SPV or SAFE or Shares for my RegCF

Speakers

Oscar Jofre

CEO and Co-Founder

KoreConX

Oscar Jofre

CEO and Co-Founder

Oscar is currently one of the Top 10 Global Thought Leaders in Equity Crowdfunding, a Top 5 Fintech Influencer, Top 10 Blockchain and a Top 50 InsureTech. He has published an eBook that has been downloaded in over 20 countries, and been distributed by partners worldwide. Oscar is a featured speaker on Fintech, regulated, equity crowdfunding, compliance, shareholder management, investor relations, and transparency in the USA, Australia, UK, Germany, France, Netherlands, Canada, Singapore, Indonesia and China. He speaks to audiences covering alternative finance, RegTech, insurance, banking, legal, and crowdfunding. Oscar also advises the world’s leading research, accounting, law firms and insurance companies on the impact Fintech, RegTech, LegalTech, InsurTech and OrgTech is having in their business.

Marty Tate

Partner

Carman Lehnhof Israelsen

Marty Tate

Partner

Marty is a nationally recognized securities, finance and fintech attorney and counsels clients throughout the U.S. and internationally on various forms of structured finance, private and public securities offerings, fintech, real estate financings, venture capital and angel financings, fund formation and compliance, business formation and corporate governance. Since 2009, Marty has been active in advising clients in the crowdfunding and peer-to-peer lending space, with a particular focus on the JOBS Act, Regulation D offerings, intrastate offerings and Regulation A. His clients in this space include nationally and internationally recognized platform operators, sponsors, issuers, REITS, funds and service providers. He has been recognized as one of the top crowdfunding attorneys in the United States and continues to provide expertise and play a leading role locally and nationally in this area of securities law.

Mark Roderick

Managing Partner

Lex Nova Law

Mark Roderick

Managing Partner

I spend all my time in the Crowdfunding and Fintech space, representing issuers, platforms, investors, and other industry participants around the United States and all over the world. I speak at conferences across the country and write a blog that serves as a compendium of legal knowledge for the Crowdfunding industry, CrowdfundAttny.com. I'm an evangelist about Crowdfunding. By making capital available to a broader spectrum of entrepreneurs, and by making available to ordinary Americans the kind of investment previously limited to the very wealthy, I think Crowdfunding can reinvigorate American capitalism and begin to address the serious wealth and income inequality in our country. I began my career as a tax lawyer and have served as the Chair of our Corporate Law Group and our Mergers & Acquisitions Group.

Oscar Jofre  00:32

Okay, I apologize for running a little late today. It was my technical glitch. I was finishing another webinar and well, I came in late. So my sincerest apologies, everyone. Good afternoon. And once again, welcome to another great session at KoreSummit webinar series 2021, where we are discussing everything about crowdfunding, equity crowdfunding with regulation CF, Regulation A plus, and of course, Reg D, we can not forget that regulation. Today we’re going to be having a discussion, obviously, around regulation CF and one of the perks that the regulators have thrown in. There are still lots of questions, and we’re going to jump into that. And my colleague who you have met before, but you know what, it never hurts me to hear it again. I want to know who you are. Please, Marty. Thanks.

Marty Tate  01:25

Again. You have probably heard it before if you’ve listened to any of these other webinars, but Marty Tate, I’m a securities lawyer, based out of Salt Lake City, Utah. I’ve been practicing in public and private finance my whole career, but it’s been heavily involved in private finance, particularly using the JOBS Act since the very beginning. started actually in 2009, with my first crowdfunding client, and continue to represent platforms, issuers, service providers in this space.

Oscar Jofre  02:02

Well, and like always, he likes making an entrance. He’s done this to us twice now. The man with the entrance. I love the background. I love this shirt, please. It’s good to hear you, Mark. Please.

Mark Roderick  02:20

Yeah, I apologize for the background and the shirt. 

Marty Tate  02:24

Yeah, you got a haircut? 

Mark Roderick  02:26

I did get a haircut. So that’s an improvement. Yeah. So yeah, I’m Mark Roderick. I am a clone of Marty and whatever Marty said about himself and his practice. Yeah, I’ve been in the crowdfunding space forever, which really isn’t a long time. It’s only about eight years. But time flies by and I represent a whole bunch of portals and issuers and I’m a big fan of Oscar. I think that’s why we’re all here.

