Jason Futko 00:38

Hello, welcome to KoreTalkX. My name is Jason Futko. I’m the co-founder of KoreConX and I’m here with Nick Antaki from Regulation D Resources. Just in terms of background, if anyone’s not watched these KoreTalks before and seen us talk, my name is Jason. I’ve been in the corporate finance advisory services role, I’m a CPA by training, and I’m the co-founder of a company called KoreConX. We’re here doing this talk today to learn a little bit more about compliance. I’ve got Nick on the line. And Nick is the general counsel of Regulation D Resources. Nick, do you want to maybe just start by giving people a little bit of background as to what you do and what Regulation D Resources does, and maybe we can start with that?

Nick Antaki 01:33

Sure. So my name is Nicolas Antaki. I am general counsel for Regulation D Resources. At reg D Resources, we draft up offering documentation as well as create portals, investor portals for private offerings, Regulation D, regulation CF, and Regulation A. What that means is that we’ll assemble all of your corporate documents, we will put in a compliant disclosure for whether it’s a form D, a form C, or a form one A to where you can raise capital from private investors in the private markets.

Jason Futko 02:12

Okay, great. Great. So we’re seeing, at least within our world, an increase in compliance requirements. Generally speaking, as time passes, there are more and more requirements on small companies, medium-sized companies and even on public companies. From your perspective, you know, what is that? What is that relevant change, and what is the compliance requirements when it comes to small businesses?

Nick Antaki 02:46

So for private offerings, your compliance really derives from that Regulation D. Whether it’s 506, B, or 506, C, regulation, CF, and Regulation A, those all have different maximum offering amounts. They all have different disclosure requirements. Compliance for those really derives from those regulations. For Regulation D, you’re putting out what’s called a private placement memorandum or PPM. And there are different disclosure requirements for 506 B, if you’re gonna raise from non-accredited investors and accredited investors, and 506 C accredited investors only. Furthermore, if you go even deeper, there are different advertising requirements for those with 506 B, you cannot generally solicit. With 506 C, you can generally solicit, but you can only direct that solicitation or advertising for the offering to accredited investors that has its own requirements, regulation CF, you’re allowed to raise up to 5 million from the general public from the Main Street investor, however, you have to file a Form C with that, that form C has its own disclosure requirements. And with Regulation A you’re allowed to raise up to $75 million. It’s a much heavier lift than Regulation D and Regulation CF, with respect to the disclosures. In turn, you’re allowed to raise from the Main Street investor, and you’re allowed to generally advertise with Regulation A you have to make sure that you have the proper vendors, whether you have the broker-dealer, a transfer agent is required, an escrow agent is generally required, and you have to have audited financials. That’s just a 10,000-foot view of the regulations, but compliance is extremely important in these private offerings.

Jason Futko 04:42

Right, exactly. And just for a little bit more clarity. What is the difference between Regulation D, Regulation CF, and Regulation A in terms of you What it is people are trying to achieve? Like people are just sorry, Nick to throw that one in. But people generally, you know, throw around terms like accredited investor and and non accredited or retail investor who can who can sort of get involved in which of these types of transactions and what is the general difference?

Nick Antaki 05:20

Sure. So with Regulation D, you are targeting mostly accredited investors. For regulation D there are two types, there’s 506 B, which is a reference to the name, the number, and the rule, the actual regulation. And then there’s 506 C, generally speaking, Regulation D, investors are going to be accredited investors, meaning their high net worth individuals or companies with a certain amount of money, and will usually have a pre-existing relationship with them. A good example is hedge funds use Regulation D 506. C, I mean, they’re targeting very wealthy individuals to raise capital to go on and use that money as they see fit. One of the things that doesn’t generally get pulled up is the Regulation D is permitted to are permitted to be an investment company. Meaning you’re using those funds to purchase securities in another company that is not allowed under Regulation CF or regulation A. Regulation CF is for smaller offerings, up to $5 million and you’re allowed to generally solicit from retail investors, what I like to call Main Street investors. Normal people out on the street, you can go solicit to them, whether that’s over social media, in magazines, and print in other prints, or doing symposia and conferences, you can solicit that is what general solicitation. Regulation A is for your companies that are generally a little more sophisticated, meaning they have to raise up to $75 million. But the trade-off there is that it’s a higher cost. To get in, there’s a higher cost burden. Whether it’s from required vendors, such as a transfer agent, you will be required to have audited financials. Furthermore, you have to disclose a significant amount significantly, significantly more, excuse me, under Regulation A, it’s akin to an S one. The form one A is akin to an S one. And that requires a little more sophistication in your business operations to where you can disclose under that form.

