Andrew Corn  00:06

God knows what my background’s gonna look like. Oh, I can just do [uncertain]. Yeah, who’s got time for that. This okay?

Sara Hanks  00:45

Just don’t move there, Andy, because you’ve got boxes behind you, as long as you don’t move, the pictures look good.

Andrew Corn  00:54

There we go. Thank you. When I tilt up there should be less. I’ve got a [uncertain] that was excavated from Nova Scotia built in the 1830s. Behind me as well, but I also do have some boxes.

Oscar Jofre  01:13

Not only just warning everyone, not only my eight month old well he’s [uncertain], and that too, I just got notified that they’re deciding to do fire alarm tests today. So if it happens, I’m just gonna go mute. And I’m just gonna go like, that meaning you guys carry on the conversation. Okay, the three of you, because we have a lot of people registered for this one. Here we go. So let’s start with the introduction to start with Sara.

Shari Noonan  01:45

Hi. Hi, Sara Hanks. CEO of CrowdCheck and managing partner of CrowdCheck Law.

Andrew Corn  01:56

Hi, I’m Andrew Corn. I am CEO of E5A integrated marketing. We are a systematic data driven investor acquisition firm.

Marty Tate  02:09

Marty Tate, securities lawyer crowdfunding lawyer with Carman Lehnhof Israelsen in Salt Lake City.

Oscar Jofre  02:19

Well, that’s perfect. So welcome, everybody. Once again, for a wonderful afternoon. We are going to be having a great time here with the KoreConX KoreSummit webinar series 2021. You met our panelists, my name is Oscar Jofre. We’re going to have a great discussion today. First of all, I just want to say we are six days away. So counting uno, dos, tres, quatro, cinco, seis. We are very, very close to the to the D day of where Regulation A goes live to 75 million. And this topic that we’re about to engage in today is one that obviously a lot of people have a lot of questions about funds. And so let’s start with the regulation. Let’s get the one and only Sara Hanks give us: why are so many people asking questions about it. Obviously, I know I’m confused sometimes whether they can and then I hear they do. I’ll be interested to hear your comments.

Shari Noonan  03:19

That’s right. I mean, one of the confusing aspects of this whole thing is that there are so many entities that have raised funds under regulation A that are called fund. Now, the the West Coast single family housing fund 2015 2016, whatever. But they are not funds as we would understand that term under the Investment Company Act. Because when you think of a fund, you’re frequently thinking of an entity that invests in small bits of other entities now, like 5% of Tesla, and then maybe some NFT’s and maybe some property, all of those things can be done as a fund but that sort of fund whether it’s a private fund, a hedge fund, or whether it’s a mutual fund registered with the SEC, none of those can use Regulation A or Regulation CF. There is in both cases, both Regulation A and regulation CF, there is a prohibition on an entity that is an investment company using those exemptions and also in with respect to companies that are exempt from the definition. Just to be super confusing, Tthe prohibition for reg CF is slightly different than the prohibition for Reg A, which means that you do get some of the real estate entities that invest in land [uncertain] invest in dirt. They can use Reg A when they couldn’t use Reg CF. But the basic principle is a thing that is, what we would think of as a fund a hedge fund or something like that, that invest in other companies cannot raise funds, under Reg CF or Reg A. And I’m sure we’re going to get into some of the exceptions or ways around that. But I’ll bounce it back to you, Oscar or the other guys.

Oscar Jofre  05:33

Yeah, my alarm. I only have one minute. So better hurry. Cut Oscar down to 30 seconds. You know, I think that’s the reason why I get confused. Because I get clients who said, they go, I’m gonna do it for a fund that my and my lawyer told me that I can’t. I’m going: I’m confused. Right? So I brought Marty in because you obviously you both know him, who he is in the space, and he’s doing that. But there is I don’t want to use the word a way around it. But there is a way to use the exemption in a way that it doesn’t violate the securities exemption. So Marty, if you can touch into, she’s gone through the regulation, now touch into the point, how can we use it? From the fund perspective?

Marty Tate  06:24

One of the things that, and Sara did a brilliant job. And I told Oscar before you before Sara joined on, I said, You know, basically everything, every answer, I should just defer to Sara, because she said she is the absolute guru in this space. I do a lot of fund formation work. And, you know, combining that with Reg A has been, you know, something that we’ve obviously, there are groups out there that call themselves funds, I will say that the SEC doesn’t like it when you call yourself a fund. Sometimes we have funds and they make us that we’re trying to qualify under Regulation A plus and they ask us to change the name. But in order to utilize Reg A plus, for a investment type company, you have to you have to be exempt from being an investment company. So as Sara said, one of the, and you can’t rely on the exemptions that most people typically rely on, which is a three c one, which is less than 100 investors, or three c seven, which is certain certain qualified investors. So you have to try to fall under another exemption. And what most people do is they say, well, we’re not investing in, we’re not investing in securities, we’re investing in real estate, or we’re, we are investing in some other type of interest. And that’s, that’s where the argument generally goes, as you’re saying, An investment company is something that invest primarily in security who say we’re not investing in securities and fall under one of these other exemptions that will, I’m sure we’ll delve into more.

