that includes all pertinent information about the business and the offering. The company must also provide ongoing disclosure about its business, including financial statements and other material information.

 

Who is Reg A+ for?

 

Reg A+ is aimed primarily at small and medium-sized businesses looking to raise funds from the public, but larger companies can also use it. Because there are fewer restrictions and requirements than traditional SEC registration, Reg A+ offers a more affordable option for companies that do not have access to venture capital or other significant funding sources. Because Reg A+ is such a robust option for companies looking to raise capital, many companies stay private longer instead of going public through an IPO. 

 

Advantages of Reg A+

 

Beyond lower costs than going public, Reg A+ offers additional benefits for issuers and investors alike. It is a unique opportunity for investors to get involved with early-stage companies since the offering allows both nonaccredited and accredited investors to invest. At the same time, these investors can benefit from the potential for higher returns and the ability to diversify their portfolios. Investors also benefit from SEC oversight, which aims to protect them and ensure that they are investing in legitimate investment opportunities. Investors may also have options for liquidity, as securities purchased through a Reg A+ offering can be traded on a secondary market.

 

Reg A+ benefits companies because it offers a relatively simple and cost-effective way to access the public markets while accessing an increased pool of potential investors than a traditional offering. Unlike conventional VC or private equity funding routes, issuers can also retain more ownership over their business while finding investors who share the vision for the mission and direction of the company. Issuers can also benefit enormously from building brand advocates out of their investors, which can, in turn, inspire new investors or customers. 

 

Reg A+ offers an excellent alternative for small businesses looking to raise capital without going through the lengthy and costly process of registering with the SEC. With a maximum offering cap of $75 million, Reg A+ can be used for companies of all sizes and offers investors the opportunity to access early-stage companies that they may not otherwise have access to. 

What are the Differences Between Regulations A, CF, D, and S?

Posted on by Oscar Jofre

When it comes to raising capital, there are various ways you can raise money from investors. And while they all have their own specific compliance requirements, they all share one common goal: to protect investors while still providing them with opportunities to invest in private companies. Let’s look at the four most popular types of equity crowdfunding; through Regulation A, CF, D, or S. 

 

Regulation A+

 

Offering size per year: Up to $75 million

Number of investors allowed: Unlimited, as long as the issuer meets certain conditions.

Type of investor allowed: Both accredited and non-accredited investors.

SEC qualification required: Reg A+ offerings must be qualified by the SEC and certain state securities regulators and must also file a “Form 1-A”. Audited financials are required for Tier II offerings.

 

This type of crowdfunding is popular because it allows companies to raise up to $75 million per year in capital and is open to accredited and non-accredited investors. Offering the ability to turn current customers into investors and brand ambassadors (like several JOBS Act regulations promote) can bring a company tremendous value and help to grow the business. A Reg A raise is excellent for companies that have a wide customer base or need to raise a large amount of capital. Compared to other regulations, Reg A+ is a bit more complex and time-consuming to implement. Yet, it still offers a great deal of potential with the ability to market the offering to a wide pool of potential investors.

 

Regulation CF

 

Offering size per year: $5 million

Number of investors allowed: Unlimited, as long as the issuer meets certain conditions.

Type of investor allowed: Both accredited and non-accredited investors

SEC qualification required: The offering must be conducted on either an SEC-registered crowdfunding platform or through a registered broker-dealer. Audited financials are required for companies looking to raise more than $1,235,000. Companies must fill out a “Form C.”

 

Compared to other regulations, Reg CF is one of the most popular due to its lower cost and ease of implementation. Regulation CF offers companies the ability to raise up to $5 million per year and allows accredited and non-accredited investors to invest in the company. Companies that need a smaller sum of capital while still leveraging the power of marketing can benefit from utilizing this type of regulation. 

 

Regulation D

 

Offering size per year: Unlimited

Number of investors allowed: 2000

Type of investor allowed: Primarily accredited investors, with non-accredited investors only allowed for 506(b) offerings.

SEC qualification required: Reg D offerings do not need to be registered with the SEC but must still meet certain filing and disclosure requirements.

 

A Reg D offering must follow either Rule 506(b) or 506(c). Both allow up to 2000 investors but differ slightly in that 506(b) offerings allow up to 35 non-accredited investors. Additionally, 506(b) offerings do not permit general solicitation. This means that companies will have to rely on their own network of investors to reach their goals. While this type of offering is more restrictive than others, it can be attractive to companies that need a smaller sum of capital and have access to a network of accredited investors. 

 

Regulation S

 

Offering size per year: Unlimited

Number of investors allowed: 2000

Type of investor allowed: Foreign (non-US) accredited and non-accredited investors

SEC approval/qualification required: Reg S offerings are not subject to SEC rules, but they must follow the securities laws in the countries issuers seek investors from.

 

An excellent complement to Reg D, Reg S allows companies to raise capital from foreign and non-U.S. investors. This regulation was made for big deals, allowing companies to reach a larger and more diverse pool of investors. Reg S is great for companies looking to raise a large amount of capital or to break into foreign markets. Issuers must be careful not to make the terms of the offerings available to US-based people.

 

Depending on the size of your offering, the number of investors you’re looking to attract, and the type of investor you want, one regulation may be better suited for your needs than another. Still, it is important to consult with a professional when making these decisions to ensure that you meet all necessary compliance requirements.

How Can an Update on RegD Impact Private Markets?

Posted on by Oscar Jofre

Far larger than the initial public offering (IPO) market, Regulation D is incredibly important within the private capital markets, facilitating over $1 trillion in capital every year. Now, the SEC is considering updates to the accredited investor definition, which would have a significant impact on Reg D offerings, the private market, and the economy as a whole.

 

Understanding Regulation D

 

To understand how an update to RegD could impact private markets, it is important to have a brief overview of the regulation. There are two types of Reg D – 506b and 506c. Both offer exemptions from Securities and Exchange Commission (SEC) registration requirements for securities offerings and require investors to be accredited. An accredited investor is an individual who meets certain financial criteria, such as earning $200,000 or more a year or having a net worth of over $1 million. The main difference between 506b and 506c is that 506b does not allow the issuer to solicit generally or advertise the offering to potential investors.

 

Changes on the Horizon

 

The SEC is currently considering updates to RegD, including changes to the definition of an accredited investor. Some changes could include raising the income or net worth thresholds, although it is still somewhat unclear as to what the SEC envisions. Raising these thresholds would mean fewer individuals would qualify as accredited investors and therefore have access to private securities offerings. The impact of these changes could affect different types of investors differently. Still, they will likely have a significant impact on private capital formation and the ability of entrepreneurs to access funding.

 

The update could also impact companies that use Reg D offerings as part of their fundraising strategy. Currently, these companies can access a much larger pool of capital than they would through an IPO or traditional venture capital, as nearly 15 million Americans qualify under the current definition. But if the definition of an accredited investor is narrowed, this could limit access to capital for smaller or startup companies. 

 

What Does This Mean for the Private Market?

 

Even though the SEC says that these changes are to protect investors, net worth and income are not the only way to determine whether an investor is accredited or not. The ability to make an educated investment decision also relies on the education and experience of the investors, which isn’t considered in the definition of an accredited investor. Some organizations, like the Investor Choice Advocate Network, believe that the definition should be updated to reflect non-financial measurements such as the professional certifications required for CPAs, registered investment advisors, financial planners, and other professionals. 

 

Updates could also mean that fewer individuals from underrepresented groups may be able to participate in a Reg D offering. With these groups historically facing obstacles to participating in capital markets, these updates could dramatically reduce investment opportunities for some individuals as well as make it more difficult for companies who are looking to raise capital from underrepresented communities.

 

Of course, it is difficult to say exactly what the impact of updated Reg D would be on private markets when we still do not know what those updates will be. Hopefully, we will have more information soon.

Celebrity Endorsements of Investment Opportunities

Posted on by Oscar Jofre

When it comes to investing, celebrities are just like the rest of us. They need to do their research before putting their money into anything. Unfortunately, many stars have fallen victim to investment schemes in the past without doing the proper due diligence. However, an issue that is becoming even more prevalent is celebrities who use their influence and followings to promote securities, without including the proper disclosures, to unsuspecting fans and investors.  So, with the SEC cracking down on celebrities and companies, it’s important to know what you’re getting into when dealing with an investment opportunity tied to a celebrity endorsement.

 

Celebrity Endorsement and Investment Opportunities

 

The SEC’s Office of Investor Education and Advocacy (OIEA) has warned investors not to make investment decisions based solely on celebrity endorsements. While celebrity endorsements exist for a wide variety of products and services, a celebrity endorsement does not mean that an investment is legitimate or appropriate for all investors. As the OIEA says, “It is never a good idea to make an investment decision just because someone famous says a product or service is a good investment.”

 

Celebrities can be lured into participating in a fraudulent scheme or be linked to products or services without their consent. According to the SEC, even if the endorsement and investment opportunity are genuine, the investment may not be good for you. Before investing, always do your research, including these steps:

 

  • Research the background, including registration or license status, of anyone recommending or selling an investment through the search tool on Investor.gov.
  • Learn about the company’s finances, organization, and business prospects by carefully reading any prospectus and the company’s latest financial reports, which may be available through the SEC’s EDGAR database.
  • Evaluate the investment’s potential costs and fees, risks, and benefits based on your personal investment goals, risk tolerance, investment horizon, net worth, existing investments and assets, debt, and tax considerations. 

 

Kim Kardashian and the SEC

 

The SEC’s announcement followed an investigation that found Kim Kardashian failed to disclose that she was paid $250,000 to publish a post on her Instagram account promoting EMAX tokens, a crypto asset security offered by a company called EthereumMax. The post contained a link to the EthereumMax website, which provided instructions for potential investors to purchase the tokens. Since the investigation, she has agreed to settle the charges and pay $1.26 million in cooperation. SEC Chair Gary Gensler noted that “investors are entitled to know whether the publicity of a security is unbiased,” and the SEC’s Director of Enforcement Gurbir S. Grewal added that “Ms. Kardashian’s case also serves as a reminder to celebrities and others that the law requires them to disclose to the public when and how much they are paid to promote investing in securities.”

 

This case highlights the need for transparency surrounding celebrity endorsements of investments. Federal securities laws are clear that any celebrity or other individual that promotes a security must disclose the nature, source, and amount of compensation they received in exchange for the promotion. Without this type of disclosure, investors cannot make informed investment decisions. The SEC’s investigation is ongoing, and it remains to be seen if any additional action will be taken in this case. This case serves as a reminder that celebrities and influencers are not above the law. When considering any investment opportunity, it is important to do your own research and consult with a financial advisor to ensure it is right for you. Be sure to ask questions and demand transparency if you are asked to invest in a security based on a celebrity endorsement.

Howey Test: What is it?

Posted on by Oscar Jofre

The Howey Test is a simple but important test used by the US Securities and Exchange Commission (SEC) to determine whether an investment contract is a security. Whether you are an investor or a company offering a security, it’s vital to know about the Howey Test and how it applies to securities.

 

Utilizing the Howey Test

 

The Howey Test is used by the SEC to determine whether an investment contract is a security. The test is named after the Supreme Court case SEC v. W. J. Howey Co., which established the test in 1946. The Howey Test has three prongs:

 

  1. There is an investment of money
  2. There is a common enterprise
  3. There is an expectation of profits 

 

If all three prongs are met, then the investment contract is considered a security and is subject to securities regulations. The Howey Test is crucial because it helps to protect investors from fraud and scams. There are many different types of securities, such as stocks, bonds, and mutual funds, and each has its own set of rules and regulations. The Howey Test ensures that all securities offerings are legitimate and that investors are not being misled.

 

The Howey Test applies to any investment contract, whether it is for a physical asset, like a piece of real estate, or a financial asset, like a stock. For the Howey Test to apply, there must be an investment of money. This can be in the form of cash, property, or even services. The second prong of the test states that there must be a common enterprise. This means that the investment must be pooled together with other investors’ money to make a profit. The third prong says there must be an expectation of profits. This means that the investor is relying on someone else, such as a company’s management team, to make investments and profits.

 

The Howey Test is not necessarily a test you can pass or fail. It is one of several tests used in securities law to determine whether an instrument being offered is a security or not. Other tests can also be used, such as the Reves test. Which should be applied depends, as the SEC says, on the facts and circumstances. An instrument is only a security if it meets all three prongs of the Howey Test. 

 

Bringing it All Together

 

The Howey Test is a simple but vital test used by the SEC to determine whether an investment contract is a security. The test’s three prongs allow the SEC to evaluate different types of investments to see if they fit the definition of a security. The Howey Test is important because it protects investors from fraud and scams. Investors want to ensure they are not being misled and that the investments they are making are legitimate. The Howey Test is one way to help make sure that is the case. 

 

What is the Role of FINRA?

Posted on by Oscar Jofre

When it comes to investment, there are a lot of things to think about. You want to make sure that you’re making smart decisions with your money, and that you’re not being taken advantage of. That’s where the Financial Industry Regulatory Authority (FINRA) comes in. FINRA is an independent regulator for securities firms, and its job is to make sure that all firms operate fairly and honestly, and that investors are protected–giving investors confidence in the legitimacy of their investment while holding securities companies to a high standard. Keep reading to learn more about the role of FINRA and how they help to protect investors.

 

What is FINRA?

 

FINRA is a not-for-profit regulatory organization authorized by the US Congress to protect investors. FINRA oversees all US-based securities firms and is considered the front line of defense when it comes to investor protection. FINRA’s rules and regulations ensure that all securities firms operate fairly and honestly and that investors are given the information they need to make informed investment decisions. Operating under the auspices of the US Securities and Exchange Commission (SEC), FINRA is the largest independent regulator for securities firms doing business in the United States.

 

Who does FINRA protect?

 

FINRA exists to protect investors, which means that they provide rules and regulations that apply to all securities firms to create a level playing field. They do this through a variety of means, including registration and licensing, monitoring and examining firms, conducting enforcement actions, and providing investor education. FINRA also offers assistance and support to investors who have been wronged by a securities firm. By educating investors about their rights and responsibilities when it comes to investing, FINRA helps protect them from being taken advantage of. In terms of security firms, FINRA’s job is to make sure they are adhering to all relevant rules and regulations, and that they are providing accurate and complete information to their investors.

 

Why is FINRA important?

 

FINRA plays an important role in the investment landscape by ensuring that all securities firms operate fairly and honestly. This helps to create trust between investors and the industry, which is essential for a thriving economy. In today’s day and age, with crowdfunding being available to accredited and non-accredited investors, FINRAs role is more important than ever. Giving peace of mind to investors is one of the most important roles that FINRA plays.

 

What is the role of FINRA as it relates to investment crowdfunding?

 

Investment crowdfunding is a relatively new phenomenon, and FINRA has been working to create rules and regulations that will protect investors while still allowing this innovative form of investing to flourish. The role of FINRA in investment crowdfunding is to protect investors by ensuring that issuers are providing accurate and complete information about their offerings, and that platforms are properly registered and compliant with all relevant rules and regulations. By doing so, FINRA is helping to create a safe and transparent environment for this growing industry.

 

One of the key issues that FINRA is concerned with is the disclosure of information by issuers, which is essential to ensuring that investors can make informed investment decisions. When it comes to Reg CF offerings, FINRA Rule 251(a)(3) requires issuers to file a Form C with the SEC before they can solicit investors. Form C must include information about the issuer, the offering, and the use of proceeds. In addition, all materials that are used to solicit investors must be filed with FINRA. These filings give FINRA the ability to review the offering and make sure that it is compliant with all applicable rules and regulations.

 

SEC Charges Eight in Scheme to Fraudulently Promote Securities Offerings

Posted on by Oscar Jofre

On September 30, 2022, the SEC announced charges against 8 CEOs and CFOs for fraudulently promoting Regulation A+ securities offerings.  The companies named by the SEC include Elegance Brands Inc. (now Sway Energy Corp.), Emerald Health Pharmaceuticals Inc., Hightimes Holding Corp., and Cloudastructure Inc.

 

This is not a good day for those who flout the rules, but we are glad the SEC has taken decisive action.  Reg A+ is gaining great momentum in the marketplace and this type of scrutiny by the SEC is necessary to keep it clean.

 

There are so many great companies and intermediaries working hard and being compliant. This only reminds us that we must continue to be diligent and keep our eyes open so that no further damage happens in the private markets.

 

It is not enough for the broker-dealers of record to simply do KYC ID verification; you also need to keep asking the hard questions.

 

If you are an IA firm,   you are creating and delivering the branding, messaging, and content through stories, videos, blogs, webinars, etc.  Each of these activities has far-reaching regulatory consequences. You can’t just simply do whatever they tell you to do; you too must be diligent in ensuring that you are telling the truth on their behalf. 

 

We turn down clients daily because we don’t compromise our ethics, and we only operate with full compliance to all regulations..  

 

There are only two ways to operate in this world:

  • Compliantly, ethically, legally
  • Non-Compliantly, unethically, illegally, and cutting corners

 

The choice is clear.

 

Capital-raising cannot be done by only the Issuer. This caution applies to all the following participants:

  • Issuer (Management, Board Directors)
  • Investors
  • Shareholders
  • Lawyers
  • Auditors
  • FINRA Broker-Dealers
  • Investor Acquisition Firms (Marketing Firms)
  • Call Centers (Boiler Rooms)
  • Transfer Agents
  • Issuance Technology Providers
  • Funding Platforms
  • Research Providers
  • Offering Aggregators
  • Investor Relations
  • Public Relations 

 

If you see any kind of questionable behavior, exercise caution and if necessary, let the SEC know.

 

SEC News Release 30 September 2022

https://www.sec.gov/litigation/litreleases/2022/lr25541.htm

 

Stay tuned for more updates from the SEC.

The SEC Released its 41st Annual Small Business Forum Report

Posted on by Oscar Jofre

For 41 years, the Securities and Exchange Commission has hosted its annual Small Business Forum. The event, led by the SEC’s Office of the Advocate for Small Business Capital Formation, aims to gather feedback from both the public and private sectors to improve capital raising and sheds light on many issues facing small businesses and investors to help event participants develop policy recommendations.

 

Highlighting the needs of small businesses within the US is crucial, as they play a vital role in the economy and job creation. Over the past 25 years, 2 out of every 3 jobs created can be attributed to small businesses. These businesses serve as the lifeblood of their communities.

 

Some of the key takeaways from the four-day event included the fact that more entrepreneurs need to be made aware of resources available when raising capital, as many have great ideas, but lack the knowledge and experience to raise capital effectively. This also means expanding access to capital to both underrepresented groups and locations, especially outside of major “tech-hub hotspots.” Additionally, panel discussions highlighted the issues minority entrepreneurs continue to face when seeking traditional funding options, such as venture capital or private equity. These funding methods often rely heavily on networks and connections that exclude many entrepreneurs. 

 

According to sources such as Crowdfund Insider, the Commission has addressed past issues such as democratizing the definition of an accredited investor by empowering a more significant segment of the population to gain access to Reg D private securities offerings. However, other suggestions often face political challenges and regulatory obstacles.

 

Even so, Commissioner Hester Pierce urged the Commission and forum participants to be inspired by the JOBS Act. She also commented: 

 

“Heightening the importance of this year’s Forum is the Commission’s current posture of, at best, indifference, and at times, hostility to facilitating capital formation. As it happens, today is the tenth anniversary of President Obama signing into law the Jumpstart Our Business Startups (JOBS) Act. That bipartisan legislation required the SEC to write rules lessening the burdens on small companies seeking to raise capital. Some of the Act’s provisions were things we could have done on our own. Congress and the President got fed up waiting for the Commission to take small business capital formation seriously.”

 

Additionally, Commissioner Allison Lee remarked:

 

“Many investors are business owners and vice versa. And capital raising and investor protection are not at odds with one another or a zero-sum proposition. Rather, investors need appropriate investment opportunities, and investor protection increases investor confidence, which in turn helps promote capital raising. The relationship between the two is symbiotic and we can and should seek to balance the need for both robust capital raising opportunities and robust investor protection.”

 

Hopefully, seeing how the JOBS Act has expanded capital formation will encourage the SEC to continue the momentum and create more tools and resources to support small businesses. In the meantime, companies should explore existing options and opportunities for capital, such as through the JOBS Act. Small businesses should not wait for the SEC to create more opportunities – they should take advantage of the rules and regulations that are currently in place to raise the capital they need to grow their businesses.

It is time to meet your MedTech A+ Team

Posted on by Oscar Jofre

With our KoreSummit on RegA + for Medtech companies quickly approaching, we’d like to introduce the speakers we are thrilled to have for this informative event an exciting and life-changing industry. It is time to meet your MedTech A+ Team.

 

Dawson Russel
A branding and marketing expert with over ten years of experience in the industry. He has helped over 100 companies build their brands and tell their stories to the right audience thanks to his specialty in creative storytelling. His company, Capital Raise Agency, provides full-scale branding, marketing strategy, website design and development, video production, lead generation, social media, email, native ad campaign management, and more. At the upcoming Medtech KoreSummit event, Dawson will be speaking about how to build a brand and tell a story that captivates an audience.

 

Scott Pantel
President and founder of Life Science Intelligence, a company that ​​provides deep knowledge of the healthcare industry, guiding clients with actionable data to identify significant trends in medical devices, diagnostic, and digital health technologies that are rapidly evolving in the industry. At the upcoming KoreSummit, Scott will be discussing where Medtech companies can begin when embarking on their capital-raising journey. His wealth of knowledge on the topic will help entrepreneurs better understand the potential of Regulation A+ and how it can be used to grow their businesses. 

 

Stephen Brock
CEO of Medical Funding Professionals, a company that helps innovative companies in the healthcare field gain access to capital. Stephen is also passionate about ensuring founders, early employees, and investors retain control of their companies. For many companies in Medtech, this means introducing them to the potential of Regulation A+, which is just beginning to see more adoption by companies in this space. Stephens’s expertise in the Medtech field will shine through in his participation in the event’s panels.

 

Douglas Ruark
A corporate finance expert who has been involved in the securities industry for over two decades. He has experience with SEC-exempt securities offerings and provides advisory services for clients preparing and executing Regulation D, Regulation CF, and Regulation A+ offerings. We are excited for Douglas to share his knowledge at the KoreSummit event, where he will be speaking about Form 1A and the regulatory requirements for filing. 

 

Shari Noonan
CEO and Co-Founder of Rialto Markets, has over 20 years of experience in financial services, giving her unique insight into the private market. Shari will be joining the event to discuss the topic: “Form 1A: What is it, the regulatory requirements, and all you need to complete the filling and go live.” This makes her a valuable speaker at the upcoming event as she can offer information on the topic from both a regulatory and technological perspective for MedTech companies. 

 

Andrew Corn
Founder and CEO of E5A, a marketing firm specializing in RegA+ offerings. With over 25 years of experience in the industry, Andrew has a unique perspective on raising capital through marketing. He will be speaking at the upcoming KoreSummit on how Medtech companies can sell the story, not the stock. Through marketing, companies can reach a wider pool of potential investors, including those who are not accredited investors. Andrew brings his world-class knowledge of marketing Regulation A+ offers and acquiring the right investors for a company’s raise.

 

Nick Antaki
Corporate attorney with experience in securities offerings and private placements, providing legal services to small and medium-sized businesses, including entity structuring, regulatory strategy, trademarks, copyrights, and trade secrets. Nick’s experience will be valuable to KoreSummit attendees as they look to raise money for their businesses, and he joins his colleague Doug Ruark from Reg D Resources.

 

Joel Steinmetz
COO and co-founder of Rialto Markets, with over 20 years of experience in the financial services field. He saw the many obstacles issuers and investors faced in the private placement market, opening up the opportunity to bring efficiency to inefficient markets, and inspiring him to co-found Rialto Markets.

 

Lee Saba
CTO and Head of Market Structure at Rialto with over 20 years of experience in financial services. We are excited to hear Lee share his thoughts in this growing Reg A+ vertical.

 

Matthew McNamara
Managing Partner at Assurance Dimensions and has over 20 years of experience as a Certified Public Accountant. He specializes in SEC and private company audits, focusing on technology, manufacturing, retail, construction, nonprofit, and transportation industries. Given his broad experience in accounting and auditing, McNamara is well-positioned to provide valuable insights on financial reporting for MedTech businesses.

 

Andy Angelos
President of Forward Progress, a company that provides end-to-end solutions for investor marketing, lead generation, and customer acquisition campaigns. Their battle-tested strategies connect you with accredited and nonaccredited investors to provide growth capital for your business. Andy will be speaking at a talk on “sell the story, not the stock” at the upcoming KoreSummit, sharing his expertise on connecting with investors and delivering sustained growth. With his vast experience in marketing and capital acquisition, Andy will surely give an insightful discussion that will be valuable for anyone in attendance.

 

John Hayes
Co-founder and CEO of Raising Stakes Media, a company that provides marketing and advertising services for businesses hoping to raise capital through a Reg A+ offering. With over 25 years of experience in the media industry, John brings a wealth of knowledge to the table for effectively telling a company’s story.

 

Oscar Jofre
Co-founder, president, and CEO of KoreConX. He has long been a passionate advocate for expanding the private capital market to increase opportunities for companies and investors alike. Part of his mission at KoreConX is to establish an ecosystem of trusted partners that can help investors and issuers succeed through the JOBS Act exemptions. 

 

Peter Daneyko
KoreConX’s CRO and brings a wealth of knowledge to the table regarding business development, startups, and sales. He will be speaking at the KoreSummit about Secondary ATS and Form 1A: What is it, the regulatory requirements, and all you need to complete the filling. This is essential information for anyone in the MedTech industry looking to go live with Reg A+, as it can be challenging to navigate the regulatory landscape. 

 

Dr. Kiran Garimella
Chief Scientist & CTO at KoreConX, is a world-renowned expert in artificial intelligence and machine learning, with over 20 years of experience in the technology industry. His experience and expertise make him a valuable asset to the KoreSummit, and he will talk about preparing for your live offering and secondary ATS.

 

Amanda Grange
Transfer specialist with KoreConX and returning for the upcoming KoreSummit event. She brings her experience to the table to discuss what issuers should be aware of when going live and the preparations they need to make to set themselves up for potential success.

 

It’s not too late to sign up for the event. You can register for the half-day webinar event here. It’s completely free to attend! 

 

How Can a Foreign Company use RegA+

Posted on by Oscar Jofre

For many issuers outside of the United States, the ability to raise capital from a wide pool of investors, including “the crowd” is immensely compelling. However, for foreign issuers to be able to use RegA+, there are some important considerations to keep in mind.

 

First and foremost is whether the company would be eligible to offer securities to U.S. investors. Foreign companies should seek the advice of qualified legal counsel to ensure compliance with all applicable U.S. laws and regulations. Additionally, foreign companies should consider the costs associated with making a public offering under RegA+ and the ongoing reporting requirements imposed on the company if it elects to use this securities exemption.

 

Benefit from RegA+ as a Foreign Company

 

The benefits of using Reg A+ for foreign companies are tremendous. Perhaps most importantly, RegA+, as a securities exemption, allows companies to raise $75 million from non-accredited investors. The exemption also enables issuers to “test the waters” concerning interest in their securities before officially launching the offering

 

Using RegA+ as a Foreign Company

 

It is vital first to understand the process and what is required when looking to do a RegA+ raise. Foreign companies should be aware of the following when using RegA+:

 

  • The company must be registered as a US company with a principal place of business in the US.
  • The company must have two years of audited financial statements.

 

While RegA+ offers a foreign company a simplified path to raising capital in the United States, several requirements still need to be met for the offering to be successful. These requirements include:

 

  • Filing a Form 1-A with the SEC.
  • Passing an SEC review process.
  • Engaging a US-based registered broker-dealer.
  • Disclosing all material information about the company and the offering.

 

However, like any method of raising capital, RegA+ may not be suitable for all foreign issuers. This makes it incredibly important to engage a knowledgeable team that can guide issuers through the process.

 

What Does ATS Mean in Trading

Posted on by Oscar Jofre

Many investors are turning to the private capital market to make long-term investments in light of the current market conditions. This has increased alternate trading systems and secondary market trading for RegA+, RegCF, and RegD securities. An alternate trading system (ATS) is a non-exchange trading venue that matches buyers and sellers to trade securities. In the United States, an ATS must be registered with the Securities and Exchange Commission (SEC) and must comply with specific regulations.

 

Different Forms of ATSs

 

There are many benefits to using an ATS, such as increased liquidity, lower costs, and greater flexibility. For example, an ATS can provide more liquidity for a security by providing shareholders with a means to sell private company shares. In addition, an ATS may offer lower costs than an exchange, such as no membership fees or listing requirements. In addition, an can often be categorized as an electronic communication network, dark pool, crossing network, or call market.

 

  • Electronic Communication Network: An ECN allows buyers and sellers to exchange shares without a middleman. Trades can also happen outside of business hours, which means that hours are not tied to the traditional stock market.
  • Dark Pools: A dark pool is a type of ATS that does not publicly display the prices or orders of its participants. Dark pools are typically used by institutional investors, such as hedge funds, to trade large blocks of shares without moving the market.
  • Crossing Network: A crossing network is very similar to a dark pool, meaning that the details of a trade are not made publicly available 
  • Call Markets: In a call market, trades are only executed once a certain number of orders has been reached, often at a set interval of time. 

 

Secondary market trading of RegA+, RegCF, and RegD securities can take place on an ATS, which is typically a registered broker-dealer platform. These platforms allow investors to buy and sell these securities even if the buyer did not invest in the initial offering. The secondary market for RegA+ securities is the most developed due to the long history of these securities. The main difference is that RegCF and RegD shareholders are required to own their securities for a longer period of time before they can be traded in a secondary market.

 

What is the Difference Between an ATS and Exchange?

Many people are familiar with the concept of an exchange; whenever you buy stocks in publicly traded companies, you go through a stock exchange like the New York Stock Exchange or NASDAQ. National securities exchanges are self-regulatory and their members, or listed companies, must meet the requirements established by the exchange. Exchanges are also SEC-registered

 

An ATS is much like an exchange in that it brings together buyers and sellers of securities. However, the main difference is that an ATS does not take on regulatory responsibilities. Therefore, an ATS can trade both listed and unlisted securities, like those purchased under a JOBS Act exemption. ATSs are also regulated by the SEC but must be operated by a FINRA-registered broker-dealer.