Jason Futko 07:46

Okay, and he raised a good point. So audited financials for Regulation A, are their audits required, and I’m just gonna throw this out as part of the lead into my next question. Are audits required for either Regulation D, or regulation CF? And what do companies need to do to sort of prepare for fundraising when it comes to any of these regulations from the compliance perspective, or just preparation?

Nick Antaki 08:17

Sure. So audits are required for regulation CF, if the amount is above a certain threshold, it’s around 1 million. So if you’re trying to go above that 1 million mark, you will have to get audited financials, we’ve actually seen several of our clients try to stay under that. So they don’t accrue the cost of the audited financials to prepare for that. And this generally goes for Regulation D, Reg, CF, and Reg A. Regardless of whether you’re getting audited financials, the accounting and bookkeeping prior to entering this offering process is highly recommended. Let’s put it that way. You don’t want to get into this process without having your accounting cleaned up and your book, your books cleaned up prior to entering this process. And that goes not only for accounting but also goes to your corporate documentation. And that’s something that we see all the time is people will start this process without having very clean corporate documents and very clean operations prior to this process. And it makes the process for putting these offerings together a lot more difficult.

Jason Futko 09:33

Understood and I think just so a lot of people understand the preparation phase can be you know, a mass or it can be fairly simple, depending not simple but relatively simple compared to some of the other ones depending how organized the company is. Right? So I’ve seen in my years of corporate finance, I’ve seen companies come looking to find capital, and they don’t have their books in order, they don’t have their minute book up to date, they don’t have their audits done. Any of those types of things can delay the timeline it takes to raise capital. You know, it’s, it’s a good indicator, and it’s good to sort of keep in mind when you’re looking to go raise capital, the more up to date, and the more ready you are, the quicker and smoother that process typically runs. If you look at even people that say, you know, VC capital is is another way to go, but yes, it is. But at the same time, VCs don’t invest in companies that aren’t organized and don’t have their ducks in a row and everything organized either. So if you go down that path, know that you know, 96-97% of deals get turned down by VCs. It’s not purely just because they’re bad ideas. You know, a lot of it has to do with the fact that they’re not organized. So if you don’t get yourself organized, and take that time to prepare, or maintain that all along, you know, to maintain your metaphor, make sure you’re up to date, your audits are ready. You know, your lawyers are in sync, and your auditor and accountant are in sync. Your quarterback, you know, everybody that’s involved in the deal is ready to go. You know, it can significantly delay or derail your fundraising. So you know, it’s something you got to keep in mind as you’re moving down the path. You guys over at Reg D Resources, you’ve, you’ve prepared over 5000 private placements, you know, in your time, and I’m not suggesting you did all the MC, but I’m sure you’re aware of quite a few of them. What are some of the more common compliance mistakes or things that people overlook when they’re, you know, getting ready to make an offering?