Andrew Corn  08:33

So I get asked this question all the time, as well. And of course, I’m not an attorney. And when it comes to structuring the deal, I’m also not an investment banker, but I have a lot of deals and more than anything else. I’ve gotten tutored by Sara Hanks. So I know the answer to a bunch of these things. But the questions I get all the time are from our real estate clients, they’ll say, Hey, we’re real estate private equity fund, we want to do something retail, it’s moving up to 75 million. Could we do our next fund that way? And the answer, of course, is No. You can’t be a 40 act fund. You can’t be a private equity fund. But you can create a C Corp holding company and then have shareholders and there’s a lot of positives and negatives that go along with that. The other requests we get all the time are things that resemble venture capital funds. And again, we say you can’t do that, but you can do a holding company. So I can go through some of the marketing reasons why a company would embrace this because it’s something we’ve been dealing with. We now have several clients who are doing this. So I can get into those aspects, but I really want to yield more on structure and why it tends to go that way to the holding company. And if there are other structures then I’d love for the lawyers. To be able to hash that out,

Sara Hanks  10:02

If I could just jump in on the structuring, it doesn’t have to be a C corp. I mean, it can certainly be an LLC, and of course, one of the things that you want to be clear here is, if you are an LLC, thinking of doing a Reg A, now would be the time to consider whether you might want to convert to a C corp. Always do this with tax advice from qualified tax counsel. But now would be the time because it is easier. Sometimes it’s easier to have a C Corp, which of course is subject to deal taxation taxation at the entity level and at the shareholder level, as opposed to a pass through where the tax does not, you’re not taxed at the LLC, but you are taxed at the holder level. But you have to file K-1s, which is you know, a pain. So now is the time to think about doing it before you go out to the public. But you can use LLCs in the same way as you can use C corps as the holding company. And I just want to emphasize those words, because well, I’m sure we’re going to get to it later. A thing like Warren Buffett has, which is a company that owns majorities of other companies, not a fund can use Reg A. And we’re seeing some companies who are planning to be Warren Buffett’s using Reg A. But I’m going to bounce it back to Andrew, because, you know, I interrupted him. So

Andrew Corn  11:43

You didn’t and that was exactly some of what I was looking for. And if Marty, if you want to add something, please feel free. Or I’m happy to review some of the marketing reasons of why these entities end up working out well, for issuers.

Marty Tate  12:04

I think the key is just that, what Sara said, is correct. If you’re holding, that is an exemption. Right, Sara, that you’re you’re investing in these majority owned subsidiaries? That’s something that, you know, as long as those have fall under an exemption, then that’s, then that would be permitted. In my experience, and Sara, I’m sure you dealt with this as well, you know, every time you sort of create this structure, and you file you’re 1-A, your offering circular, that’s something that you have to address. You have to address, why you’re not an investment company. And sometimes the SEC will, you know, buy your argument right away. And sometimes they’ll say, Well, you know, we might want a little you might need to explain it better, or give us a better argument as to why you’re not an investment company. But that seems like something we’re always having to address.

Sara Hanks  13:14

Yeah, I think that’s a good point. And that the one of the things that’s important in this area, is, of course, when you file with the SEC, the people doing your review are going to be one of a number of different branches. Excuse me, the real estate branch is very used to fund like things, and providing that you have an entity that invests in majority holdings or owns the land or can touch the land by getting that through a mortgage, whatever. It’s easier sometimes to have that conversation with the real estate branch, then with some of the other branches who haven’t seen things that want to call themselves funds. So the conversation can be a lot longer with the other branches.

Andrew Corn  14:07

So one of the reasons I think I was invited to join what could be a technical conversation is some of the very practical things that come to structuring the deal from a marketing perspective, or an investor acquisition perspective. So one of the first questions my firm asked during our onboarding process is, what did the investors get? Because if they’re investing in a C Corp, think of it almost as permanent capital. They’re buying shares of a company. So our question to the company is, is what do they get back? You know, it’s usually a fairly simple answer. They’re going to get X percent preferred return or dividend in this case, every year and is that payable quarterly or monthly and that’s a big marketing conversation, as well as the practicality conversation. So we get into that. But then how do they get their money back? Well over X number of years and X percent, they’ll have their money back. But let’s say they’re investing in a bunch of different multifamily. What happens when a building is sold? To they keep that money and buy the next one? Are they going to do a special dividend? And what do they want to promise being that they can’t foresee the future? So with the structure comes a bunch of very practical challenges of predicting the future. What is the intent and how are the investors going to benefit from all of this? So that’s a big focus of ours. Now, if you take this one step further into something that is similar, more like a venture capital type structure, and we have four of those we’re working on currently, they will have to have similar answers, how are they going to get money back into the pockets of the investors? And if they end up investing in 10, 15, 20, companies, which they need majority share of, it’s not as minor holding, like a VC firm. They need to again explain how are they going to return capital eventually to shareholders. And also, as you as an issuer, do you want to commit to permanent capital and run this for a long time? So you know, a lot of these questions come up in marketing, as opposed to a little earlier when structuring the deal with the attorneys. But it always comes back to a conversation with the attorney sooner or later.