 

The Impact of Liquidity on Investing

 

Liquidity is an important concept to understand when trading securities and refers to the ability of a security to be bought or sold quickly and at a fair price. A security that is easy to buy and sell is said to be liquid. A security that is difficult to buy or sell is said to be illiquid. An investor might consider the liquidity of a security when making an investment decision. For example, an investor might choose to invest in a liquid security if they plan on selling it quickly. An investor might choose to invest in an illiquid security if they are willing to hold it for a more extended time. When trading securities on an ATS, it is crucial to consider the security’s liquidity. A security that is not liquid may be challenging to sell, and worth considering the liquidity of a security before investing in it.

Trends We Believe Will Shape Investment Crowdfunding

Posted on by Oscar Jofre

In the first half of the year, a great deal has happened in investment crowdfunding. We’ve seen several trends emerge that are worth looking at as we move into 2022. These trends can impact everything from how you raise capital, structure your investments, and what kinds of companies you invest in. Here are three trends that we believe will shape investment crowdfunding in the coming year:

 

More support for Alternative Trading Systems (ATSs)

 

Alternative Trading Systems (ATSs) have been around for a while, but they’ve been slow to catch on in the investment crowdfunding space. That’s starting to change, though, as more and more platforms are beginning to see the benefits of using an ATS. An ATS is a platform that allows for the secondary trading of securities, which means that it can be used to buy and sell shares of companies not listed on a traditional stock exchange. One of the benefits of using an ATS is that it gives investors more liquidity for their investments. This means that investors will be able to sell their shares more efficiently and at a better price. ATS will also be a significant player as digital securities continue to evolve and see wider adoption.

 

Another benefit of using an ATS is that it can help to level the playing field for issuers. By using an ATS, issuers will be able to list their securities on a platform that is open to a broader range of investors. We believe that the increased use of ATSs will positively impact crowdfunding investments in the coming year. That’s because ATSs can help make the market more efficient, giving issuers and investors more options, but sweeping regulations are being proposed for alternative trading systems.

 

More focus on Environmental, Social, and Governance (ESG) factors

 

ESG investing is an investment strategy that considers environmental, social, and governance factors. This investing style has been gaining in popularity in recent years, as more and more investors are looking for ways to invest in companies that positively impact the world. We believe that the focus on ESG factors will continue to grow in the coming year as more investors look for ways to align their investments with their values, and crowdfunding can make the most out of this.

 

There are several reasons why we believe that the focus on ESG will continue to grow in the coming year:

  • A recent Gallups study showed that nearly half of the respondents polled are interested in sustainable investments, yet only 25% had heard about it. This could be a significant opportunity for companies looking to raise capital for ESG-focused businesses.
  • We also expect to see more regulation around ESG investing in the coming year. The SEC proposed a rule in March of 2022 requiring any SEC-registered companies to add specific disclosures on periodic reports and registration statements. Companies must also share information on climate-related risks that may impact business. While companies using JOBS Act exemptions are not SEC-registered, this may be an interesting development as investor demand continues to rise.
  • We also expect to see more interest from retail investors in ESG investing. A recent survey by Morgan Stanley found that 75% of millennial investors are interested in sustainable investments. This is a trend that we expect to continue in the coming year as more and more retail investors look for ways to invest in companies that positively impact the world.

 

Impact on Minority Companies

 

The past couple of years have been challenging for many businesses, but it has been especially challenging for minority-owned companies. That’s because the pandemic had a disproportionate impact on minority communities. For example, Black and Latino households have lost more wealth than white households during the pandemic, with 55% of households facing major financial problems. This has led to many people of color rethinking their investment strategies.

 

In addition, traditional financial institutions have long underserved minority-owned companies. Of venture capitalists, only 2% of their portfolio companies had a Latino founder, and 1% were led by a black person in 2017. 2020 data has shown little improvement The pandemic has highlighted just how important it is for minority communities to have access to capital. That’s why we predict that investment crowdfunding will become an increasingly popular way for minority-owned businesses to raise capital in the coming years.

 

Closing Thoughts

 

These three trends we believe will shape investment crowdfunding in the coming years. By understanding these trends, issuers and investors will be better positioned to take advantage of their present opportunities, allowing investors to connect more with businesses that they are passionate about and that align with their values. At the same time, it is also important for us to continue pushing the industry forward, enabling wider access to capital for businesses and more investment opportunities for investors.

It All Started with the JOBS Act

Posted on by Oscar Jofre

This month, we launched our newest series, KoreTalkX, during which we have hosted exciting, one-on-one conversations with industry experts to expand the knowledge base on capital raising in the private markets. We’re recapping the episodes so far and look forward to the next live event on Tuesday, May 31st, when Dr. Kiran Garimella (CTO, KoreConX) and Andrew Bull (Founding Memeber), Bull Blockchain Law) discuss digital securities. 

 

KoreTalkX #1: 10th Anniversary of the JOBS Act

In this conversation, David Weild IV, Father of the JOBS Act, and Oscar Jofre discuss the importance of the JOBS Act concerning small businesses and entrepreneurship. An important focus has been how the Act has helped increase innovation and expand access to capital for smaller companies, which is crucial for paving a brighter future.

 

Listen to the full episode on Spotify, Amazon, or iTunes!

 

KoreTalkX #2: How Can ESG Reshape Capital Raising?

This talk between Peter Daneyko and Paul Karrlsson-Willis, CEO of Justly Markets, discusses impact investing and ESG (environmental, social, and governance) criteria. Since the JOBS Act has allowed more people to invest in companies and given rise to the popularity of crowdfunding and investing for non-accredited investors, they discuss how many people are investing in businesses with missions they’re passionate about. 

 

Listen to the full episode on Spotify, Amazon, or iTunes!

 

KoreTalkX #3: How to Start and Manage a Cap Table?

In this discussion, Amanda Grange and Matthew McNamara, Managing Partner at Assurance Dimensions, talk about starting and managing a cap table. A primary focus is how the SEC compliance guidelines protect companies and how a good transfer agent will help a company stay within those guidelines. They also talk about how a well-managed and structured cap table can streamline a raise.

 

Listen to the full episode on Spotify, Amazon, or iTunes!

 

KoreTalkX #4: Thoughts on Investor Acquisition

Jason Futko and Tim Martinez, co-founder of Digital Niche Agency, talk about how to acquire investors for your startup. They highlight how important it is to have a good strategy before launching your campaign and how companies have a powerful opportunity to transform investors and customers into brand ambassadors. Additionally, they suggest entrepreneurs be prepared for a long marathon to achieve success and how to help achieve this in today’s climate.

 

Listen to the full episode on Spotify, Amazon, or iTunes!

 

Security Tokens for RegA+

Posted on by Oscar Jofre

Although security tokens have been around for a while, they have started to gain popularity because they offer several advantages over traditional investment vehicles. In particular, security tokens can be used in RegA+ offerings, allowing companies to raise money from accredited and unaccredited investors. As a result, security tokens have quickly become one of the most popular ways to invest in startups and other high-growth businesses.

 

What are Security Tokens?

 

Security tokens, as the name implies, are securities. And much like traditional securities, they represent an ownership stake in a company or some other asset and are subject to the same SEC oversight as stocks, bonds, mutual funds, and other forms of investment vehicles. Because of this, they share a familiar structure and have regulatory protection that makes them attractive for companies and investors alike. There is a greater assurance for the issuer that their investment will be protected from the volatility often associated with unregulated cryptocurrencies. For the investor, there is the added security of knowing that an asset backs its investment with value outside of the blockchain. 

 

​​”Security tokens are the missing link between the traditional financial world and the blockchain,” says Andrew Bull, founding partner of Bull Blockchain Law and KorePartner. “They provide the benefits of both worlds: the security of regulated securities and the flexibility and opportunity of digital assets.”

 

However, are security tokens the same as digital securities? The short answer is: yes, security tokens are the same as digital securities. Both represent an ownership stake in an entity or property, subject to SEC regulations. Thus, the names can be used interchangeably. The key difference between security tokens and traditional securities is that the former are digital representations that move and exist on a blockchain. 

 

It is also important to consider that while security tokens are cryptocurrencies, they are different from coins. Coins represent value on their own, like Bitcoin or Ethereum, whereas tokens have a function other than storage or exchange alone. And unlike utility tokens, security tokens represent a stake in an asset that has value outside of the blockchain. 

 

“Because security tokens denominate a stake in an asset that already has value outside of the blockchain, their value is not necessarily domain or ecosystem specific, as is the case with utility tokens,” says Bull. “Instead, the assets apportioned through the security tokens exist in the traditional market, in public and private equities. This makes the security token a naturally more attractive investment to both issuers and investors, as it provides a connection between traditional and digital investment assets.”

 

Benefits of Security Tokens for Issuers and Investors

 

Security tokens offer many benefits to companies and investors. Perhaps most importantly, they provide a bridge between traditional and digital investment assets, making it easier for companies to raise money and investors to gain exposure to the blockchain ecosystem. Because security tokens are subject to SEC regulations, issuing companies may benefit from the reassurance that their investment might be protected to a certain extent. The same benefit goes to the investor.

 

“Both parties can expect their ownership stake to be preserved on the blockchain ledger, as well,” said Bull. Investors can benefit from security tokens because they connect traditional and digital investment assets. Security tokens also have the potential to help investors by providing regulatory protection. This is important because it can help to mitigate the risk associated with investing in more experimental, unregulated cryptocurrencies.

 

On the other hand, digital assets not subject to SEC regulation, like utility tokens, have proven vulnerable to volatility and, therefore, challenging to maintain conditions stable enough to run a company. In this case, the investor in the utility token is exposed to a great deal more risk than the investor in the security token.

 

In summary, security tokens offer several benefits to both companies and investors. They provide a bridge between traditional and digital investment assets, making it easier for companies to raise money and investors to gain exposure to the blockchain ecosystem. These characteristics make security tokens less vulnerable to volatility and a more stable form of investment. They are also subject to SEC regulations, which provide some protection for both companies and investors.

Credit Cards, Escrow, and Broker-Dealers for RegA+ = $75 Million for Cannabis Companies

Posted on by Peter Daneyko

 

“It’s About Time”

 

Up until now, it was a real challenge for Cannabis companies to take advantage of Reg A+ exemptions that allow private companies to raise up to $75 million from the crowd; accredited and non-accredited investors alike.  So you have the investor community’s appetite, the table is set and they are ready, willing, and able; but what else do you need?

 

FINRA Broker-dealer

 

The regulation is meant to create jobs, allow private companies another way to raise capital, and allow for the investor community at large to participate. Before RegA+ exemptions, many potential investors were left looking into the candy store without any way to invest.  So with the democratization of capital and the ability of an untapped investor community to now have a seat at the table, the broker-dealer becomes an all-important intermediary.  In a highly regulated environment, the Broker-dealer takes the onerous task of KYC, ID verification, and AML ( anti-money laundering) off the issuer’s shoulder;  so you, the Issuer, can run your business without worrying about this important compliance requirement. As a result, you not only have the opportunity to gain large groups of investors but also develop brand advocates who share in your story.

 

Escrow Agent 

After the broker-dealer, you need an escrow agent that can hold funds from investors in all 50 states and territories and only charge you one flat fee. 

 

This key intermediary holds the investors’ funds on behalf of the Issuer until the broker-dealer completes the ID, KYC, and AML verification. Once these checks are complete, the escrow agent can release the funds. Until recently, a couple of historical challenges for industry sectors such as cannabis included the inability to get Escrow for their capital raises. Not only is Escrow now available but also at a cost-effective price point and with normalized fees, which is really the way it should have always been.  

 

Credit Cards 

 

Now below 2.9%  allowing both cannabis companies and their shareholders to be fairly treated when investing in the growth of their companies;  bringing jobs to communities and opportunities to those that believe in the company. Being responsible with your credit cards is common sense. Still, the ease of use and points as an added bonus is certainly one of the nice perks and perhaps a big reason for their high usage via crowd participation in private capital raises.

 

If you’re part of the Cannabis ecosystem looking to learn more about how KoreConX can help you on your capital raising journey, please fill out the form here.

What are the Benefits of Having a Diverse Investment Portfolio?

Posted on by Oscar Jofre

Building a diverse investment portfolio is one of the smartest things you can do for your financial health. By spreading your money across various asset classes, you can reduce your risk and maximize your return potential. Keep reading to explore the benefits of diversifying your investments and learn some tips for creating a well-rounded portfolio.

 

Benefiting from a Diverse Portfolio

 

A diverse investment portfolio is spread out across several different businesses, industries, and asset classes. This reduces the risk that any single investment will fail, making your overall portfolio more resilient to economic downturns. This is done by having less than 50% of your entire investment portfolio tied to any specific business, country, or industry. Instead, a good risk-averse strategy for investing would be spreading out investments among assets as much as possible: like investing in 10-20 companies, each with 7.5-10% of your investment capital in each. This will form a far more robust investment portfolio. It is worth considering a diverse investment portfolio, even if you are a more experienced investor, as it will help balance risk and reward.

 

The benefits of having a diverse investment portfolio include:

 

  • More resilience: A diverse investment portfolio is more resistant to economic downturns as it is not reliant on one specific industry or sector.
  • Better returns: A well-diversified portfolio will typically outperform a non-diversified one over the long term.
  • Reduced risk: By spreading your investment across many different businesses, industries, and asset classes, you are less likely to lose everything if one particular investment fails.

 

When deciding whether to invest in a diverse range of asset classes, you must consider your investment goals and financial objectives. For example, an investor with less experience and fewer aversions to risk may choose to invest in high-risk assets. In contrast, investors with more experience or less risk tolerance may shift their focus to lower-risk assets for diversification, such as fixed-income investments. Both investors will be able to diversify their portfolios, however, this diversification is based on a strategy they feel most comfortable with.

 

Systematic vs. Specific Risk

 

Systematic risk is the inherent risk in an investment that cannot be eliminated by diversifying your assets. This type of risk is also known as market risk, and it affects all investments in the same way. For example, a stock market crash will affect all stocks, regardless of whether they are in different sectors or countries. This type of risk is impossible to eliminate and must be considered when making any investment.

 

Specific risk is associated with one particular investment, such as a company going bankrupt. This type of risk can be diversified away by investing in different companies or assets. For example, if you are worried about the possibility of a company going bankrupt, you can diversify your portfolio by investing in other companies in different industries.

 

Diversification is important because it allows you to reduce the overall risk of your investment portfolio. By investing in various assets, you can minimize the impact that any one investment has on your portfolio. For example, if you invest only in stocks, then a stock market crash will significantly impact the value of your portfolio. However, if you also invest in bonds, the stock market crash will not have as significant an impact because bonds will still be worth something. Diversification is not a guaranteed way to make money, but it is a way to minimize risk.

 

Tips for a Diverse Portfolio

 

When it comes to investing, it’s always important to diversify your portfolio. This way, if one of your investments fails, you still have others thriving. Here are some tips for diversifying your investment portfolio:

 

  • Invest in various industries: This will help minimize the effects of any one industry downturn. Allowing you to see growth in other sectors still.
  • Spread your investment across several companies: This will help ensure that if one company fails, others still have the potential to make you money.
  • Invest in a variety of asset classes: This includes things like index funds, bonds, equities, commodities, and dividend stocks. This will help you balance risk and reward.
  • Choose the right mix of investments for your situation: This will vary depending on your financial goals, objectives, and your risk tolerance.

 

By following these tips, you can help to ensure that your investment portfolio is well diversified. Even with a diverse selection of assets, it is essential to monitor your portfolio regularly to confirm that your continued investment is still in-line with your goals, protecting you if one of your investments fails.

 

If you’re looking to explore your options for investments, consult your financial, tax, or investment advisor. You should also be aware of and accept the risks of investing. This article is not financial advice.

 

This post was adapted from content by our KorePartners at Rialto Markets. You can view their article here.

Foreign Investors Key Considerations for Your Next Deal

Posted on by Nate Dodson

This post was originally written by our KorePartners at Crowdfunding Lawyers. View the original post here. 

 

When discussing fundraising for your deals, most of our attention has previously focused on U.S. citizens investing their own money. That’s to be expected, but it’s important not to overlook another potential funding source: foreign investors. This article will explore what you should know about working with foreign investors in the U.S. and their potential impact on your deal.

Foreign Investors in the U.S.

Foreign investors are those individuals or companies outside of the United States who invest their money into U.S.-based businesses. And foreign money can be great. But, of course, there are advantages and disadvantages to know here and some pretty important restrictions.

How Foreign Investments Work

Before we dive into how these investments work or the pros and cons of foreign investments, we should touch on the restrictions put in place by the U.S. government. You’ll find that they’re twofold. First, there are restrictions set out by the country’s government in which you’re raising funds that you need to consider, as well as those applied by the U.S. government. Second, there are also regulations regarding how much money can be raised from foreign investors.

Foreign Investment Regulations

Each country has its own rules regarding investments. It is your responsibility to investigate what those are and how they may impact you, your investors, and the money that you raise. Some factors to consider include how much money you’re raising and the level of involvement between citizens of foreign countries.

It’s important to stay in legal compliance within all countries, which means you need to know the true cost of remaining completely legally compliant within each’s borders. In some cases, you may find that it is simply too expensive to develop a feasible plan. For example, suppose you’re raising a small amount of capital in a foreign country to transfer to the United States, and you’re not being fraudulent. In that case, complying with local securities laws might be somewhat cumbersome.

Too often, those raising funds focus more on securities laws here in the United States rather than in the other country, but this can hamstring you.

Limitations on Who Can Invest

In addition to the laws governing investments in the other country, you’ll also need to consider our domestic Office of Foreign Assets Control, or OFAC, here in the U.S. This organization determines which foreigners can invest and which ones should be blocked. In some cases, the OFAC focuses on the individual or the nation in question. In other instances, their review centers on the foreign country and the investment amount.

For instance, if an investor has 15% of greater assets in North Korea, Iran, Syria, and some other countries, they cannot invest here in the U.S. Again, you will need to check the OFAC website to see who is on the blocked persons list.

This is all part of getting to know your investors. It’s an enormous risk, but it can be potentially rewarding. You don’t want to take any money from people that you shouldn’t be because it can lead to problems beyond the scope of securities law.

Of course, these rules are implemented with good reason. They help ensure that you’re not taking money from a terrorist, helping someone launder money, for instance.

U.S. Securities Laws

We’ve touched on these briefly, but they bear deeper scrutiny. U.S. securities laws have a significant role to play when it comes to foreign investors. For instance, we have a law called “Regulation Asks,” which states that the securities laws for foreign investors don’t apply because they’re foreigners to the SEC. Regulation S states that if you investors are outside the country, most securities laws do not apply.

With that being said, if you commit fraud in any way, dealing with foreign investors will not prevent the SEC or any other authorities from investigating you and your investors. So it’s important to avoid the assumption that Regulation S protects criminal behavior – you should always do the right thing.

However, this brings up an important point. Since securities laws may not apply the same way to foreign investors that they do to U.S. investors, are you still required to provide disclosure? Absolutely, yes. The best path forward is to comply with Reg D as much as possible because then at least you’re providing proper disclosure to your investors and not taking advantage of the vulnerable out there.

Potential U.S. Tax Implications for Foreign Investment Deals

The tax situation is never simple, and adding foreign investors to the mix can muddy the waters a great deal. The tax consequences here can be substantial because when you add foreign investors to the mix and operate as an LLC, there’s pass-through taxation.

You will also have to deal with increased IRS scrutiny. The IRS is extremely worried about what your foreign investors will do – will they take their earnings and leave without paying taxes? Ultimately, you are responsible for their actions. This can mean that if a typical deal requires approximately 30% in withholdings, you should withhold the proper amounts from your investors’ earnings and pay it to the IRS on their behalf.

We also have FIRPTA, the Foreign Investment in Real Estate Property Tax Act of 1980. It requires you to withhold 15% from investors’ returns, although you should check with your tax specialists on the sale of real estate for any distributions that will go to foreign investors.

Avoiding Tax Complications with Foreign Investors

There are a lot of potential downsides to working with foreign investors. So how can you avoid them? Just don’t take on any. How do you avoid them, though?

It just comes down to requiring foreign investors to create their corporation or LLC within the U.S. This ensures that you’re able to let them into the deal, and you no longer have to worry about taking 45% of their returns and transmitting them to the IRS. You’ll also be able to deduct all of their expenses and losses against their income since they won’t be considered “pass-through” entities.

In addition, you can set up a separate bank account for each investor, and ensure that they only receive payments through that account. That way, you can keep track of who has paid what and make sure that everyone pays their fair share.

So, while it might seem like a good idea to work with foreign investors, you need to think twice before doing so. If you do decide to go ahead with it, you’ll need to consider these issues carefully and consult with a skilled attorney.

The Canadian Exemption

While the rules we’ve discussed here apply to investors from most nations, there is an exemption for Canadian investors under certain circumstances. The U.S. maintains a treaty with Canada that states these investors are not subject to the tax withholdings we just talked about. That means Canadian investors can be taken on without too much worry, at least about tax withholdings, with one caveat – you must have a limited partnership and cannot use an LLC or C corp or any other business formation option.

If you wish to work with Canadians, you’ll need to set up a limited partnership to receive their investment. If you choose to do so, make sure you understand all the risks involved with doing so.

The Big Questions to Consider When Taking on Foreign Investors

We’ve covered a lot of ground here in a short time. So, to sum up, let’s go over the big questions you’ll need to answer when you consider taking on foreign investors within your deal.

  • Are they from a country subject to sanctions, like North Korea, Syria, Iran, or Russia? Note that this list changes from time to time as sanctions are placed and lifted. Always check the OFAC list to ensure that your investors are clear about bringing their money into the U.S.
  • Are you following the securities laws of the other country? Are you doing enough business in that country that you need to be concerned about these laws?
  • Are you complying with U.S. tax rules as they pertain to your deal? For example, are you withholding the proper amount and remitting it to the IRS? If not, you’ll be held responsible unless your partners are American entities or have an exemption.

Do you understand all the risks involved in dealing with foreign investors? Do you know where to find information about each country? Is your legal team familiar with international law? These are all things you’ll need to think through before you sign off on any deals and it’s important to consult with an experienced attorney to help guide you

How Do I Get Foreign Investors Involved in My Deal?

If you want to attract foreign investors, you’ll need to make sure that you’re meeting their needs. To start with, you’ll need to understand why they would invest in your project. What are their goals? What are their motivations?

You’ll then need to determine if you can meet those goals and motivations. Can you provide them with something unique? Something that’s hard to find elsewhere? A good place to start is by looking at what you offer and comparing it to what others offer.

Once you’ve determined that you can meet their needs, you’ll need to figure out how to get them involved. There are two ways to approach this. One is to simply ask them to invest directly. They will likely require some sort of equity stake in your company. In exchange, they’ll receive a return on investment (ROI) based on the success of your venture.

Alternatively, you may choose to take a more traditional route. You can form a limited liability company or corporation, and invite them to join as shareholders. Their shares will be treated as income-generating assets, which means they’ll pay taxes on their share of profits. This is also known as “passive” investing.

In either case, you’ll need to know the law in both countries so that you don’t run afoul of local regulations. We’ve already touched on this briefly, but it bears repeating. Be aware that you may be required to register as a broker-dealer, and comply with all applicable federal and state securities laws.

What Happens After I Take On Foreign Investors?

Now that you’ve got investors, you’ll need a plan for managing them. How do you keep them happy while still keeping your own interests protected? You’ll need to set expectations early on. Make sure everyone understands what they’re getting into.

One thing to remember is that you’re dealing with people who have different levels of experience. Some may be new to investing, while others may have been around the block many times before. It’s important to make sure that everyone understands the risks involved.

As you go through the process, you’ll also want to make sure that you have a clear understanding of the terms of the agreement. For example, you should know whether you’re going to issue stock, sell debt, or use other financing methods. As we mentioned earlier, you’ll need to be prepared to deal with taxes. If you’re issuing stock, you’ll need to decide whether you’re going to treat the shares as long-term capital gains or short-term capital losses.

Finally, you’ll want to make sure that your business plan takes these things into account. You’ll need to consider how you’re going to finance the project, how you’re going to manage risk, and how you’re going to handle any potential legal issues.

In Conclusion

In the end, working with foreign investors is a tricky situation, but with proper guidance from both experienced tax and legal professionals, it can be profitable for both you and your investors.

Can I Use My IRA for Private Company Investments?

Posted on by Oscar Jofre

Individual retirement accounts (commonly shortened to IRAs) allow flexibility and diversity when making investments. Whether investing in stocks, bonds, real estate, private companies, or other types of investments, IRAs can be useful tools when saving for retirement. While traditional IRAs limit investments to more standard options, such as stocks and bonds, a self-directed IRA allows for investments in things less standard, such as private companies and real estate. 

 

Like a traditional IRA, to open a self-directed IRA you must find a custodian to hold the account. Banks and brokerage firms can often act as custodians, but careful research must be done to ensure that they will handle the types of investments you’re planning on making. Since custodians simply hold the account for you, and often cannot advise you on investments, finding a financial advisor that specializes in IRA investments can help ensure due diligence. 

 

With IRA investments, investors need to be extremely careful that it follows regulations enforced by the SEC. If regulations are not adhered to, the IRA owner can face severe tax penalties. For example, you cannot use your IRA to invest in companies that either pay you a salary or that you’ve lent money to, as it is viewed by the SEC as a prohibited transaction. Additionally, you cannot use your IRA to invest in a company belonging to either yourself or a direct family member. If the IRA’s funds are used in these ways, there could be an early withdrawal penalty of 10% plus regular income tax on the funds if the owner is younger than 59.5 years old. 

 

Since the IRA’s custodian cannot validate the legitimacy of a potential investment, investors need to be responsible for proper due diligence. However, since some investors are not aware of this, it is a common tactic for those looking to commit fraud to say that the investment opportunity has been approved by the custodian. The SEC warns that high-reward investments are typically high-risk, so the investor should be sure they fully understand the investment and are in the position to take a potential loss. The SEC also recommends that investors ask questions to see if the issuer or investment has been registered. Either the SEC itself or state securities regulators should be considered trusted, unbiased sources for investors.

 

If all requirements are met, the investor can freely invest in private companies using their IRAs. However, once investments have been made, the investor will need to keep track of them, since it is not up to their custodian. To keep all records of investments in a central location, investors can use KoreConX’s Portfolio Management, as part of its all-in-one platform. The portfolio management tool allows investors to utilize a single dashboard for all of their investments, easily accessing all resources provided by their companies. Information including key reports, news, and other documents are readily available to help investors make smarter, more informed investments. 

 

Once investors have done their due diligence and have been careful to avoid instances that could result in penalties and taxes, investments with IRAs can be beneficial. Since it allows for a diverse investment portfolio, those who choose to invest in multiple different ways are, in general, safer. Additionally, IRAs are tax-deferred, and contributions can be deducted from the owner’s taxable income. 

What is Regulation S?

Posted on by Oscar Jofre

It is essential to be familiar with the different regulations that govern how companies can raise capital in today’s business world. One important rule is Regulation S. This article will give you a basic overview of Regulation S, how it affects businesses, and how companies can use it to raise capital.

 

What is Regulation S?

 

Regulation S is a set of rules that govern security offerings to offshore investors. It is an attempt by the SEC to clarify its role in regulating securities offerings sold by US companies outside the United States. The regulation allows companies to offer and sell securities without registering the offering with the SEC, as long as the securities are only offered and sold outside of the United States. This excludes investors within the US from participating in the offerings. If an offering is for foreign and domestic investors, it would not fall under Reg S exemptions because it would have to be registered with the SEC.

 

Benefits of Reg S

 

Regulation S is an important securities regulation because it allows companies to offer and sell securities offshore without registering with the SEC. This is important because it enables companies to raise money from investors worldwide, and it also protects investors because it ensures that all offerings are made lawfully. At the same time, it enables companies to have a greater reach for their security offerings, as they can now globally raise money from investors all over the world.

 

As it was designed, Reg S was always intended for large transactions made by large companies to sophisticated investors. The primary use case of Reg S is still the Euro bond or an extensive offering by a U.S. or foreign company that is made outside the United States. Because Reg S can be used for such a large-scale offering by large corporations, companies will always continue to use it as an option when they need to raise funds globally.

 

The Pitfalls of Regulation S

 

The problem is many companies do Reg S offerings incorrectly in this particular space of crowdfunding. Many think all they need to do is sell to somebody outside of the United States, but they ignore that Reg S has three separate categories. These categories are based on the likelihood of the transaction being made in the U.S. or the securities returning to the U.S. The most effortless use case of Reg S is a foreign company selling securities under their own rules. An intermediate use is a reporting company registered with the SEC. For startups, the rules of non-reporting U.S. companies are stricter, but many businesses are not complying with these rules.

How Can Companies Keep Their Offering Out of the US?

 

No offer sold under Reg S should be advertised or be made known in the U.S. To this effect, companies should Geo-fence any offering site so individuals with U.S. IP Addresses can not see what you are offering. However, if you have Geo-fenced your offer and implemented the proper protections to ensure a US investor cannot invest, and someone found their way around it, it’s not on you. Companies do not need to police the internet, but they should ensure that their Reg S offerings are only available internationally with Geo-fencing. 

 

While Reg S does not have as wide of a use case as Reg A or Reg D, Reg S is helpful if you feel you will exceed the $75 million of Reg A and can capitalize on international investors. However, companies must be aware that Reg S only tells how to comply with the U.S. rules, not another countries regulation. With most countries having restrictions on making offerings to less sophisticated investors, you want to ensure you meet all these standards if raising capital internationally. 

 

The Regulation S exemption was implemented to help companies raise capital from non-US investors without SEC registration. It has its benefits, but it is not always accessible or appropriate for every company.

What is Regulation A+?

Posted on by Oscar Jofre

Regulation A+ (RegA+) was passed into law by the SEC in the JOBS Act, making it possible for companies to raise funding from the general public and not just from accredited investors. Since March 2021, companies have been able to take advantage of the limit’s increase to $75 million. This provides companies the ability to pursue equity crowdfunding without the complexity of regular offerings. So, what investments does RegA+ allow?

Outlined in the act, companies can determine the interest in RegA+ offerings by “testing the waters.” While testing the waters allows investors to express their interest in the offering, it does not obligate them to purchase once the Offering Statement has been qualified by the SEC. Also allowed by the Act, companies can use social media and the internet to both communicate and advertise the securities. However, in all communications, links to the Offering Statement must be provided and must not contain any misleading information.

It is important to understand the two tiers that comprise RegA+. Tier I offerings are limited to a maximum of $20 million and call for coordinated review between the SEC and individual states in which the offering will be available. Companies looking to raise capital through Tier I are required to submit their Offering Statement to both the SEC and any state in which they are looking to sell securities. This was a compromise for those who opposed the preemption that is implemented in Tier II.