Nick Antaki 11:59

Yeah, so Reg D, we’ve been around since 1999. And there have been some common themes. Since 1999. The Jobs Act was passed. It’s been amended since 2012 several times, most recently, March of 21. And I just looked at the SEC regulation schedule this morning, and they’re planning on changing Regulation D again. We don’t know exactly what they’re going to do. However, it is a constantly changing environment. And you need someone that has experience in that environment and knows what, what the pitfalls are some of those pitfalls that come up time and time again, including yesterday, something like this came up; I’ll give you an example. One of our clients came to us, and they say oh, by the way, we’ve raised $4 million in the sale of convertible notes and safes. Before we came to you, well, this is something I just want to impress upon everyone listening, convertible notes and safes are securities, and those have to be registered under the proper forms and proper filings with both the SEC and states state notice filings. Whether that’s a form D, or otherwise, they do need to be registered prior. Anytime you raise money, whether it’s friends and family, which doesn’t actually exist, or whether it’s a more official filing, it needs to be done properly. With the SEC and state notice filings, that’s probably the number one thing that we see is people raising capital before they even come to us. And then you have to go to the lawyers in the company and try to clean up that cap table. You know whether the safe event or the convertible note trigger event is going to be triggered by this. This offering is usually a big topic of concern. The other would be improper advertising, both prior to the offering going live and after the offering going live. That includes generally soliciting under a regulation that you’re not allowed to generally solicit. It’s not putting the proper disclosures with the advertising. It’s directing the advertising to people that you should not be directing to another one that comes up on occasion. It doesn’t happen with us, and I’ll tell you why. But on occasion, what will happen is prior offerings or current offerings. The company will not properly maintain investor verification documents, meaning they won’t timestamp them. You know, the investor could be an accredited investor today, but tomorrow they might not be. What we have is we have a service called our portal. We have a web team web development team, where we will provide you with The forward facing portal, investor facing portal. And the back end of that is maintaining all of the administrative tasks inherent in Regulation D. filings. I know that KoreConX also does a lot of that with the regulation CF filings. I don’t know if you do it with REG D, do you?

Jason Futko 15:21

We do provide some technology in that space as well. 

Nick Antaki 15:26

Yeah. So maintaining not only the investor verification documents, but the general administrative tasks that are with a Regulation D offering, or rather with any private offering. I’ll give you an example. When I first started out, we made a 504 offering, which is effectively useless. We did a 504 and a 505 and a 506 offering, and maintaining those investor records and those communications was itself a full-time job. Now we have the advantage of technology. That’s something that our portal does. Very, very well, we’ve developed we designed it. This is we’ve we’re on the third iteration of our web portal. So we can help you maintain that electronically, which is the better way to do it anyway. The last thing I’d say that a lot of companies come to us with, with Regulation D seems to be the top regulation for this, but it’s improper disclosures, improper disclosures, or truly insufficient disclosures that lack all regulatory and all compliant disclosure requirements.

Jason Futko 16:50

Right. Yeah, that’s, that’s interesting. And just to cover back to your point there, Nick, you know, we, we’re a technology company, you know, mainly, so we’re just providing the tech. It’s people like yourselves that actually guide clients through or, or gide the issuers through all of these regulations and so forth to help them along their way. You know, we, from a perspective of, of the three regulations, you know, you brought up some great points and some great issues and things to be concerned with. What is your sort of experience? And the trend that you see the last couple of years sort of moving into the next couple of quarters moving forward? Is it heavily reg D? Is it Reg A? Is it reg CF? Is it a mix? What seems to be your take on what’s happening in the market?

Nick Antaki 17:47

Yeah, so the past few years, since COVID, changed, changed everything the past few years, we’ve seen a kind of a drop off in the volume of Reg Ds. Over the past, I’d say over the past two years, there’s been a drop off in the Reg Ds. However, in March 2021, the SEC changed the maximum offering amount for Regulation CF, from 1 million, around 1 million to 5 million. What that did is it allowed for a lot more companies that needed more and that needed to really just put out their story to the Main Street investor. It also brought a lot more people into the to the space people like Reg D Resources. We didn’t do reg CF offerings until recently, simply because it just wasn’t worth our time. It wasn’t it wasn’t worth it. And there weren’t enough people in the space and clients within the space for us to get into it. Since that change, we’ve recently gotten into the space. And we’ve seen the reg CF volume take up what would have been reg D volume. otherwise would have been reg D volume. Reg A plus we launched our Reg A plus service over two years ago. And we’ve seen the volume steadily increase with Reg A. I think the reason is that the maximum offering amount has been brought up from 50 to 75 million. But it’s also created a process whereby more sophisticated, more sophisticated companies can go in, and they can raise that massive amount of capital from the Main Street investor. What Reg A really allows to do is it allows you to put your company in front in your novel idea in front of normal people where you can solicit, you know, minimum offering or minimum investment amounts of say $100 from a massive amount of people, it really increases the pool of potential investors. We have actually recently, meaning within the past six months, we’ve actually seen an uptick in Regulation D volume and regulation CF volume with a constant volume of Regulation A. So we see that as a positive outlet for the private markets. For private investment companies, generally speaking, the private and public markets are inherently different, inherently different. Private allows for more long-term upside at the cost of liquidity of your shares. But with that uptick in reg D and Reg CF, those investors are trying to capitalize on the public downturn.