Sara Hanks  16:46

That was an interesting thing that you mentioned there, Andy, the holding company structure, and because this is one of the deals that you and I are working on at the moment. This takes us to one of the areas where you really have to thread the needle very finely with the SEC, when you not going in there as a holding company, you know, Warren Buffett, I own majority stakes in this railroad and this insurance company, whatever you’re going in with aspirations, and you’re going in saying, I am planning to be a holding company, not a fund, holding company. I am planning to acquire majority stakes in various companies, but don’t have any yet. And so one of the first things you got to get over with the staff is them looking at you and saying, you look like a SPAC us and SPACs can’t use Reg A. And of course, the concept of a SPAC is we’re gonna we’re gonna raise money from idiot investors, you think that it’s cool that the Kardashians are raising a SPAC? Sorry, I can be negative about those things. But yeah, you’re raising money from punters who think that you’re probably going to have better deal flow than them. And you’re going to find the amazing company, which of course you are going to overpay for. But we’ll set that aside. You can’t use the SPAC structure and a SPAC is we’re raising funds, it’s blank check, you’re gonna give us money, and you’re going to trust us to go find something good. Can’t do that with Reg A. For Reg A, you have to have a specific business plan, you can’t be planning to merge with or aqcuire an unidentified company. So you have to say, this is our business plan, it’s very precise, we’re going to look for companies with these characteristics, and we are going to acquire them. And one way that you can prove that you are not looking to invest in unidentified companies is to identify the companies. Now once you identify the companies, you’ve got a different set of problems. Because once you identify the companies, if their acquisition is probable, you have to get audited financials for them. And if you’ve just entering into letters of intent with a number of different companies, that you hope that you’ll be able to raise enough money to acquire them eventually. They don’t have audited financials yet. So the needle that you have to thread there is Yeah, they are not unidentified, these are possibly targets of ours. But they are so conditional because the acquisition in the letter of intent is so conditional that you know we we only acquire them if we raise enough money that we cannot say the acquisition is probable so we don’t have to produce the financial statements. SEC is not keen on that sort of thing. And you can have sort of ongoing discussions with all of those. In the meantime, after you’ve identified your target somebody who is a private venture company, that venture capital fund comes in and says all these good things that you’ve identified here, here’s our shopping list and goes and buys one of them. Happened to us very recently. There is a very, very fine line that you have to walk in setting up that kind of structure. And I think, you know, I’m getting the vibe from the SEC, that they really don’t like it because it looks kind of SPAC-y to them. And you’re not supposed to use Reg A for SPACs, but we’re not.

Andrew Corn  20:35

It’s interesting, because you’re walking that fine line with funds. And, you know, I’m a former fund manager, and basically, you have an exact investment process. And from a marketing perspective with the holding company, that, again, is what we’re trying to get across. Here’s our criteria, here’s what we’re looking for, here’s what we believe we’re going to do. And then a lot of them will have specialties. We’re only going to invest in software as a service or healthcare or clean energy. But all them end up being fairly blank check-y, in a way for all the reasons that Sara stated. But what I find fascinating is they’re no more blank check than the real estate companies that get a pass much faster, because they haven’t identified which buildings they’re going to buy, or anything else like that. So it feels a little bit like a double standard to me. And that has definitely come out in some frustration.

Sara Hanks  21:35

I think that’s absolutely right. And we see this sort of real estate, non real estate split in several different places, because real estate funds can go out as a blind pool, we have or do not have a track record, we’re gonna buy single family homes on the East Coast, boom, you can go out and do that, and give us money, and we’ll go find those things. But if you try and take that model of give us money, we will buy an asset and apply it to different asset classes, you get comments along the lines of well, you know, we’ve done you can, you actually have to own the assets the same way, as you know that a lot of the collectible Reg A companies, some of the guys who own the sneakers, or the guys who own the race horses, which is by some, by the way, something we should talk about is race horses in general. But, you know, identified assets is one thing, blind pool of assets. Some of the non real estate branches are looking at and saying, oh, that you can do that. And we’re saying you can with houses, how is it different with bottles of wine, for example?

Andrew Corn  22:43

Aren’t most SPACs, already publicly traded entities where most Reg As are remaining private? 

Sara Hanks  22:50

Yes, a SPAC is a public company. And a Reg A is a private company that’s done a public offering.

Andrew Corn  22:57

Is that not enough of a distinction for the SEC?

Sara Hanks  23:00

No, I’m not going to try and read minds there. Sometimes the inconsistencies can be a challenge.

Marty Tate  23:11

Sara, you brought up a good point about some of these, like the collectibles and having to identify what those are. You know, what those are, a lot of times are being offered in in a series and you’re saying okay, this series buys this racehorse or this automobile or this package of assets, which is a distinguishing factor because you are identifing those which makes it a little bit different than a fund or blind pool. I was just thinking about it from sort of the investment advisor angle, which is a lot of times these groups, you know, we’ll avoid that because they’re saying we don’t have discretionary control over where these funds are going these funds are going into this specific set of asset which was, you know, a little bit different. And I think that’s, you know, one of the reasons why that with collectibles and stuff that model has been adopted. I would I don’t know I am I can’t think of any off the top of my head. But are there any blind pool Reg As that are going out and doing collectibles?