Oscar Jofre  02:57

Thank you, Mark. I really appreciate that and again, I forgot. My name is Oscar Jofre. So we’re gonna have a fun discussion. As I said, I just came from another webinar, and I was sharing some of the notes with Marty before you came in Mark. And it’s gonna be very timely to this because, you know, people read the regulation like this. Oh, regulation CF, great, you can raise 5 million. Did you know now you can put everybody under an SPV? But nobody asked the question. What’s an SPV? How do we get it set up? And what’s different? Oh, no, it’s really simple. You’ll put all the shareholders under that umbrella. And you know, under your cap table, it’s going to show as one. So everybody in the audience is jumping up and down excited about this, which we should be, but we need to get there. And this discussion today is really, we’re so close. We’re only a couple of weeks away from the grand day. And because of that, there are still some questions that need to be asked regarding the structure, which we had a previous discussion on Reg A, but in reg CF, whether it’s you know, keep using the SAFE and the SPV. And so I’m not going to work o the element of what’s the difference between the two but I do want to work on the SPV side because it’s one that’s coming at me a lot. And I am going to put both of you on the spot like I always do to see if you put some more thought into it. What do you envision with it? And obviously, So first, let’s start with what is an SPV? So I’ll start with you, Marty. Let’s go with that. And then let’s bring it down to how this will affect a reg CF company and how we can structure one.

Marty Tate  04:36

SPV special purpose vehicle or SPE special purpose entity is an entity formed just for that, for a specific purpose. Typically, it’s formed as an entity to collect investors that will then go turn around and make a single investment it’s also the S is interchangeable too because it can be called a single purpose. This vehicle, the single purpose is making this investment, they’re used a lot in real estate, a lot in reg D offerings, a lot in syndications on real estate, and they’re used a lot in like I said, the reg D world where you’ll have accredited investors go into an SPV and invest in an issuer’s offering. I know that groups like seed invest and angels list, this was the model they used. It previously has not been available for reg CF offerings. So that’s what we’re going to talk about.

Oscar Jofre  05:42

Okay, that’s perfect. So we’ve given what traditionally it looks like. Okay, Mark, let’s dive in. I mean, you know, reg CF, more than I know [uncertain], help me out. So I want to say thank you, first of all, on that note, but so give me, how does that can apply now to a company, knowing that we don’t have little, not too much guidance on it?

Mark Roderick  06:05

Well, yeah, I’d be happy to. And I mean, the big news, which I’ll explain what I mean is that this was a change in the law, that was absolutely not needed. And in practical terms has no effect. For better or for worse, it is a change required and made solely because of a misunderstanding of what cap tables are by the entire investment community or by a large section of the investment community. So this was the lay of the land or continues to be until these new rules come into effect in reg CF, and in Reg A for that matter. But let’s just talk about reg CF, you are not allowed to raise money using Reg CF for a so-called investment company. The Investment Company Act of 1940 defines the term investment company and it basically means a company that owns securities, that exists solely to own securities, like a mutual fund. So you can’t use reg CF for a mutual fund. And SPVs of the kind we’re talking about exist, as Marty said, for one purpose and one purpose only. And that is to hold the stock of the operating company. So if, for example, you have, company XYZ and it’s creating great new social media app, that’s the operating company, you could have an SPV, a new entity, typically an LLC, that exists solely to own stock of XYZ. Why would you do that? Well, you would do it because the owners of XYZ worry about having a messed up cap table, they worry about having too many entries on their cap table, too many owners, too many shareholders, they’re concerned that if they have too many shareholders, that’s going to keep them from raising capital in the future somehow. So if they are, say, raising money from 500 reg CF investors, they’re saying, Oh my god, we’re gonna have 500 new entries on our cap table, that’s going to be terrible for raising money in the future. If we could just put those 500 people in a separate LLC, and only that LLC will own our stock. So now we only have one entry on our cap table. Wow, that’s fantastic. That will make it easier for us to raise money in the future. That’s why this rule is being implemented because of that thought process. You couldn’t do it before now, because that SPV that owns the company stock that is an investment company under the Investment Company Act of 1940. And the change to allow this all to happen is a change to the Investment Company Act. It’s not really it’s not a change to the crowdfunding regulations. It’s a change that says for purposes of the crowdfunding regulations, this kind of entity will not be treated as an investment company. Okay, so that that’s the technical change being made. So now we can funnel all those 500 people into this one entity. Now, what problem exactly is this supposed to solve? One problem it doesn’t solve is all 500 people have to get K-1. All right, it’s not as if you can only send out one K-1, yes, you send the one K-1 to the SPV. But then the SVP which has to be managed by the company itself, now he has to send out 500 K-1s. So you haven’t saved anything there, have you? What about voting? What about having all these people vote now? Because if you’re issuing voting securities, then the rule is that SPV also has to issue voting securities. So if there’s a vote to be taken with respect to the underlying company’s stock, it’s true that only the SPV gets the vote it shares. But all 500 investors get to vote on what the SPV does. What about things like pre-emptive rights? Well, again, if you give the SPV pre-emptive rights, then yet Are you make it harder for future rounds of financing. The point is if you issued the right kind of securities, and let’s say the simplest right kind is just nonvoting common stock, right? It doesn’t matter if you have 500 people on your cap table, it doesn’t keep you from raising money in future financing rounds. Putting those 500 people in an SPV has absolutely no bearing on raising money in the future. It’s just the perception that this is an issue that has driven the creation of this new SPV rule. So I’ll shut up in a second. Some reg CF sites like WeFunder for example, and they might have been the ones who thought of it, they pretend to create one entry on your cap table. Now through this complicated, there’s a transfer agent and a voting agreement. It doesn’t create one entry on your cap table. It’s a deception. It’s a deception, that doesn’t hurt anybody. But the reason they did it, what went through the steps in this additional cost to create a deception for their companies and their investors? Is again, this misconception about cap tables. So as you can see, I don’t really have an opinion about it.