Jason Futko 20:51

Right. So you’re seeing, and at least this is what I’ve been seeing on the side is people are staying, it seems people are staying private kind of longer, using the Regulation A or regulation CF, or even reg D, to raise their capital privately, stay private longer, and then go public at a later point, sort of when they’re more capitalized and more prepared. That’s the least I found in the past that some of these companies that go public too early, take their kind of eyes off of running the company and have to sort of focus on investor relations, public relations activities, which sort of sidetracks a small business when their CEO has already enough responsibility moving forward. So it’s interesting to see that shift. And I don’t know if, if that’s consistent from what you’re seeing, but it’s certainly, certainly what I’m seeing. And I think, I think the increase in these regulations from 50 million to 75 for Reg A, and like you said, Five, increase to 5 million for Reg CF makes them a lot more attractive for small businesses who are looking to raise capital. So you know, they can take their opportunities to do it a different way. That being said, you know, they have to understand, and I think you’re giving them a great picture here of the types of things they need to sort of be aware of to do these transactions, particularly Reg A, I mean, Reg CF, you’ve seen a lot of successful crowdfunding platforms that have sort of helped small businesses get some of that capital. So a lot of people have taken for granted the fact that they can go to a crowdfunding portal and pull together some capital. Even if you go to the portals, though, they’ll tell you the same thing that most of us will not use. You got to bring an audience. If you’re looking to raise capital from a lot of people, you need to have access to a lot of people. The crowdfunding platforms have access to some, but they’re not going to fill your entire offering, generally speaking, so it’s good to have a good following of people. So social media has become important. Messaging has become important. You know, marketing has become important. Investor outreach and acquisition as a domain become very important. And corralling all of that information. And moving forward. And having a plan of attack is also going to be key. Is there anything in that, that I’ve missed in terms of outlining some of the things that they need to do in terms of preparing for that fundraising?

Nick Antaki 23:42

Yeah, so we’re talking a lot about the compliance aspect and the disclosure requirements and what you need to get into the offering to make that offering live? I think another facet, one of the bigger facets, is marketing and having that plan of attack and knowing how you’re going to try to solicit those investors. We do not advise on that. But what we found is that the successful offerings have a very defined plan of attack, not only with getting the offering live, which is what we help. Do we help quarterback that whole process? We can take that responsibility out of the C suites hands? No, it really comes down to how you are going to advertise this offering to the types of investors that you’re looking for. And that’s another point that I wanted to bring about the difference between private and public markets is that the investors are inherently different. There are different types of investments, you know, with private offerings, you’re really looking at longer hold times. You’re looking at the longer hold times for the Securities and the longer upside. And the trade-off is that, you know, the upside for these private companies and these private investments is essentially, exponentially larger than public companies. Now, whether or not the public company or the private company goes live or not, there’s that liquidation event. In private companies, a lot of the liquidation events is a buyout from a public company. 