Sara Hanks  24:25

There will be when we get them through the SEC. We’ve got one at the moment. But it’s a really good point that the identified assets and the role of investment advisor because as you say, if you’ve got an identified asset, you don’t have somebody going looking for an asset so you don’t have an investment advisor. And you don’t have to answer the question as to whether the person is an outside adviser or officer of the company and does he need to be a registered investment advisor? Because here’s the asset, here’s the racehorse, here’s the shoe. But if you have a blind pool of non real estate assets, you are going to have to answer that question as to whether there is an investment advisor in the loop or not.

Marty Tate  25:18

The reason why I asked that, Sara and I’ll have to look at that, but you know, is there is there an argument that those collectibles are not securities? So therefore, you’re not in in you know, you’re not investing in securities, you’re investing in shoes.

Sara Hanks  25:37

It’s a really good argument, and I’m not sure if there is a standard answer to it yet. But I mean, you’ve hit on one of the most important things about that is one of the things you have to look at is are the things that are going into the series or the blind, poor, however, you set it up, are they securities in and of themselves? And, you know, just to be, you know, for the lawyers watching, yeah, the howey test, we’re going back to the oranges, right. Whereas, you know, the oranges themselves are not securities, but the interest in the whole structure are. And you have that with some assets as well. So for example, a part share in a racehorse, if you are the guy, if you are investing in the company that owns the whole of the race was fine, you know, you own the racehorse. But if you are taking minority interest in the race horse and somebody else is doing the work, someone else is deciding who the jockey is, and whether the race horse takes drugs and where it will live and what it will eat, then the interest in the racehorse owning company, are securities quite possibly. And so you’ve got to work out whether you’re investing the securities and whether you’re going to trigger the 40 Act definition by reason of having 40% of your assets in a quote Investment Securities. So that happens with resources, sneakers, you tend to own outright, I don’t think there’s any sneaker management companies, but that’s one of your gating issues always in a blind pool asset investment vehicle or in a series. Is the thing, a security, because you know, horses, like oranges, can be security sometimes.

Marty Tate  27:36

Interesting. I’m currently working on a this is a whole other, this is a whole other but, I’m currently working on, it’s not necessarily fund, but it’s a company that is investing in oil and gas interests. We had to kind of navigate this because you had the Investment Company Act considerations, but then you specifically under Reg A your can’t offer, you know undivided interest in in mineral rights. So that became we had to go through and actually ask, well, we’re not offering those. So there’s, there’s a lot of different things. And I’m sure, Sara, you deal with this as well. You know, there’s all these different silos of regulations like [uncertain] mentioned, that investment advisory act and and the Investment Company Act and Reg A and all of these different things you have to navigate in structuring these deals, and they become a lot more relevant when you’re talking about a quote unquote, fund.

Sara Hanks  28:44

Yeah, exactly. I mean, interesting that you raise the undivided oil and gas interest because I once called the SEC and said, okay, where’s this defined? And they’re like, we don’t know, do you have any guidance as to what exactly that means? And I don’t know if you’ve got an answer, but I’m going to look to you next time. I have an oil and gas question

Marty Tate  29:08

The answer that we got back from the SEC was you can offer you know, you could offer equity interest in this company that then turns around and invests in, in mineral rights in oil and gas interests. That’s fine. You couldn’t do a Reg A offering that just directly offered the oil and gas interests you were selling oil and gas interests under Reg A, you could sell, you know, LLC interest or limited partnership interests or whatever or common stock in an entity that goes out and [uncertain].

Sara Hanks  29:44

It’s interesting because I mean, you know, you don’t have to do the same analysis there too as if the company is investing in interests, which are minority interest and held by somebody else. Yeah. Every layer down, All the way down, you got to check for the turtles all the way down. Yeah.

Andrew Corn  30:08

So we are always looking for what do we believe will raise capital? You know a lot of that has to do with the investment process. And it is so similar to working with a fund. What is the process? Is it repeatable? Is it scalable, where if you raise a lot of money, you’ll be able to invest all the money? What’s the timeframe? Are you going to be sitting on the cash? If you’re paying a preferred return or a dividend and you are advertising a number? If you don’t invest the money quickly? Will you be able to fulfill that? Or will you have to do a return of capital, which Oh, you can advertise is tax free, but it’s just giving people their money back. That’s why there’s no tax on it, it’s kind of a bogus way of doing things. So all these things come into play when looking at how it’s going to work. I’ve now encountered a Reg A plus, which is raising money trying to make an acquisition, stalling, raising more money, and kind of playing chicken with the 12 month window. And that way they are acquiring and they’re trying to acquire 100% of the companies. So they truly are a holding company. So there’s a lot of dances that are being done around this. And I’m not sure how much of it is phobia of the SEC, or if it is gee, we see this opportunity right now we don’t want someone to come in because we’ve identified them and swoop in and buy them. So there’s an awful lot going on in this space. But I do think it’s very exciting, especially with a really good solid management team that’s got a track record that has invested successfully before. And certainly offering those types of investments to into regular everyday individuals, I think is super different. You know, it’s hard to get a diversified portfolio of privately held companies with a reasonable stake doing it any other way without doing huge due diligence yourself. And of course, you want to invest in this company because you want their due diligence and their experience, etc.