Oscar Jofre  12:30

No, no, actually, you know, thank you. I let you go at it because I didn’t know any of that. And that’s really interesting to hear the backdrop to all this because everybody makes it sound like it’s such a big deal. But it really isn’t a big deal.

Mark Roderick  12:46

It is an absolutely meaningless deal. It Yeah. If you’re gonna screw up your cap table, you know, if you’re a company, and you issue 500 to 500 investors nonvoting common stock, you have not screwed up your cap table. If you issue to one investor, for example, you know that the investor has pre-emptive rights over future issuances, and has veto rights over future stock issuances. You have screwed up your cap table with one investor. It’s not the number. It’s the terms of the securities that you issue, which the new SPV rules have absolutely nothing to do with. So this is an instance where the SEC has adopted a rule purely to respond to a sort of marketing confusion issue, as opposed to a substantive issue.

Oscar Jofre  13:47

And thank you for saying that word confusion because I’m dealing with that right now. And you’re right. It’s confusing. And I’m just gonna add a little bit to that. Because if we have seen this model, where investors have invested directly in the company, and now the company is doing another reg CF, but this time they decided to use this deception model, you call it and they go, Well, wait a minute, how come I don’t see the shares that I own? And I’m sorry, you don’t own shares in the company you own shares on that over there? That’s not what they showed me. And it’s really interesting. That’s not what they showed me. This is the interesting part. Companies, I’m only giving this as a heads up. I like what you said, it’s not about the numbers. It’s about the terms. Because I would argue I would say listen, would you rather have one shareholder that’s got the right terms that control or would you like to have 10,000 that one by one, you can manage that? The technology’s definitely there. There are no excuses for that.

Mark Roderick  14:52

It doesn’t matter anymore. You know, click a button and you can send out ten K-1s or 1000 K-1s.

Oscar Jofre  15:00

Agreed, agreed. So you’ve heard this conversation, Marty, you and I were just starting at the last webinar we had, the conversation got started, we dove right into the SPV. Mark added a bit of groundwork that I didn’t have. And I have a different view now. But that being said, one of the discussion points we discussed was, okay, if we’re going to do it, we have no guidance from the SEC, on a number of issues. Can we talk a little bit about that? If there was an issuer that’s going to use it? What are some of the issues outside of what Mark just mentioned?

Marty Tate  15:39

I don’t want to say we don’t have any guidance, but we don’t have a lot, I think there’s a lot of the funding portals that elect to use this, are gonna have to fill in some gaps and understand but you know, one of the issues that we talked about, I think, on another one of these was, you know, who’s going to manage this. The SEC provides that the issuer has to, this is a responsibility of the issuer to I mean, they don’t have to set up themselves, they can use, you know, the platform can help them set it up, but it’s ultimately their responsibility the issuers, over the management of this company, they can be reimbursed for expenses associated with that. But so, that was one of the things that we talked about is okay, you know, are some of these third-party SPV companies that, you know, that’s what they do is just manage these SPVs? Are they going to fill in the gap? You know, maybe, and there’s doesn’t say anything about outsourcing that up that responsibility, you know, are seeking some, some administrative assistance and doing things like K-1s, but so, I think it’ll be interesting to see how that set up. You know, one of the issues that I while though I agree with Mark, that you’re right if you issue nonvoting common or nonvoting. You know, if it’s an LLC if you create an interest that that doesn’t have voting, that that does solve a lot of the problems. But you know, if you’re an LLC, you’re going to issue K-ones anyway. So it’s setting up an SPV to invest in your LLC isn’t going to necessarily help, I think one of the big things and maybe you’ll get to this Oscar, and you know, I’d be interested to see, to hear Mark’s take on it. And maybe it just it’s just a nonissue because nobody’s really getting close to this number. But one of the potential benefits of an SPV is that all of the shareholders that come into that SPV as long as they’re natural persons do not count towards the shareholder count under 12 G so that if they’re a natural person, and they come into this SPV, they don’t go towards that 2000 limit or threshold that would trigger you know, having to become a reporting company. So that is a potential benefit. However, I don’t know how much of a practical benefit that is, because, you know, I mean, I don’t know how many of these companies are selling, you know, 1000 shares, or having 1000s of purchasers in their offering. So, but that is a potential benefit of this new role that I think is something that I’ve actually heard you address, Oscar, and one of the reasons why, you know, it’s wise to use a SAFE.