Jason Futko 25:20

Right? Right. So it’s kind of important as companies are raising capital, and in thinking about their plans, they have thought about an exit strategy and their plan moving forward. I mean, acquisitions are great, but they’re not always there to be relied on. So, you know, if somebody comes and says their only strategy is acquisition being acquired, you know, being acquired by Google, then, you know, that’s, that’s a question mark more than an answer. So you need to make sure that as you sit and plan, you think about an exit strategy, think of secondary markets, for instance, which are now popping up in the private space you, you can think about, eventually going public once you’ve gotten to a certain point. So those kinds of things are important. There’s also ongoing compliance. I mean, we’ve talked a lot here about compliance related to an offering. And I know that’s kind of your specialty. But there’s there’s ongoing compliance and has to be sort of maintained from the end of a fundraise, Nick, maybe you could give us just a little bit of color on what types of compliance issues that they may want to consider also, and I’m thinking, obviously, you’re gonna have filings at the end of the fundraising, you’re going to have some ongoing filings that you need to maintain. And then other compliance-type issues that you can think of just anything you can add to that would be great. 

Nick Antaki 26:53

Sure, so as you mentioned, there are ongoing reporting requirements for regulation CF and Regulation A. With Regulation D, the ongoing compliance really comes from itself starting compliance, meaning the company has to do it on their own in their own initiative. And what that really entails is, that Regulation D, it is reporting any material changes to the existing investors. If the offering is still alive, if you’re still taking on investment with the Regulation D, you have to send them a new PPM that reflects whatever changes happen to the company. After the raise is closed, for REG D, it’s just whatever ongoing requirements ongoing reporting requirements are required under your shareholder’s agreement, your articles, your bylaws, whatever. With the regulation CF there and Regulation A, there is ongoing reporting, in that there’s a semi-annual and annual reporting requirements. With Regulation A and CF, you actually have to submit those to the SEC on the requisite forms. With those, it’s generally the same standard of meeting, you have your semiannual, and your annual, but if there are any material changes to your company, you have to report them to your current shareholders and prospective investors. Compliance with respect to state notice filings, you know, you may have to do annual state notice filing saying that your offering is still in place. With all of these, you’re still beholden to your bylaws, your shareholder’s agreement, your articles, your operating agreement with respect to whatever reporting is required under those. But the other compliance that you have to stay on top of your advertising, you have to make sure that you’re soliciting to the proper people and that the solicitations are compliant under whatever regulation you’re doing. Right. You brought up one other point that I wanted to. I wanted to discuss exit strategy. And this is something that I’ve always advised as a corporate lawyer, not necessarily a securities lawyer. But before you get into these, these offerings, and you start giving out shares or equity ownership or, in some cases, debt to whoever your investors are, you have to make sure that your corporate structure is in is not in compliance isn’t really the right word, but it’s appropriate for what you’re trying to do. For example, if you are trying to have if your only exit strategy is to go public, your shareholder’s agreement, your articles, and your operating agreement are going to be tailored to that with respect to the types of securities that you’re going to put out. If you don’t want to get with, I’ll give you an example with Regulation A, they are freely transferable, meaning they are not restricted securities, which is to say that Regulation A does not prohibit transfer of the shares. Regulation D does. Regulation CF does to an extent, after a year, they’re freely transferable. But let’s, let’s go with Regulation A. With Regulation A, you have no restrictions on transferability. Now what will happen is we’ll have a company that just finished a Regulation D offering and their shareholder’s agreement, their articles say that the shares are completely restricted, they’re absolutely restricted stock. Well, you don’t want to go into a Regulation A offering without amending your corporate documentation, you know, allowing for transferability if you want them to be trans, non-transferable. So be it that’s your decision. But you don’t want to go in there with that restriction. Because let’s say that you go and you have a successful offering. Well, now you have 10,000 more shareholders, and removing that restriction on transferability it’s going to be a nightmare. So it’s stuff like that you’d have to clean up before you get into the process. And that’s something that we help you with. We’ll work with your corporate attorneys, talking about certain provisions that simply should not be in there. I’ll give you another example. The SEC, absolutely hates arbitration provisions in either the shareholder’s agreement, the articles, or the subscription agreement. They absolutely hate them. You know, we’ve tried to submit arbitration provisions, and the SEC will automatically throw some comments back to you, asking you to amend them to the point where removing them is the best course of action, it stuff like that will help you.