For offerings that fall under Tier II, companies can raise up to $75 million from investors. For these offerings, companies must provide the SEC with their offering statement, along with two years of audited financials for review. Before any sales of securities can take place, the SEC must approve the company’s offering statement, but a review by each state is not required. It is also important to note that for Tier II offerings, ongoing disclosure is required unless the number of investors was to fall below 300.

In contrast to typical rounds of fundraising, investors are not required to be accredited, opening the offering up to anyone for purchase. Under Tier I, there are no limits that are placed on the amount a sole person can invest. For unaccredited investors under Tier II, limits are placed on the amount they can invest in offerings. The maximum is placed at ten percent of either their net worth or annual income, whichever amount is greater. To certify their income for investing, unaccredited investors can be self-certified, without being required to submit documentation of their income to the SEC. Additionally, there is no limit placed upon the company as to the number of investors to whom it can sell securities.

Once investors have purchased securities through RegA+ investments, the trading and sale of these securities are not restricted. Only the company that has created the offering can put limits on their resale. This allows investors to use a secondary market for trading these securities.

Through Regulation A+, companies are given massive power to raise funds from anyone looking to invest. With the Act allowing for up to $75 million to be raised, this enables companies to raise capital from a wide range of people, rather than only from accredited investors. With two tiers, companies have the freedom to choose the one that best fits their needs. Regulation A+ and the JOBS Act have the potential to drastically change the investment landscape.

How Have the JOBS Act Exemptions Impacted Company Founders?

Posted on by Oscar Jofre

Since the JOBS Act was passed in 2012, it has been easier for company founders to raise money with exemptions like Reg CF and Reg A+, changing the landscape of private capital investments. 

 

The JOBS Act provides exemptions from registration for private companies raising money with key benefits, like:

  • Ability to keep the company private
  • Not having to disclose everything publicly
  • Less regulatory burden when raising money
  • Access to accredited and non-accredited investors

 

Reg A+ & Reg CF

Regulation CF is an exemption outlined in the JOBS Act that lets companies raise a maximum of $5 million in any 12-month period by selling securities to accredited and non-accredited investors. Regulation A+ allows issuers to offer and raise up to $75 million in funding without having to comply with all the strict requirements of a traditional IPO. This has allowed company founders to bypass some of the red tape and paperwork associated with more traditional fundraising methods and raise millions of dollars for their organizations. 

 

With RegA+ and RegCF, private companies have increased opportunities to raise capital. Before the JOBS Act, private companies were only invested in by wealthy individuals and firms like venture capital or private equity, but now investment opportunities have been opened to the non-accredited investor as well. This increases the pool of available investors for any given deal since the number of non-accredited investors is immense, which is powerful for companies seeking capital with these methods. 

 

Impacting How Capital is Raised

WIth the doors the JOBS Act has opened up, entrepreneurs who have a great idea but no funding to realize their vision have the opportunities to raise the capital needed to grow their businesses. Companies in the private sector can connect with their investors in ways not typically seen in the public market; investors may be loyal customers or passionate about the cause or mission the company believes in. This is a unique opportunity for companies to build and maintain relationships with their shareholders that may be interested in investing in future offerings as well. 

 

Company founders can also retain more control over their company raising money through the JOBS Act exemptions, another significant benefit. There is a little more flexibility for founders to set the valuation they’re looking for and construct a deal more favorable. In other traditional funding scenarios, venture capital or private equity investors may seek more equity than the founder is hoping to give up or disagree with the valuation. 

 

The JOBS Act has created opportunities for companies to secure the funding they need to grow and sustain their businesses. Compared to traditional funding routes, RegA+ and RegCF are often more cost-effective and enable them to raise significant amounts of capital.

Why are Data and Research Key in the Private Capital Markets?

Posted on by Oscar Jofre

Data and research are essential pieces of the puzzle regarding the private capital markets. Investors can make informed decisions about where to put their money, and private markets can attract the best investors by having access to accurate and timely data. By conducting thorough research on potential investments, investors can mitigate risk and maximize return potential.

 

Importance of Data & Research

Private market data provides understanding and predictions of trends, allowing investors to look for companies on a trajectory towards growth and success. Data helps identify these trends and enables investors to make more informed decisions. For example, if a company has the data to demonstrate an upward trend in annual revenue and gross profit, it can be compelling to any potential investor. Investors stay informed of private markets and make informed decisions by private companies providing up-to-date data.

 

Research is necessary to understand the risks and opportunities of any investment. Research helps investors see that a product or service works as intended and solves a real problem or need. Even if the revenue and gross profit look good on paper, investors won’t go for a product that isn’t solving a real problem or helping people. This is because investors need to be aware of any investment’s potential dangers and benefits before putting their money into a private offering. To make an informed decision, private capital investors need to know all they can about the company they are investing in.

 

Conducting Market Research

Private capital investors conduct due diligence on potential investments by reviewing various data sets and conducting company research. This information allows investors to understand the risks and opportunities associated with each asset. Research that demonstrates the viability of a product or service helps investors understand the potential return on investment.

 

There are multiple methods for investors to conduct market research based on private company data. One way is a SWOT analysis, allowing investors to take an in-depth look at a business and its needs to succeed by comparing its strengths, weaknesses, opportunities, and threats. In a rapidly changing market, companies that can demonstrate a trend of growth and success with minimal weaknesses are more likely to attract investment. 

 

Benefiting from Private Capital Research

Investors need to make quick decisions, so having access to up-to-date data is critical. Data is essential for understanding how a company’s market performance affects private company growth. The current market performance also influences an investor’s decision on due diligence on potential investments.

 

Private market data helps paint a more accurate picture of the company and its operations, which can be helpful for both investors and company employees alike. With accurate data, investors can make better decisions regarding where to invest based on their ROI expectations, company performance, and management effectiveness. Presenting data and research provides private companies with feedback from the market, including information about how potential customers feel, what they think about a product, or how successful a product may be compared to the rest of the market.

 

The private capital markets are a haven for risk-averse, long-term investors. With the correct data and research, investors can make more informed decisions and reduce the risk of investing in a company that may not be a good fit for their portfolio. Private capital markets increase transparency by showcasing company data, drawing in potential investors, and allowing more investment opportunities. Whether looking for funding or an investment, it is vital to understand how data and research can help private capital markets grow.

 

The Evolution of Reg A+

Posted on by Oscar Jofre

During the recent Dare to Dream KoreSummit, David Weild IV, the Father of the JOBS Act, spoke about companies going from public to private, access to capital Reg A+, the future of small businesses raising capital, and the future of the broker-dealer system. The following blog summarizes his keynote address and what Wield believes will be the future of raising capital for small businesses. 

 

Reg A+’s Creation

The JOBS Act, passed in 2012, helped address a significant decrease in America’s IPOs. “When I was vice-chairman of NASDAQ, I was very concerned with some of the market structure changes that went on with our public markets that dropped the bottom out of support for small-cap equities,” said Weild. “80% of all initial public offerings in the United States were sub $50 million in size. And in a very short period of time, we went from 80%, small IPOs to 20%, almost overnight.” The number of operating public companies decreased from about nine thousand to five thousand. The changes in the market significantly restricted smaller companies from growing, unable to go public because of prohibitive costs and other expenses. 

 

Effect on Small Business

After years of lobbying and the passage of the JOBS Act, only one of the seven titles went into effect instantaneously: RegA+. With this new option for raising capital, startups could raise $50 million in money without filing a public offering. The previous maximum was $5 million; this would eventually be increased to $75 million. It also expanded the number of shareholders a company can have before registering publicly, which is essential as companies can raise money from accredited and non-accredited investors through this regulation. RegA+ and the other rules have had a significant impact on the way startups do business. This has been a significant benefit for small businesses, as it has allowed them to raise more money without going through the hassle and expense of becoming a public company. 

 

Reg A+ into the Future

The capital raising process was digitized by taking the investment process and making it direct through crowdfunding, removing economic incentives for small broker-dealers who could not make their desired commission on transactions. This resulted in many of them consolidating out of business and leaving a gap in the private capital market ecosystem that supports corporate finance. Changes to the JOBS Act are beginning to reintroduce incentives for broker-dealers, which will continue to shape the future of private investments as it will continue to facilitate the growth of a secondary market. Wield’s thoughts on the future of capital raising marketing are that the market is not yet corrected, but it is on track. He said: “I would tell you that there’s a great appetite in Washington to do things that are going to improve capital formation.”

 

Getting more players like broker-dealers involved in the RegA+ ecosystem will do nothing but benefit the space. In his closing remarks, Wield said that this would provide for a “greater likelihood that we’re going to fund more earlier stage businesses, which in turn gives us the opportunity to create jobs and upward mobility. Hopefully, since much entrepreneurial activity is focused on social impact companies to solve great challenges of our time, whether it’s in life sciences, and medicine, or climate change, you know, I firmly believe that the solutions for climate change are apt to come from scientists and engineers who’ve cracked the code on cutting emissions or taking CO2 out of the atmosphere. And so from where I said, getting more entrepreneurs funded is going to be important to have a better chance of leaving a respectable environment for the next generation.”

End to End for RegCF

Posted on by Oscar Jofre

When the JOBS Act was signed into law in 2012, it brought about many changes in the private capital markets, namely, the dramatic increase in the availability of capital from more expansive pools of investors. Later on, 2016 saw Regulation Crowdfunding, also known as Title III or RegCF, go live. At that point, US-based issuers could raise up to $1.07 million from both accredited and nonaccredited investors. Additionally, companies in the startup stage through to full operating companies across all industries can take advantage of this exemption to raise capital. 

 

However, due to the comparatively low limit of RegCF in the early days when the regulation was introduced RegCF was largely overlooked by many companies seeking to raise capital. Now, it continues to gain momentum due to the limit of RegCF increasing to $5 million in March of 2021. Since then, RegCF has reached a significant milestone. In October 2021, companies surpassed a cumulative total of $1 billion raised under the regulation. Now that the limit has increased nearly five times from where it started, we expect the adoption of Reg CF to continue to grow much faster than the half-decade it took to reach $1B.

 

Getting Started with RegCF

 

For issuers looking to use Regulation CF for their offering, it is relatively straightforward for those looking to raise up to $1.07 million. For raises of this size, the issuer is not required to submit audited financial statements to the SEC. They must retain a securities lawyer to complete their Form C and obtain a CrowdCheck Due Diligence report. Next, the issuer must find an SEC-registered transfer agent to manage corporate books and cap tables, a requirement under the regulation. Additionally, the issuer must also select a FINRA-registered broker-dealer to raise capital directly from the issuer’s website. 

 

The process for raising up to $5 million is pretty similar. However, the main difference is that issuers require an audit. With this being the only difference, there is not much in terms of the change to the regulatory and compliance requirements.

 

What do RegCF Broker-Dealers Need?

 

For broker-dealers working on RegCF raises, it is something different than anything else they’ve done; they need to be prepared to handle things they may not have needed to consider in other types of capital raising activities. These things include:

  • Investment Landing Page: Once the landing page is created and ready to go live (a step sometimes done by investor acquisition firms), the broker-dealer must manage it. This includes taking over or registering the domain name. This ensures the broker-dealer is in total control, with the ability to shut it down or change/amend things as needed. 
  • Back Office: After an issuer signs up with a broker-dealer, the broker-dealer provides them with the escrow and payment rails. For the escrow account, the broker-dealer is on title as a broker-dealer so that they handle all payment components like credit cards, ACH, wire, cryptocurrency, and IRA. Typically, the bank or trust providing the escrow account will also offer wire and ACH. Since broker-dealers currently cannot hold any crypto, crypto payment options allow issuers to submit crypto that gets exchanged into fiat USD. 
  • Due Diligence: The broker-dealer will be able to rely on the CrowdCheck report, an industry standard. 
  • Registration: The broker-dealer must be registered in all 50 states to be able to provide the best help to an issuer.

 

What Compliance is Needed?

 

The compliance officer also has responsibilities they need to meet for a successful RegCF raise. This included performing ID, AML, KYC, and suitability on each investor who is investing in the offering. Plus, while accredited investors aren’t restricted to the amount of money they can invest through RegCF, the compliance officer can request an individual to go through verification, but it is not necessary. The compliance officer must also manage the KYC process through the entire offering until the money is released to the issuer. Another new change to RegCF is that companies can have rolling closes, which means that they can start closing each time they hit their minimum. When it comes to closing, the broker-dealer must ensure that the company has filed its Form C amendment.

 

What Does an Issuer Do to Prepare?

 

While the broker-dealer fills their component of the RegCF raise, an issuer will typically work closely with an investor acquisition firm to bring the eyeballs to the website. The issuer is responsible for meeting their regulatory requirements, like preparing their audit if raising over $1.07 million. Even if an issuer does not have their audit ready, they can still start their raise up to the $1.07 million amount. Once the audit is done, the offering can be amended to go to $5 million instead. Since securities are being sold directly on the issuer’s website, the traffic they’re driving there is only for them. Previously, when RegCF offerings could only be done on a registered funding portal, traffic would be directed to a site with many other offerings as well. 

 

This is not to say that funding portals don’t serve a purpose; instead, some issuers (especially those who have grown out of the startup phase) prefer more direct traffic. Currently, there are over 70 funding portals (and more on the way). Each option has pros and cons depending on the issuer and the raise that must be considered when launching RegCF. Additionally, some investor acquisition firms prefer an individualized landing page because it directs traffic and attention solely to the issuer.

 

Investment Process for RegCF

 

When the investor (or potential investor) goes to the landing page and begins the investment process, the first thing collected is their email address. This allows the investor acquisition firm to remarket to the individual if they left the page before completing an investment. Every day, a report of drop-offs will be provided that details which stage of the investment process the investor left. Plus, data is provided as to where each investor is coming from.

 

 After the initial stage of the process, the investor will proceed to enter their information, like how much they want to invest, their income, how they want to invest, and other data necessary to complete the investment. Once all of the information is entered, the investor will review and sign the subscription agreement before submitting their investment. 

 

Once the subscription agreement has been submitted, the investor receives an email allowing them to register their account with the issuer’s private label page to manage the investment they’ve made. Even though the broker-dealer manages the website, the investors’ experience end-to-end is with the issuer. Once the investment is completed, the investor will be able to find it in their portfolio. Through the portfolio, the SEC-registered transfer agent and the company manage the cap table and provide individual investors access to their investments.  For each investment, the investor can view all of its details rather than keeping that information in paper documents. They can see what rights they have for each security, how much they invested, how they paid, etc. 

 

Through the entire investment process, not only is the investor involved but there are many other parties involved. Beyond helping the company set up the investment, the broker-dealer also helps to ensure that the issuer has everything ready in their platform. The broker-dealer is then responsible for ensuring that the offering and investors are vetted into the platform as well. Additionally, the compliance officer will also have to verify the investors through the platform’s compliance management system. Once the investor is approved, their funds are sent to escrow, which the broker-dealer monitors to make sure they’ve all arrived. When the minimum is met, the broker-dealer closes, allowing the company to receive their funds and the cap table to be updated. 

 

For 2022, we anticipate that RegCF will be a game-changer. The amount of capital raised under the regulation makes it a perfect fit for seed and Series A companies that may have otherwise used RegD. Like RegD, issuers can target accredited investors, but they can also target nonaccredited as well. This significantly increases the potential pool of investors and opportunities available to raise capital. While there are an estimated 8.5 million accredited investors, only 110,000 have been verified. When considering nonaccredited as well, this number grows substantially to 233 million individuals. 

How Does a Transfer Agent Protect Issuers and Investors?

Posted on by Oscar Jofre

A transfer agent is responsible for the custody of securities and preserves books and records. They also keep up with who owns what investment, which can be especially important if a company goes bankrupt or merges with another entity. Transfer agents are a crucial part of the securities industry and something all investors and issuers should be aware of. They help protect companies and investors by ensuring that transactions go smoothly while maintaining accurate ownership records and paying dividends every quarter.  

 

Without a qualified transfer agent who can complete these tasks efficiently, the risks for all parties increase; private issuers would be more vulnerable because they might not find errors, incorrect ownership information, or inaccurate assets. These inaccuracies may lead investors to incur higher costs, losses from missed market transactions, suffer from delayed payments, deliveries of dividends, and face unanticipated tax liabilities for unclaimed assets.

 

To protect issuers, transfer agents maintain an accurate and current record of share ownership and make sure that this information is reported accurately to them. Transfer agents provide issuers with a complete list of their shareholders and guarantee that these records are up-to-date. It is the job of the transfer agent to make sure that any changes in ownership are correctly recorded and reported to the issuer so both parties are protected from future complications or confusion. They are essential when issuers deal with investors, giving issuers a detailed account of who investors are and the amount of equity they have remaining. 

 

Transfer agents protect investors by ensuring their brokerage account is accurate and up to date. Agents view new transactions to ensure they’re coming from the correct party, and they review brokers’ reports for mistakes or fraud. Without transfer agents, the ability to track ownership and transactions would be nonexistent. Perhaps more importantly: if we didn’t have transfer agents, it would become impossible for shareholders to trade their securities. This would severely limit liquidity in the secondary market since it would become impossible for anyone who wanted to sell a share to find anyone willing to buy it. By allowing investors to view accurate and complete information on the company they are investing in, investor confidence is increased by this transparency and availability.

 

Additionally, transfer agents maintain investor financial records and track investor account balances. These agents usually belong to a bank, trust company, or similar establishment. Agents record transactions, process investor mailings, cancel and issue certificates, and more. Transfer agents protect issuers and investors by ensuring records maintain correct ownership and credentials at all times, making transfer agents the security link between these two parties; all agents must be registered with the SEC. 

 

Transfer agents are a vital part of the financial world. They provide a valuable service for issuers and investors by ensuring that trades happen smoothly, issuing new shares during an offering, or transferring ownership from one investor to another.  They play a pivotal role in protecting issuers and investors by assuring that they have a reliable, efficient process for handling transfers and executing trades on behalf of their clients.

What are the Benefits of Digital Securities for Issuers and Investors?

Posted on by Oscar Jofre

With the emergence and development of blockchain technology, digital securities have seen wider adoption by investors and investment firms. Arising from the need for protection against fraud and as a way for investors to ensure asset ownership, digital securities are a digital representation of traditional securities and follow the same regulatory rules. Since their first appearance, digital securities have come to represent any debt, equity, or asset that is registered and transferred electronically using blockchain technology. 

 

Digital securities are made possible by blockchain, also known as “distributed ledger technology”. Distributed ledger technology is a database where transactions are continually appended and verified across by multiple participants, ensuring that each transaction has a “witness” to validate its legitimacy. By the nature of the system, it is more difficult for hackers to manipulate, as copies of the ledger are decentralized or located across multiple different locations. Changes to one copy would be impossible, as the others would recognize it as invalid.

 

Distributed ledger technology allows digital securities to be incredibly secure. Ownership is easily recorded and verified through the distributed ledger, a huge benefit over traditional securities. Any transfer of digital securities is also recorded and with each copy of the transaction stored separately, multiple witnesses of the transaction exist to corroborate it. 

 

With traditional securities, investors can lose their certificate of ownership or companies can delete key files detailing who their investors are. Without a certificate, proving how many shares an investor owns would be incredibly challenging. In contrast, digital security ownership is immutable. Investors are protected by always being able to prove their ownership since the record cannot be deleted or altered by anyone. Additionally, investors can view all information that is related to the shares they’ve purchased, such as their voting rights and their ability to share and manage their portfolios with both accuracy and confidence. 

 

Since the record is unchangeable, it also serves as a risk management mechanism for companies, as the risk of a faulty or fraudulent transaction occurring is removed. Digital securities are also greatly beneficial to the company when preparing for any capital activity since the company’s records are transparent and readily available. With traditional securities, the company would typically hire an advisor to review all company documents. If the company has issued digital securities, this cost is eliminated, as it is already in an immutable form.  

 

Also making digital securities possible are smart contracts that eliminate manual paperwork, creating an automated system on which digital securities can be managed. Integrated into the securities is the smart contract, which has preprogrammed protocols for the exchange of digital securities. Without the time-consuming paper process, companies can utilize digital securities to raise funds from a larger pool of investors, such as the case with crowdfunding. Rather than keeping manual records of each transaction, the smart contract automatically tracks and calculates funds and distributes securities to investors. 

 

Companies that are looking to provide their investors with the ability to trade digital securities must be aware that they are required to follow the same rules set by the SEC for the sale and exchange of traditional securities such as registering the offering with the SEC. This ensures that potential investors are provided with information compliant with securities regulation worldwide. According to the SEC, investors must receive ongoing disclosures from the issuer so they can make informed decisions regarding ownership of their securities. Companies that are not compliant with the SEC can face severe penalties and may be required to reimburse investors who purchased the unregistered offerings. 

 

Besides the companies offering securities, broker-dealers must also register with the Financial Industry Regulatory Authority (FINRA). Similarly, platforms on which digital securities can be traded must register as an Alternative Trading System operator with the SEC. Both broker-dealers and ATS operators can face severe penalties if not properly registered. 

 

Possibly the greatest benefit of digital securities is that it allows for smoother secondary market transactions. With records of ownership clear and unchangeable, an investor can easily bring their shares to a secondary market. Transactions are more efficient and parties have easy access to all necessary information regarding the securities being traded, removing the friction that is typically seen with traditional securities. 

 

At KoreConX, the KoreChain platform is a fully permissioned blockchain, allowing for companies to issue fully compliant digital securities. Records are updated in real-time as transactions occur, eliminating errors that would occur when transferring information from another source. The platform securely manages transactions, providing investors with support and portfolio management capabilities. Additionally, the KoreChain is not tied to cryptocurrencies, so it is a less attractive target for potential crypto thieves. KoreChain allows companies to manage their offerings and company data with the highest level of accuracy and transparency.

 

Since digital securities face the same regulatory rules as traditional ones, investors are protected by the SEC against fraudulent offerings. This, together with the security and transparency that blockchain technology allows, creates a form of investment that is better for investors and issuers alike. Since the process is simplified and errors are decreased without redundant paperwork, issuers have the potential to raise capital more efficiently. They will also be better prepared for future capital activity. For investors, a more secure form of security protects them from potential fraud and losses on their investments. With digital securities still in their infancy, it will be exciting to see how this method of investment changes the industry. 

What is the Difference Between the Public and Private Capital Markets?

Posted on by Oscar Jofre

 

The public and private capital markets work differently, but both sectors play essential roles in supporting economic growth. Companies raise funds for long-term growth and acquisitions in the public capital market, usually through debt instruments like bonds or stock, while private companies raise capital through private investments.  This article provides an overview of the differences between the two types of capital markets, including how they function and their role in economic development. 

 

Public Capital Markets

Public capital markets consist of equity and debt markets where buyers and sellers trade with each other daily. Many companies use this type of market to raise new capital or sell their existing stocks. It is typically easier for publicly traded companies to use these markets than private ones because traditionally, a wider pool of investors is available, and shares provide a significant amount of liquidity. Most investors use public markets to invest in companies, which buys them a partial interest in a company. It is also where many companies go when they want to raise new capital to fund their business operations. 

 

Private Capital Markets

Private capital markets are where privately-held companies can sell equity to investors like private equity, venture capital firms, and even individuals. This sale of securities is typically exempt from registration with the SEC and may come in the form of a Reg A, Reg CF, or Reg D offering. Before the JOBS Act, these types of investments were limited to high net-worth individuals and institutional investors. Post JOBS Act, even everyday investors can get a piece of a private company, which may offer a significant return if that company ever goes public through an IPO. Additionally, offerings in the private sector typically cost less to the issuer than an IPO, which makes JOBS Acts exemptions a very attractive form of fundraising. 

 

Because of the history of the private capital markets, there are misconceptions that it is expensive to invest. However, Reg A and Reg CF offerings can be affordable for investors, with investments for hundreds of dollars or less. However, non-accredited investors are limited to the amount they can invest each year by their annual income or net worth. The same restrictions don’t apply to private companies. Additionally, investors in the private capital markets have the potential for liquidity through alternative trading systems. 

 

Publicly traded companies are listed on an exchange so that anyone can buy their stocks. This means they have to follow specific guidelines set by the SEC to maintain listing requirements. Private company stock is not publicly available for trading, but there are still ways you may be able to get your hands on some shares. It’s important to note that different securities trade differently depending on where they’re bought from, and choosing the public or private capital market is the first step in any investment.

 

 

 

What is an NFT?

Posted on by Oscar Jofre

A non-fungible token, more commonly known as NFTs, is a unique cryptographic asset that cannot be replicated and stored on a blockchain. By definition, fungibility is when an asset can be exchanged with more of the same good or asset–think of a dollar that can be easily exchanged into pennies or nickels and retain the same value. This means that by being non-fungible, NFTs cannot be traded or exchanged for an identical asset; one NFT cannot be exchanged for another NFT.

Throughout 2021, we have seen the meteoric rise in popularity of NFT, which can represent assets from artwork to videos and even real estate. In the case of artwork, it may be hard for someone to understand the value of buying a digital asset. The importance is ownership; the blockchain on which the NFT is stored verifies the identity of the asset’s owner in an immutable ledger. 

In the discussion on NFTs, it is essential to consider that not all digital assets are classified as securities. Based on the Supreme Court’s Howey case, the Howey Test helps determine whether an investment contract exists and is used to classify digital assets. With this test, an investment contract typically exists “there is the investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.” If a digital asset meets these requirements and is classified as a digital security, it must be registered with the SEC or exempt from registration. With registration, issuers are required to disclose certain complete, non-misleading information to investors. 

If an NFT can meet the digital security requirements, they can be offered through raises that happen under exemptions like Regulation A+. NFTs are not bound by federal securities laws and pose a potential investment risk without meeting these requirements. 

What makes an NFT a good investment is its resale potential. If there is no market for the asset and it cannot be resold, it loses its value. It is not like other digital attests like cryptocurrencies, where one bitcoin is always equal in value to another. As the landscape of cryptocurrencies, NFTs, and digital securities continue to evolve, it will be interesting to see their role in the future private capital markets.

 

$1 Billion Raised Through RegCF

Posted on by Oscar Jofre

It seems 2021 is the year where we continue to break new ground for the JOBS Act, and today marks a momentous milestone in its history. Fundamentally, the act was designed to empower businesses and democratize capital. Not only has it succeeded in this goal, but it has also allowed companies to create jobs and return ownership to company founders. Recently, the amount of capital raised under Regulation CF offerings has reached an amazing milestone: $1 Billion USD over the lifetime of the exemption. 

 

This tremendous achievement would not have been achieved without the great work done by those in this sector. As of June 2020, there were 51 active RegCF funding platforms, a number that continues to grow as we see continued expansion on offering limits from regulators to make this funding method even more powerful. Now, over a year later, and after RegCF offering limits increased to $5M USD, we see nearly 70 regulated crowdfunding portals registered with FINRA.

 

We would not be arriving at this milestone today without the great work our of KorePartners in the industry, many of which have the same mission of creating equal access to the private capital markets for the everyday investor and include:

 

 

And perhaps most importantly, we would like to thank you: the investors who have poured capital into causes and businesses you are passionate about. Without your investments, we would be a long road away from the milestone we celebrate today. You have made the JOBS Act a reality and a phenomenal success that we could not have achieved without you. The everyday investors have been the lifeblood of this industry, fueling innovation, company growth, and job creations with your investments.

 

With more capital poured into private companies through these regulations, there is more opportunity than ever before for companies to succeed and investors to get involved with innovative, industry-changing companies. Such opportunities were previously unavailable to Main Street investors, but the JOBS Act has radically changed this landscape. After the incredible growth over the last nine years since the JOBS Act’s initial passage, it will be exciting to see how the space progresses over the next decade. 

 

Hooray to $1 Billion USD and counting!

 

As we move into the future, this is the group that will advance RegCF to raise $5 Billion USD for private companies:

Tokenization in RegA+

Posted on by Oscar Jofre

As the private capital market continues to undergo a digital transformation, ideas like blockchain, digital securities, and tokenization continue to be discussed by regulators, issuers, and investors. “Tokens” represent actual ownership in a security and is a registered investment vehicle. However, when the term was coined in the mid-2010s, tokens became thought of as unable to support the compliance, regulations, and legal requirements of a security. Instead, digital securities and digital assets became the preferred term to accurately convey the time, effort, and reliability in this form of investment.

 

Digital securities will have a transformative impact on the capital markets. For example, when the public market was built more than 100 years ago, the technological tools of today were unavailable. As the system has aged, it has become antiquated. These new forms of securities will result in a more efficient, equitable, and accessible capital market system for both issuers and investors. However, since the technology is so new, the educational component will be the next hurdle because many still are unaware of what digital securities are. 

 

It is important to consider that digital securities are not about disintermediation, but instead intermediation with the right efficiency and focus, bringing together the right parties like broker-dealers, lawyers, and transfer agents. Unlike other digital assets, digital securities are regulated by securities laws, and having the right processes in place ensures that raises are done compliantly. If a RegA+ raise is structured improperly, it could mean the company has to refund investors of their investment. 

 

Because many investors don’t want to hear the term tokenization or digital asset, the educational component will be essential for the widespread adoption of digital securities. However, as digital securities make investment processes frictionless, we will continue to see how digital securities for RegA+ continue to evolve.

Why do I need Blue Sky registration for Secondary Trading?

Posted on by Oscar Jofre

Through the Regulation A+ exemption, securities issuers can raise up to $75 million as of March 2021. This creates a significant opportunity for the everyday investor to make investments in private companies and for the companies to benefit from the large number of investors that exist within this space. Unlike securities purchased on a national securities exchange, like the NASDAQ or New York Stock Exchange, investors in private companies have been somewhat limited in their options for liquidity.

 

This created the need for a secondary market on which investors could sell shares to other interested buyers, rather than waiting for the company to go public through an IPO to sell their shares. However, when it comes to enabling investors to be able to access secondary market platforms for their shares, there are a few things issuers need to consider.

 

First, just as the original offering has to comply with the Blue Sky laws in the states they choose to do business in, secondary market trading falls under the same requirements. For offerings that fall under the Tier 1 Reg A+, offerings are required to meet the blue sky requirements in each state and must be reviewed and registered by the state and the SEC. For Tier 2 offerings, the offering preempts Blue Sky laws and does not require review and registration. Some states also require issuers to work with a broker-dealer for the offering, so issuers should pay careful attention to that requirement when preparing their offering.

