Alternative finance Archives

As a Canadian Company, can Canadians Invest in Your RegA+?

Posted on September 22, 2021 by Oscar Jofre

We have extensively discussed how Americans can invest in securities offered under Regulation A+. However, Canadian companies can also use the exemption to raise capital to fund their businesses. Despite the ability for Canadian companies to use Reg A+, this was a decision made by US regulators, as the JOBS Act is a US, not Canadian, law.

Because Reg A+ is a US regulation, it makes it incredibly simple for Canadian companies to raise money from investors based in the United States. They go through the standard procedures for Tier 1 or 2 offerings before making the offering available to investors. On the other hand, Canadians investing in Canadian companies through Reg A+ is a little more challenging to be done.

In theory, it is possible. The issuer would need to be qualified in each Canadian province they are conducting the offering in. They can seek a Canadian equivalent of a broker-dealer to structure the offering so that investors can invest. In practice, this is not done very often, as meeting compliance requirements for all Canadian provinces is challenging in addition to US compliance requirements. In addition, the cost would be far more than the potential upside. Interestingly enough, Canadian regulators have created rules for secondary trading that give Canadian investors more opportunities to invest. Canadian investors can “hop the border,” so to speak, and buy securities in a secondary market transaction. This allows Canadians to purchase securities in a Canadian company.

Even though Canadian companies could technically raise money from Canadians under Reg A+, it is often cost-prohibitive. That does not mean investors are out of luck. Through secondary market transactions, Canadian investors can purchase securities in Canadian companies, allowing them to become shareholders.

What are Options?

Posted on August 6, 2021August 6, 2021 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 Forms of Alternative Finance are Available?

Posted on July 19, 2021July 19, 2021 by Oscar Jofre

Starting a business can be difficult. Most young companies enter the scene with little capital to help them grow. Taking a loan out from the bank is a good start, but some options can end in higher rewards without a loan hanging over your head. These are alternative finance options, like raising seed capital from friends and family, angel investors, or crowdfunding. Today, we will explore forms of alternative finance available to you as a private company and where in the life cycle of your business they may appear.

Friends and Family

In the early stages of your company’s business life cycle, raising capital from family and friends is a great place to start securing safe, additional funding if you are able. When your family and friends are early investors, they are not required to register as such, making it easy for them to help your growing company. In this stage of your company’s development, entrepreneurs will want to retain as much equity as possible. Friends and family investors make this possible without needing to give up part of a growing company.

As you begin to accelerate your business plans, there are several avenues available that can help you raise significant capital and increase your valuation if (or when) you plan to offer your company later on the public market.

Angel Investors or Venture Capital Firms

As a private company, one of the traditional ways for you to raise capital is through an angel investor, a wealthy individual, or a venture capital firm, a group of investors that invest in companies on behalf of their clients to make them money. Both of these investors will generally invest early, requiring equity and hoping for a successful return on investment later on.

Peer-to-Peer Lending

Peer-to-peer lending is a pretty straightforward form of alternative finance. Typically, through online platforms, investors can enter a pool of lenders, which a borrower can pull from and then repay. This form of investment cuts out the bank as the middleman, which opens up access to companies that may not have good credit.

Crowdfunding

Crowdfunding is a great mechanism for investments that build a company’s proof of concept because crowdfunding success relies on having a product or service people want or believe in. As the name would imply, crowdfunding is sourcing small investments from a large number of investors and falls into one of two categories rewards-based or equity-based offerings.

Rewards-Based Crowdfunding

Rewards-based crowdfunding is an investment that expects compensation in the form of the product a company is producing. A good platform for this form of crowdfunding is Kickstarter. You will often see independent video game developers or small business owners looking to raise capital for a particular product and offer rewards based on how much an investor invests.

Equity-Based Crowdfunding or Regulation CF

Regulation CF is a crowdfunding tool regulated by the SEC signed into law in 2012. However, it has recently expanded to allow more investing opportunities. The JOBS Act allows non-accredited investors to invest in private companies in exchange for equity in the company. 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.

This tool allows companies to raise as much as $5 million in 12 months from many investors. In 2020, 358,000 investors participated in Reg CF campaigns.

Regulation A+

Another method of allowing companies to have non-accredited investors invest in their companies is Regulation A+, by exempting the offering from SEC registration. Many companies have begun to offer securities through the RegA+ exemption following a successful RegCF raise. Proceeding this way will elevate your chances of raising more money, up to $75 million annually, because the Regulation CF will show potential investors that the products or services offered by the company are of great interest to many individuals. It is important to note that non-accredited investors are limited to investing 10% of their annual income or net worth, whichever is greater.

There are many avenues of alternative finance to investigate before going to a traditional financing option as a private company. We encourage you to look into all of these types and see which is right for you and your business.

What is RegTech?

Posted on July 7, 2021July 7, 2021 by Oscar Jofre

In the wake of the 2008 economic crisis and the subsequent recession that followed, there was a push to create new regulations to govern financial institutions in the United States. With these regulations came requirements that businesses had to follow to be compliant with the new laws. What followed the new regulations was a rise in companies offering services to help companies manage compliance easily and efficiently, both in time and cost. This is the purpose and application of RegTech.