Sara Hanks  32:31

So that’s a really good point. And I think you’ve just identified one of the great disappointments to me, and all of the rule changes, the rule changes that go into effect next Monday. They were kind of the low hanging fruit, regulatorily speaking, of the proposals, the concept release that the SEC released in 2019. And they were talking about very broad reaching, like should we regulate sales instead of offers? No, you can say what you like, but when you actually sell, that’s when liability attaches. And I’m very much in favor of that always have been. They didn’t do that. One of the things that they raised is something that the former chairman Jay Clayton was very keen on is, you know, mini funds and hedge funds, taking advantage of Reg CF or Reg A investing in early stage companies. And then the idea being that, you know, a crowdfunding investment of $500, in a small company is one thing, but $500 invested across 10 companies is a different, safer, more diversified thing. And it would be would have been nice. If we could have had little baby mini funds that gave investors if you could just say, Hey, I’m gonna take you know, everybody who invested on refund or or start engine this week, that would have been kind of neat. And it would have been a huge regulatory left. He got to change so many regulations on the 33 Act and the 40 Act and the investment advisors. And I can see why, you know, it didn’t happen, but I do regret it. I don’t think it’s going to happen now for for the next through this administration. And it’s a shame because it would have been nice if grandma has already a diversified portfolio. If she’s got her emergency funds. She’s got her 401 K, and she’s got a bit of play money. Why shouldn’t she be able to diversify across a few nice startups? It’s a shame.

Andrew Corn  34:45

Yeah, you know, I’m seeing that was people are looking for income. And, you know, I’m not a professional investor anymore. I’m not offering anyone any personal advice. But there are about Bunch of alternative energy deals where I’ve said, Gee, they’re making electricity from sunlight, and they’re paying 7%. And they have a contract from a state, that’s a pretty good deal and relatively secure. Certainly not FDIC insured, but you’re also not getting half a percent of the back. So that might be something you want to do. And a lot of these deals, you know, there’s no pie in the sky on them, you know, most of these, you know, recapping a bunch of solar deals or wind deals, you’re going to get your percent, they don’t even own the land under it, you know, you’re basically investing in this contract between the company and the utility, but you are part of clean energy, and you are going to make your nice interest rate. So every deal needs to be looked at at Gee, you know, what are you doing with this, so I agree with you, Sara, it would be great. I who have some expertise could invest in 20 of these and do it for hundreds of other people and do a Reg A Plus, you know, based on, you know, being a fund of investments. But I don’t believe that that is something that you’re allowed to do. But I have noticed my portfolio of CFC has been growing quite a bit. Some of that is just testing technology on different platforms. But from my perspective, the only way to test it is to invest. So it’s been an interesting journey.

Sara Hanks  36:37

So it’s a shame that there were, there were some things I would have liked to have seen the SEC, ease up on. One thing I just wanted to, to, to flag as if anybody’s thinking of doing some fun, like holding company like thing. One of the more successful routes through the SEC, is to actually have a business to start out with. So you’re not going in as a blank check company, you’ve got a teeny little business, and you’ve required it and you’ve got your audited financials, and it’s maybe you know, generating half a million a year, and you raise money for it. And it’s going to expand into an empire. And that seems to have had a much easier trip through the SEC, than the, you know, the guys who have nothing so so by some piddly little thing that just happens to have audited financial statements. I know the SEC, if they’re watching this, they’re going to be terrible advice. But that process seems to have been successful. And it is, of course, absolutely legitimate. You’ve got a company. And they’re really, the examiners are sort of focusing on the company itself. And it’s also a good example, you say, we are planning to build no vegetarian restaurants. And here is the first one. And we actually have one. And we plan to acquire a whole bunch more. And so they can see this is what they’re all going to look like. But but it does seem to be a little bit of a nice I was in Enron it’s like a shortcut is less less hassle, when you actually have a thing that you can show them.

Andrew Corn  38:37

Could you then buy a soup company and then maybe buy some farm an existing organic farm and then buy?

Sara Hanks  38:46

If you said you’re going to Yeah.

Marty Tate  38:50

We that’s funny, Sara, that that’s a that’s an approach we’re looking at right now with a with a client that they have a, you know, part of, I mean, really, what they want to do is, is be this conglomerate and buy up these dip, make these different investments and buy up these companies. But right now, they’re sort of what’s paying the bills is they do some software development. We are a software company that plans to expand so but we haven’t started at that we’ve had that discussion. And that’s so that’s interesting. You brought that up because

Sara Hanks  39:27

yeah, I can give you the name of one of the companies that that one of my later clients modeled themselves on but the the the company that made it through so easily had exactly that. We’ve got a teeny little thing. And we’re going to acquire some other little things and then some more bigger things and but the teeny little things seems to have helped get through the SEC.