Oscar Jofre  18:39

Yeah, I have a question about that. You brought up an interesting point. So I’ll ask you, Mark. So I got put in an SPV. I thought I invested in the company directly. Oh, I heard the company made an agreement with a secondary market ATS, my security is off the 12-month hold. This holder is really not the holder of the entity. So it so they don’t count. Therefore, they don’t have the same privilege as the people they’re sitting on the direct cap table the company correct. Or does the SPV itself trade on behalf

Mark Roderick  19:14

Yeah, that would be about the dirtiest trick a company could play on its reg CF investors. The good news is we’re listed on an ATS. The bad news is you’re not included. So they would I think they would definitely lift the SPV on the ATS. And by the way, were ATS meaning alternative trading system meaning a secondary market for your shares. You are Marty are absolutely right that it is a separate entity. If they do it that way, it is going to be a separate entity. So you would have to list both the issuer and the CO issuer. For securities laws, the SPV will be the CO issuer on the exchange in order to give liquidity to the investors, you were absolutely correct.

Oscar Jofre  20:14

Perfect. So I think one more question on this. So, you alluded to this, Marty, you said that the SEC has provided some guidance. So is there a bit of a framework? Are we still in the early stages yet that first of all, somebody, whoever is going to use this first, you really need to understand your capital raising journey, because as to what Mark and I are saying, is that it could derail? It could be deceptive, it, could you name it, you need to understand everything about it, which, up until now, nobody knew that. So thank you for that, Mark. It’s really opened it up. I’m gonna, I’m gonna really put this in kind of a chart. Is there anything else? Marty Did you would say regarding SPV, that company, you know, a portal or a company needs to consider before they engage with it? And the last conversation we had one of the things that we were talking about was whether it would it could adopt a nominee model inside the SPV? Do you recall that? What the Europeans do where they put a nominee in charge of all the investors, but that’s not what the SEC intended here with the SPV? Correct?

Marty Tate  21:30

Correct. And so, you know, where I have a lot of familiarity with this, as I said before, is with under in the reg D, 506 c world, represented a company that that was their job as they would set up these SPVs. And they had, under that model, basically, they would designate a third-party manager, that manager would have the authority to make all of the decisions on behalf of the SPV. So, those interest holders in the SPV really didn’t have a vote. The way that those were set up is basically that if something was presented to the shareholders, that the manager would vote on behalf of the SPV. And they would just follow whatever the majority of the people were doing. So if it was corporate action, a merger, or something they would approve, they would just go along with what everybody else. Here, it’s a little different. It’s basically if you’re issuing voting stock, like Mark said, everybody’s got to vote. So that means you’ve got to go out and get, you know, do a consent solicitation on that, and for whatever corporate action. So that’s a complication that I think is going to be interesting to see how that’s dealt with, again, that might just be outsourced to a third party. But that’s an additional expense that goes along with that. I think you did raise an interesting issue about secondary trading. And it’ll be interesting to see how, in most of the cases where I’ve seen SPVs used, that’s not an issue. They’re doing more of a venture capital type investment. Secondary trading isn’t something they’re thinking about immediately. And they would, you know, they know, they’re just sort of holding until there’s an exit. I imagine that would be the same thought here. But again, if that’s the case, I don’t know why you would use that as they’re not as compelling reasons to use an SPV as you think,

Mark Roderick  23:39

Let me jump in and say, the terms SPV and the concept of using an SPV, in practice have traditionally been a very open-ended term about what the SPV might look like, and what its internal organization might look like, and so forth. And I don’t want to leave people with the impression that as adopted in the new sec rules that it is open-ended because it’s not open-ended. The rules are very, very stringent about what this SPV has to look like, and in short, without listing the rules, the SPV is supposed to be an exact mirror image of the original offering. So the investors have to be required to be put in exactly the same position as if they had acquired the securities of the issuer from the issuer and we’re on the issuers’ cap table. So you know, it’s not a situation where you can issue one kind of security to the SPV. And then oh, let’s think of another kind of security to issue to the owners of the SPV. It has to be an identical security. So there’s very little flexibility. And you know, people have asked me, well, can I form an SPV to now invest in a lot of different reg CF offerings? No, that’s not what this is about. You know, an SPV is specific, not only to the issuer but to a particular reg CF offering. So, you know, if an issuer does one reg C, offering using an SPV, and then does another offering, it’s going to be another SPV. It’s very constricted to serve the very, very limited purpose that the SEC was trying to accomplish, which again, was only about marketing and market confusion. They’re not trying to liberalize anything or allow for any playing around, they are just trying to say, okay, all these people wrongly believe that if you have a lot of investors on your cap table, it somehow is going to mess you up. So here’s this mechanism. So you can only have one member on your cap table, go for it.

Marty Tate  26:32

The term they use as you can say, it’s a conduit.

Mark Roderick  26:36

It’s a conduit. Exactly. That kind of says it all right. 