RegTech, or Regulatory Technology, is more specifically the use of technology to manage regulatory processes within the financial industry. The goal of companies that offer RegTech is to use cloud computing, machine learning, and big data to drive automation and lift a majority of the burden of complicated compliance requirements of the compliance teams in businesses, to reduce human error, and accomplish difficult tasks more efficiently. As regulations become more robust and regulators are demanding more transparency in the forms of auditability, traceability, and automation, a company that is required to comply with a lot of regulations cannot easily subsist without some form of RegTech to help them avoid the risk of sanctions.

RegTech services help to compile large amounts of data in secured and compliant ways, as well as comb that data for risks to the organization. While these services affect the budget of a company, it is arguably canceled out by the amount of time and energy saved by simplifying the complex processes.

For example, let’s say a bank was previously doing all of their regulation audits manually, scanning the compliance law and solving what pertains to them, what they need to do, and how they need to do it to be compliant. While they could feasibly do this, it will take a considerable amount of time if the compliance officer tasked with this job is not a master of the laws pertaining to their enterprise. Then, following that long process, the bank will need to show the reporting, who did the reporting, when it was pulled, and keep the information secured.

This type of manual process is solved by RegTech. Not only will your data be secured, but it will also be accessible and timestamped, so you can demonstrate who complied, how they complied, and when they complied by logging all of the actions a user takes and creating a trail.

This is one example of how RegTech helps in a compliance situation, but it is also used by regulators to help reduce the time it takes to investigate compliance issues. While these are the more well-known aspects of RegTech, it also helps in many more categories within the financial sector, such as:

Reporting
Anti-money Laundering
Compliance
Governance
Risk Management
Management and Control
Transaction Monitoring

As the financial industry continues to rely more and more on data and technology, RegTech will continue to grow to keep up with the demand for more applications from companies and regulators alike.

KorePartner Spotlight: Brian Belley, Founder and CEO of Crowdwise

Posted on June 4, 2021June 4, 2021 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.

Brian Belley, founder and CEO of Crowdwise, has always been passionate about investing and alternative investments. By training, Brian is an aerospace engineer, but the JOBS Act represented the culmination of his interests. He took this as a great opportunity to build a platform providing a wealth of information centered around crowdfunding.

At Crowdwise, the primary service is free educational material for investors through courses and industry data on crowdfunding and early-stage investing. From his own experience and education on private investments, Brian understood what was most applicable to investors. The goal is to make this information easily digestible, translating data into the essentials that can be understood by new investors. Brain’s specialty lies in tech and early-stage startups, as well as analyzing industry data and trends.

The private capital market is particularly existing for Brian because of the opportunities he foresees. In two to five years, the space will likely look completely different as it continues to be democratized and open to new investors. There are increasing opportunities for investors to build a diversified portfolio with broad investment types. At the same time, more investment opportunities for the everyday investor will lead to more access to capital, and new businesses will be able to come into existence because of it.

Brian is excited about Crowdwise’s partnership with KoreConX, saying that it is completely about cooperation and building an ecosystem. He said: “not everyone has to be a competitor.” As more people continue to drive the private market forward, it will benefit everyone in the space, both investors and companies alike.

What is Alternative Finance?

Posted on April 19, 2021April 20, 2021 by Oscar Jofre

By definition, alternative finance includes any financing source outside of the traditional realm of the traditional finance systems like regulated banks and stock markets. Such methods include raising seed capital from friends and family, angel investors, venture capital firms, peer-to-peer lending, or crowdfunding. In contrast, traditional finance options require companies to apply for loans from a regulated bank or publicly offer stocks for sale to the public.

For companies in their earliest stages, raising capital from family and friends is often a safe way to secure additional funding. Friend and family investors are not required to register as investors, unlike traditional investors, making it easy for them to contribute to a growing company. Often founders do not need to relinquish equity to friend and family investors, allowing founders to retain as much equity as possible through their early stages.

If a company requires more financial resources, its next options may be angel investors and venture capital firms. With angel investors, wealthy individuals invest using their own money and meet the SEC’s accredited investor requirements. It is quite common for angel investors to act as a mentor to the companies they invest in, anticipating that it will help them secure a return on their investment. Venture capital firms often invest in startup companies that display the potential for a successful return and are SEC-registered and regulated. Rather than investing their own money, they invest money from other investors to generate profits for the investor. Typically, venture capital firms request equity so that they can have a share in the company’s development.

Another alternative form of financing is through peer-to-peer lending. Typically through online platforms, applicants are matched with lenders who are typically individual people. Interest rates are usually low and are not regulated by traditional banks. Platforms assess borrowers for risk to determine if they are eligible to invest.

One of the fastest-growing forms of alternative finance is crowdfunding and can include both rewards-based and equity-based offerings. With rewards-based crowdfunding, investors invest to be compensated with products that the company offers. Equity crowdfunding allows investors to exchange their investments for equity in the company. Equity crowdfunding is supported by Regulation CF, which allows private companies to raise up to $5 million from non-accredited investors, usually done online through the various crowdfunding portals presently available or a broker-dealer. Crowdfunding is extremely valuable in that it allows avid brand supporters to become investors and become an advocate for the companies they love. For non-accredited investors, the maximum investment per year is either $2,200 or 5% of their annual income, whichever is greater.

Regulation A+ is another method allowing companies to receive investments from non-accredited investors by exempting the offering from SEC registration. Companies can secure up to $75 million annually through this method of funding. Non-accredited investors are limited to investing 10% of their annual income or net worth, whichever is greatest.

The variety of alternative finance options are attractive to companies who would like to go routes other than a traditional bank loan or those who may not be eligible for one.

Tag: Alternative finance