 

Similarly to complying with the laws governing raising capital, issuers must also comply with the laws that govern secondary trading markets in the states they are looking to make secondary trading available in. Since Blue Sky laws vary between jurisdictions, it can be difficult for issuers to maintain compliance with the laws in each state. In this case, issuers can file for “manual exemption” of the Blue Sky laws, accepted in numerous states. This means that issuers can qualify for secondary trading as long as they meet disclosure requirements, like meeting financial standards and ensuring that key company information is listed in a national securities manual.

 

While meeting compliance requirements to offer secondary trading to investors may seem like a challenging task, working with a broker-dealer can ensure you are meeting all requirements. As an issuer, once you can offer secondary trading, your investors will benefit from liquidity options for their shares.

How often do I need to hold an AGM?

Posted on by Oscar Jofre

Every year, Warren Buffet hosts the Berkshire Hathaway Annual Shareholders Meeting. This meeting is an Annual General Meeting (AGM), widely viewed with many people in attendance. The reason for this is that it is often more than the typical AGM, which we will detail below, as Buffet often talks about more than just Berkshire Hathaway. This year, on Saturday, May 1st in Los Angeles, Buffet was joined by, as Yahoo Finance reported, “Vice Chairman Charlie Munger and both shared their unscripted views on Berkshire Hathaway, the markets, the economy, corporate governance, and a lot more.”

 

This example is only one of what an AGM can be. First, these meetings are required by regulations imposed by the Securities and Exchange Commission (SEC). An AGM, as the name suggests, is a meeting held every year for shareholders. This is the time for a company’s board of directors to present information to the shareholders and a chance for shareholders to exercise their right to vote, given to them by owning a share, after hearing the vision and direction of the company.

 

Some specific requirements are defined by each state in which a public or private company is incorporated, however, they follow a general set of what should happen at each. This variance comes from the company’s articles of incorporation, bylaws, and state requirements. The typical AGM breaks down as follows: 

 

  • Reading and approval of the minutes of the previous meeting 
  • Financial statements
  • Ratification of the director’s actions
  • Election of the board of directors
  • Concerns and questions from Shareholders

 

While shareholders are the focus of this meeting, they are not always available for the meeting. For this reason, they can vote by proxy via an online avenue or by mail. In addition, the SEC requires public companies to make meeting information available online for shareholders, so that they can be informed of their votes. Meeting information is also submitted to the SEC for regulatory compliance and sets the specific date and time for the meeting. These reporting requirements are a means to provide transparency for shareholders and the accountability of company management. 

 

The question of how often to hold an annual general meeting is every year. More specifically, from Cornell Law:

 

“An annual meeting of the shareholders of the subsidiary holding company for the election of directors and for the transaction of any other business of the subsidiary holding company shall be held annually within 150 days after the end of the subsidiary holding company’s fiscal year.”

 

Shareholders will also need to be notified a minimum of 20 days and a maximum of 50 days before the event. Outside of this yearly meeting for shareholders, if there is an action that the company needs shareholder votes for and cannot wait for the next annual meeting, they can call an Extraordinary General Meeting. EGMs are meant for urgent matters that cannot wait.

How to Select a Crowdfunding Platform for Your Capital Raise

Posted on by Oscar Jofre

One of the significant advancements brought to the financial sector in recent years was the enaction of the JOBS Act signed into law by President Obama on April 5th of 2012. Within that legislation contained a form of raising capital for private companies available to any American, whether they were accredited investors or not. This was Regulation CF or regulated crowdfunding.

When Reg CF was implemented, it limited the amount an unaccredited investor could invest and how much a private company could raise. In March 2021, the limit a company can raise increased to a maximum of $5 million within 12 months. Previously, before the introduction of Reg CF, it was challenging for the average investor to invest in a private company, as they did not have the capital to do so. This is now possible through Reg CF, which uses equity crowdfunding platforms to connect investors and private companies. 

Funding portals are regulated by FINRA, which imposes compliance on the organizations that provide the service and includes regulatory oversight and reporting requirements. FINRA has a list of funding portals registered and regulated by FINRA, which is the first thing to check when considering a funding portal. 

Part of the value of crowdfunding platforms for private companies is establishing demand and a proof of concept. If people are willing to invest in a Reg CF offering, it shows that people want a product or service to succeed. So, choosing the correct equity crowdfunding portal for you depends on the user base of that platform. For example, let’s look at three portals to see the differences of who is investing on those platforms. 

FanVestor is a platform predominantly for celebrities looking to raise money for a product or a charity. If, as a private company, you are among this group of people, this would be an effective platform, as investors would look here for you. In contrast, if you are a startup, you would be looking at portals like Republic or WeFunder. These two portals focus on startups, with Republic focused on real estate, video games, and crypto, and WeFunder, focused on giving small businesses and startups an alternative to venture capital and banks; their focus is “fixing capitalism.”

Look at where the investors are and what they are excited about, and then match that with your goals and vision. This is the best way to choose the right funding portal. It puts your company in the best place to raise the most capital and take your vision from dream to reality, with the backing of investors that believe in you. 

Beyond that, look to see which platform is the most beneficial for your situation. Consider how much they will charge and help you with the campaign. The purpose of working with a funding portal is to put your company, product, or service in the best possible position for success. The right crowdfunding platform will balance your weaknesses with their strength. 

What is KYP?

Posted on by Oscar Jofre

Previously, we have talked about KYC or Know Your Client. KYC is a rule from the non-profit Financial Industry Regulatory Authority (FINRA), created in the United States in 2007, in response to the growing fears of economic collapse that could come from underregulated securities firms. One part of the FINRA rule set created in 2012 is KYC (Rule 2090). Another is Rule 2111 (Suitability). It is important to mention both of these rules, as the topic for today, KYP, or Know Your Product, directly relates to them in their effort to protect investors. 

 

The KYC rule dictates that in the event of opening or maintaining an account for an investor, a broker-dealer is required to verify the investor’s identity by matching the provided material from the investor to government records. This aids the government in fighting money laundering and other financial crimes, as a broker-dealer must also review their finances for evidence of these types of crime. It also allows potential customers to evaluate broker-dealers as FINRA tracks the brokers in good standing with their organization. Finally, with suitability, a broker-dealer must use reasonable effort to understand the risk tolerance and facts about a potential customer’s financial position. This means understanding the types of products and plans an investor is comfortable making, as people of different ages and levels of wealth have different plans for their money. For instance, younger adults typically have a higher risk tolerance as they have a longer-term time horizon to work with their money. On the other end, older adults have lower risk tolerance. There is no one type of investing that works for every person, as each person has a different set of circumstances dependent on their life experiences. 

 

Where KYP comes in is a further step past just KYC and suitability. You may know the client their investment preferences, but if you do not understand the product you are investing in for your client, that information is essentially useless. Under KYP, a broker-dealer, “must understand the structure and features of each investment product they recommend. This includes costs, risks, and eligibility requirements. The KYP requirement applies to both the firm and the individual.“

 

KYP expands on the suitability requirement from FINRA by requiring a full understanding of each investment so that it fits an investor and their specific risk tolerance more effectively. This involves:

 

  • The risk level of the investment, meaning its liquidity, “price volatility, default risk, and exposure to counterparty risk” 
  • Any costs associated with fees or embedded costs
  • The financial history and reputation of the issuer or parties involved
  • Any legal and regulatory framework that applies

 

Just as it is important to know your client and understand what types of investments are suitable for regulatory and business purposes, it is important to understand the products you recommend. 

What is the Difference Between Fiduciary Responsibility and Regulatory Requirement?

Posted on by Oscar Jofre

By definition, a fiduciary is a person or an organization who holds a legal or ethical relationship of trust with another person or organization. Typically, this has to do with the responsibility or duty in a financial sense. As an adjective, it gets defined by the Oxford dictionary as “involving trust, especially with regard to the relationship between a trustee and a beneficiary.” The word gets most commonly used when stating that a company has a fiduciary duty to its shareholders. In practice, this means that the company has an ethical and legal responsibility to act in the best interest of its investors. For example, the company and its executives need to protect a shareholder’s financial investment in that company and is an example of a duty of loyalty. Included also is a duty of care, which indicates that a fiduciary will not back away from their responsibility.

 

Fiduciary duties do not just relate to the financial sector. For example, a lawyer has a fiduciary duty to their client to act in their best interest, but we will focus on the financial sector. Fiduciary responsibility in finance is a relationship between two non-governmental entities. In contrast, a regulatory requirement is a rule that a government or government-related organization imposes and enforces onto an organization.

 

Many governmental organizations impose regulations on the financial sector, like the Office of the Comptroller of the Currency or the Federal Reserve Board. The governmental-related organizations are the Financial Industry Regulatory Authority (FINRA) and Securities and Exchange Commission (SEC). We have previously discussed the regulations passed by both FINRA and the SEC in preceding blogs, which detail those processes well.

 

Both fiduciary responsibility and regulatory requirements can result in legal action if there is a breach in conduct, but the actors and stage are different. With fiduciary responsibility, the beneficiary of the fiduciary duty would file suit against the trustee in civil court who knowingly or unknowingly failed in their duty. This is a relationship between non-governmental actors, so in this case, a person litigating against an organization or vice versa.

 

On the other side, regulatory requirement gets dictated by a government entity like the SEC or OCC suing a company or individual for failing to comply with the law. This suit would land in criminal court, with punitive fines, damage to their reputation, and sanctioning. For example, in California, you need to be a registered broker-dealer for a Regulation A+ offering. If you decide as a company to ignore this law, the state regulator can, and will, require you to return all money raised, and you can get barred from raising money in the state. You will get labeled as a bad actor, which will damage the reputation of your business.

 

While fiduciary duty and regulatory requirements are different in terms of the responsibilities, actors, and negative consequences involved when failing to comply, they are critical to follow and maintain.

Why are Background Checks Important?

Posted on by Oscar Jofre

Money laundering is a global issue, with the United Nations estimating that between $800 billion and $2 Trillion are laundered each year, with 90% of this estimation remaining undetected. Money laundering is the act of taking money obtained through illegal activities and then introducing it into the system to legitimize or clean it and then make use of it. Originally, and most often, this was applied to the actions of organized crime but has expanded to included tax evasion or false accounting. 

 

The United States has multiple laws to prevent this type of activity and reclaim the illegitimate assets from criminals aiming to circumvent the system. Many of these laws directly affect the financial institutions of the nation. American banking and investment businesses need to follow compliance regulations that help in the effort to combat money laundering, including FINRA’s (Financial Industry Regulatory Authority) Rule 2090 (KYC or Know Your Client). The Know Your Client rule was introduced by FINRA to require broker-dealers to use reasonable effort to verify the identity of customers (or any other account owners) and assess their risk level. Part of this goal is to add transparency to the financial institutions in America, especially following the 2007-2008 financial crisis, and incorporate Anti-Money Laundering (or AML) compliance into the structure of our institutions.

 

AML and KYC are extensions of the Bank Secrecy Act and the CDD (Customer Due Diligence) Rule. The act, created in 1970, aims, as the Financial Crimes Enforcement Network states, “to improve financial transparency and prevent criminals and terrorists from misusing companies to disguise their illicit activities and launder their ill-gotten gains.” So, through the Know Your Client rule, broker-dealers must evaluate the information provided by a potential customer and verify their identity against government documents and assess the risk level they pose towards financial crime. 

 

This activity is a check for any indication of money laundering or terrorism financing. Part of this is a background check or a customer screening, checks beyond their identity. Using the customer’s identity, financial institutes check against various lists, like sanction lists, watch lists, and PEP lists to evaluate if the customer may be engaging in illegal activities. 

 

Background checks get followed by continuous monitoring, allowing broker-dealers to better spot irregularities in the transactions. For instance, in the event of large cash transactions, those typically over $10,000. Amount exceeding this amount must be reported and monitored. All to say that many governments and non-government institutions require compliance to defend against this issue that gets taken very seriously. Throughout 2020, there were several institutions fined for violating AML related compliance. Kyckr compiled these together and found that: 

 

  • Twenty-eight financial institutions were issued fines for AML-related violations.
  • Regulators from 14 countries issued AML-related fines.
  • Fines totaled roughly $3.2 billion USD.

 

Failing to follow the laws and maintain compliance can have serious consequences for financial institutions. Ensuring that you do the proper level of due diligence, follow the Know Your Client rule, and perform a background check can protect your business. 

 

What are Options?

Posted on by Oscar Jofre

Like warrants, options are a form of security called a derivative. As a derivative’s name suggests, these securities gain their value from an underlying asset. In the case of options, this is the underlying security. 

 

There are typically two primary forms of options; call options and put options. Both are governed by contracts; a call option allows the holder to buy securities at a set price while a put option allows them to sell. However, options contracts do not come for free. They can be bought for a premium, which is a non-refundable payment due upfront. Once options have been purchased, the holder has a certain amount of time during which they can exercise their options. On the other hand, options do not require the holder to purchase the shares contracts allow. When options are exercised, the price paid is referred to as the strike price.

 

In buying call options, the holder is guaranteed to buy securities at a certain price, even if the underlying security significantly increases in price. A put option works more like an insurance policy, protecting the holder’s portfolio from potential downturns. If a security was to decrease in price, the shareholder would be able to sell at a set price specified by their option contract, even if the market price was to fall lower than what the option allows it to be sold at.

 

In addition to being a way to minimize investment risks and maximize profits, options are becoming a popular incentive for employees, especially in startup companies when looking to attract employees. In addition to options that can be bought, options also refer to the ones issued to employees by their employer. This gives employees the chance, but not the obligation, to buy shares within a specified time. Employee stock options either come as an Incentive Stock Option or Nonqualified Stock Options, with the difference being the tax incentives that go along with exercising the options. 

 

Whether you have call or put options, they are a useful way to protect your portfolio from downsides or benefit from being able to purchase more shares at a discounted price. They are just one of the many forms of securities available, which should be considered carefully when making investment decisions.

What is KYC?

Posted on by Oscar Jofre

In 2007, the SEC approved the founding of the non-profit Financial Industry Regulatory Authority (FINRA). FINRA was created in the wake of a failing economy to consolidate the regulation of securities firms operating in the United States. The authority’s responsibilities include “rule writing, firm examination, enforcement, arbitration, and mediation functions, plus all functions previously overseen solely by NASD, including market regulation under contract for NASDAQ, the American Stock Exchange, the International Securities Exchange, and the Chicago Climate Exchange.”

The mission is to safeguard the investing public against fraud and bad practices. To fulfill this mission, FINRA added two rules in 2012: Rule 2090 (KYC or Know Your Client) and Rule 2111 (Suitability). 

KYC works in conjunction with suitability to protect both the client and the broker-dealer and help maintain fair dealings between the parties. The Know Your Client rule is a regulatory requirement for those responsible for opening and maintaining new accounts. This rule requires broker-dealers to access the client’s finances, verify their identity, and use reasonable effort to understand the risk tolerance and facts about their financial position. 

KYC is an important rule as it governs the relationship between customer and broker-dealer and safeguards the proceedings. At the heart of this rule is the process that verifies the customer’s identity (or any other account owners) and assesses their risk level. Part of FINRA’s goal is to eliminate financial crime, which means that when a broker is accessing a potential customer, they are looking for evidence of money laundering or similar crimes. This process goes both ways as FINRA allows a customer to verify the identity of brokers in good standing with the organization.

KYC also goes hand-in-hand with the Anti-Money Laundering (AML) rule, which seeks to identify suspicious behavior, outlined under FINRA rule 3310. Crimes such as terrorist financing, market manipulation, and securities fraud are illegal acts that KYC, AML, and other rules aim to prevent.

Another part of the Know Your Client rule is the requirement of a broker-dealer to use reasonable effort to understand a client’s risk tolerance, investment knowledge, and financial position. For example, accredited investors can make Regulation CF and A+ investments without facing restrictions, while the everyday investor is limited based on their net worth and income. 

When making recommendations for a client, a broker-dealer must comply with Rule 2111, the suitability rule, which means that they must have reasonable grounds for this suggestion based on a review of the client’s financial situation.

Compliance with these rules is maintained by following policies and best practices that govern risk management, customer acceptance, and transaction monitoring. Due diligence is done to know a client needs to be recorded, retained, and maintained so that broker-dealers can continuously monitor for suspicious or illegal activity. In 2020, FINRA processed 79.7 billion market events every day and imposed $57 million in fines. 

What is Regulated Crowdfunding

Posted on by Oscar Jofre

On April 5th of 2012, President Obama signed into law legislation called the JOBS Act. Four years after that act was signed, Title III of the JOBS Act was enacted. This was Regulation CF, which allows for private companies in their early stages to use crowdfunding to raise money from any American, not just accredited investors. This opened the doors with funding portals for companies to trade securities to a larger pool of investors to raise needed growth capital and allow average people to benefit from the possibility of investing in an early-stage company.

When it was first implemented in Spring 2016, Reg CF allowed companies to raise a maximum of $1.07 million within 12 months. Now, with new amendments added to the law by the SEC that went into effect in March 2021, companies can raise a maximum of $5 million. You may be familiar with the idea of crowdfunding with the success of websites like Kickstarter, and this works similarly. Instead of donation tiers that would award you merchandise from the campaign, investing in a private company with Reg CF will give you securities or equity in the companies. Previously, the barrier for entry into this investment type was very high, as you needed a lot of capital to invest in a private company. 

The new amendments still have a limit on how much a particular individual can invest when it comes to non-accredited investors but removed the limits on accredited investors. More specifically, for investors with either a net worth or annual income less than $107,000, investments in Reg CF offerings are limited to $2,200 or 5% of the greater of their annual income or net worth.

Reg CF is typically used for early-stage startups to build capital and has significantly changed the road map for entrepreneurs, allowing them to look to crowdfunding options before venture capital investments. Because the cost and barrier to entry for Regulation CF lower than with Reg A, many companies are using this after their first round of funding to prove the viability of their concepts and build a business. Then after a successful Reg CF, raising up to $5 million, this proves that there is interest in what you are building. In turn, this improves your valuation and allows for a much more successful Reg A campaign that could help you raise even more capital. 

There is a significant benefit to everyone involved in a Reg CF. The companies running the campaign are raising money to prove their viability, fuel the growth, and democratizes capital, allowing everyday Americans to participate in a system that was until recently closed to them. In 2020, 358,000 investors participated in Reg CF campaigns, a significant increase from the 15,000 investors participating in 2019. RegCF is a way for Americans to diversify their investment portfolio. They can grow as an investor by investing in a private company with a much lower entry cost.

With Reg CF garnering much success for both investors and issuers alike, it will be exciting to see how it continues to evolve in the future. We may see even higher raise limits, further expanding access to capital, increasing the number of American jobs, and further democratizing investment opportunities.

 

What is a RegA+ Annual Shareholder Meeting?

Posted on by Oscar Jofre

With Regulation A+ allowing companies to raise up to $75M USD, the regulation enables many great investors to support an issuer’s journey. From the everyday person to accredited investors, people can claim their stake in companies they foresee to be long-term successes. However, with shareholders come significant responsibilities issuers must uphold to maintain compliance with securities regulations. One such requirement is holding an AGM.

 

An Annual General Meeting, or simply AGM, is a meeting of shareholders that companies are required to hold once per year. The purpose is to provide shareholders with an update on the company and what plans lie ahead. During these meetings, the company’s directors will present annual reports to shareholders that are indicative of its performance. AGMs are a critical component of upholding the rights of shareholders, ensuring that they are provided all necessary information to make the right decisions regarding their investments. Typically, these meetings should be held after the end of the company’s fiscal year, giving shareholders adequate notice to attend or attend by proxy.

 

A company’s articles of incorporation and bylaws will outline the rules for an AGM, however, they typically include a review of the minutes from the previous AGM, financial statements, approval of the board of directors’ previous year actions, and election of directors. AGMs held by private companies do not require any regulatory filings but require them to check or change their bylaws to ensure that the meeting can be held online and information can be distributed digitally.

 

Before any AGM, shareholders will receive a proxy statement, which outlines the topics to be discussed at the meeting. The statement will include information on voting procedures for shareholders with voting rights, board candidates, executive compensation, and other matters that are important to a shareholder. The company will typically send shareholders a package containing this information by mail or over the internet if that is their preference. For shareholders that have invested directly in the company and their name is in the company’s official records, they are entitled to attend the meeting in person. For shareholders that have purchased shares through a broker-dealer or investment bank, they can request information on how to attend the meeting and cast their votes. Shareholders with the option to eVote can satisfy SEC requirements. Since 2007, “notice to access” rules enable companies to send a one-page notice to inform shareholders that materials are available online rather than being mailed a full copy of all reports.

 

AGMs are essential for the success of any private company, ensuring that shareholders are well-informed about company decisions and can exercise their voting rights. KoreConX offers our clients an all-in-one AGM planner as part of the REgA+ end-to-end solution. Our solution helps our clients maintain full compliance with securities laws, manage AGMs end-to-end, distribute circular materials, allow shareholders to securely vote online, and enable everyone to participate. We recognize that your shareholders are an important part of your company and strive to simplify the process of managing your relationships with them.

 

Annual shareholder meetings for RegA+ offerings are an essential part of compliance. Issuers are required to hold this meeting annually, empowering their shareholders to be active participants. Contact KoreConX to learn more about our AGM planning solution.

 

Reg A and Reg CF Issuers: Time to Count Your Shareholders!

Posted on by Sara Hanks

Reg A and Reg CF have been around for a few years now and we are finding that some of our clients, especially those that have made multiple offerings, are getting to the point where they need to consider the implications of Section 12(g) of the Securities Exchange Act, which requires companies to become registered with the SEC when they meet certain asset and investor number thresholds.

Let’s start with the requirements of Section 12(g). It says that if, on the last day of its fiscal year, an issuer has assets of $10 million and a class of equity securities held of record by either 2,000 persons or 500 persons who are not accredited investors, it has to register that class of securities with the SEC.

Drilling down on each of those elements:

  • Assets: This is gross, not net, and it will include any cash that a company has raised in an offering but not spent yet.
  • Class of equity securities: Issuers with multiple series of preferred stock or multiple series in a series LLC will need to talk to their lawyers about what constitutes a separate “class.”
  • Held of record: Brokers or custodians holding in “street name” count as a single holder of record. Crowdfunding SPVs created under the SEC’s new rules also count as one holder, and as discussed below, there are special, conditional, rules for counting Reg A and Reg CF investors.  But check with your lawyers whether you need to “look through” SPVs formed for the purpose of investing in Reg D offerings.
  • Accredited status: Issuers are probably going to have to make assumptions as to the accredited status of their investors unless they maintain that information separately, and assume investors in Reg D offerings are accredited, and investors in Reg A and Reg CF offerings are not.
  • Registering a class of securities in effect means filing a registration statement with all relevant information about the company and becoming a fully-reporting company. This includes PCAOB audits, quarterly filings, proxy statements, more extensive disclosure and all-round more expensive legal and accounting support.

Since becoming a fully-reporting company is not feasible for early-stage companies, both Reg A and Reg CF are covered by conditional exemptions from the requirements of Section 12(g). The conditions for each are different.

Issuers need not count the holders of securities originally issued in Reg A offerings (even if subsequently transferred) as “holders of record” if:

  • The company has made all the periodic filings required of a Reg A company (Forms 1-K, 1-SA and 1-U);
  • It has engaged a registered transfer agent; AND
  • It does not have a public float (equity securities held by non-affiliates multiplied by trading price) of $75m, or if no public trading, had revenues of less than $50m in the most recent year.

Issuers need not count the holders of securities issued in Reg CF offerings (even if subsequently transferred) as “holders of record” if:

  • The company is current in its annual filing (Form C-AR) requirements;
  • It has engaged a registered transfer agent; AND
  • It has total assets of less than $25m at the end of the most recent fiscal year.

It’s important that the issuer’s transfer agent keep accurate records of which exemption securities were issued under, even when they are transferred. As of March 15, 2021, Reg CF also allows the use of “crowdfunding vehicles”, a particular kind of SPV with specific requirements for control, fees, and rights of the SPV in order to put all of the investors in a Reg CF offering into one holder of record. This is not available for Reg A, and still comes with administrative requirements, which may make use of a transfer agent still practical.

If an issuer goes beyond the asset or public float requirements of its applicable conditional exemption, it will be eligible for a two-year transition period before it is required to register its securities with the SEC. However, if an issuer violates the conditional exemption by not being current in periodic reporting requirements, including filing a report late, then the transition period terminates immediately, requiring registration with the SEC within 120 days after the date on which the issuer’s late report was due to be filed.

It’s good discipline for companies who have made a few exempt offerings and had some success in their business to consider, on a regular basis, counting their assets and their shareholders and assess whether they may be about to lose one or both of the conditional exemptions and whether they need to plan for becoming a public reporting company.

What Impact Will Blockchain Have on Private Markets?

Posted on by Oscar Jofre

Blockchain has become a familiar buzzword, especially as things such as cryptocurrency grow in popularity. Currently, 46 million Americans now own Bitcoin. However, blockchain has many more industry-changing applications. Nearly any asset, both tangible and intangible, can be tracked and traded through blockchain. 

 

Blockchain, also known as distributed ledger technology, is a database where transactions are continually appended and verified across by multiple participants, ensuring that each transaction has a “witness” to validate its legitimacy. Blockchain transactions are immutable, meaning that they cannot be changed, making it difficult for hackers to manipulate. Copies of the ledger are decentralized, not stored in one location, so any change to one copy would immediately make it invalid, as the other copies would recognize that it had been altered. 

 

In private markets, blockchain technology has the potential to become a powerful tool, replacing manual inefficiencies with secure, digital processes. Everything from issues certificates to shareholders and preparing for audits becomes easier with transparent, readily available records. While public blockchains, like those that host Bitcoin transactions, enable anyone to participate, companies can also establish private and permissioned blockchains. In these forms of blockchain, the ledger is still decentralized, only access is controlled and only authorized individuals are allowed to participate. 

 

Rather than traditional securities, private companies can use distributed ledger technology to offer shareholders digital securities instead. These securities are still SEC-registered or fall under exemptions like Regulation A and Regulation CF. Digital securities protect investors, enabling them to always be able to prove their ownership, and companies are protected from the possibility of losing records of their shareholders. Private companies also benefit from blockchain as records are already transparent and readily available. Rather than hiring an advisor to review company documents, private companies employing blockchain technology will have records ready to go when conducting any capital market activity. Blockchain also dramatically reduced the amount of manual paperwork, since digital securities can be governed by smart contracts that preprogram protocols for their exchange. In addition, blockchain makes it easier for private companies to share information and data, while shareholders can feel confident that records are immutable and unable to be tampered with. 

 

Many companies are still in the early stages of adopting blockchain or are just beginning to consider its possibilities. Blockchain will only continue to be adopted by private companies both in the United States and around the world, improving the processes associated with private market transactions. The private market will benefit from increased transparency and efficiency, making transactions smoother for both companies and their shareholders.

What is the Role of a Corporate Secretary?

Posted on by Oscar Jofre

A Corporate Secretary is a required position set forth by state corporation laws and is part of the ‘check and balance’ on board members and offers the board advice and support. While providing the company with advice on the state laws, they are also tasked with ensuring that board members maintain their fiduciary duties to shareholders. 

 

One way they do this is by accurately recording and maintaining the minutes for the board meetings they usually set up. Corporate secretaries are responsible for ensuring that an adequate number of board meetings are held and that scheduling coincides with the availability of board members. They are required to comply with meeting notices and often are responsible for other logistical arrangements. This is just one of the basic tenets of the position and typically remains a constant between companies. 

 

Corporate secretaries are essentially a compliance officer for board members, serving as a liaison between the board, officers, and shareholders while maintaining documents that are required to keep the board and company in compliance with regulations. They also direct the activities related to the annual meeting of shareholders and share transfers. As a note, while the corporate secretary does not need to be a lawyer, they need to have sufficient knowledge of corporate and securities law to ensure compliance, so a background in law can be helpful. They should also be as well-versed in the company’s business, understanding it thoroughly to be an effective corporate secretary.

 

Even though the role of the corporate secretary is dynamic and complex, varying slightly between companies, the basic function of the position can be boiled down to being responsible for providing support to the board, officers, and shareholders on business matters and the laws that apply to them. Whether it is setting up, facilitating, or creating the agenda of a board or annual shareholders meeting, a corporate secretary is an essential and mandatory part of a company’s structure in the modern world of business. 

Shareholder Rights and Why They’re Important to Know

Posted on by Oscar Jofre

The first thought that comes to mind when someone says “shareholder,” is Wall Street, understandably, as Wall Street is home to the New York Stock Exchange and NASDAQ, the two largest stock exchanges in the world. In this sense, becoming a shareholder is dependent on owning stock. A common word in the financial industry, a stock is a unit of measure for how much of a company a shareholder owns. When it comes to the stock market found on Wall Street, those are stocks being traded in public companies, like Apple, Microsoft, and Amazon. These are household names, but there are also privately-owned companies that you would know by name, like Koch Industries, Bloomberg, Staples, and Petsmart. These private companies also have shareholders, who have rights associated with their ownership in a private company. For private company shareholders, there are three major rights; access to information, voting rights, and the ability to attend and participate in meetings.

 

One quick comparison we can make between private and public companies is the number of shareholders they have. Because a public company has shares available on the stock market, there is a greater opportunity for everyday people to grab at least one share, while private companies traditionally have far fewer shareholders because there is less access. However, the JOBS Act is changing the landscape, allowing the everyday investor to access more investment opportunities in private companies through Regulation A+ and Regulation CF. These regulations allow investors to invest smaller amounts of money in exchange for shares of a private company. No longer are these types of investments limited to accredited, angel, and venture capital investors. 

 

However, this plays a role in the rights of shareholders due to the volume of your voice in meetings and decisions. One right that shareholders have is the ability to attend meetings on major decisions in the company. When there are fewer investors in a company, the louder your voice will be in the room. This is important because by owning a part of that company, shareholders gain the right to participate and attend meetings to protect their investment from decisions that they feel would misuse their funds.

 

As a shareholder, you have the right to vote on major decisions being made by the company that could very well change the direction of the company. This again goes back to protecting your investment, as investing in a private company is often a long-term investment. Private company earnings can be paid out to shareholders, but the more likely scenario for a shareholder in a private company, especially if it is not a particularly large company, is a liquidity event, such as going public, buying out shareholders, or by being able to offer shares for sale on a secondary market alternative trading system. Making sure that your investment is safe is why you have the right to vote on major decisions. The same is true for your access to information. As a shareholder in a private company, you have a right to know how the company is doing, to see how your investment is playing out.