Oscar Jofre  26:40

Yeah. No, it does it 

Mark Roderick  26:42

Purely a conduit?

Oscar Jofre  26:45

I’ve heard that argument, or who the heck wants all that in your cap table? You know, they keep thinking that we’re still managing cap tables on paper.

Mark Roderick  26:53

Which is true. That’s true.

Oscar Jofre  26:56

I just don’t see how but that’s okay. That’s part of the education.

Mark Roderick  27:00

Let me one, I just, you know, since we’re never shy about sharing opinions here. So this has been part of the pushback from the organized institutional investors like organized angel investors, and VC funds. You know, all those folks properly see crowdfunding as a threat. You know, crowd funders are the disruptors of the VC business model. And from the beginning, they have thought of these various spins, that they could say to company founders to dissuade them from using crowdfunding. And this is one of them. You can’t do that you’ll screw up your cap table. So it’s not exactly an accident that people think this. It’s a myth that has been intentionally put out there. You know, to this is not the grand conspiracy theory, but, you know, to keep founders away from equity, crowdfunding.

Oscar Jofre  28:17

Wow, our topics are always enlightening, because we open up a whole new area. But listen, this is what this is about. This is about the discussion. Look, we’re all on a learning curve. I mean, I know you guys have been as deep as I have 10, 11 years into it, and people go, Well, that’s a long time. No, we’re just getting started. You know, the education continues. If we look back at our webinars from 10 years ago, you go, Wow. Well, that’s what we had then? Look what we are now. So it’s good.

Mark Roderick  28:48

We didn’t have webinars, we didn’t even know we’re winning, you have color TVs 10 years ago, did we?

Oscar Jofre  28:56

Well, they did over here.

Marty Tate  29:01

One point, maybe it’s contrary to what Mark was saying, but it’s interesting, I’ve heard both sides of the argument. I have represented companies that had done it a reg CF round, and they’re going out to raise capital, and you did get some, you know, I want to say pushback from the VCs that were saying, you know, we don’t like this, we don’t like that you have all these investors, we need to figure something else with them. You know, in fact, to that point, we’ve, you know, created a voting trust and so forth to try to deal with that. And, again, that’s not universal, but that can happen. So I don’t want to say that that never happens, but it can’t but I’ve also seen the converse where people have said, Hey, we want you to do a crowdfunding raise first. If you can go out and raise a million dollars under a CF And then we’ll come in with a series a, you know, because they want that sort of proof of, of, they want you to go out and market it and get the sort of ancillary benefit of doing a crowdfunding raise of, of raising market awareness. So I think there are arguments on both sides.

Oscar Jofre  30:19

There really are. And I think VCs are starting to, like during our series A we did have some terms where they were prohibiting us from doing a Reg A. And for us, that was a nonstarter. It was this was our path, we knew our journey. So this is as important as any entrepreneur, these vehicles are great, but you’ve got to know what you want to do. And if you’re going to deter from it, you’ve got to understand the impact of everything you’ve done said. So for us, we knew it was this reg A that was it.

Mark Roderick  30:51

That’s funny. Given your business Oscar, they were gonna tell you, you couldn’t do a reg A.

Oscar Jofre  30:58

I know. I know. Yeah, it was hilarious. It was part of the terms and I go, but it seems sensible. And they go no, but I understand that. But we did get to VCs I am letting, you know, we did find VCs. Just because one said no, they’re all not like that. So to your point, Marty. So I want to move it now, so we talked to the SPV, we needed to talk a lot about it because it’s the new one. But the other instrument is the SAFE. So I’ll go to you Mark on this. What is a SAFE? Why has it been the instrument of choice so far, based on the information we have? So can we walk through that?