Marty Tate  39:51

One point that Andrew made earlier and just that I think is is we talk is I kind of mentioned all the different areas that you’d have to Navigate through and structuring. And I’m not. I’m not a tax lawyer. So, but a lot of these things, like Andrew was saying, really get driven by, you know, I think the tax ramifications and how it’s structured, and so many of those things, and that’s why you see the real estate deals, a lot of those are offered as rebates, which, you know, again, that’s just a tax classification. But it’s, it’s crazy how many questions we get about, you know, even the that level of the implications, the tax implications. So it’s just another thing to think about. Because, like Sara said, if you go out as a fund as an LLC, and you’re taxed as such, you’re in you raise a lot of money from a lot of investors that could be administratively really difficult. And so some people like that, but then they don’t like the double layer of taxation. So

Andrew Corn  41:03

yeah, even the number of shareholders based on this their limitation with an LLC, you know, one of the first things we say to an issuer, early on Well, before we’re engaged is to 110 1000 shareholders. Because if you’re going to raise 50 $75 million, you’re going to have that. And that’s the whole idea behind Reg A, or you’re going to have three 5000 investors for a reg CF, if you’re raising the $5 million. So you know, that needs to be part of the business plan. Anyone who wants a clean cap table with 10 investors on it should not be looking at anything that has the word crowded.

Shari Noonan  41:47

It’s right. Although one thing I should just fly because I’m sure people are thinking about it at the moment, in our next week, in regulation CF, but not Regulation A you will be able to use crowdfunding vehicles. Are they funds? No, they are not. They are just a way to protect against triggering the registration requirements of the Exchange Act of 1934. By putting all of your investors in an SPV. And the way we are structuring those things is the SPV is just sort of married to the company. Here the the the SPV holds the the underlying shares issues SPV interests, but there’s no daylight between them. And as far as the investors are concerned, they’re probably that you know, that they are going to see this as communications with, with and between the company that they’re probably not going to even focus on the fact that there are there’s a level of securities between them and the company. But that’s not a fund. That doesn’t change. It’s just a matter of holding change. That’s all it is.

Andrew Corn  42:58

And the purpose of doing that is to clean up your cap table for an IPO. You see round

Shari Noonan  43:07

it The thing is that people talk about, you know, messy cap table and clean up the cap table on the company’s cap table. There’s going to be one. So long as all of the investors are natural persons. There’ll be one in a crowdfunding SPV. But then underneath it, and you know, the company is going to be responsible for making that happen. Underneath the crowdfunding SPV is going to be all of the crowd. So your cap table, you know, it’s messy, but it’s messy at one remove. It’s still there. The crowd is still there. I’m gonna

Oscar Jofre  43:40

be mercy. No, no, I think Mark Broderick said it best. You remember that conversation we have with Mark about the whole thing people have saying that we got to stop having Yeah,

Sara Hanks  43:51

I know. It’s It’s It’s a silly conversation to start with. Because you can always have a cap table that just says the crowd. And then you can expand it. I mean, you know, that software of the sort that you provide cool connects means there that is actually a meaningless discussion anyway. But if you were concerned about a messy cap table, it’s not gonna change it really. It’s just moving it down to a different place.

Oscar Jofre  44:20

Yeah, I was just gonna say that. I think Mark brought up a really great point, which was, you just added more cost and more burden, like you can now two entities? Yeah. Well, we’ll get into that. I have a twist for all of you. You guys have been great. By the way. I have to tell you, I heard everything. You didn’t get to hear the. So thank you, Andrew. I just want to make sure I say that. Um, so obviously Regulation A allows both the US and the Canadian company. We’ve been talking a lot about C Corp and LLC, which is a US structure that doesn’t exist in so how does a Canadian fund Or what what? Has anybody experienced this yet? Or maybe let’s just start from there. Marty, have you had anything from Canada in that direction? No.

Marty Tate  45:11

No, I have not. I have not done it. I have not done a Reg A for Canadian company. Sara.

Sara Hanks  45:17

I’ve done a couple are actually a few with various so different structures. One I think would arguably be real estate company. But it was very much a sort of very traditional blind pool give us money, you know, we’ll, we’ll buy stuff. Just, you know, this stuff just happened to be in Ghana.

Oscar Jofre  45:41

Okay, so no, I just thought maybe there was a different type of structure because look, every single day it either people go, can I use a font? Or can I use a pump? You know, what I heard through all of this? Is you better talk to a lawyer before you better start talking. And I did hear you say this, Marty, you said it a few times. The SEC does not like the word fun. That is correct. Right. When it comes to Reg A.

Marty Tate  46:07

In in my experience, that’s the Dave. The Dave frowned upon that I don’t think it’s like prohibited but it’s definitely something they begin. It’s just I, from what I can tell, it’s just because they said, Well, you can’t use a Reg A plus for fun. So you can’t call it a fun. However, if you look, if you do a search, there are Reg A pluses that have the word fun. And then so it’s, it’s not a it’s not a hard.

Oscar Jofre  46:35

It’s not the end of the world. Okay. And and no, just today, I’ve been confused. So I’ve been, I feel bad now. Because I’ve always been telling people, no, it’s a fun, you can use it. But I don’t want to use the word work around there is a different structure that you can utilize. That’s what it comes down to. Right. Which would

Sara Hanks  46:53

mean not being a fund. I mean, yeah. So to go back to what I just like, if you’re not a fund, don’t call yourself a fund. Okay. So, yeah, don’t don’t be misleading. And we try and dissuade our clients from using that word, the F word.