 

It is important to know your rights as an investor whether it is in a public or private company because you have put your money in the hands of others with the expectation that they will use it to grow and make more money for you in the future. As an investor in a private company, you have more say than an investor in a public company by the fact that you are one of few as opposed to one of many. Use that power and protect your investment; remember that if you own stock, you own part of the company and have rights. 

What is Due Diligence?

Posted on by Oscar Jofre

When it comes to investments of any kind, due diligence is essential for both issuers and investors alike. Do so what exactly is due diligence?

 

Due diligence is ensuring that a potential investment comes with the accurate disclosure of all offering details. The Securities Act of 1933, a result of the stock market crash years earlier, introduced due diligence as a common practice. The purpose of the act was to create transparency into the financial statements of companies and protect investors from fraud. While the SEC requires the information provided to be accurate, it does not make any guarantees to its accuracy. However, the Securities Act of 1933 for the first time allowed investors to make informed decisions regarding their investments. 

 

In the process of investing, investors should review all information available to them. Investors should ask questions such as:

 

  • Company Business Plans: What are the issuer’s current and future plans? Do their projections seem reasonable given their current financial reports?
  • Company Management: Who are the company’s officers, founders, and board members? What is their previous experience in business and have they had success? Does the management team pass a Bad Actors check?
  • Products/Services: What does the company offer? Is it something that you would use or does there seem to be a wide appeal for the product or service in the market? 
  • Documentation: Is the company’s bylines, articles of incorporation, meeting minutes, and other related documents available to review?
  • Revenue: What does the company’s revenue look like? Does it make sense considering the demand for their products? What do revenue projections look like?
  • Debt: Does the company have debt? Is it comparable to other companies in the industry?
  • Competition: What does the company’s competition look like and how do they plan to deal with it? Has the company properly protected intellectual property through trademarks, patents, copyrights, etc.?
  • Funding: Why is the company raising funding and what are the plans for the money raised?

 

While these are important questions to ask, there are other factors that investors should think about. Investors should consider whether they are financially able to take on the risk of investment. While investing in private companies can lead to a huge return, success is not guaranteed. Investors should ask themselves if they would be able to afford to lose their investment or not immediately being able to make a profit. They should also ensure that they are qualified to invest. If they are a non-accredited investor, have they already made investments that could alter the amount they can invest?

 

Issuers should make sure that all information investors need to make an educated decision to invest is adequately provided. They do not want to risk potential lawsuits down the road for failing to disclose certain information. Issuers can ensure that they are meeting all due diligence requirements by using a broker-dealer as an intermediary for their investment.

Are You Ready to Raise Capital?

Posted on by Oscar Jofre

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 investmentsand 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.

How a Member of the Crowd Made Crowdfunding Easier

Posted on by Sara Hanks

A while back, one of our favorite start-up clients called me and asked me to speak to a potential investor. Paul Efron, a resident of Arizona, wanted to invest in the company’s Regulation A offering. However, when he went onto the company’s website to invest, his subscription was rejected. The company was accepting subscriptions from investors in every state but Arizona and Nebraska.

Why Arizona and Nebraska, asked Paul?

The reason was that while federal law and most states’ laws say that a company selling its own securities is exempt from broker-dealer registration, that’s not the case in a handful of states. These states say that if a company isn’t using a registered broker-dealer to sell in their state, the company has to register itself as an “issuer-dealer.” Depending on the state, that can involve letters to the regulators showing that the company and its officers are familiar with securities regulations, fingerprints, and, in the case of Arizona, a requirement that the company comply with “net capital” requirements as if they were an actual broker. Start-ups, of course, very rarely have any excess capital sitting around. So our client decided just not to sell in Arizona. (There were similar issues in Nebraska, which has since changed its rules.)

Paul could have done several things at this point. He could have pretended he lived somewhere else. He could have given up and invested in something else. But, being an entrepreneur himself, he decided the law needed to be changed, and set about changing it.

He reviewed the Arizona legislature website and saw that every legislator gets an email address on the website.  The way the website email system is setup, doing a mass email campaign with individual emails was possible.  Paul sent out an email to every one of the 30 Senators and 60 Representatives which took about an hour of click, click, cut and paste.  He found the autofill function very helpful.  Republican Senator Tyler Pace and Democratic Representative Aaron Lieberman replied to the email.  Having a member of both parties from both houses was perfect for this nonpartisan bill.  He brought me in to explain the issue to the legislators, their staff and the relevant committee staff. They listened, understood, and drafted. The first attempt at getting the legislation through was derailed because of COVID.  Paul contacted the legislators again.  The bill was reintroduced, passed this session, and the Governor signed it into law last week.

Start-ups (and Arizona investors) owe Paul. Not just for getting this roadblock removed, but for setting an example of what can happen when a citizen looks at a regulation and says “Well that doesn’t make any sense; how do I fix that?”

Managing Your Investments in Private Companies

Posted on by Oscar Jofre

For investors, investing in private companies can be a beneficial way to diversify their investment portfolios. Whether the investment was made through private equity or RegA+, proper management can contribute to long-term success. However, once the investment is made, investors need to ensure that they are correctly managing their shares. With this in mind, how should investors manage their investments once they have been made?

 

Investments made in private companies can often come with voting rights. Being a part of company decisions is an important aspect of being an investor and helps to elect company directors and resolve issues. Investors exercising their voting rights can be a major aspect of managing their portfolio.

 

Whether information is provided directly to the investors by the company or through a transfer agent, as companies release reports and other key information, shareholders should maintain current knowledge of the information. Understanding the company’s direction and changes that are occurring can give investors a picture of the future so they can determine how their shares will affect their portfolio. The investor should also know where the data can be found so that they are easily able to access and assess it.

 

Additionally, investors should monitor the liquidity of the shares. Since some private company shares can be traded in a secondary market, understanding the value and the option to trade is important for investors. If they know how much their shares are worth, and they have the ability to sell them, investors can freely trade their shares. This is key if they decide that they no longer want to be a shareholder in a particular private company.

 

However, for investors who own shares in multiple different companies, managing this information can become a burdensome task. With an all-in-one platform that incorporates portfolio management for investors, KoreConX streamlines and simplifies the process. KoreConX Portfolio Management allows investors to manage their investments from a centralized dashboard. Investors are easily able to see the shares that they own in each private company they’ve invested in. Through the platform, investors can access critical company information and performance data in one place, eliminating the need to remember where each piece of information is kept. Investors are also notified of upcoming shareholder meetings and can exercise their voting rights through the KoreConX platform. When companies and investors utilize the KoreConX platform, they can achieve higher success rates by maintaining compliance with necessary regulations. Utilizing KoreConX Portfolio Management is a powerful tool for investors to make informed decisions regarding their investments.

 

When dealing with private company investments, it is incredibly important that investors properly manage their portfolios. Remaining up-to-date on company decisions and performance can help them plan for the future of their shares while allowing them to make decisions to increase the success of their investments. When investors understand their voting rights, company developments, and the liquidity of their shares, they can be an active participant in their financial success.

KorePartner Spotlight: Jonny Price, Vice President of Fundraising at Wefunder

Posted on by Oscar Jofre

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

 

Jonny Price has always had an interest in economic development and a passion for economic justice and equity. In his first role in the fundraising sector, he worked for a company called Kiva, which provided crowdfunded micro-loans to US entrepreneurs. With his experience as the head of Kiva US, it was a natural transition to Wefunder, where he serves as VP of Fundraising.

 

For too long, investments in private companies have been limited to only accredited investors. For the average person, their only chance to invest was once the company went public. Wefunder makes it so that private investments are not just limited to wealthy investors – through Wefunder, anyone can become an angel investor for as little as $100.

 

Jonny is excited about how this is changing the private investment space. When ordinary people can invest in brands they care about, more capital is available for founders and entrepreneurs to grow their businesses. Especially in minority and women-run businesses, there is a great disparity in access to capital. Only 1% of VC funding goes to black founders, and 3% goes to female-only founding teams. Crowdfunding helps to level the playing field tremendously.

 

Partnering with KoreConX was the right fit for Wefunder. Jonny said: “I have known Oscar for a while and am impressed with the services they offer. A number of Wefunder clients have used the platform, and had very positive things to say about the KoreConX team.”

Conducting a Successful RegA+ Offering

Posted on by Oscar Jofre

If your company is looking to raise funding, you’ve probably considered many options for doing so. Since the SEC introduced the outlines for Regulation A+ in the JOBS Act, the amount companies are able to raise was increased to $75 million in January 2021 during rounds of funding from both accredited and non-accredited investors alike. If you’ve chosen to proceed with a RegA+ offering, you’ve probably become familiar with the process, but what do you need for your offering to be a success?

 

When beginning your offering, your company’s valuation will play a key role in the offering’s success. While it may be tempting to complete your valuation in-house, as it can save your company money in its early stages, seeking a valuation from a third-party firm will ensure its accuracy. Having a proper valuation will allow you to commence your offering without overvaluing what your company is worth.

 

Since the SEC allows RegA+ offerings to be freely advertised, your company will need a realistic marketing budget to spread the word about your fundraising efforts. If no one knows that you’re raising money, how can you actually raise money? Once you’ve established a budget, knowing your target will be the next important step. If your company’s brand already has loyal customers, they are likely the easiest target for your fundraising campaign. Customers that already love your brand will be excited to invest in something that they care about.

 

After addressing marketing strategies for gaining investments in your company, creating the proper terms for the offering will also be essential. Since one of the main advantages of RegA+ is that it allows companies to raise money from everyday people, having terms that are easy for people to understand without complex knowledge of investments and finance will have a wider appeal. Potential investors can invest in a company with confidence when they can easily understand what they are buying.

 

For a successful offering, companies should also keep in mind that they need to properly manage their offering. KoreConX makes it simple for companies to keep track of all aspects of their fundraising with its all-in-one platform. Companies can easily manage their capitalization table as securities are sold and equity is awarded to shareholders, and direct integration with a transfer agent allows certificates to be issued electronically. Even after the round, the platform provides both issuers and investors with support and offers a secondary market for securities purchased from private companies.

 

Knowing your audience, establishing a marketing budget, creating simple terms, and having an accurate valuation will give your RegA+ offering the power to succeed and can help you raise the desired funding for your company. Through the JOBS Act, the SEC gave private companies the incredible power to raise funds from both everyday people and accredited investors, but proper strategies can ensure that the offering meets its potential.

Tax Alert for Sponsors and Fund Managers: IRS Issues Final Regulations for Carried Interests

Posted on by Mark Roderick

Every real estate syndication and private investment fund involves a “carried interest” for the sponsor, also known as a “promoted interest.” The IRS just issued final regulations on how those interests are taxed.

A carried interest is what the sponsor gets for putting the deal together. For example, a typical waterfall might provide that on sale of the project investors receive a preferred return, then investors receive a return of their capital, then the balance is divided 70% to investors and 30% to the sponsor. That 30% is the sponsor’s carried interest.

For as long as anyone can remember the sponsor’s 30% carry has been taxed as capital gain. This favorable tax treatment has been the subject of considerable controversy given that the carry is paid to the sponsor not for an investment of capital but for the performance of services. Why should fund managers and deal sponsors be taxed at capital gain rates while hardworking Crowdfunding lawyers are taxed at ordinary income rates? Or so the issue has often been posed.

As a gesture in the egalitarian direction, the Tax Cuts and Jobs Act of 2017 – the same law that gave us qualified opportunity zones – added section 1061 to the Internal Revenue Code. Section 1061 provides that while carried interests are still taxed at capital gain rates, the threshold for long-term rates is three years rather than 12 months.

That means if an investment fund buys stock in a portfolio company and flips it at a profit after two years, the investors are taxed at long-term capital gain rates while the sponsor is taxed at ordinary income rates, a big difference.

IMPORTANT NOTE:  In the real estate world section 1061 applies to vacant land or a triple-net lease, but not to a typical multifamily rental project. (The issue is whether the asset constitutes “property used in a trade or business” under Code section 1231.)

The final regulations just issued by the IRS clarify a few points:

  • They clarify that the three-year holding period doesn’t apply to an interest the sponsor acquires by investing capital along with other investors.
  • They clarify that if the sponsor receives a distribution with respect to its carried interest and reinvests the distribution, the interest the sponsor receives as a result of the reinvestment is not subject to the three-year holding period.
  • They provide that if the sponsor sells its carried interest, you “look through” the partnership to determine the holding period of the partnership’s assets.
  • They provide that if the sponsor transfers the carried interest to a related party, the sponsor can recognize taxable phantom gain.
  • They deal with in-kind distributions of assets to the sponsor with respect to the carried interest.

Section 1061 is one more tripwire for deal sponsors and their advisors. Be aware!

The State of the Jobs Act 2021 KoreSummit Webinar

Posted on by Oscar Jofre

The JOBS Act was signed into law just nine years ago, in April of 2012. Since then, thousands of companies have taken advantage of the Act’s exemptions to raise capital for their companies.  More than half a million investors have participated, providing funding to these companies—and it’s just getting started!

 

The JOBS Act’s fundamentals are simple:

  • Democratize capital so everyone can invest
  • Give ownership back to the owners
  • Create jobs

 

The proof of momentum is in the numbers and there now exists real tangible growth in the private markets.

 

The JOBS Act’s Impact by the Numbers for 2020

Total Funding Portals: 51

Total Companies Funded: 1,100

Total Companies Raising $1M USD: 229

Number of States: 48

Total Raised: $239.4M

Total Number of Investors: 358,000

Average Raise: $308,978

 

On November 2, 2020, SEC Commissioner Jay Clayton announced an amendment to two regulations that have truly expanded investors’ access to the funding of startups, emerging growth companies, and affinity-based projects online.  Companies can now use Reg CF to raise up to $5M USD, and RegA+ to raise up to $75M USD.

 

On March 15, 2021, our webinar brings together two individuals who began this journey more than a decade ago. You will hear them reflect on their experiences and, more importantly, what lies ahead for the next version of the JOBS Act and the following chapter on capital raising for entrepreneurs.

 

David Weild IV is a stock market expert best known for his position as Vice Chairman of NASDAQ. He is currently the Founder, Chairman, and CEO of Weild & Co. Inc., the parent company of the investment banking firm Weild Capital, LLC (dba Weild & Co.). Weild is also known as the “father” of the JOBS Act and has been involved in drafting legislation for the US Congress.

 

Sara Hanks, CEO of CrowdCheck and Managing Partner of CrowdCheck Law, is an attorney with over 30 years of experience in the corporate and securities field. CrowdCheck and CrowdCheck Law together provide a wide range of legal, compliance, and due diligence services for companies and intermediaries engaged in online capital formation, with a focus on offerings made under Regulations A, CF, D, and S, whether traditional or digitized securities.

 

Sara’s prior position was General Counsel of the bipartisan Congressional Oversight Panel, the overseer of the Troubled Asset Relief Program (TARP). Prior to that, Sara spent many years as a partner at Clifford Chance, one of the world’s largest law firms. While at Clifford Chance, she advised on capital markets transactions and corporate matters for companies throughout the world. Sara began her career with the London law firm Norton Rose. She later joined the Securities and Exchange Commission and as Chief of the Office of International Corporate Finance, she led the team drafting regulations that put into place a new generation of rules governing the capital-raising process.

 

Sara received her law degree from Oxford University and is a member of the New York and DC bars and a Solicitor of the Supreme Court of England and Wales. She serves on the SEC’s Small Business Capital Formation Advisory Committee. She holds a Series 65 securities license as a registered investment advisor. Sara is an aunt, Army wife, skier, cyclist, gardener, and animal lover.

 

This fireside discussion will be hosted by Vincent Molinari, co-founder and CEO of Molinari Media (Fintech.TV), who has followed the industry and is using the JOBS Act to raise capital for his own firm.

Regulation A+ Is Even Better After Passage Of The Economic Growth Act

Posted on by Lahdan Rahmati

On May 24, 2018, President Trump signed the Economic Growth, Regulatory Relief and Consumer Protection Act (the Act) into law. The Act was introduced by Senator Mike Crapo, a Republican Senator from Idaho, in the United States Senate Committee on Banking, Housing and Urban Affairs on November 16, 2017. The 73-page-long Act contains a short and sweet Section 508 entitled “Improving Access To Capital” that changes Regulation A in a big way.

Some Background

In mid-2015, the U.S. Securities and Exchange Commission (Commission) amended Regulation A in order to expand the exemption from registration under the Securities Act of 1933, as mandated by the Jumpstart Our Business Startups (JOBS) Act, to enhance the ability of smaller companies to raise money. Regulation A allows companies to offer and sell securities to the public, but with more limited disclosure requirements than those that apply to full reporting companies under the Securities Exchange Act of 1934 (Exchange Act). In comparison to registered offerings, smaller companies in earlier stages of development are able to use this rule to more cost-effectively raise money.

Why Is This A Big Deal?

(1) Reporting Companies Will Be Able to Rely on Regulation A: Prior to the Act, reporting companies were prohibited from utilizing Regulation A to raise capital. The Act requires the Commission to finalize rules that amend 17 C.F.R. Section 230.251 to remove the requirement that the issuer not be subject to Section 13 or 15(d) of the Exchange Act immediately before the offering. Therefore, reporting companies will be able to rely on Regulation A to raise capital.

(2) Reporting Companies Will Not Be Required To File Additional Reports: The Act requires that the Commission finalize rules that amend 17 C.F.R. 230.257 to deem reporting companies as having met the requirements of 17 C.F.R. 230.257. Therefore, reporting companies that already meet the reporting requirements of Section 13 or 15(d) of the Exchange Act do not need to file additional reports required under 17 C.F.R. 230.257.

When Will The Rules Be Finalized?

Rulemaking is the process by which federal agencies implement legislation by Congress that is then signed into law by the President. Rulemaking generally involves the following steps:

(1) Concept Release: The Commission issues a concept release when an issue is unique and complicated such that the Commission wants public input before issuing a proposed rule. The Act is very straightforward so the Commission will probably not issue a concept release and go straight to the next step.
(2) Rule Proposal: When approved by the Commission, a rule proposal is published for public notice and comment for a specified period of time, typically between 30 and 60 days. A rule proposal typically contains the text of the proposed new or amended rule along with a discussion of the issue or problem the proposal is designed to address. The public’s input on the proposal is considered as a final rule is drafted.
(3) Rule Adoption: When approved by the Commission, the new rule or rule amendment becomes part of the official rules that govern the securities industry. The new rule or rule amendment is in the form of an adopting release that reflects the Commission’s consideration of the public comments.

 

See the original article, published on our KorePartner’s blog here.

Using a Transfer Agent Doesn’t Mean You Have a Single Entry on Your Cap Table

Posted on by Mark Roderick

Many issuers are concerned that “Crowdfunding will screw up my cap table.” In response, several Title III funding portals offer a mechanism they promise will leave only a single entry on the issuer’s cap table, no matter how many investors sign up.

The claim is innocuous, i.e., it doesn’t really hurt anybody. But it’s also false.

The claim begins with section 12(g) of the Securities Exchange Act. Under section 12(g), an issuer must register its securities with the SEC and begin filing all the reports of a public company if the issuer has more than $10 million of total assets and any class of equity securities held of record by more than 500 non-accredited investors or more than 2,000 total investors.

17 CFR §240.12g5-1 defines what it means for securities to be held “of record.” For example, under 17 CFR §240.12g5-1(a)(2), securities held by a partnership are generally treated as held “of record” by one person, the partnership, even if the partnership has lots of partners. Similarly, under 17 CFR §240.12g5-1(a)(4), securities held by two or more persons as co-owners (e.g., as tenants in common) are treated as held “of record” by one person.

With their eyes on this regulation, the funding portals require each investor to designate a third party to act on the investor’s behalf. The third-party acts as transfer agent, custodian, paying agent, and proxy agent, and also has the right to vote the investor’s securities (if the securities have voting rights). The funding portal then takes the position that all the securities are held by one owner “of record” under 17 CFR §240.12g5-1.

Two points before going further:

  • Title III issuers don’t need 17 CFR §240.12g5-1 to avoid reporting under section 12(g). Under 17 CFR §240.12g6(a), securities issued under Title III don’t count toward the 500/2,000 thresholds, as long as the issuer uses a transfer agent and has no more than $25 million of assets.
  • 17 CFR §240.12g5-1(b)(3) includes an anti-abuse rule:  “If the issuer knows or has reason to know that the form of holding securities of record is used primarily to circumvent the provisions of section 12(g). . . . the beneficial owners of such securities shall be deemed to be the record owners thereof.”

But put both those things to the side and assume that, by using the mechanism offered by the funding portal, the issuer has 735 investors but only one holder “of record.”

Does having one holder “of record” mean the issuer has only a single entry on its cap table? Of course not. At tax time, the issuer is still going to produce 735 K-1s.

The fact is, how many holders an issuer has “of record” for purposes of section 12(g) of the Exchange Act has nothing to do with cap tables. The leap from section 12(g) to cap tables is a rhetorical sleight-of-hand.

As I said in the beginning, the sleight-of-hand is mostly harmless. Except for some additional fees, neither the issuer nor the investors are any worse off. And the motivation is understandable:  too many issuers think Crowdfunding will get in the way of future funding rounds, even though that’s not true.

Even so, as a boring corporate lawyer and true believer in Crowdfunding, I’m uncomfortable with the sleight-of-hand. When SPVs become legal on March 15th perhaps the market will change.

Why Does My Company Need a 409(a)?

Posted on by Oscar Jofre

Whether your company is a new startup or an established private company, understanding and proper use of a 409(a) is essential to your company’s success. Thinking about it early will help you avoid potential setbacks and challenges later on, giving you more time to focus on growing your company, rather than tackling penalties. If that doesn’t convince you that a 409(a) is something that your company needs, a better understanding of what it is will convince you.

 

To start with the basics, what is a 409(a)? First added to the Internal Revenue Code (IRC) in 2005, 409(a) outlines the taxation on “non-qualified deferred compensation,” which includes common stock options for employees. For companies to be able to offer their employees the ability to purchase stock in the company, they must complete a 409(a) valuation to determine the “strike price,” or the predetermined price at which employees can purchase the stocks. 

 

Undergoing a 409(a) valuation ensures that the strike price is at or above the fair market value and that the company remains compliant with the IRC. For companies who the IRS find to be noncompliant with the code, some penalties include an additional 20% tax penalty and penalty interest. 

 

So, how do you ensure that your company accurately determines the fair market value of your common stock? This can be done a couple of ways, either by someone within the company or by a third-party valuation firm. Whether you’re planning on completing 409(a) valuation in-house or hiring a firm, there are a few key things to keep in mind. 

 

For valuations done in-house, whoever is chosen must have at least five years of experience related to valuation. Since this can be subjective, the IRS could rule that the individual did not meet the requirements and that the valuation is inaccurate. Additionally, only private companies that are less than 10 years old can choose to complete their valuation in-house. It is also important to remember that if the IRS were to investigate, it would be the company’s responsibility to prove their valuation was correct. 

 

Hiring an outside firm, while often the more costly option, is usually more reliable. As long as the firm maintains a consistent approach to valuations and is independent, meaning that the firm is only providing the company with valuation, the company is given “safe harbor” protection. A safe harbor protects both the company and its employees, as it would be the IRS’s responsibility to prove that the valuation was inaccurate. 

 

Once your company has received its 409(a) valuation, how long does that last? It is considered to be valid for one year after the valuation. After that, it must be redone to ensure compliance. If your company closes a round of funding or undergoes any material changes before that period is up, a new 409(a) valuation would be required. 

 

Armed with the knowledge of what exactly a 409(a) is, you can help your company achieve success and maintain IRC compliance. Even early on, being compliant with tax codes ensures you avoid severe penalties and expensive delays should the IRS decide to audit your company as it begins generating revenue. 

KorePartner Spotlight: Sara Hanks, CEO of CrowdCheck

Posted on by Oscar Jofre

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

 

With over 30 years in the corporate and securities law field, Sara Hanks has a wealth of experience. Before CrowdCheck began, Sara and one of the firm’s co-founders (whose husband became the other cofounder) served on the Congressional Oversight Panel where they spent 18 months in DC investigating the Troubled Asset Relief Program. Shortly after this time, the bills that became the JOBS Act were passing through Congress and Sara’s interest in the private capital markets grew.

 

Sara and the CrowdCheck co-founders began to discuss due diligence and the implication crowdfunding would have. With their combined legal and entrepreneurial experience, they knew they could help investors make good investment decisions and walk entrepreneurs through the compliance process. These conversations led to CrowdCheck, which Sara says was “founded on the back of a cocktail napkin.”

 

CrowdCheck and its affiliated law firm, CrowdCheck Law, provides clients with a complete range of legal and compliance services for issuers and investors. As a “weapon against potential fraud,” CrowdCheck does due diligence for investors, letting them see the results themselves in a report that is easy to understand. The firm also helps entrepreneurs through the complex process of compliance, making sure that they have met all legal requirements. Sara and CrowdCheck have tremendous experience applying exciting securities laws to the online capital environment, a skillset valuable in the crowdfunding space.

 

One of the things that excites Sara most about this space is that there are “so many cases of first impressions.” Raising capital isn’t new, but with crowdfunding, new questions arise every day and there is the opportunity for innovative delivery of information.

 

A partnership with KoreConX is exciting for Sara and CrowdCheck because KoreConX values and understands how essential compliance is. “This environment won’t work without compliance,” Sara Hanks said, so it was valuable finding a partner that did not need convincing when it came to compliance.

KorePartners Spotlight: Rod Turner, Founder, Chairman, and CEO of Manhattan Street Capital

Posted on by Oscar Jofre

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

Rod Turner is the founder, chairman, and CEO of Manhattan Street Capital, an online fundraising platform allowing companies to cost-effectively raise capital using Regulation A+, Regulation D, and other regulations, supporting them throughout the entire capital raising journey. The goal is to make it easier for investors to invest and for issuers to list their offerings. The popular term for the services provided by Manhattan Street Capital is “quarterbacking”; they are not the company raising money, but they bring all necessary services providers together and advise the company and marketing agencies on the nuances of raising money successfully. These services combine with the company’s offering platform which separates Issuer Clients into their own offering pages with rich features and deep instrumentation and integration with all marketing.

Before founding Manhattan Street Capital, Rod Turner founded 6 other successful tech startups. He has had extensive experience in the capital markets, from securing VC funding, IPOs listed on the NASDAQ, mergers and acquisitions, as well as building a VC fund with a colleague. This experience has led him to understand the power of RegA+ as a fundraising tool for startups and mid-sized companies.

“I recognized pretty quickly that RegA+ is a phenomenally good fundraising instrument and that the regulations are really well-written, very pragmatically written, when it comes to implementing them. Which I was just really excited to see.”

Rod has seen many mature startups and mid-sized  companies  that are “strangled by the lack of access to growth capital” and sees RegA+ as very attractive solution for many of these companies Rod estimates that the scale of capital raised via Reg A+ may amount to $50-60 billion raised per year when it hits full stride. By getting involved in the industry, Rod wants to help solve this issue faced by companies and help them to secure the funding they need. “I want the whole industry to be very successful,” Rod said. RegA+ is continuing to expand rapidly, which will continue to open more opportunities for companies throughout the US.

At Manhattan Street Capital, Rod deeply analyzes the RegA+ industry to solve problems for his company and its clients. Each year, Rod and the Manhattan Street Capital team go through all the EDGAR filings with the SEC to assess the scale of RegA+. Rod likes to take a bigger picture approach so that he can solve problems that are not noticed by those that only focus on their specialty. 

Bringing Private Placements into the Digital Age

Posted on by Lee E. Saba

How blockchain-based technology will transform private markets

 

Remember the first time you drove a car with a rear-facing camera? The first time you streamed an on-demand movie at home via the Internet, or used GPS instead of a fold-out paper map to find your way on a trip? Similarly, emerging digital technologies have the potential to significantly streamline the cumbersome process of issuing and trading private securities, while automating regulatory compliance and enhancing secondary-market liquidity, transparency, and price discovery. The best part? All these benefits can be captured within existing market structures.

 

The growing popularity of private placements over public listings in recent years is a well-documented phenomenon, driven by tightened regulatory requirements for public issuers and a widening search for returns among investors in a low-interest-rate world.

 

Strong Growth in Private Markets

Acknowledging that raising capital in private markets is simpler than floating public offerings, the path to private issuance is still lengthy and complex. After capital is raised, issuers incur ongoing costs for stock transfers, escheatment, dividend payouts, and compliance. Meanwhile, participants in secondary markets must cope with complexities in making legal and transfer arrangements. Indeed, the timeline for executing trades in privates is currently calculated not in hours or days, but in weeks and months. Throughout, the process is larded with paper, paper, and more paper, stuffed into a file cabinet or residing on email servers.

 

Contrast that with the way new digital mechanisms can transform how private markets operate.

Source: Preqin

 

Blockchain based technologies help ensure that regulated securities are allowed for trading, execute and track payment and receipt of dividends, and validate that transactions have been executed solely with approved investors.  Post-trade processes leverage blockchain’s single “source of truth” — that is, the immutability of a blockchain ledger — working with SEC registered transfer agents.  Alternative trading systems (ATS) are now live for secondary trading of private yet regulated digital securities.

This is no pie-in-the-sky, far-in-the-future scenario. Industry standard-setting bodies like the FIX Trading Community (aka FIX), the Digital Chamber of Commerce, and the Global Digital Asset & Cryptocurrency Association, operating within the framework of the International Standardization Organization (ISO), are at work developing ways to integrate trading of digital securities into existing market structures. For example, FIX has a globally represented working group focused on adapting its widely used messaging standards to communicate and trade digital assets.

 

In short, digitization of private securities can ease capital raises, streamline compliance, improve liquidity and transparency, and save issuers and investors money — all within a regulated ecosystem. In future articles, we’ll explore what the emerging digital trading landscape means specifically for issuers and investors.

 

Continue reading “Bringing Private Placements into the Digital Age”

How Can a Company Raise Capital?

Posted on by Oscar Jofre

For companies looking to raise capital, there are many different options. While not every option may be best suited for every company, understanding each will help companies choose which one is best for them.

 

In the early stages of raising capital, seeking investments 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 for your company. 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 and angel groups can also be a source of capital. Angel investors are wealthy individuals that meet the SEC requirements of accredited investors, who invest their own money. 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 in their investment. 

 

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 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. 