Mark Roderick  31:40

Sure. And I will warn you in advance. I’m not nearly as opinionated about SAFEs as I am about the other stuff. A SAFE, the word the letters, it’s an acronym. Simple agreement for future equity. So back in the old days, 10 years ago, you have a startup company, it thinks it’s going to raise a lot of money in the future. But right now, it’s just raising a little money. And you know, the whole company consists of a founder and maybe a Chief Technology Officer and a great idea. But not much else. We’re raising a million dollars, just to get started, hire some other team members, do some market research. And so we now say, okay, we’re going to, we’re going to sell a stock for a million dollars. And the investors say, Well, how much? How much am I paying? You know, how much stock am I getting for my million. And the founders and the investors get into this impossible discussion about what the company is worth, because who the heck knows, you know, maybe its future value is a billion dollars, but maybe it’s future dollars, or future value is $4.99, at Safeway. So it’s an impossible and fruitless negotiation. And so long ago, people came up with a concept of, Okay, I’ll tell you what, for right now, we will lend you this million dollars, it’s, it’s just a loan, and then it converts when you raise maybe $5 million. And at that point, by definition, everyone will have a better idea of what the company is worth, then we’ll our note will convert to stock at the value at that time. Oh, that’s a good idea. And then, even that was okay, what a note if we can’t pay you interest, so why are we charging interest, and that’s how the safe was born. So SAFE is a convertible note, that isn’t a note and it just says, here are the million dollars. We have no idea how much stock we should get, you have no idea. So we’re gonna say that, right now. It’s just nothing, but when you raise say $5 million in the future, and you have a pricing round, you know what the company’s worth, we will get stock at that time at that price, but typically for a discount, and there were some other complexities in there that I won’t go into. So that’s it’s just a way to avoid an impossible negotiation over value between a founder and the founder’s early investors, and it’s a very, very widely used instrument. At some point, somebody, and maybe one of you knows who it was, wrote an article saying that SAFEs are inappropriate for reg CF. Because now I’m kind of making this up because the dumb people who invest using reg CF are not smart enough to understand what a SAFE is. That was the almost the explicit, you know, point. And the SEC in the initial draft of these proposals that came out last March jumped on board with that argument. Yeah, SAFEs, they’re just so complicated. And I mean, I’m all for protecting small investors and so forth. I’ve never really understood that argument. I mean, I think, common stock, try to explain to a layman what common stock is, you know, what you get for that piece of paper. That’s a really complicated instrument. I don’t see SAFEs as being more complicated than that. So but they were through the comment period, the SEC was persuaded not to prohibit SAFEs. So we still have SAFEs, and they’re a very popular instrument. I personally don’t see anything wrong with them. Now that the limit is going from 1 million to 5 million if it is, you know, a SAFE, make sense when you’re raising $200,000. If you’re raising $4 million, it probably makes a lot less sense, because $4 million would typically be a pricing round, you know, you would decide what the company’s worth at that point. But anyway, that’s all I have to say about SAFEs. I think they’re perfectly appropriate. Do you do disagree with that, Marty?

Marty Tate  36:54

No, I have been on record saying I don’t love the SAFE. And I warmed up to it, I guess, early versions of it, you saw were very, they might have fallen into that, you know, the reason for that article because they were very non-friendly to investors, basically, they were, I’ve seen SAFEs that acted like debt that never had to be repaid. And one of the risks, and I guess it still, you know, can exist in certain versions is if you have if you never have that qualified financing, you never have that next round that would automatically convert these interest into, you know, SAFE interest into whatever the security that’s offered, whether it’s series a preferred or common or whatever, and that next round, then you potentially the investors could just be holding this instrument that says, hey, I could convert potentially, but you know, maybe if the company never has that liquidity or that qualified financing that it would be worthless anyway. So I didn’t love them at first, but I think that you’re seeing an evolution of the instrument, and they are more investor-friendly. I actually do agree with you that and we’re dealing with this question right now with some issuers that it’s perfect if you’re raising 200,000, or 500,000. But if you get into a $5 million raise, then again, it looks like something more of a pricing round. And a lot of companies if they go out and raised $5 million on a SAFE. I don’t know what that, you know if you’re going to people don’t need more than 5 million, right? I mean and have to have to convert that in the next financing. Is there going to be the next financing? I don’t know.

Oscar Jofre  39:00

At the least now, Mark, what we know is we found the author, so that’s important. So we know who that is.

Mark Roderick  39:07

Oh, yeah. Marty. No. Yeah.

Oscar Jofre  39:11

So the one thing, the one thing I’ll say about the SAFEs is that I like the instrument, I agree with you there. What I don’t like about the instrument is that it’s too much one way. Right now it’s 100% towards the company, I think, if the company is really going to or work, obviously, this is coming from the platform, they need to balance it. They need to balance it where the investor has no protection, I’m not referring to protection, but at least have some sort of sight that something may come out of it. So because we’ve been on the other side where the company chooses just to pay them out and knowing that they’re going to do another capital raise. Right. And so you use our 500,000 or a million dollars, and we only got one client right now, it’s one that you and I have a Marty, because can I just buy it? No, that’s don’t do that, you do that you, you destroy the whole notion of it, it is what it is. They’ve got to that first capital this, you’re here in reg A because of it. And you need to because you need to become the first because it hasn’t been done yet. Our client will be the first one Marty will be the first conversion of reg CF. [uncertain]. And I think this is the success, is the only way we have some measurement to where it goes. So I have one question on the SAFE, though. The reason it was put into a SAFE, would it have anything to do with rule 12 G or is he relevant on that? Marty?

Marty Tate  40:50

Yeah, I’ve heard you actually bring up that point in another discussion. And I think that that is a valid point for using it. But it goes back to that question. It allows you to go out and I guess sell over 2000 of these things without having without triggering that. They did the reporting requirement, but again, I don’t know if that is that happening? Have people had more than 2000 investors into a SAFE? I don’t I don’t have that data. But I think that’s your argument.

Mark Roderick  41:29

Do you think a safe is an equity security for purposes of Section 12 G?