Jason Futko 31:52

Right? Oh, that’s great. Now, the structuring is obviously key, and that comes back to the front of the transaction, getting out ahead of any of that stuff, so that you can avoid the pitfalls later on. And that’s great. You know, if you structure it properly from the get-go, it makes it a little bit smoother. And I mean, back to your example. I mean, your example was somebody who had done a reg CF, using a safe, and you need to consider whether or not that converts on your transaction or, or moving forward, there’s a lot of people who have done safely. So you know, that’s relevant topic of conversation for them to understand what it is they’re going to be doing in the next round. So very important. So we’d like to KoreConX, we’d like to break it into kind of pre-transaction, during transaction and post transaction will think about the activities. Because a KoreConX or an infrastructure product, we’re there to help the companies manage the data online and manage a variety of these tasks as they go through to do that, and we break it down into those categories. So prior, as you mentioned, is the preparing, you know, it’s getting yourself ready, it’s, you know, getting the structure of the transaction and the company organized before you can go to the transaction. And then you know, obviously, you guys are there helping with that and then helping manage throughout the transaction, there’s a variety of things that happen, outreach to investors to make sure they’re done compliantly. Make sure you’re doing everything properly, making sure you’re doing if there’s accredited investor checks, you’re doing those investor accreditation checks, whether you have a broker involved. And we highly recommend in most cases. Brokers are involved in a lot of these transactions, depending on which type you’re using, and which type of exemption you’re using. And of course, making sure that all the other participants are moving and working on the schedule. So finding an ecosystem, like the ones you’ve created, and we’ve created, where partners have worked together on these types of transactions, and they know what has to be done and in what order becomes hugely important for maintaining compliance and making sure that you get through as efficiently as possible as well. And then as I mentioned, and as you did, as well, you know, post transaction, there’s a variety of other types of activities that you need to be made aware of and maintain, to keep your compliance, you know, up to date, whether it’s the filings. Whether it’s the national securities register when you’re getting ready to, you know, reach that secondary market trading component. You know, there’s some legal requirements there to make sure you’re in the register, and you’ve done the the filings that all the states. Those kinds of things are important. You want to make sure that you’ve talked to your lawyer and talk to your team about what your plan is, and discussed all aspects of that plan. And then of course, your ongoing requirements just to communicate with your shareholders is a big one. You know, as you just said, you could have 10,000 new shareholders, and maintaining and communicating with them, typically in the old model, would have been a real headache. Now that we’ve got the technology, KoreConX is an example. There are others that help with the communication piece. And with staying compliant with doing your AGM online, e-voting, any of those kinds of things that you need to do to maintain your ongoing compliance are critical as well. So always consider sort of all aspects of what it is you’re trying to do. And if the more planning you do, the smoother it should go. Hopefully, it was more of a statement, I guess than a question that can.

Nick Antaki 35:47

I’d like to just add on to that you have to understand that a lot of your investors are going to be pinged whether it’s through cookies or algorithms. They’re going to be pinged with other private offerings, have a professional look to your private offering, and having a professional feel to the whole process is critical to getting that investment.

Jason Futko 36:10

Exactly. Well, I, I can’t think of anything off the top of my head. Nick, is there anything else that we think we need to share with the audience at this point?

Nick Antaki 36:23

No. We covered I think we covered a lot of a lot of ground here. I would just like to say that. If you have any questions regarding your offering, whether you’re considering an offering, please feel free to give the company or me a call.

Jason Futko 36:39

Awesome. Yeah, no, please do. So again, thanks to Nick, for taking the time out and helping us provide this information to your Regulation D resources. He’s a great resource, and he’s very helpful. Also, you can reach out to people at the KoreConX team, and will help guide you to other professionals in the ecosystem if you need help in any of the other aspects that we discussed here today. Again, thanks so much for joining us today.

Nick Antaki 37:08

All right. Thank you