 

For some companies, crowdfunding may be useful for raising funds. 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. Through the JOBS Act, the SEC passed Regulation A+ crowdfunding, which allows companies to raise up to $75 million in capital from both accredited and non-accredited investors. Crowdfunding gives companies 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 companies 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 November 2020 update to the regulation, investment limits for accredited investors were removed and investment limits for non-accredited investors were revised to be $2,200 or 5% of the greater of annual income or net worth. It is also important to note that now, companies looking to raise capital using RegCF are permitted to “test the waters,” to gauge interest in the offering before it’s registered with the SEC. The SEC also permits the use of SPVs in RegCF offerings as well. 

 

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, companies choosing to raise capital through RegD 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  

 

Companies can also 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. 

 

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. 

 

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 its own account or those of its 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 brokers-dealer. 

 

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 method of raising capital a company chooses, 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. 

What is Regulation A+?

Posted on by Oscar Jofre

Regulation A+ (RegA+) was passed into law by the SEC in the JOBS Act, making it possible for companies to raise funding from the general public and not just from accredited investors. With the implementation of Title IV of the act, the amount that companies can raise was increased to $50 million (since increased to $75 million), offering companies the ability to pursue equity crowdfunding without the complexity of regular offerings. So, what investments does RegA+ allow?

 

Outlined in the act, companies can determine the interest in RegA+ offerings by “testing the waters.” While testing the waters allows investors to express their interest in the offering, it does not obligate them to purchase once the Offering Statement has been qualified by the SEC. Also allowed by the Act, companies can use social media and the internet to both communicate and advertise the securities. However, in all communications, links to the Offering Statement must be provided and must not contain any misleading information. 

 

It is important to understand the two tiers that comprise RegA+. Tier I offerings are limited to a maximum of $20 million and calls for coordinated review between the SEC and individual states in which the offering will be available. Companies looking to raise capital through Tier I are required to submit their Offering Statement to both the SEC and any state in which they are looking to sell securities. This was a compromise for those who opposed the preemption that is implemented in Tier II.

 

For offerings that fall under Tier II, companies can raise up to $75 million from investors. For these offerings, companies must provide the SEC with their offering statement, along with two years of audited financials for review. Before any sales of securities can take place, the SEC must approve the company’s offering statement, but review by each state is not required. It is also important to note that for Tier II offerings, ongoing disclosure is required unless the number of investors was to fall below 300.

 

In contrast to typical rounds of fundraising, investors are not required to be accredited, opening the offering up to anyone for purchase. Under Tier I, there are no limits that are placed on the amount a sole person can invest. For unaccredited investors under Tier II, limits are placed on the amount they can invest in offerings. The maximum is placed at ten percent of either their net worth or annual income, whichever amount is greater. To certify their income for investing, unaccredited investors can be self-certified, without being required to submit documentation of their income to the SEC. Additionally, there is no limit placed upon the company as to the number of investors to whom it can sell securities.

 

Once investors have purchased securities through RegA+ investments, the trading and sale of these securities is not restricted. Only the company that has created the offering can put limits on their resale. This allows investors to use a secondary market for trading these securities.

 

Through Regulation A+, companies are given massive power to raise funds from anyone looking to invest. With the Act allowing for up to $75 million to be raised, this enables companies to raise capital from a wide range of people, rather than only from accredited investors. With two tiers, companies have the freedom to choose the one that best fits their needs. Regulation A+ and the JOBS Act have the potential to drastically change the investment landscape.

Effective Date of the Amendments to Reg CF and Reg A

Posted on by Andrew Stephenson

The amendments to Reg CF, Reg A, and other rules relating to capital formation utilizing exempt offerings have finally been published in the Federal Register, with an effective date of March 15, 2021.

Meet the KorePartners: Andrew Corn, CEO of E5A Integrated Marketing

Posted on by Oscar Jofre

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

 

From the first project he worked on while still in college, Andrew Corn has been involved in financial marketing. After his first analyst’s presentation, “and then second, and then fifth, I decided to drop out of college and focus on that full time. Soon after, I wrote my first IPO roadshow, built a company around that, and a few years later, also started working for money managers,” Andrew said. After selling that company, Andrew went to work for a publishing company specializing in investingas the chief marketing officer.

 

Then, for 9 years, Andrew left the marketing industry and created a multi-factor model used to analyze the stocks available on US exchanges to select them for separately managed accounts, and he and his team designed the index behind six ETFs, eventually selling that company to a bank, where he served as the chief investment officer. “When E5A was born, it was born as an investment house, and then I got sucked back into marketing in 2012 and switched E5A over into a marketing firm in 2013,” Andrew recounted. At E5A, they acquire investors through systematic, data-driven marketing.

 

For companies that are looking to raise capital, marketing plays an incredibly important role. For RegA+ offerings, a company’s first target is typically its existing network of customers. However, a marketing firm such as E5A can help companies to understand the behavior and demographics of current customers. Knowing how customers behave will allow companies to targetpeople that are demographically and behaviorally just like their current customers.

 

With RegA+ offerings, the majority of the money will be raised through marketing. “The beauty of that is that it’s passive,” Andrew says, “we can look at entirely new groups of prospects who are the most likely people who would be interested in investing in a company like yours. Sometimes we can find them through behavior or demographics, hopefully, it’s a combination of both.” Once potential investors have been found, marketing agencies can come up with the messaging platform that will raise money through these investors. Companies are often surprised that their existing network raises little money, but the investors they can gain through marketing helps them reach their goals.

 

Through the use of marketing, Andrew is excited about how companies benefit from acquiring investors at scale. “If you’re a restaurant chain, you want as many people to know about it as possible. If you have a direct-to-consumer product, you want many people to know about it. So a byproduct of raising capital is promoting the brand or the business.” Both investors and the companies get more engaged as information is put out regularly.

 

With RegA+ allowing investors of all wealth, income and experience levels to participate, the restriction allowing only accredited investors is lifted. Additionally, Andrew believes that increasing the limit from $50 to $75 million will greatly improve the regulation since oftentimes companies require more funding. With IPOs on both the New York Stock Exchange or the NASDAQ often over $100 million, he believes increasing the cap to as much as $200 million in a few years would be better for companies looking to utilize RegA+.

 

For its clients, E5A is a “turnkey marketing company, so we do everything from messaging platforms to data-targeting to media buying and optimization, message testing, web development, etc.” Andrew expects that E5A will be held to a standard of success being measured by the amount of money raised. While looking to maintain as much control of the outcome, E5A also understands that many of the companies they work with have their own marketing or IT departments, and try to share as much work with them as possible and include them in the process.

 

E5A looks to work with companies that have a high probability of success, which requires an ecosystem of legal, accounting, technology, broker/dealer, consulting, and marketing services. Andrew says, “We feel that Oscar and the KoreConX team are putting together a world-class network of service providers who are experts in each of their individual tasks. We are glad to participate.”

Warrant Issuers, Keep Your Offering Statement Evergreen

Posted on by Jeanne Campanelli

An increasing number of issuers have been using Regulation A to make continuous offerings of units, consisting of a combination of equity, often common stock, and warrants to purchase the same equity at a future date.  Under the Securities Act, the units, the shares of stock, the warrants and the shares of stock issuable upon exercise of the warrants are separate securities whose offer and sale must be registered on a registration statement or covered by an exemption from registration such as Regulation A.  That is why offering statements under Regulation A list each of these individually and why the SEC requires the validity opinion filed as an exhibit to the offering statement to cover all of them (See Staff Legal Bulletin No. 19, available at https://www.sec.gov/interps/legal/cfslb19.htm ).

 

Most warrants that are part of these structures are exercisable for more than a year after their date of issuance, often up to 18 months.  Since the exercise of the warrant and payment of the exercise price for the underlying shares is a new investment decision by the warrant holder, the offering statement covering the underlying warrant shares must continue to be qualified under Regulation A in order for the new shares to be covered by the exemption from registration. That means that an issuer must keep the offering statement “evergreen,” or qualified for at least 2 to 3 years to cover those exercises, even if the offering of the units is completed before the first anniversary of qualification.   Most Regulation A offerings permit rolling closings.  The effective date of a warrant is typically the date on which a closing is held and a warrant is issued to an investor.  For example, if an issuer commences a Regulation A offering on the date its offering statement is qualified (let’s say February 1, 2021) and holds its first closing of units on March 1, the warrants issued in that closing are exercisable until September 1, 2022, well past the anniversary of qualification.  Assuming the offering stays open for at least 9 months and the final closing is held on November 1, 2021, the warrants issued in that final closing are exercisable until May 1, 2023.

 

Under the securities laws, registration statements for continuous offerings are kept updated, or “evergreen,” when an issuer complies with its reporting obligations under the Exchange Act by filing timely periodic reports such as their annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.  However, since the analogous periodic reports under Regulation A are filed under the Securities Act, their filing does not keep the offering statement evergreen.  If an offering is to extend more than one year from qualification, issuers conducting continuous offerings need to file post qualification amendments (“PQA”)  in accordance with Rule 252(f)(i) every 12 months after the qualification date to update the offering statement, which includes incorporating the financial statements from the periodic reports filed during the previous 12 months.  If the original offering statement was scheduled to terminate before the warrant exercise period ended, the PQA would also need to extend the termination date. A PQA in those circumstances renders the offering statement un-qualified and subject to a possible new SEC review, which means an issuer may continue to make offers (so long as the financials are not stale yet) but may not make sales, such as the issuance of warrant shares upon exercise of warrants, until the SEC re-qualifies the offering statement (See our blog post on updating continuous offerings: https://www.crowdcheck.com/blog/updating-continuous-offerings-under-regulation).  Using our example above, the issuer of units would need to at a minimum file a PQA in sufficient time before February 1, 2022 to allow for a possible Staff review and comment period to meet the annual requirement under Rule 252.  Moreover, if the unit offering lasts more than 6 months after the original qualification date, an issuer should anticipate having to file a second PQA in early 2023 to cover the exercise of warrants issued in the last closing of the offering.

 

Warrant issuers should also keep in mind some additional steps they will need to take.   The subscription agreement and the warrants themselves will need to include additional reps, warranties and covenants, such as a covenant to keep the offering statement evergreen.  Plus, even after qualifying the PQA with the SEC, the issuer will need to insure that it is current with state notice filings, which typically need to be renewed every 12 months as well.

Foreign Issuers Using Regulation A and Regulation CF

Posted on by Sara Hanks

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

  • 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.”
  • 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 Regulation 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 Regulation 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.

What is the Role of a Transfer Agent for a Private Company?

Posted on by Oscar Jofre

For companies issuing securities to investors, a transfer agent plays an important role in the process. If your company has yet to issue securities but will be doing so soon, a clear understanding of the purpose of a transfer agent is necessary when choosing the best one to fit your company’s needs.

 

Throughout a company’s rounds of funding, investors will purchase their share of the company to fund the company’s growth. These purchases come in the form of securities and a careful record of them must be kept. Knowing the number of shares each investor owns will be essential in future business deals. In the past, investors were issued paper certificates by a transfer agent, denoting their share of ownership. Now, it is more common for them to issue certificates electronically, which saves the issuer both time and money. 

 

Not only does the transfer agent issue certificates, but they keep a record of who owns what, pays distributions to shareholders, and serves as an intermediary for the company for all transactions related to securities. In this capacity, they provides support to both the issuer and the investor. They are tasked with the responsibility of maintaining accurate records regarding all securities issued by the company. 

 

For a private company, a transfer agent is incredibly important when dealing with investors. When utilized alongside a capitalization table (usually called a cap table), a transfer agent can help the company provide a precise record of who their investors are and how much equity they have remaining, which becomes essential in future rounds of investments. When both current and potential investors can view accurate and complete information on the companies they are investing in, the transparency and availability of information increases the investors’ confidence. 

 

When choosing a transfer agent for your company, the one that eliminates unnecessary costs and time is the most logical option. Through its all-in-one platform, KoreConX offers just that. Completely integrated with the rest of the platform, the KoreConX Transfer Agent is SEC-registered and can be used with other features, such as cap table management and access to a secondary market. Since the KoreConX Transfer Agent manages paperwork and issues certificates electronically, the lengthy process of manual filing is eliminated, creating an experience that is both streamlined and faster. Through the KoreConX Transfer Agent, any change made is reflected in the cap table in real-time, reducing any errors that could be caused by the manual transfer of the data. 

 

Private companies can benefit immensely by employing the use of a transfer agent. Allowing them to manage their securities more efficiently, companies can keep a more detailed record of transactions. As it is the transfer agent’s responsibility to maintain the records of securities, it is essential that companies carefully consider when they’re making their choice. 

 

A good transfer agent must be able to handle many forms of securities instruments, such as equity, debt (bonds, debentures), convertibles, options, warrants, promissory notes, crowdfunding, etc. All of this should be done as efficiently as possible in a fully compliant way in multiple jurisdictions. Ideally, they should provide both the company and its shareholders information in real-time without additional expenses. Most importantly, transfer agent services that are easily integrated with other capabilities, such as portfolio management, shareholder management, minute book, investor relations, and so on, provide companies with a more inclusive and efficient way of maintaining their financials. 

How to be Ready for Raising Capital

Posted on by Oscar Jofre

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. 

Can I Use My IRA for Private Company Investments?

Posted on by Oscar Jofre

Individual retirement accounts (commonly shortened to IRAs) allow flexibility and diversity when making investments. Whether investing in stocks, bonds, real estate, private companies, or other types of investments, IRAs can be useful tools when saving for retirement. While traditional IRAs limit investments to more standard options, such as stocks and bonds, a self-directed IRA allows for investments in things less standard, such as private companies and real estate. 

 

Like a traditional IRA, to open a self-directed IRA you must find a custodian to hold the account. Banks and brokerage firms can often act as custodians, but careful research must be done to ensure that they will handle the types of investments you’re planning on making. Since custodians simply hold the account for you, and often cannot advise you on investments, finding a financial advisor that specializes in IRA investments can help ensure due diligence. 

 

With IRA investments, investors need to be extremely careful that it follows regulations enforced by the SEC. If regulations are not adhered to, the IRA owner can face severe tax penalties. For example, you cannot use your IRA to invest in companies that either pay you a salary or that you’ve lent money to, as it is viewed by the SEC as a prohibited transaction. Additionally, you cannot use your IRA to invest in a company belonging to either yourself or a direct family member. If the IRA’s funds are used in these ways, there could be an early withdrawal penalty of 10% plus regular income tax on the funds if the owner is younger than 59.5 years old. 

 

Since the IRA’s custodian cannot validate the legitimacy of a potential investment, investors need to be responsible for proper due diligence. However, since some investors are not aware of this, it is a common tactic for those looking to commit fraud to say that the investment opportunity has been approved by the custodian. The SEC warns that high-reward investments are typically high-risk, so the investor should be sure they fully understand the investment and are in the position to take a potential loss. The SEC also recommends that investors ask questions to see if the issuer or investment has been registered. Either the SEC itself or state securities regulators should be considered trusted, unbiased sources for investors.

 

If all requirements are met, the investor can freely invest in private companies using their IRAs. However, once investments have been made, the investor will need to keep track of them, since it is not up to their custodian. To keep all records of investments in a central location, investors can use KoreConX’s Portfolio Management, as part of its all-in-one platform. The portfolio management tool allows investors to utilize a single dashboard for all of their investments, easily accessing all resources provided by their companies. Information including key reports, news, and other documents are readily available to help investors make smarter, more informed investments. 

 

Once investors have done their due diligence and have been careful to avoid instances that could result in penalties and taxes, investments with IRAs can be beneficial. Since it allows for a diverse investment portfolio, those who choose to invest in multiple different ways are, in general, safer. Additionally, IRAs are tax-deferred, and contributions can be deducted from the owner’s taxable income. 

Reg CF Investment Vehicles: What Are They Good For?

Posted on by Andrew Stephenson

In its recent rulemaking, the SEC added new Rule 3a-9 under the Investment Company Act to allow for the use of “crowdfunding vehicles” for Reg CF investments. It is important to recognize that crowdfunding vehicles are quite limited, and not at all similar to the special purpose vehicles (“SPVs”) used to aggregate accredited investors in angel or venture capital funding rounds.

In that type of SPV, there is often a lead investor or manager who may act on behalf of the investors in the SPV. Those persons could be exempt reporting advisers under the Investment Advisers Act, or even fully registered investment advisers. In this way, SPVs create real separation between the investors and the underlying issuer, with some person or entity acting as an intermediary when making decisions or providing information to investors.

For crowdfunding vehicles, on the other hand, the SEC requires that investors receive the same economic exposure, voting power, ability to assert claims under law, and receive the same disclosures as if they invested directly in the issuer itself. In particular, a crowdfunding vehicle:

  1. Is organized and operated for the sole purpose of directly acquiring, holding, and disposing of securities issued by a single Reg CF issuer;
  2. Does not borrow money and uses the proceeds from the sale of its securities solely to purchase a single class of securities of a single Reg CF issuer;
  3. Issues only one class of securities in one or more offerings under Reg CF in which the crowdfunding vehicle and the Reg CF issuer are deemed to be co-issuers;
  4. Receives a written undertaking from the Reg CF issuer to fund or reimburse the expenses associated with its formation, operation, or winding up, receives no other compensation, and any compensation paid to any person operating the vehicle is paid solely by the Reg CF issuer;
  5. Maintains the same fiscal year-end as the crowdfunding issuer;
  6. Maintains a one-to-one relationship between the number, denomination, type and rights of Reg CF issuer securities it owns and the number, denomination, type and rights of its securities outstanding;
  7. Seeks instructions from the holders of its securities with regard to:
    1. The voting of the Reg CF issuer securities it holds and votes the crowdfunding issuer securities only in accordance with such instructions; and
    2. Participating in tender or exchange offers or similar transactions conducted by the Reg CF issuer and participates in such transactions only in accordance with such instructions;
  8. Receives, from the Reg CF issuer, all disclosures and other information required under Reg CF and the crowdfunding vehicle promptly provides such disclosures and other information to the investors and potential investors in the crowdfunding vehicle’s securities and to the relevant intermediary; and
  9. Provides to each investor the right to direct the crowdfunding vehicle to assert the rights under State and Federal law that the investor would have if he or she had invested directly in the Reg CF issuer and provides to each investor any information that it receives from the Reg CF issuer as a shareholder of record of the crowdfunding issuer.

The result is that no lead investor or manager can be used, and investors will have the same rights and responsibilities as if they invested in the issuer directly.

The biggest practical effect is that Reg CF investors will appear on one line on the issuer’s cap table (addressing the “messy cap table” issue), and that line will represent the full number of beneficial owners, who each must still be notified by the issuer in the event of any decisions requiring investor action. The issuer could hire an administrator to handle communications with the investors in the crowdfunding vehicle, but there was nothing preventing an issuer from doing that previously.

However, by only existing as one line on the issuer’s cap table, and confirmed in its rulemaking, crowdfunding vehicles will count as one “holder of record” for the purposes of Section 12(g) of the Securities Exchange Act. This is the provision that says that a company has to register with the SEC and become fully-reporting when it reaches a specified asset and number-of-shareholder threshold. Up to now, crowdfunding companies have relied on a conditional exemption from Section 12(g) but some companies have worried about what will happen when they no longer comply with those conditions.

The SEC further opined that with these changes, it is possible that issuers will provide greater voting rights than has been common in Reg CF offerings. I am not sure that will be the case, as use of crowdfunding vehicles will not simplify obtaining votes for any necessary corporate consents unless the rights of investors are curtailed by the use of drag-alongs or similar provisions.

Setting up a crowdfunding vehicle will require documentation tailored to follow the terms of the securities being sold in the crowdfunding offering, and arranging for administrative tasks such as issuance of K-1s to the investors.  CrowdCheck is available to talk through the implications of using crowdfunding vehicles and whether it makes sense for your Reg CF offering.

Why is a Broker-Dealer Important for Private Company Offerings?

Posted on by Oscar Jofre

If you’re looking to raise money for your private company, chances are that you’ve at least heard the term “broker-dealer.” However, if you’re new to the process, you might not be too familiar with what they do and why they are a key component of the fundraising process. 

 

Simply put, a broker-dealer is an agent that assists you in raising capital for your private company.  Broker-dealers can be small, independently working firms or ones that operate as part of large banks and investment firms. Both are subject to registration with the SEC and must join a “self-regulatory organization” such as FINRA. If a broker-dealer is not registered they can face penalties enforced by the SEC.  You can check a broker-dealer’s registration here: https://brokercheck.finra.org/. 

 

For private companies looking to raise money, working with a broker-dealer will be a key part of their capital raising activities. 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. Ensuring that issuers are compliant with all regulations is essential to a successful round of capital raising and good business practices. If issuers are not compliant, they can face penalties from the SEC including returning the money raised.

 

Broker-dealers are intermediaries in a fundraise transaction between the private company and the investors.  As such, they are mandated to perform a variety of compliance activities.  If you retain a broker-dealer, they will first be responsible for performing due diligence on your private company. This is important so that there are no false representations to investors.  Investor protection is one of the main responsibilities of the SEC, so the broker-dealers must ensure they are performing appropriate steps to ensure the information presented to investors is accurate, appropriate, and not misleading.

 

Once the broker-dealer has completed the due diligence, they work with private companies to prepare appropriate information to share with investors and set timelines.  This can involve liaising with your legal counsel to ensure the offering documents are complete and to ensure what type of investors they can approach with your offering.  Each country has its own regulations around how you can approach investors, which is why it is important to have a good broker-dealer and legal counsel in each region you intend to offer your securities. 

 

There are different types of investors that can be approached depending on jurisdiction and securities regulations. They include Venture Capital, Private Equity firms, Institutional investors, or individuals. While most of these are professional investors, the individual investor group is further broken down into accredited/sophisticated investors and the general public.  Accredited investors have to meet income or wealth criteria to invest in accredited investor offerings (Regulation D type of offerings in the USA).  The popular mechanisms in the USA to present your offering to the non-accredited or general population (over 18 years) are Regulation CF and Regulation A+.

 

As the broker-dealers reach out to investors and find interested participants, there are steps that they have to perform to ensure that the investor is appropriate for the company.  Typical checks that broker-dealers have to conduct on investors can include performing identification verification, anti-money laundering checks, assessing the suitability of the investment to the investor, and doing accreditation checks. 

 

With the help of a broker-dealer, companies can raise the funding their company needs while being confident that they are maintaining compliance with the regulations that are in place. With over 3,700 registered broker-dealers in the United States alone, every issuer looking to raise capital can be confident of finding at least one well-suited broker-dealer that meets their needs.

SEC Proposes Relief for “Finders”

Posted on by Sara Hanks

I have long (oh so long) been one of those urging the SEC to give some clarity with respect to the status of “finders.” See here for the latest piece.

Early-stage companies raising funds very often reach out to a guy who knows some guys who have money and have invested in startups in the past. If the first guy wants to be compensated by reference to the amount of money his contacts are able to invest, he may well have violated the broker registration requirements of the Securities Exchange Act of 1934. And it’s not only him who needs to be worried; if a startup raises funds through someone who should have been registered as a broker and wasn’t, their sales of securities may be subject to rescission – buying the securities back, with interest.

Nonetheless, startups are so strapped for money (and often don’t understand the requirements of the law) that they do this all the time.

Industry participants have been asking the SEC for guidance in this area for decades, and now the SEC has come up with some simple proposals that should be of use to the startup community.

The SEC is proposing to exempt two classes of finders, Tier I Finders and Tier II Finders, based on the types of activities in which they are permitted to engage, and with conditions tailored to the scope of their activities. The proposed exemption for Tier I and Tier II Finders would be available only where:

  • The issuer is not a reporting company under the Exchange Act;
  • The issuer is seeking to conduct the securities offering in reliance on an applicable exemption from registration under the Securities Act;
  • The finder does not engage in general solicitation;
  • The potential investor is an “accredited investor” as defined in Rule 501 of Regulation D or the finder has a reasonable belief that the potential investor is an “accredited investor”;
  • The finder provides services pursuant to a written agreement with the issuer that includes a description of the services provided and associated compensation;
  • The finder is not an associated person of a broker-dealer; and
  • The finder is not subject to statutory disqualification at the time of his or her participation.

Tier I Finders. A “Tier I Finder” is defined as a finder who meets the above conditions and whose activity is limited to providing contact information of potential investors in connection with only one capital raising transaction by a single issuer within a 12-month period, provided the Tier I Finder does not have any contact with the potential investors about the issuer. A Tier I Finder that complies with all of the conditions of the exemption may receive transaction-based compensation (in other words, compensation based on the amount raised) for the limited services described above without being required to register as a broker under the Exchange Act.

Tier II Finders. The SEC is also proposing an exemption that would permit a finder, where certain conditions are met, to engage in additional solicitation-related activities beyond those permitted for Tier I Finders. A “Tier II Finder” is defined as a finder who meets the above conditions, and who engages in solicitation-related activities on behalf of an issuer, that are limited to:

  • Identifying, screening, and contacting potential investors;
  • Distributing issuer offering materials to investors;
  • Discussing issuer information included in any offering materials, provided that the Tier II Finder does not provide advice as to the valuation or advisability of the investment; and
  • Arranging or participating in meetings with the issuer and investor.

A Tier II Finder wishing to rely on the proposed exemption would need to satisfy certain disclosure requirements and other conditions: First, the Tier II Finder would need to provide a potential investor, prior to or at the time of the solicitation, disclosures that include: (1) the name of the Tier II Finder; (2) the name of the issuer; (3) the description of the relationship between the Tier II Finder and the issuer, including any affiliation; (4) a statement that the Tier II Finder will be compensated for his or her solicitation activities by the issuer and a description of the terms of such compensation arrangement; (5) any material conflicts of interest resulting from the arrangement or relationship between the Tier II Finder and the issuer; and (6) an affirmative statement that the Tier II Finder is acting as an agent of the issuer, is not acting as an associated person of a broker-dealer, and is not undertaking a role to act in the investor’s best interest. The Commission is proposing to allow a Tier II Finder to provide such disclosure orally, provided that the oral disclosure is supplemented by written disclosure and satisfies all of the disclosure requirements listed above no later than the time of any related investment in the issuer’s securities.

The Tier II Finder must obtain from the investor, prior to or at the time of any investment in the issuer’s securities, a dated written acknowledgment of receipt of the Tier II Finder’s required disclosure.

A Tier II Finder that complies with all of the conditions of the proposed exemption may receive transaction-based compensation for services provided in connection with the activities described above without being required to register as a broker under the Exchange Act.

A finder could not be involved in structuring the transaction or negotiating the terms of the offering. A finder also could not handle customer funds or securities or bind the issuer or investor; participate in the preparation of any sales materials; perform any independent analysis of the sale; engage in any “due diligence” activities; assist or provide financing for such purchases; or provide advice as to the valuation or financial advisability of the investment.

This exemption would not affect a finder’s obligation to continue to comply with all other applicable laws, including the antifraud provisions of federal and state law. Additionally, regardless of whether or not a finder complies with this exemption, it may need to consider whether it is acting as another regulated entity, such as an investment adviser.

The exemption is really aimed at the guy at the golf club who has accredited buddies he can introduce the startup to. It would be available to natural persons only (not companies) and the finder couldn’t undertake general solicitation (he should know the people he is introducing to the startup; if he has to go searching for them, he’s essentially acting as a broker. The “no general solicitation” and “natural person” conditions means that the proposed exemption doesn’t help clarify the regulatory status of non-broker online platforms.

We are a little disappointed that so many of the comment letters on the proposal have been negative. We do understand that there is a great deal of clarification needed with respect to what it means to be in the business of a broker. And the SEC needs to work closely with the states in this area. But we at CrowdCheck are pleased that the SEC has provided some clarity in this area.

Regulation A Offering Limits Increased to $75 Million

Posted on by Oscar Jofre

On Monday, November 2, exciting news was announced by the SEC regarding Regulation A offerings. The Securities and Exchange Commission approved long-awaited amendments to offering limits to “promote capital formation and expand investment opportunities.” These amendments, going into effect on January 2, 2021, drastically increase the amount of capital that issuers can raise through RegA+ offerings.

 

Before the Jumpstart Our Business Startups Act (JOBS Act) of 2012, Regulation A was a relatively obscure and underutilized regulation since adherence to Blue Sky Laws in all 50 states made it time-consuming and costly. The JOBS Act transformed RegA into a company-friendly law allowing businesses to raise millions of dollars. Broken down into two tiers, Tier 1 allows companies to raise a maximum of $20 million after meeting compliance with Blue Sky Laws in each state, while Tier 2 previously allowed up to $50 million to be raised after the offering statement has been reviewed and accepted by the SEC. While neither tiers place limits on the amount an accredited investor can invest, Tier 2 limits individual investors to either 10% of their net worth or annual income.

 

With this latest amendment to Regulation A, companies will now be able to raise a maximum of $75 million under Tier 2 offerings. This comes as great news for companies looking to raise capital through RegA offerings since Tier 2 offerings comprise the majority of those conducted, with 73% of qualified offerings falling under this tier. This substantial increase allows issuers to raise larger sums of capital to fund their business and its development. In addition, the updated Regulation A raises the offering limit of secondary sales from $15 million to $22.5 million. With Tier 2 offerings preempting Blue Sky Laws in each state, it offers companies an efficient tool for efficiently raising capital on a nationwide scale. 

 

With an increase of $25 million, this drastic improvement to Regulation A offerings will empower more companies to raise the capital they need for success.

Equity Crowdfunding Platforms (RegCF)

Posted on by Oscar Jofre

As of 02 JUNE 2020, there are 51 active RegCF Equity Crowdfunding Platforms helping companies raise up to $1.0M USD.

We are all anticipating that RegCF is going to be potentially increased to a $5 million funding cap.   The SEC has proposed this increase, along with some other changes, and many observers expect the Commission to move forward with a higher funding cap.    

We recently did a Q&A with  Wefunder on what RegCF companies require.

We have compiled the list of 51 Active Equity Crowdfunding Platforms along with the sectors they serve.