Marty Tate  41:35

I don’t, do you have

Oscar Jofre  41:37

 I do, I do. 

Marty Tate  41:39

You do, Oscar? What do you think, Mark?

Mark Roderick  41:43

Um, whichever one of you is willing to buy me dinner I will agree with you on that. I think it’s I mean, I think for purposes of Section 12 G. I think something is either a debt instrument or an equity instrument. I don’t think there’s anything in between, I think. A Safe you know, nowadays a typical SAFE says, but if we hadn’t had a conversion, and you know, in three years, we get our money back. Does that make it a debt instrument? Because there’s this concept of getting paid back? Or would you say everyone knows the real value of this instrument? Is future equity? In which case it’s an extra equity instrument? I don’t I don’t know. I don’t even know. 50/50.

Marty Tate  42:34

Yeah, and I don’t I don’t know either. To me, it looks more like debt. And but that also begs the question that why not just go out and offer a convertible note? Because there are differences between, you know, convertible note and a SAFE, right.

Mark Roderick  42:51

There can be I mean, they don’t? There doesn’t have to be. One of the things that happens with these instruments is someone creates a form that is, let’s say neutral as between company and investor. But then the first lawyer who uses it, let’s say, you know, she’s using it to raise money for some company, she says, Well, my clients, the company. So I’m going to put in some provisions that are favorable to the company. And so it quickly becomes not neutral, I guess I’m saying so we’re using the term SAFE as it as if it has some static meaning as you two have pointed out, there are good SAFEs and bad SAFEs actually. So you know, it’s not, it’s not, it’s not just one thing. It’s, it can be it can look exactly like a convertible note, if you put in enough provisions.

Oscar Jofre  44:00

Yeah, yeah, I believe that that’s the graduation. Sorry, I didn’t mean to cut you off, Marty. I just feel like the SAFE needs to go up one level, but go on.

Marty Tate  44:10

I was just gonna say that. Yeah, we have seen that. I mean, you raised a situation that I’m dealing with, with another client that, you know, they’re growing and they’re having a series A and they’re, they’re actually on a Series B financing and, but they have this, this reg CF round that they did and they have these SAFEs out there and the terms of that say that the company has the option to convert them, or they can buy them out. And so it completely goes against you know, these people took a risk. Yeah, the company’s like, and luckily the company wants to do what’s right. We want to make sure that we take care of these investors, but they’re also kind of looking at this chance and saying it would be nice to clear up our cap table and get rid of these 500, you know, investors that came in? So, you know, if you look at the terms of that say that says, Yeah, they can just buy him out.

Mark Roderick  45:11

And that’s awful, I mean that that would be, I think we would all agree, that would be completely unfair.

Oscar Jofre  45:19

Had to do that already. More than five times.

Mark Roderick  45:23

Yeah, that’s too many.

Oscar Jofre  45:25

To me, my message, my message to the CEO of that company, I go, I hope you never come back to crowdfunding again. Because, you know, what? That’s not what this was about? Oh, well, now we’re, we’re ready for venture money. But you know what, you better make sure they drive you all the way through because the people that got you there you? It’s really, yeah, it is it. And the other one male versus female CEOs on this is really simple. Males will make them cash out females, it’s quite the opposite. They embrace it. Now, I had one client that was on borderline, and I pressed him hard, I go, I would even walk. I said, look, I’m your provider, and I would walk. Because that’s not what I stand. I didn’t work 11 years, given away all this, so you could take advantage of the regulation, the very people that got, “but, so many people,” then you shouldn’t have done it in the first place. You know, it’s as simple as that. So let me ask you this, then. So we’ve been talking to SPV share, SAFE, then why not shares I mean, I, what is so wrong, why did we need to create a SAFE or a note, why not just say, you know, the investors are? To be honest, people are saying they don’t can read a SAFE instrument, which most don’t till afterward. The valuation isn’t really the reason for investing anyway. I mean, we’re seeing that in reg A, so why not put them in shares? Is there a particular reason you can think of Mark?

Mark Roderick  46:57

Well, our investment world today, like it or not, is shaped by Silicon Valley. So all these instruments, even convertible notes, and certainly SAFEs, you know, were all invented in the Silicon Valley ecosystem. And, and in that ecosystem, it really was, you know, we don’t want to argue about value for a startup company. So you know, there were good reasons. Now we take that out into America at large, and maybe that reason isn’t good enough anymore. To answer your comments, I do think for small companies raising small amounts of money valuation is an issue. And I think a SAFE is valid, that’s a valid reason to issue SAFEs. Technically, you ask a lawyer, you know, why not, is just issue common stock? You a lawyer could say, well, because stockholders by law have certain rights. No matter what you do, you know, stockholders have certain rights to see your books and records, to complain that you’ve been paying yourself too much salary, you know, stuff like that. And so, as I think a typical corporate lawyer would rather have investors not have those rights. It’s the same reason when we’re preparing or thinking about implementing an executive compensation plan. You know, we often use something called Phantom stock, which is basically a contract, right, that says to the executive, you have the right to get just as much money as you would have earned, if you own 1000 shares of our common stock, why not just give them the stock? Well, that’s why because stockholders have rights. So that’s a reason. I think in the context of reg CF or Regulation A I don’t think it’s a great reason. I think companies, where valuation is not an issue, can feel perfectly fine issuing actual equity securities. That’s my view.