Oscar Jofre  47:10

Yeah. And if I understand that correctly, by not becoming a fun, they don’t need a fund administrator. They don’t need to do K and K once or navs? I mean, this is a great savings, right? What do they still need to do all that?

Sara Hanks  47:24

Well, it depends on the structure to go back to the conversation that Andy and I were having is if you are an LLC, you do have the K one s here. And but the thing is, it’s you don’t need all of the trappings of of true funds. But you do have all of the administration that goes with whichever entity type you chose, whether it’s a C Corp, Canadian company, LLC, whatever, those things don’t change.

Marty Tate  47:49

And you still can have it. I mean, depending on the structure, they still can use a nap. I mean, that’s something that you pretty common,

Sara Hanks  47:56

especially with real estate.

Oscar Jofre  47:58

No, that’s interesting. Obviously, we’ve got some people here, if anybody has any questions for Sara, Marty, or Andrew, all you got to do is hit the little button there, raise hands, and we will bring you in to ask the question. But in the meantime, obviously, the conversation continues. We do have somebody here, Richard Ross. So here we go. Ladies and gentlemen. Richard Ask away.

48:20

Thank you. I’m just want to clarify, it seems that if one is doing the Reg A plus, one should identify the operation and not have a blank check. That’s sort of the antithesis of SPAC. If you’re doing this SPAC, you have to be blank check. And you cannot have pre identified investment. Is that basically correct?

Sara Hanks  48:40

Yes, that is basically correct. Thank you.

48:44

And what’s topic 11 of SPAC This is not too much of a detail. And if it is, I apologize, we’ll take it offline. But topic 11 of the SEC says banks can identify in certain cases, what they’re going after. Again, if it’s too obscure, ignore it.

Sara Hanks  49:00

Yeah, I am, as you might have picked up from one of the things I said I don’t like SPACs, do them. So I am completely ignorant on that space. Marty, anything?

Marty Tate  49:11

Yeah, I sometimes you’ll see that. But generally, you know, I don’t I I’ve, I’ve done I’ve worked on SPACs. But I, you know, I’m not an expert. And I think that you’ll a lot of times you’ll there’ll be areas specific Again, that’s SPAC not Reg A.

Oscar Jofre  49:32

Yeah, perfect. All right. So let’s continue. Obviously, the conversation is if they if there’s others that have questions related to funds, so Okay, so we started talking about some of the collectibles we didn’t go too deep into it, or I know it you started diving, diving into it, but you didn’t, you didn’t get too much into this. We’re starting to see that now coming out more right and this is a structure Sara go, we’ll talk a little bit more. So let’s let’s, let’s finish this off with the collectibles because it seems to me like every other day, that seems to be the topic, please.

Sara Hanks  50:12

Yeah, well, I mean, if I could start by saying on one of the things, so we keep a record of all of the offerings that have been made under Reg A of which they’re on 945. Now, that’s last week’s numbers. So someone approaching 1000. And I am, we code them, and I’m seeing more and more, you know, the tag a for assets. So, you’ve got artworks one of the earliest everything from I think one of the very first one of the very earliest collectibles was a trading cards, or play play a card from Dungeons and Dragons. Or maybe it was mystic the gathering or something like that it was from one of the major games. And that’s the sort of thing that is, you hope, you know, a counter cyclical type of investment, it’s, it’s completely different to operating companies completely different to real estate. It’s another asset category that investors should be considering. But you really do have to know what you’re talking about. Because in many cases, the way that these are presented to investors is somebody who doesn’t know the market goes out and gets the thing. And then basically securitizes these are asset backed securities in their purest form. And you want to know that that first thing that happened, happened at a good market price, because if you overpaid for your sneakers, or your trading card or your racehorse, then you’re never going to make money on that.

Oscar Jofre  52:05

So Marty, did you want to add to that? My apologies. I almost got it. Almost got the alarm there.

Marty Tate  52:12

No, I think, sir. No, I don’t have anything to add on that. She She nailed it.

Oscar Jofre  52:21

Oh, that’s good. That’s Well, you did say if anybody ever wants any of the questions and answers about Regulation A we do need to go to terror. So there is one little thing that I want to demystify here. I know we’re talking about Reg A, and quite often we talk about funds and people go well, you know, if Reg A is too much of a hassle, I’ll just do a reg D with a with a right gas. Right so the right gas? Oh, yeah, it came in discussion 48 hours ago, and I just couldn’t believe it that it there are still people floating that are dear. So that will it? Does it change anything? The fact that it it, whether it’s a Reg A or right guests are my are they just talking riddles of exemptions, that they’re trying to get their way around to get non weak non accredited investors into the fund?

Sara Hanks  53:12

I think one of the most important things about reg s and I say this as the person who drafted reg s at the SEC. Generally it is not appropriate for any of this stuff. One of the starting points is if you’re doing a if you’re doing a reg D and you’re selling to accredited investors on it, just sell to the currently accredited investors. If you’re doing regular DNS side by side, do you really need to sell to non accredited foreign people? Do they have that much money? I mean, yeah, I mean, I know this does happen in crypto all the time. And this is where we’ve seen it most abused but reg s does not sit very, very comfortably with 506 C. And we always advise clients you do not use them side by side. One of the biggest reasons is that the reg s cannot be obvious from the United States. You can’t see it. It’s got to be geo fenced. You got to make sure that when somebody from the US logs on to whatever offering site you have, they are not aware that there’s a reg s there. I tend to be very strict on this and those of you who know me I’m not usually very hard asked about stuff but this one just don’t do it.