Company Name URL City State Sector
Bioverge Portal, LLC https://www.bioverge.com/ San Francisco CA Healthcare
Buy the Block https://buytheblock.com/ Denver CO Community
CollectiveSun, LLC http://collectivesun.market/ San Diego CA Social Ventures
Crowd Ignition https://crowdignition.com/ New York NY General
CrowdsourcedFunded https://crowdsourcefunded.com/ Chicago IL General
EnergyFunders Marketplace http://www.energyfunders.com/ Houston TX Energy
EnrichHER Funding, LLC https://ienrichher.com/ Atlanta GA Loans
Equifund Crowd Funding Portal Inc. www.equifundcfp.com Kanata ON General
EquityDoor, LLC https://equitydoor.com/ Austin TX Real Estate
Flair Portal ( Flair Exchange) https://www.flairexchange.com/ Vancouver BC Gaming
Flashfunders Funding Portal www.flashfunders.co Sherman Oaks CA General
Funders USA https://www.fundersusa.com/ Newport Beach CA Technology
Fundit http://fundit.com/ Fairfield NJ General
Fundme.com, Inc. www.fundme.com Murray UT Technology
Fundopolis Portal LLC https://www.fundopolis.com Boston MA General
GrowthFountain Capital www.growthfountain.com New York NY General
Honeycomb Portal www.honeycombcredit.com Pittsburgh PA General
Hycrowd https://www.hycrowd.com/ Jersey City NJ General
Indie Crowd Funder www.indiecrowdfunder.com Los Angeles CA Film
Infrashares Inc. https://infrashares.com San Francisco CA Infrastructure
IPO Wallet LLC https://ipowallet.com/ https://invest.ipowallet.com/ Sachese TX General
Jumpstart Micro www.jumpstartmicro.com Bedford MA General
Ksdaq https://www.mrcrowd.com Monterey Park CA General
MainVest, Inc. https://mainvest.com/ Newburyport MA General
Merging Traffic Portal llc www.mergingtrafficportal.com Orlando FL General
MinnowCFunding www.minnowcfunding.com Pasadena CA Real Estate
MiTec, PBC (Crowdfund Main Street) https://www.crowdfundmainstreet.com/ Fremont CA Impact
NetCapital Funding Portal www.netcapital.com Lewes DE General
NSSC Funding Portal (SmallChange) www.smallchange.com Pittsburgh PA Real Estate
OpenDeal (Republic) www.republic.co New York NY General
Pitch Venture Group LLC https://letslaunch.com/ Houston TX General
         
Raise Green, Inc. http://www.raisegreen.com Somerville MA Impact
Razitall www.razitall.com Basking Ridge NJ General
SeriesOne https://seriesone.com/ Miami FL General
SI Portal (SeedInvest) www.seedinvest.com New York NY General
Silicon Prairie Holdings, Inc. https://sppx.io/ St. Paul MN General
         
SMBX https://www.thesmbx.com/ San Francisco CA Bonds
Sprowtt Crowdfunding, Inc. https://www.sprowttcf.com/ Tampa FL General
         
StartEngine Capital www.startengine.com Los Angeles LA General
STL Critical Technologies JV I, LLC (nvested) www.nvstedwithus.com St. Louis MO General
         
Title3Funds www.title3funds.com Laguna Beach CA General
Trucrowd www.us.trucrowd.com https://fundanna.com
https://cryptolaunch.us
https://musicfy.us		 Chicago IL General
VedasLabs Inc. https://vedaslabs.io/ New York City NY General
Vid Angel Studios (VAS Portal LLC) https://studios.vidangel.com/ Provo UT Film
Wefunder Portal https://www.wefunder.com San Francisco CA General
Wunderfund www.wunderfund.co Cincinnati OH General
WWF Funding Portal LLC https://www.waterworksfund.com/ Detroit MI Water

If you have any questions about how we can help you with your RegCF contact us

lily@koreconx.io

FINRA BD Requirements for RegA+ & Digital Securities

Posted on by Oscar Jofre

FINRA BD Requirements for RegA+ & Digital Securities

The private markets are receiving a much updated revamp by the SEC which is having a major impact on registered FINRA Broker-dealer firms.  Here are two (2) of the most common activities for which FINRA Broker-dealers (BD) are approached by companies.  Most BD’s are not aware that in order to help companies raise capital utilizing these regulations, there is a registration they must first do with FINRA.

We went to the source that has been helping many FINRA Broker-dealers and put the responses in a simple way.  Ken Norensberg, Managing Director, Luxor Financial provides the answers to which all BDs need to pay extra attention to make sure you are fully compliant.

RegA+ (Regulation A)

Broker-dealers today have the ability to help companies that are using either Regulation D (RegD) or regulation A(RegA+).  Now what they are not aware of is that in order to allow them to help companies with RegA+ they do need to be registered with FINRA. If that registration isn’t done, they are not allowed to proceed in offering those services. This process can take anywhere from 60 to 90 days or it could happen sooner.  Most firms are not aware that when they take on a RegA+ client, they must apply to FINRA to represent them in the offering. This is done at the same time the company is filing their Form 1A with the SEC for their RegA+ offering.

Digital Securities

Digital Securities are now becoming main street language and most Broker-dealers want to offer this to investors. Unfortunately, if they do not have FINRA approval for digital securities, it’s not a product they can represent or offer to investors.  Digital Securities require registration. The process is like putting a full new member application, and it will take anywhere up to four (4) months.  Your firm must file with FINRA for each of the exemptions you want to use for Digital Securities (RegD and or RegA+.  Here is what your firm will be required to answer to FINRA in its application.

  • You will need a detail business plan
  • What entities are the holders of the “private keys” in the DLT network that would be required to gain access to the digital securities, cash-backed digital securities holdings or digital currency? 
  • Are multiple keys needed to gain access or is a single key sufficient?
  • Who controls or has access to the DLT network where the assets are held?
  • What happens in the event of a loss or destruction of assets (either due to fraud or technological malfunction) on the network?
  • If the broker-dealer was to fail and is liquidated in a proceeding under the Securities Investor Protection Act of 1970, as amended, how would customers’ securities and funds be treated, and how would customers access their assets?
  • In instances where firms have established partnerships with other firms to serve as their back-ups and to carry out critical functions in the event of emergencies, what type of access would those back-up firms have to the private keys?
  • How will customers or the Securities Investor Protection Corporation (SIPC) trustee access the customers’ assets in the event of a defaulted broker-dealer? What parties will be involved, and what are their roles and responsibilities?
  • How does the use or application of the DLT network affect the market risk, liquidity or other characteristics of the asset?
  • What information is maintained using the DLT network?
  • What will be deemed as the physical location of the firm’s records maintained on a node of a DLT network that may extend over multiple countries?
  • What parties have control or access to the firm’s records? What are their rights, obligations and responsibilities related to those records, and how are they governed?
  • What is the firm’s (and other participants’) level of access to the data, and in what format would it be able to view the data?
  • How does the DLT network interact with the firm’s own systems for recordkeeping purposes?
  • How would the records be made available to regulators?
  • How will the firm’s traditional exception reporting, used to supervise transactions, be generated from a DLT network?
  • How will the firm protect any required records from tampering, loss or damage?
  • Clearance & Settlement?
  • Anti-Money Laundering (AML) Procedures & Know Your Customer (KYC) Rules?
  • Customer Data and Privacy?
  • Trade & Order Reporting Requirements?
  • Supervision & Surveillance of Transactions?
  • Fees & Commissions?
  • Customer Confirmations & Account Statements?
  • Anticipated Customer Base?
  • Facilities, Hosting?
  • Licensed & Qualified Staff

As the market is evolving to provide more alternatives to companies and investors, FINRA Broker-dealers need to also make sure their licenses are up to date to be able to offer these updated alternatives.  It’s not enough that you are registered with FINRA.

Thank you to Ken Norensberg, Managing Director of Luxor Financial, who provided this valuable information to assist Broker-dealers to stay compliant.  Ken has been helping FINRA Broker-dealers manage these new registration requirements. 

About Ken Norensberg & Luxor

Luxor Financial Group, Inc. a NY based Broker-Dealer Consulting Firm that specializes in setting up Independent Broker-Dealers. We are experts in New Member Applications, Continuing Membership Applications, Expansion Filings, FINRA and SEC Audits, Anti Money Laundering Reviews, Business Development and general compliance and business development services. www.luxorbd.com

Ken is a former Member of the FINRA Board of Governors. FINRA oversees the regulatory activities and business practices of over 4,500 Broker-Dealers, 163,000 Branch offices, 630,000 registered representatives and 3,500 employees and consultants with annualized revenues and a budget of approximately $800,000,000 (Eight hundred million dollars.)

The Board contends with many complex issues that affect large organizations from generating revenues, managing expenses, personnel, legal, regulatory, political and operational issues.

Additionally, Ken was a Member of the following committees and subcommittees:

  • Regulatory Policy Committee
  • Emerging Regulatory Issues (Subcommittee)
  • Financial, Operations & Technology Committee
  • Pricing (Subcommittee)
  • Ex-Officio of the Small Firms Advisory Board (SFAB)

What is Reg A plus versus Reg A?

Posted on by Kendall Almerico

The simple answer is that today, Regulation A (Reg A) and Regulation A+ (Reg A+) are the exact same law. There is no difference, and the two terms may be used interchangeably.

Some confusion stems from the two similar terms, and there is much misleading information about this online. I’ve even spoken at events where I’ve heard other lawyers claim the two laws are different. They are not.

Historically, there was no Reg A+, there was only Reg A. Regulation A was an infrequently used law that allowed a company to raise up to $5,000,000 from the general public, but with the company still having to go state-by-state to get Blue Sky law approval for their offering.  This expensive and time-consuming process of dealing with review of an offering by 50+ state regulators made Regulation A far too expensive and time-consuming for most issuers to only be allowed to raise $5,000.000. 

 In 2012, the Jumpstart Our Business Startups Act (JOBS Act) became law, and Title IV of that act amended Regulation A in many ways, most notably (a) doing away with the state by state blue sky law requirement and (b) raising the limit from $5,000,000 to $20,000,000 or $50,000,000, depending on which “tier” of the law is used. Congress took a virtually worthless law, and turned it into an excellent and company friendly law that has allowed many companies since to raise millions.

Interestingly, since in 2012 when the law went into effect, and even since 2015 when the SEC passed its rules allowing the law to actually be used, the law is still officially called Regulation A. But, both the SEC, and commentators also started simultaneously calling the law “Regulation A+” or “Reg A+” to note that it was a supercharged version of the old Regulation A law.

Finally, to get super-lawyer-nerdy here, the official name of the law is Regulation A – Conditional Small Issues Exemption, and is part of the Securities Act of 1933, found at 17 CFR §§ 230.251 – 230.300-230.346.

What are investor limits on investment size of both?

As noted in my other blog article, these is no difference between Regulation A (Reg A) and Regulation A+ (Reg A+). They are the exact same law.  The two terms may be used interchangeably. Therefore, investor limits on investment size are the same for either term.

However, there are investor limits on how much an investor may invest in Regulation A. These limits depend on which “tier” of the law is being used.

Tier 1 of Regulation A allows a company to raise up to $20,000,000, but the company must go through Blue Sky law compliance in every state in which it plans to offer its securities. There are no limitations on whether someone can invest, or how much someone can invest, in a Tier 1 offering. 

As a side note, Tier 1 offerings tend to be limited to one state, or a small number of states, because of the added cost of Blue Sky compliance. The SEC does not limit the amount of investment, but states may have limitations in their securities laws, so an analysis of each state’s securities laws is necessary if doing a Tier 1 offering.

Tier 2 of Regulation A allows a company to raise up to $50,000,000, and the company does not have to go through Blue Sky law compliance in any state in which it plans to offer its securities. However, there are limitations on how much someone can invest, in a Tier 2 offering if the offering is not going to be listed on a national securities exchange when it is qualified by the SEC.  If the Tier 2 offering is going to be listed on such an exchange, there are no investor limitations.

For a Tier 2 offering that is not going to be listed on a national exchange, individual investors are limited in how much they can invest to no more than 10% of the greater of the person’s (alone or together with a spouse) annual income or net worth (excluding the value of the person’s primary residence and any loans secured by the residence (up to the value of the residence).

There are no limitations on how much an accredited investor can invest in either a Tier 1 or a Tier 2 Regulation A offering.

Why is my cap table so important for my company?

Posted on by Oscar Jofre

It’s never too early in the process of building a company to start managing your capitalization table (otherwise known as a cap table). As a detailed document recording all information regarding shareholders and the equity owned in the company, a well-managed cap table will become essential to long term success. Even if you’re thinking that your company does not need to keep such detailed records early on, understanding its importance may change your mind. 

At first, keeping track of equity might be a simple task. In the early stages, perhaps equity had only been distributed amongst cofounders. However, as the company grows, equity might be given out to key team members and employees, which all needs to be recorded accurately.  Without numbers correctly recorded, it will likely be hard to know exactly how much equity is remaining for the future. Also, with proper recording, it will allow founders to easily determine how certain deals may affect the equity distribution of the company. 

For potential investors, the cap table will be a key resource. Before investing in a company, investors will want to become familiar with current shareholders and the equity that each one possesses. The transparency a well-managed cap table allows will help avoid delays and increase investor confidence. During rounds of funding, the founder should also be concerned with how awarding investors with equity will affect their ownership in their company. For both parties during investor negotiations, the cap table will be essential. 

Once the company has received investments from investors, managing shareholders will also become an important task, which can be done in the cap table. The cap table will typically include investor information, such as who they are, their voting rights, and the number of shares that they own. With this information in one centralized place, if voting was to take place, the cap table ensures that all investors would be included as necessary.

One major benefit of starting to manage a cap table as soon as possible is that it will save time and resources in the long run. As the company begins to seek funding, the cap table would be already prepared and up to date. If the company did not already begin to keep records in their cap table, they would need to go back and create one, which could increase the chances for errors since it could be possible for them to have lost documents or records that they would need.

So what is the best way to manage your company’s cap table? Even though you can make a simple spreadsheet in Excel, using software such as KoreConX’s all-in-one platform might be more beneficial for long-term success. As deals occur, the cap table is automatically updated, eliminating errors that could result from manual changes. The platform also provides investors with the transparency they need to feel confident in their investments. Companies will benefit immensely from the increased transaction speeds and expedited due diligence that results from a properly managed cap table.

SEC changes to RegA+ and RegCF

Posted on by Oscar Jofre

On 04 March 2020, the US Securities Exchange Commission (SEC) has laid out the proposed changes that are going to have a major impact on the private capital markets.  This is very positive for the market. These changes have been in the works for a number of years and many in the industry have advocated for these changes that are now materializing.

The Commission proposed revisions to the current offering and investment limits for certain exemptions. 

Regulation Crowdfunding (RegCF): 

  • raise the offering limit in Regulation Crowdfunding from $1.07 million to $5 million;

This is going to benefit the 44+ online RegCF platforms such as;  Republic, Wefunder, StartEngine, Flashfunders, EquityFund, NextSeed.   These online platforms have paved the way and now more US-based companies will be able to capitalize on this expanded RegCF limit.  

Regulation A (RegA+) 

  • raise the maximum offering amount under Tier 2 of Regulation A from $50 million to $75 million; and
  • raise the maximum offering amount for secondary sales under Tier 2 of Regulation A from $15 million to $22.5 million.

As you saw in our recent announcement of our RegA+ all-in-one investment platform, we expect more companies to now start using RegA+ for their offerings and they need a partner that can deliver an end-to-end solution.   www.koreconx.io/RegA

These two changes are momentous and will have far-reaching consequences in democratizing capital and make it very efficient for companies to raise capital. This also increases the shareholder base, which makes it even more important for companies to have a cost-effective end-to-end solution that can manage the complete lifecycle of their securities.

If you want to learn more please visit:

www.KoreConX.io/RegA

Here is the complete news release by the SEC

https://www.sec.gov/news/press-release/2020-55?utm_source=CCA+Master+List&utm_campaign=40105b558a-EMAIL_CAMPAIGN_2020_01_02_09_01_COPY_01&utm_medium=email&utm_term=0_b3d336fbcf-40105b558a-357209445

Facebook’s Libra Reboots the Crypto World

Posted on by Oscar Jofre

Facebook Libra Project set’s to rebook the crypto world.

Since the announcement by Facebook of their Libra Project, everyone in the world came out with their take on what Facebook was up to. Thousands of articles and interviews with everyone jumping in. 

It’s safe to say that what Facebook has done, no other company has been able to do on a global scale and receive such global exposure. Today, the only places where crypto is discussed is Medium, Facebook, Twitter, LinkedIn, and the crypto rags. But now, we are talking about major global media exposure like CNN, MSNBC, Fox News, BBC, etc.

Facebook today has 2.4 Billion (Facebook, Instagram, Whatsapp) users that is 31% of the world’s population.

In one announcement, Facebook woke up every central bank, bank regulator, government, and various officials in the world. Now they can’t pretend they don’t know what crypto is and how it would impact them, a huge achievement by one of the most mistrusted companies in the world.  In one announcement, Facebook created fear most never thought possible in crypto sector. Facebook can overnight be the world’s largest central bank. Think about it.

The World’s Largest Central Bank!

The current turf wars that President Donald Trump is having with China, Canada, Russia, Mexico, France, and Denmark, just to name a few, would be put to a complete halt by one company, Facebook.  That is power!

The crypto sector’s hardcore evangelists see this as validation and are rooting for the rise in the price of bitcoin and other cryptos that nobody on earth knows what they are and have no value in the real world today.

Facebook Libra would bring it to real-world and make it usable instantly to 2.4 billion users globally. No other bank or country can pull off such a stunt.

Are you awake now!

What is the impact of LIBRA by Facebook.

Some are excited its validation. Some see it as a competitor.

Here is what’s going to happen whether Facebook launches LIBRA or not. 

Facebook can and will kill over 98-99% of the crypto companies around the world that have coins which are trading but have no real value.

This will be done in two ways:

  1. Facebook decides to abandon the LIBRA project for lack of regulatory support. This will create global uncertainty that start-up projects will face the same demise as Facebook.  Investors will be asking themselves if Facebook can’t pull it off, how is this new start-up going to accomplish it?
  2. Facebook is denied by regulators to proceed. This is the worst one of all.  Today, countries like Mexico, Indonesia, Nigeria, and more are shutting down companies in light of what Facebook has launched.  Facebook is a threat to central banks, governments, regional banks, and many others who will not allow them to proceed, forcing even those who are supportive of crypto to side with regulations to shut them down.  This is the killer if Facebook goes all the way only to be shut down.  

Either way, this is going to hurt a majority of the crypto players.

As I mentioned, Facebook did what no other crypto company has been able to accomplish:  woke up everyone and bring instant global awareness.

Even the hard supporters of crypto are now wondering, wait a minute, what would happen?

Facebook made the whole crypto business real overnight and now we have a really serious discussion. We got our wish: global awareness. Sometimes, you have to be careful what you ask for!

Yes, we all agree it would have been better if it was not Facebook, as the company faces fines globally for how they manage data, and featured in the latest 2019 documentary, The Great Hack, and how its platform was used to change the outcome of many governments, not just the United States.

Every government around the world is going after this company for its untrustworthy business practice, and then the company adds crypto to the mix just to complicate matters. There is a danger that Facebook could become a Fakebook.

They are the supervillain du jour of business.

Because of their size, they got instant global exposure and has put this at the highest ever scrutiny. So, the reality of crypto becoming what everyone hopes could finally come to a very hard stop.

Politically speaking, what is happening around the world is that every country is protecting its borders and citizens. Even crypto supporters in governments, regulatory agencies, and banks will take a step back.

What Facebook has now shown them is that any of these crypto players can become bigger than any one nation or any one bank.  So best to put the brakes now before it gets carried away.

So get ready for the Great Crypto Reboot.  And it will not look like what you thought!

Webinar sheds light on Digital Securities Terrain

Posted on by Oscar Jofre

The regulator’s message is clear: there’s no room for tampering with the regulation when it comes to capital raising, and many companies that invested time and energy on ICOs (Initial Coin Offering) are now facing the consequences.

But that doesn’t mean that the private capital markets are dead when it comes to digital assets, on the contrary. Companies have been tirelessly researching to find an alternative to ICOs that is compliant with regulations.

The private market industry is now being inundated by terms such as Digital Securities, Tokenization, STOs, ICOs. To decide the fate of their business in the digital arena, entrepreneurs need to be on top of the game and know the concepts, the differences, and who are the stakeholders behind every new term.

Having all this in mind we, at KoreConX, put together a Webinar “An Industry Evolving: Digital Securities, Tokenization, STOs, ICOs… What are they? How do they differ? Who’s regulating them?“.

To provide the public with the most up-to-date information about the topic, we invited two experts in the field. Oscar Jofre, CEO and Co-Founder of KoreConX, and Darren Marble, CEO and Founder of Issuance, will discuss the landscape for traded securities utilizing different forms of distributed ledger technology.

The webinar will happen this Wednesday, April 17th, at 11 am EDT.

Click here to register for free.

Click on the link below to watch our previous webinars:
Marketing Your Raise From Traditional Capital to Digital Securities

Who do you trust with your Crypto?

Posted on by Kiran Garimella

“The great thing about trustless cryptocurrency systems is just how many incompetents you have to trust along the way.” – David Gerard, author of Attack of the 50 Foot Blockchain.

Lately, I’ve stopped reading fiction because real life drama with public blockchains is way more entertaining. The fun never stops.

For example, one tragi-comedy began when the CEO of QuadrigaCX allegedly passed away a few months ago. Unfortunately, he never put the private keys to the company’s crypto millions into safe custody. In a traditional banking system, this would have been a mild inconvenience at worst, if even that. Bankers, like all humans, pass away, retire, or move on. When was the last time you went into conniptions because your bank manager quit?

The QuadrigaCX soap opera was just getting started. After going into regulatory protection (which in itself is a bit ironic for those “investors” who are using crypto as a statement against regulation), QuadrigaCX manages to lose some more by “inadvertently” transferring some money into another wallet from where the money cannot be retrieved. In the traditional banking system, when you sign up for direct deposit or do a wire transfer, considerable verification happens upfront to make sure the numbers and recipients are valid; further, both parties agree that deposits made in error can be reversed by the financial institution.

In another episode, Ernst & Young, appointed by regulators, discovered that six of the cold wallet addresses used by QuadrigaCX apparently haven’t had any balances in them since one year.

I realize many investors lost money in this and similar ventures when common sense suggests they should have stayed away. While this is unfortunate, I don’t believe these investors are ‘main-street’ investors, but reckless risk-takers for whom I have less sympathy. That’s why I’m looking forward to future episodes; this is entertainment at its best!

Public blockchains have been popularly known as the ‘trustless system.’ Strictly speaking, they should have been called ‘the system where you don’t have to trust authoritative institutions, government, central bankers, or any individual of the establishment’, though that lacks marketing pizzaz.

Instead of reposing trust in centralized institutions and in humans with traditional roles, public blockchains transfer that trust to the mathematical algorithms that power cryptocurrency operations such as mining.

Cryptography is an excellent trust mechanism and practically unbeatable, but only under specific conditions and only up to a point. Cryptography cannot undo the actions of those who operate crypto-exchanges, online capital-raising platforms, the crypto-majority (i.e., 51%, or whatever constitutes the quorum for making changes), the software writers, wallet makers, wallet operators, public addresses that are fronts for scammers, and so on. Most of these participants are not fraudulent, but that’s beside the point. Storing your life savings in Fort Knox is of no use if you lose your keys! To the end user, the effect of fraud, incompetence, or error in cryptos is the same and equally disastrous.

Traditional finance has a number of interlocked trust mechanisms: reputation, credentialing, registration, regulatory filings, auditing, established operational procedures, and various checks and balances. Does this make fraud impossible? Hardly. Does this prevent the consequences of incompetence? Not at all.

Fraud, incompetence, and mistakes are here to stay for the foreseeable future. In addition to all this, there’s technology risk. Generally speaking, it is very tough to eliminate risk entirely. The best we can do is to disperse the risk in a way that it becomes economically unrewarding to engage in criminal activity by the vast majority of participants. For the remaining risk that just cannot be eliminated (given the unending human penchant for mischief), the parties are protected through a variety of safety nets. As in all meaningful things, available trade-offs redistribute advantages and disadvantages. In the case of cryptos, the questionable advantage of censorship-resistance comes at the price of increased risk. Increased security in the case of permissioned financial blockchains comes at the price of complying with regulations.

In the real-world, trade-offs are unavoidable and blockchains expand the available trade-offs. Unfortunately, that includes the ability to choose to trust unsavory and incompetent participants at the entry and exit points of the public blockchain.

In securities, permissioned blockchains offer increased process efficiency, facilitate liquidity (but cannot create it), and enable stronger compliance across multiple participants. As far as securities are concerned, both types of blockchain offer strong cryptographic basis for technical validations. But you do have a choice. You can choose to trust that unknown participants are not out to scam you, CEOs have kept all private keys safely, no founder is going to perform an unorthodox exit, that transactions are meaningful (and not just the same scam artists moving stuff around continually to create artificial trading volume or manipulating prices), that miners will continue to mine and validate transactions even when crypto prices tank, that some miners won’t collude to obtain majority hashing power and create an adversarial fork (the new ‘F’ word in crypto-world), and that some dictator won’t fund a hashing takeover. You also have to trust the technology to scale properly and that it will continue to thrive and improve, and that the software programmers won’t make any major mistakes that will cause all your crypto to vanish into la-la land.

The alternative is to trust the verification of identities and KYC/AML checks, the registrations of broker-dealers and ATS operators (with SEC, FINRA, etc.), the registration of the transfer agent, money transmitter licenses, regulatory filings, securities lawyers (and their registrations and bar memberships), etc.

You actually can have both! Here’s how:

Public blockchain: Crypto Kitty

Permissioned blockchain: Family Kitty.

Now, was that so difficult?

Lessons To Be Learned From The SEC’s Recent Penalties for ICO Companies

Posted on by Kendall Almerico

The Securities and Exchange Commission recently brought their regulatory hammer down on several ICO-related companies. After months of public statements from officials and rumors of numerous subpoenas and investigations, the SEC sent a strong and undeniable message to companies that have held unregulated initial coin offerings, and to those who are considering it.

Don’t do it.

There are lessons to be learned from these recent regulatory actions. These lessons confirm what I have been preaching in my securities law practice to all of the coin/token/crypto companies I have been talking to or representing: Follow the existing securities laws to raise capital selling tokens or be prepared to suffer some extreme consequences. In this article, I will dig into the story of Carrier EQ, also known as AirFox, whose story is a perfect illustration of the dangers a company faces when they hold an ICO without following securities laws.

I am going to get into a lot of specific facts because what AirFox did is so common in the ICO world, so we can all learn from their mistakes. I will also explain in layman’s’ terms what happened to AirFox as the SEC reviewed their offering, in an effort to provide a “heads-up” to companies that still believe they can get away with holding an ICO in the United States without going through the SEC. It appears that AirFox did not receive very good advice in their ICO, and despite all the recent warnings and negative publicity, I still have ICO companies contacting me wanting to use these same methods (“But I’m selling a utility token!”) that got AirFox in trouble.

Two things are obvious after this SEC enforcement action:

  1. You cannot call what you are selling a “utility token” and have securities laws magically not apply to your offering (see Lesson 7 below), and
  2. Unless you can definitively prove what you are selling is not a security, you need to follow securities laws in your offering.

The AirFox ICO

AirFox is a U.S. company that sells mobile technology that allows prepaid mobile phone customers to earn free or discounted airtime or data by interacting with ads on their smartphones. From August to October 2017,[1]AirFox offered and sold blockchain-issued digital tokens called AirTokens in an ICO where the company raised about $15 million to create a new international business and ecosystem. AirFox told potential ICO investors that the new ecosystem would include the same functionality of AirFox’s existing U.S. business (allowing prepaid mobile users to earn airtime or data by interacting with ads) and would also add new features such as the ability to transfer AirTokens between users, peer-to-peer lending, credit scoring, and eventually using AirTokens to buy and sell goods and services other than mobile data. In the ICO, AirFox stated that AirTokens would potentially increase in value as a result of AirFox’s efforts, and that AirFox would provide investors with liquidity by making AirTokens tradeable in secondary markets.

Any advisor who even has a basic understanding of securities law would look at this and say “Hey, AirFox, you are selling securities. You are selling tokens to the general public, that you are alluding to an increase in value, to finance a new business.” Apparently, AirFox’s “crypto advisors”[2] and lawyers (if they had any) did not bother to Google “what is a security?”[3]

The SEC Penalties

On November 16, 2018, the SEC instituted “cease and-desist proceedings” against AirFox. This means, in laymen’s terms, that the SEC told AirFox to “Stop Breaking The Law!” because the SEC is about to come in, and effectively shut their company down with penalties. As a result, AirFox reached a settlement with the SEC so they could have some hope of continuing in business. The settlement requires AirFox to:

· Pay a $250,000 fine,

· Inform each person that purchased AirTokens of their right to get their money back if they still own the tokens or if they can show they sold them for a loss,

· Issue and post a press release on the company’s website notifying the public of the SEC’s order, containing a link to the order, and containing a link to a “Claim Form” for investors to get their money back,

· File the appropriate paperwork with the SEC to register the AirTokens as a class of securities — this means the AirFox now must follow all securities regulations and ongoing reporting requirements as to these tokens — an extremely expensive requirement, and

· Deal with a lot of other ongoing reporting requirements related to these penalties to keep the SEC informed.

In essence, the SEC made AirFox pay a large fine, forced them to return up to $15 million back to investors, publicly admit on online and in the press that they broke the law, and be subject to a ton of time-consuming and expensive paperwork (disclosing information like audited financial records that investors typically need to decide if a stock is a good investment ).

How many companies that held an unregistered ICO could financially stay viable with the imposition of such penalties? My suspicion is that there are very few.

What do we learn from the AirFox settlement?

1. The SEC is going to follow the Howey test[4] at least as a baseline to determine if a token sold in an ICO is a security. AirTokens were “securities” under the Howey test because people buying the tokens would have had a reasonable expectation of obtaining a future profit based upon AirFox’s efforts, including AirFox revising its app, creating an ecosystem, and adding new functionality using the proceeds from the sale of AirTokens.

Lesson: If your token offering cannot pass muster with a well-known 76-year old Supreme Court ruling, you are selling securities.

2. If you sell tokens that are securities, you have to either (a) register the securities with the SEC or (b) qualify for one of the well-known exemptions from registration such as Regulation D or Regulation A when you sell the tokens. In other words, follow existing securities laws. AirFox, like many ICO companies, did neither of these things, which is illegal.

Lesson: This isn’t rocket science. Either file an S-1 and register your token offering or be sure you qualify under one of the exemptions from registration (like Regulation A) before you sell any tokens to anyone.

3. The SEC is going to read your “white paper”[5] and review everything[6]related to your token offering. With AirFox, the SEC specifically noted that “in September 2017, AirFox explained to prospective investors in a blog post that the ‘AirFox browser is still considered ‘beta’ quality and will continue to be improved over the coming months as we execute on the AirToken plan.’” This blog post helped the SEC satisfy one of the Howey prongs of what constitutes a security: Money from the token sale was being used in a common enterprise for the company raising capital to build their business.

Lesson: Follow securities laws in all offering documents, marketing materials, media interviews, and everything whatsoever associated with the token offering.

4. AirFox’s white paper informed investors that 50% of the proceeds of the offering would be used for engineering and research and development expenses. In AirFox’s whitepaper, the company proposed a potential timeline of development milestones which covered from August 2017 through the second quarter of 2018.[7] Again, the company’s own documentation showed they were selling securities under Howey, by explaining that the company was going to use the funds from the token sale to fulfill their business plan.

Lesson: If you are using the funds from the token offering to build your business, follow your business plan, or build your ecosystem the tokens will be uses in, you are probably selling securities.

5. In its ICO, AirFox raised approximately $15 million by selling 1.06 billion AirTokens to more than 2,500 investors. The number of investors is important: A company selling securities is required to register their equity securities under “Rule 12(g)”[8] if the class of securities was held of record by more than 2,000 persons and more than 500 of those persons were not accredited investors. In other words, if you sell securities to 2,001 total investors, or 501 non-accredited investors, you have to be registered with the SEC.[9] With more than 2,500 investors, AirFox would be subject to these expensive registration requirements, if their tokens were considered to be securities.

Lesson: Watch the number of investors in your offering. Even when you are selling tokens that are clearly securities, you must pay attention to the rules surrounding how many investors you are allowed based on the laws applicable to your offering.

6. AirTokens were available for purchase by individuals in the United States and worldwide through websites controlled by AirFox. The company is based in the United States. The websites selling the tokens in the U.S. were controlled by the company. This all subjected AirFox to the jurisdiction of the SEC.

Lesson: If your company does business in the U.S., or wants to touch the U.S. investor market, you need to follow U.S. securities laws. If you are not a U.S. company[10], and do not sell or market at all to U.S. investors, most of this article may not apply to you at all.

7. The terms of AirFox’s the ICO required purchasers to agree that they were “buying AirTokens for their utility as a medium of exchange for mobile airtime, and not as an investment or a security.” In other words, AirFox assumed they could agree with their token purchasers that they were selling a “utility token” and not a security. It doesn’t work that way. Calling something a “utility token” and saying it “is not a security” is meaningless to the SEC. As the SEC notes “at the time of the ICO, this functionality was not available. Rather, the AirFox App was a prototype that only enabled users to earn and redeem loyalty points, which could be exchanged for mobile airtime. According to the company, the prototype was “really just for the ICO and just for investment purposes so people know . . . how it’s going to work” and “[did not] have any real users” at the time of the ICO. Despite the reference to AirTokens as a medium of exchange, at the time of the ICO, investors purchased AirTokens based upon anticipation that the value of the tokens would rise through AirFox’s future managerial and entrepreneurial efforts.”

This quotation from the SEC is important for two reasons:

· It makes it clear that the AirTokens violate the Howey test. Investors purchased AirTokens anticipating that the value of the tokens would rise through AirFox’s future managerial and entrepreneurial efforts. That is, almost literally, the definition of a security contract from Howey — someone investing in a company where the company’s efforts will increase the value of the investment.

· More importantly, the SEC seems to have cracked the door open a little. The SEC specifically set out several reasons why the AirTokens are securities and not “utility tokens” …but what if those reasons did not exist? What if this ICO had taken place later, and the following facts had been in existence:

(a) At the time of the ICO, the tokens’ functionality was available,

(b) The app was a not a prototype but was fully functional,

(c) The app had real users at the time of the ICO,

(d) The tokens were being used onlyas a medium of exchange at the time of the ICO, and

(e) Purchasers of the tokens had no anticipation that the value of the tokens would rise through the company’s future managerial and entrepreneurial efforts, because the tokens were not allowed to be traded on an exchange or otherwise.

While the marketplace for such tokens would not likely yield nearly $15 million in purchasers like in AirFox’s ICO, it seems that the SEC mightentertain characterizing tokens in the scenario[11] above as not being subject to securities laws.

Lesson: You can’t call what you are selling a “utility token” and have securities laws magically not apply to you. What you call your tokens is irrelevant to the SEC’s legal analysis.

8. AirFox’s whitepaper described an ecosystem to be created by the company where AirTokens would serve as a medium of exchange and that the company would maintain the value of AirTokens by purchasing mobile data and other goods and services with fiat currency that could be then purchased by holders of AirTokens and that the company would buy and sell AirTokens as needed to facilitate the purchase and sale of goods and services with AirTokens. In other words, the investors in the tokens would, again, be relying on the future efforts of AirFox, clearly one of the Howey prongs that make the AirTokens clearly securities under the law.

Lesson: If you are relying on the future efforts of the company selling the tokens to give the tokens value, the tokens have failed one portion of the Howey test.

9. Prior to the ICO, AirFox communicated to prospective investors that it planned to list the tokens on token exchanges to ensure secondary market trading. Obviously, liquidity in any investment is a huge part of the investment decision by a purchaser, and AirFox made it clear (a very common trait in unregulated ICOs) that their tokens would be traded on crypto exchanges, so buyers could sell them and potentially make a profit. This satisfies the “investment” arm of the Howey test. If investors have a reasonable expectation of profit from being the tokens, the tokens are very likely securities.

In fact, in the middle of the ICO, AirFox announced that it was reducing the token supply from 150 billion to 1.5 billion without changing the anticipated market cap “to alleviate concerns raised by many current and potential token holders and token exchanges who prefer each individual token to be worth more.”

Imagine a tradition initial public offering of stock, where the IPO company suddenly changed the number of shares of stock available but kept the valuation of the company the same. “Hey, those shares you first-in buyers got for $20 are now worth $2000 each because we decided to sell 1/100thof the number of shares.” This kind of market manipulation would likely end of with a few people in federal prison.

Lesson 1: If you tell purchasers of your token that the tokens are going to be traded and that you are going to do things to make the tokens more valuable for these investors, you are selling securities, without any question.

Lesson 2: Changing the material terms of a securities offering in the middle of it = bad idea.

10. The SEC noted the following interesting bit of information. Following the ICO, AirFox attempted to list AirTokens on a major digital token trading platform, and answered an application question that asked, “Why would the value increase over time?” AirFox’s response was “As time lapses the features and utility of AirToken will go up as we continue to build the platform. As of today, the people are able to download our browser to earn and purchase AirTokens to redeem mobile data and airtime across 500 wireless carriers. Over the next two years, the utility of the token will expand and therefore, more people across the world will need to have AirTokens in their possession to participate on our platform and ecosystem.”

Lesson: The SEC reads and reviews everything, including interactions a company has with third-party companies.

11. AirFox offered and sold AirTokens in a general solicitation to potential investors. This means AirFox advertised the ICO to the general public and solicited investments from anyone willing to send them money. In the securities world, general solicitation is limited to certain types of securities under certain exemptions, and allowing any investor to purchase securities, regardless of their accredited status, is not allowed in most cases.

Lesson: If you are going to advertise your token offering (and how else would you get the word out and find investors?) you need to follow securities laws and regulations related to general solicitation.

12. Through a “bounty” campaign, AirFox provided “free” AirTokens to people (crypto advisors) who helped the company’s marketing efforts. AirFox entered into an agreement with a crypto advisor who had previously led similar ICO promotions by other companies. This crypto advisor received a percentage of the AirTokens issued in the ICO in exchange for his services, recruited other people to translate AirFox’s whitepaper into multiple languages and to tout AirTokens in their own internet message board posts, articles, YouTube videos, and social media posts. More than 400 individuals promoted the AirToken initial coin offering as part of the bounty campaign. These individuals also received AirTokens in exchange for their services.

While the SEC did not specifically address this point in their ruling, I would not be surprised to see some regulatory or legal investigation undertaken against these crypto advisors. Depending on several factors that there is not enough publicly available information to know for certain, it is possible these crypto advisors may have conducted illegal broker-dealer activities subject to various regulations. The advertising and marketing of securities is highly regulated and based upon the representations made by those who were paid “bounties” by AirFox, it is also possible that some of these individuals did not follow existing laws and regulations as to how such advertising should be conducted.

Lesson: Follow all securities laws and regulations related to marketing, and only deal with advisors who understand and follow securities laws. When interviewing advisors, ask them about their experience in token offerings that were done in compliance with SEC regulations, not their experience with unregulated ICOs.

13. AirFox aimed its marketing efforts for the ICO at digital token investors rather than the anticipated users of AirTokens.

· AirFox promoted the offering in forums aimed at people investing in Bitcoin and other digital assets, that attract viewers in the United States even though the AirFox App was not intended to be used by individuals in the United States.

· AirFox’s principals were interviewed by individuals focused on digital token investing.

· In a blog post, AirFox wrote that an AirToken presale was directed at “sophisticated crypto investors, angel investors and early backers” of the AirToken project and in a pre-sale, prior to the public offering, AirFox made AirTokens available to early investors at a discount.

AirFox made no effort to market the ICO to the anticipated users of AirFox tokens — individuals with prepaid phones in developing countries. Instead, AirFox marketed the ICO to investors who “viewed AirTokens as a speculative, tradeable investment vehicle that might appreciate based on AirFox’s managerial and entrepreneurial efforts.”

Lesson: If you are going to claim you are selling “utility tokens” in an offering, you should sell those tokens to the ultimate users of the tokens. If you do not, you are likely selling securities to speculating investors, and your argument of selling “utility tokens” falls apart very quickly.

Conclusion (The Final Lesson)

I’ve been talking to (and in some cases, actually representing) token and crypto companies ever since the DAO decision when the floodgates opened to companies realizing that the only safe way in the U.S. to issue a digital asset, token or coin is to follow securities laws. It’s not that hard. Every mistake AirFox made was avoidable, and everything they did to violate well-established securities laws could have been avoided if they had received good advice. Selling investments to U.S. citizens is one of the most highly regulated industries in the world. To think a company can avoid following these well-established laws and regulations just because of a new technology, and because “everyone else is doing it,” is ridiculous.

Can I start openly selling cocaine online to anyone who wants to buy it because I keep the records of the sales on a distributed ledger and track each kilo on a blockchain? No, and nobody would be so stupid to try.[12]

This is not that difficult. The final lesson is: If you want to sell tokens without following securities laws to the U.S. market, you need to be 100% certain they are not securities, and that is going to be very difficult to do in most cases. If you and your advisors are not 100% certain that what you plan to sell is not a securitiy, get advice from reputable securities counsel before you do anything.

Once more thing: if you find yourself creating arguments to get around parts of the Howey Test rather than being able to definitively prove your tokens do not fit the Howey definition of a security, then the SEC is most likely going to disagree with you, and deem your tokens to be securities.

[1]It is important to note these dates. One month before the AirFox ICO, in July 2017, the SEC announced that it viewed the tokens offered by The DAO, an ICO that raised more than $150 million in 2016, as securities. This ruling was widely reported and sent shockwaves through the “unregulated” ICO industry. It would be hard to imagine that those advising AirFox were not aware of the DAO ruling when they started their ICO one month later.

[2]Some “crypto advisors” are persons (nearly always without a law degree) who advertise that they have “helped companies raise millions” in other ICOs (none of which followed U.S. securities laws). They often have influence in the ICO community and on ICO review websites where, in many cases, the review of an unregistered ICO is based on how much money you pay the website.

[3]Or, their advisors Googled it, read the Howey test, and decided “Let’s make like an ostrich and ignore the obvious.” Advisors to ICO companies should not take the attitude of “but everyone else is doing it and raising millions of dollars so it must be okay” or, my favorite, “there are no rules for ICOs, these are unregulated!”

[4]SEC v. W. J. Howey Co., 328 U.S. 293 (1946). The “Howey Test” is the U.S. Supreme Court’s definition of what a security is and has been the law for 76 years. In a nutshell, the four-part Howey Test determines that a transaction represents an investment contract if a person (a) invests his money (b) in a common enterprise and is (c) led to expect profits (d) solely from the efforts of the promoter or a third party.

[5]A “white paper” in the ICO world is a document that explains the business and the offering. In most cases, these documents are heavy on technical language regarding the tokens and blockchain but offer little to no guidance on the financial health of the business and rarely disclose all the risks of investing in the offering. In many cases, these “white papers” are not even close to what a securities lawyer would draft for any securities offering. But, many ICO companies apparently are advised to believe their white paper, with its page of legal disclaimers copied from other white papers found online, will magically protect them from any securities laws repercussions.

[6]The SEC will look at a company’s white paper, any other offering documents, websites, social media, media interviews, and any other online or offline matter related to the offering. If it is publicly available, the SEC is going to review it. Even if it is not publicly available, the SEC may subpoena it. In the AirFox case, the SEC noted that AirFox talked about prospects for development of the AirToken ecosystem on blogs, social media, online videos, and online forums and even gave a specific example of quotes from AirFox’s principals making claims in a YouTube video.

[7]These are typical White Paper 101 inclusions in an ICO. A breakdown of what the funds will be used for (which is actually a normal part of a securities law compliant offering document) and a timeline. While there is nothing wrong with these disclosures, the problem is that these white papers rarely discuss the risks involved with the offering, and almost never disclose anything about the financial condition of the company — staples of a compliant securities offering.

[8]17 CFR 240.12g-1

[9]There are notable exceptions to this rule under certain exemptions from registration, including under Regulation A, as amended in the JOBS Act.

[10]Without getting too technical, if you are a New York City based company, with offices and employees in Manhattan, who sets up a shell company in the Virgin Islands that has no office or employees and you run that company out of New York, you are not being clever and avoiding the fact that the SEC is probably still going to consider you a U.S. company. All you have done is sent up a red flag.

[11]There are other factors to consider, as Howey is just part of the analysis as to whether something is, or is not, a security. But, for illustrative purposes, this section of the SEC’s analysis is very helpful for companies considering a token sale, because it illustrates a potential path to a token not being subject to securities laws, and the possible ability in very narrow circumstances to sell a token outside of securities laws.

[12]Okay, someone might be dumb enough to try. Never underestimate the stupidity of some people. The TV show America’s Dumbest Criminals filled three years of episodes with people who might have tried this. For the record, if a stupid criminal tries this, and says it was my idea, please remember that they are, as noted, a stupid criminal and do not believe them.

Disclaimer (because I am wearing my lawyer hat): Kendall Almerico is a securities lawyer who represents companies raising capital in JOBS Act offerings (Regulation A in particular) and companies that want to sell tokenized securities in a compliant manner through a security token offering. This article does not contain legal advice and should not be relied upon bu anyone for legal advice. It is simply the opinions of Kendall Almerico interpreting certain matters that were recently in the news. Do not rely on this article for legal advice as every situation is different. In all cases, consult your own attorney or advisors.

There, I said it.

Difference between Crypto and Security Token

Posted on by Oscar Jofre

Is there a difference between cryptocurrency and a security token?

The answer is yes, there is a big difference. And it is time we get these right so the thick fog around this topic can begin to clear up. It is very important to understand how each of them is very different from each other.

You probably read or hear these two words every day and in most cases in the wrong context. Before we get into the difference lets make one thing clear.

Crypto or Cryptocurrency is an alternate (i.e., non-fiat) CURRENCY
Security Token is an EQUITY POSITION IN A COMPANY

All over the web, there are many discussions, blogs, articles, and tweets on using blockchain. Of course, many of them follow to the extraordinary words “Crypto”, or “Cryptocurrency” and “Security Token”.

I am amazed by the number of people who use these two words interchangeably, yet they are so different as stated above. Let’s have a look at each one in more detail.

What is Crytpo or Cryptocurrency?
Wikipedia has a clear definition: “A cryptocurrency (or crypto currency) is a digital asset designed to work as a medium of exchange that uses strong cryptography to secure financial transactions, control the creation of additional units, and verify the transfer of assets.”

Crypto or Cryptocurrency is just a currency. Other examples of currency are Dollars, Euros, Pesos, etc. These currencies are traded worldwide by currency traders. Nowadays we have the introduction of digital currencies such as Bitcoin, Ethereum, Litecoin, etc. Wikipedia has put together a list of these digital currencies.

Currencies are regulated by a securities commission or foreign exchange agencies. The rules around who can purchase currency and trade them are very simple. In most cases, it is required to be 18 years or older. ID Verification, AML (Anti Money Laundering), and some basic KYC (Know Your Customer) will be done. Not more than this is required to purchase a currency.

For trading, the platforms will need to be registered with commissions and/or regulators in their country to legally operate the exchange. This financial regulator is regulating the currency, transfer, and trading business.

What is Security Token?
In 2017 we saw the emergence of companies issuing tokens to raise capital. In countries such as USA and Canada, regulators have been very clear on this form of capital raising.

When a company offers a token from their company for an investor to invest in, the goal is for the token to trade and gain in value. Security agencies, including the SEC in the USA and the CSA in Canada, have made it clear that when companies are conducting a token offering in which the token has the ability to trade and gain in value, it must be issued as a security token.

Security Token is a tokenized security that is issued by a company. The security represents an equity position in the company. In order to issue the security, the company must comply with regulations as to how it can market the offering, who it can attract to invest in their company, reporting requirements, trading restrictions, and custodianship (Transfer Agent) requirements.

For a company to issue a security token it must:

  • Determine what jurisdiction (countries) it wants to attract investors from
  • Determine what exemption to use to offer their security token to investors (accredited or non-accredited investors)
  • Determine trading restrictions per jurisdiction and exemption
  • Determine reporting requirements per jurisdiction and exemption
  • Determine Transfer Agent requirements per jurisdiction and exemption
  • Determine if Broker Dealer is required per jurisdiction
  • Determine what regulated ATS Secondary Market is available for trading

As you can see it’s clear how different these two are from each other and there should be no confusion going forward.

Here is how the two can come together and be used in the proper context. You can use cryptocurrency to invest in a security token offering by a company. But that can only happen as long as the company has agreed to accept this form of digital currency, the investor meets regulatory requirements, the company can offer their securities in the country (Jurisdiction) of residence of the investor, and if the company is using a broker-dealer, the dealer is also prepared to accept that form of payment.

Top Questions a Securities Lawyer will Ask an STO Issuer (in USA or Canada)

Posted on by Oscar Jofre

Security Token Offering is a serious business. The days of the ICO are over. These are clear messages not only from the SEC and other regulatory bodies but also from thoughtful and experienced professionals. The SEC, in particular, is delivering this message mainly through regulatory actions and the position of SEC Chairman Jay Clayton. Most recently, a federal judge ruled that the U.S. securities laws may cover ICOs, giving the Feds a much-needed victory in their battle against fraud and money laundering.

Regardless of the nuances and the debate, what should be clear to issuers who have legitimate businesses or startup plans is that investors, as well as issuers, require protection. If anything, legitimate issuers should welcome such scrutiny and regulation which ensures the market is kept free of bad actors and questionable affiliations.

However, companies considering a security token offering need to be prepared to respond to questions that their securities lawyers will ask. To this end, we reached out to top lawyers to learn which information is crucial to them when a client reaches out for advice on their Security Token.

The professionals that contributed to this list are Sara Hanks (CrowdCheck Law, LLP – USA); Ross McKee (Blake, Cassels & Graydon, LLP – Canada), Lewis Cohen (DLX Law, LLP – USA); Rajeev Dewan and Kosta Kostic (McMillan, LLP – Canada); Alessandro Lerra (Lerro & Partners – Italy), and Alan Goodman (Goodmans, LLP – Canada).

Below is the list of items on which lawyers and other advisors will be focusing. There is no particular order, but you should be ready when contacting your securities lawyer or advisors to make sure you are prepared. This list is subject to change as the market develops.

  1. What jurisdiction is your company incorporated in and in what jurisdictions is your company doing or will do business?
  2. In which countries are you planning to offer your security token?
  3. Is the company already a public reporting issuer anywhere or are any of its other classes of securities already listed on an exchange?
  4. Will you be conducting a Direct Offering or a Broker-Dealer Offering?
    1. If a Direct Offering, how will you manage all of the regulatory requirements (including “Know Your Client” requirements)
    2. If you aren’t using a Broker-Dealer and you are selling to retail investors, how will you comply with the requirements of states that require you to register yourself as an issuer-dealer?
  5. Will this be for accredited investors only or will it also be made available to non-accredited investors?
  6. How do you plan to confirm or verify accredited investor status?
  7. How do you plan to confirm or verify investors are not on prescribed lists?
  8. Do you have a method to establish the suitability of the investment for an investor?
  9. What securities law exemptions do you intend to rely on for each jurisdiction you want to sell your security token?
  10. What documentation or certification will investors be required to sign?
  11. What is your investor record-keeping system and how do you plan to handle regulatory reporting of the distribution of securities tokens?
  12. What are the tax implications of the sale of the token for both the issuer and the investor?
  13. If ongoing tax reporting (e.g., FATCA) is required, how will that be handled?
  14. Which blockchain is the token going to be created on?
  15. Does the client understand the differences between public blockchains and closed or permission blockchains?
  16. Does the platform already exist?
  17. Do you know which Security Token Protocol you would like to use?
  18. Does the Security Token Protocol manage the lifecycle, custodianship requirements, and corporate actions of the security token?
  19. Does the Security Token Protocol have the capabilities to be managed by a regulated Transfer Agent?
  20. Has the smart contract code for the token been audited by a code audit firm?
  21. What level of assurance does the code audit firm give in terms of their work?
  22. Is the Security Token Protocol implemented on robust, highly-secure, and enterprise-class technology platform?
  23. Does the blockchain for the STO prevent cryptocurrency fraud, unauthorized mining, and forking?
  24. Does the blockchain for the STO provide guaranteed legal finality for securities transactions?
  25. Does the blockchain for the STO provide for recourse with forking or technical intervention in case of errors, losses, or fraud?
  26. Is there a utility element in the token?
  27. Is the security token coupled with a cryptocurrency?
  28. Does the blockchain have a well-defined and published governance model, and are you confident that the governance processes and governing entities are credible?
  29. Does the blockchain have adoption and recognition from financial institutions?
  30. Will the tokens be immediately delivered to the purchasers?
  31. What is the stated purpose of the offering and what is the business of the issuer?
  32. Is the number of tokens fixed or unlimited? Is there a release schedule for future tokens?
  33. How many tokens, if any, are being retained by management?
  34. Will the tokens have a fixed value?
  35. How many security token holders do you expect?
  36. Are you aware of the requirements for a Transfer Agent?
  37. What are the rights of security token holders?
    1.  Voting?
    2. Dividends?
    3. Share of revenue/profits?
    4. Wind up the business?Will the purchasers be seeking a return on their investment or are they buying the token for other purposes?
  38. Will the purchasers be seeking a return on their investment or are they buying the token for other purposes?
  39. What is the exit strategy for the company?
  40. Does your company currently have a Shareholders Agreement?
  41. Does the company have a board of directors?
  42. Do you have financial auditors?
  43. Do you intend to list the tokens on any secondary markets and are those markets in compliance with regulatory requirements that apply to securities exchanges?
  44. Following issuance of the tokens, are any lock-up periods required or advisable with respect to the token?
  45. Are there any requirements that the tokens may only be traded with persons in (or outside) certain jurisdictions?
  46. Once any lock-up period has concluded, where will the tokens be able to trade?
  47. How will any applicable resale restrictions be implemented and complied with? How will subsequent sellers and purchasers of tokens be made aware of these resale restrictions?
  48. How are any requirements for the tokens to trade on a given market or alternative trading system being handled?
  49. Does the company intend to provide ongoing reporting to investors and if so, how will that be handled?
  50. Will the blockchain be used to facilitate any additional levels of transparency?
  51. What social media platforms are you using?
    1. Telegram
    2. Twitter
    3. Facebook
    4. Medium
    5. LinkedIn
  52. Do you know what limitations on communication or other requirements (such as legending or delivery of an offering document) apply to social media communications?
  53. Are you planning set up a “bounty” or similar program that offers free tokens?
  54. Will you be using airdrops?
    1. How are recipients selected and what do recipients need to do in order to receive airdrops?
    2. Have you made sure the airdrops comply with applicable securities law?
  55. Do you have a white paper?
    1. Has the whitepaper been released?
    2. Does the whitepaper include a clear business plan?
    3. What statements, representations, or comments have been made by management in the whitepaper, any other publication, or orally, about the future value or investment merits of tokens?
    4. Should the whitepaper be characterized as an offering memorandum and if so, does it have the prescribed disclosures and notices?

We hope this can assist you in preparing for your security token offering (STO). Obviously, for those who have already raised their money, tokenizing their securities will require some of the same questions.

A Big Lesson from the Delaware Blockchain Amendments

Posted on by Kiran Garimella

Andrea Tinianow, the founding director of the Delaware Blockchain Initiative (and ‘Blockchain Czarina’), recently published a very insightful article on the significant gap in the mainstream protocols for security tokens. The gap is in the way the Delaware Blockchain Amendments are interpreted by the mainstream security token platforms.

The Delaware Blockchain Amendments were an outcome of the Delaware Blockchain Initiative. The Amendments were introduced in the Delaware Senate Bill 69 and signed by the Governor on July 21, 2017. This landmark legislation allows Delaware corporations to maintain their stock ledgers on a blockchain. In making this provision, what the Delaware Bill meant was that all of the stock ledger data should be maintained on the chain, rather than only a portion of the data.

The more accurate interpretation of the provision bumps up against one limitation that public blockchains face. As the number of nodes in the chain grows dramatically—as it should in a truly decentralized system—the performance of the chain suffers. Validation, consensus, and finality take longer and longer. The problem becomes significant when security tokens are involved, since the data payload of securities transactions is much larger than the normal token payment data within Bitcoin and other payment-oriented cryptocurrencies and tokens. More importantly, contract execution is much more complicated than technical (or cryptographic) validation of transactions. Even simple contracts can generate a multitude of mini-transactions that need to follow a labyrinth of complex processes in the securities world. All this activity generates more data, exacerbating a problem that currently has no clean solution in fully decentralized public blockchains.

One way around this problem is to put securities data off-chain and store the keys on-chain. This can provide some relief on storage but probably not as much impact on performance. Even with the limited payload, the Bitcoin blockchain has grown from around 1 MB in 2010 to more than 170 GB eight years later! Transactions speeds are even less impressive. Hardcore fans of Bitcoin deem it unfair to compare its 7 transactions per second with that of Visa (which conducts around 20,000-30,000 or even more transactions per second), since Visa had over 60 years to improve its technology. Presumably, Bitcoin fans predict that Bitcoin’s transaction speed would match that of Visa if the Bitcoin network too had a couple of decades of improvements. But these arguments miss the point: by the time Bitcoin achieves Visa’s throughput, Visa itself could double or treble its own performance. Ethereum too is facing similar issues and currently experimenting with various approaches, including sharding and proof-of-stake.

In any case, putting securities data off-chain violates the provisions of the Amendments. “Thus, although the ERC-884 is designed to transfer shares of stock, the share ownership information is captured in an off-chain database,” says Andrea Tinianow, alluding to a derivative of the ERC-20 protocol. “This arrangement is in stark contrast to what was contemplated by the Delaware Blockchain Amendments….”

In contrast, the KoreChain maintains all information on the chain. Scalability and performance are not issues precisely because this is a permissioned chain with functional sharding (a topic for another blog) but no mining, proof-of-work, or proof-of-stake. The KoreToken protocol also addresses the full ecosystem of participants in securities transactions. The implementation of services is too important to leave it to interpretations and all the subsequent hassle of reconciling varied interpretations. For example, even the most basic partial sale of security tokens on a secondary market exchange requires a minimum of twenty-five separate sub-transactions involving upto five participants. In order to be robust, real-life implementations have many more steps. Currently, all these steps do take place, but the majority of them happen after the primary sale transaction occurs. These tasks fall into various groups of activities such as clearance, settlement, reporting, disclosure, and corporate record-keeping.

There is no debate that the whole process is inefficient, costly, and error-prone. This makes the process an excellent candidate for true smart contracts on the blockchain. But this does not imply that the blockchain makes these tasks unnecessary. From the context of a naive security token protocol, Andrea Tinianow points out in her article, “Tokenized shares do not eliminate many of the types of errors that are symptomatic of a system that relies on third-party intermediaries to manage and control shareholder databases.” KoreChain, engineered carefully to be fully compliant with all the complexities of securities regulation and corporate law, mitigates errors and creates efficient end-to-end securities transactions without ignoring the risks. The KoreChain implements all tasks that are mandated by securities regulation and corporate law.

Capital Raising “Capital markets point of view” dealer

Posted on by Jonathan Heymann

For private issuers, raising capital is the next natural step once you have exhausted other traditional forms of financing. It becomes even more enticing when you read about other firms doing it, and thinking why shouldn’t that be us.

However, being prepared to take the issuer to the next level can be a source of frustration if you’re not ready for it. Nobody is willing to just hand out money; you have to make a convincing case based on fact and incomplete due diligence documentation can leave you out in the cold.

Issuers must prepare comprehensive information which covers who the guiding minds behind the issuer are, who the current shareholders are, business continuity planning, company financials, what is it that makes you unique and a comparison with competitors in the same industry.

Dealers are bombarded by people who claim to have the next best thing, but if you can’t boil it down to facts and figures, they won’t spend much time looking at you. Using up to date technology to gather all the corporate information is critical to your success. Using a platform to house your cap table management, minute book, financials, investor relations and corporate data in electronic format means you can walk into a meeting prepared for whatever they throw at you.

For dealers, having a platform whereby issuers can login and input all the relevant information that you need from them, allows you to control the process and weed out the unprepared ones before you devote a lot of time to analysing potential deals. A controlled mechanism whereby issuers know what information they need to provide and where to put it, saves everyone significant time and effort.

Taking it one step further, for registered dealers to have the ability to easily showcase their approved products online, along with pertinent information about the issuer – corporate biographies, financial information, information about the proposed raise –  helps dealers to bring their proposed offerings to potential investors. From a compliance perspective, it means having all of your due diligence in one place, for when the regulators come to visit.

Taking it two steps further, for investors to b able to view potential offerings, input their Know Your Client (KYC) information to determine their eligibility, answer questions to determine the suitability of the investment, have the platform conduct the necessary AML checks and then provide an efficient method for payment, once approved by the CCO, and you have an efficient and cost effective ecosystem which helps issuers, dealers and investors communicate.

KoreConX has an all-in-one platform to accomplish this and ensures that all parties are acting in compliance with securities regulations. Issuers can effectively connect with dealers who in turn can connect with investors all while ensuring that they have the necessary KYP/KYC processes and documentation in place, should they get audited.

Join the all-in-one platform empowering private capital markets.

Free forever, KoreConX makes it easy for participants in private capital markets to manage their investment portfolios, raise capital, and meet global compliance standards along every step of the way.

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