Marty Tate  54:29

Well and to that point, if you have I mean Sara was talking reg D and reg 506 C and A reg s which is true but you asked me You said something about Reg A and a reg s i don’t know why you would. I mean you can just have the non us investors non accredited so they can come into that. Yep, really invested out so that I don’t know why that would ever be a thing is they wanted to exceed you know the the limits on accredited But then again, then you know why? Yeah.

Oscar Jofre  55:05

If you guys are in conversations, you know what it’s like, sometimes when you put people up against a wall, you keep telling them this can’t be done, then they keep throwing other exemptions or you’re just like, Okay, you know what I wrote back on all their cell array? I mean, look, this was very insightful. I think. I know, it’s a bit of unclear. No, it’s not unclear. Sorry, I think it’s very clear. I think the key is, obviously, you can use the font, it’s not a fun, there are ways to use the regulation just in a different way. But no matter what, it The key is starting to speak with Lloyd, this is now one that you can just go out and copy off, you know, add guard and say they did it, why don’t I do it? And here we go. I did it. This one requires a lot more thought process into it, because you need to structure it properly. Otherwise, it’ll backfire on you pretty badly. So any last remarks, Marty, and to this point from the for Reg A using funds?

Marty Tate  56:07

Yeah, I? I again, it’s not it, it’s possible, I guess, is what I’m saying. Is it? You know, depends on what what you’re doing. I think that, you know, we always start with sort of the dyno and try to work, you know, figure out the way to make it happen, obviously, in the truest sense. It’s no, it’s, it’s not available, but in, but there’s lots of ways to make things work. So I, I was telling you, Oscar, that I’ve done a lot of fun formation prior, you know, kind of separate from, from these security or these Reg A offerings, and, and so bringing those two worlds together has been something I’ve enjoyed, but not without challenges.

Oscar Jofre  56:54

Yeah, no, it’s good. And Andrew, I mean, obviously, you’re on the marketing side, I mean, does it make a big difference in closing remarks that if they don’t get to use the word fun, it won’t be as attractive? Or does it really matter?

Andrew Corn  57:08

So from a marketing perspective, when when the word fund is in there, it frequently implies a type of liquidity. You know, we do a lot of work for exchange traded funds, marketing them both to advisors into retail. And when there’ll be a comparable deal in the private market, it’s like, well, there should be a private company premium, meaning they should expect higher returns in exchange for giving up that liquidity. So there are a lot of nuances to all this. But the big advice that we give is to make sure that it’s structured in a way that’s going to get qualified. And also that you need some kind of track record, you can’t get five guys together, guys and gals together and say, oh, we’re gonna start investing in this with no track record no history. Because the first question I’m going to ask you before considering whether we would take you as a client is how do you do during the pandemic? That question used to be how do you do in a way, though not? Now, it’s going to be how do you do during the pandemic? If the answer is we’ve never invested before? That kind of gives you a bunch of the answer as well. Because you can hear from the attorneys, it’s not going to be easy to structure this into get a qualified, you know, without a history and a true plan.

Oscar Jofre  58:32

Yeah, do you know that you brought up an interesting point that I didn’t even think of, I mean, obviously, we take it for granted that when people are applying for Reg A, the CEOs and founders know the space and all that, but a fund is different. You, you are taking on the responsibility of managing money, right. And however you may structure it, as you’re doing Marty, and Sara, ultimately, is to bring a return on the investment, you’re not really building you’re building in a different way. So never actually recruited me that that also plays into it as well. Sara, your last remarks and comments as the as the one that knows, regulation, but I don’t think

Sara Hanks  59:11

I’m not saying that. But yeah. Just know, know what, you know, what you’re saying, to build on what, what Andrew said, You’ve really got to know you’ve got to know what you’re selling and why you’re selling it and what you’re going to do with the money, how they’re going to get the money back. The SEC cares about the investors care about that. And to build on what Marty said it stunk call yourself a fund if you’re not really a fund.

Oscar Jofre  59:41

Yeah, that’s, that’s very, and I have a few clients that don’t call themselves out. They’re just a holding company, raising capital to and they’ve never used that. So it’s a great way to close off. Thank you again, all of you. You did a great job today. You didn’t need me. That hurts me a little bit, but that’s okay. Um, But I’m glad that three of you had a great discussion. And obviously the audience enjoyed it. As always, we do record all our sessions, they will be available on our YouTube channel KoreConX and of course, of KoreSummit.io. And for everyone else, don’t forget, we are six days away of excitement, lots of discussions. And on March the 15th, if you haven’t registered yet, we have what is called the state of the JOBS Act 2021. With the one and only Sara Hanks,

Sara Hanks  1:00:30

People are going to get bored of seeing me, Oscar.

Oscar Jofre  1:00:34

Why, why would they do that? And she’ll be joined by David Weild. Before father the JOBS Act, and of course, Vincent Molinari, who will be playing host for that event. So thank you, everyone. Have a wonderful afternoon and week