Marty Tate  49:29

I think that Mark, your last sentence is, is typically where I’ve gone to justify that is valuation if it is an issue if you’re saying you know what, what are you worth and you know, you’ve got a balance sheet that’s all zeros and like you said, it’s an entrepreneur and maybe a CTO and it’s hard to go out and say we’re going to sell we’re, you know, we have a $10 million valuation, we haven’t sold anything and we’re going to sell. So that to me. That’s probably the best reason to use a SAFE is just that you don’t need to pick a valuation.

Mark Roderick  50:09

Yeah,  the other instrument that has become very popular in reg CF which has the same benefits is a so-called revenue sharing note, I sort of like revenue sharing notes for that reason. You know, people don’t have shareholder rights, they don’t care how much bonuses you pay yourself. There is an end date if they’re very simple. I mean, a revenue-sharing note is much simpler to understand than either SAFE or common stock, you know, I’m going to share this company’s revenue for a while, and then I won’t.

Oscar Jofre  50:50

I like that one. I think that one, we haven’t seen that before, at least not on the scale. And I do hope it emerges, because at least this way, if they put in $100, and they get $100 back, they can go and say I’ve got you to know, I got my investment back. And then anything else is just reaping the rewards. But it is interesting, based on the instruments, whether the success, whether some are using it purely, you know, data starting to come out in one and everybody is praising it for the numbers. But we need to look, trace that money all the way until here. So we can actually say it was successful, did it create jobs, did it do all this? So for me, personally, I’ve been asking this question a lot lately, regarding shares, why not just offer shares. And again, it is the only time I would probably think of a SAFE or a note, it’s not even so much about valuation, because I think we all know, now Silicon Valley, doesn’t dictate this market anymore. This is the crowd dictated one of the partners we have said it best, I’d rather have 1000 people telling me they love my company than one investor telling me and then trying to dictate everything they want. And that’s an interesting perspective on how crowdfunding works. And so but if the uncertainty of the company of value, and the uncertainty of where they’re heading next, maybe those instruments make sense. But if you already know, you’re going to do a reg CF, you already know, you need another X number of dollars. And you’re going to use regulation D and all that. You know, the cleanest cap table is the cap table you can see and you can visualize and utilize, you know, and that is available today. That’s no longer a barrier anymore. And it can be as cost-effective as free. So there is no more reason not to embrace this. So. Okay, so we talked about SPV, SAFE, you brought in notes there, Marty thank you for that because I have seen the promissory note. And then, of course, the revenue share, but revenue share, is that an instrument? Would you call that an instrument? Or is that just more of a tactical element? 

Marty Tate  53:04

You would have a revenue-sharing agreement and that revenue-sharing agreement and interest in that would be considered a security. So yeah, it’s something that we worked on. And sounds like Mark’s worked on as well.

Mark Roderick  53:22

It is definitely a security to answer your question, Oscar.

Marty Tate  53:26

Yeah. But it doesn’t work universally. Right. I mean, it’s only for companies that, anticipate it. I think it works great for companies like, you know, app developers, or game developers or something like that where they anticipate they’re going to generate revenue in the near term. Probably not great for the long-term real estate deal.

Oscar Jofre  53:54

No, no, that’s true. I mean, we’ve always said it all depends on the company, the objectives, but at least we covered you know what we demystify quite a bit here. We spent a bit of time on the SPV, which I think historically, I have a much different view on this now than I did before. I still don’t like them. I don’t like them even more now. Thanks, Mark.

Marty Tate  54:22

Again, I like, of course, taking the opposite view of Mark just to spice things up. So I do think that the SPV and I was somebody who said I think this is a good thing. And I think it will have a benefit, particularly. And I think the one spot would be like a real estate deal. Where that’s just and maybe it’s just because that’s how you typically would see it in a real estate deal. And that capital stack you would have, you might have an SPV that’s coming in to fill you know the equity portion of the deal and The sponsor comes in. In that situation, I think you might see it. It’s not necessary. But it’s definitely I know that the people that are doing real estate and want to do real estate under CF plan to use it. So I don’t think it’s like I would agree with Mark that it’s not absolutely necessary. But I think that that it might serve a purpose.

Mark Roderick  55:26

Well, and don’t let me forget. I mean, I do think it will be widely used. Even though I don’t think people need it. There is definitely a very widespread misperception about messing up cap tables. And founders, you know, the last thing they want to do raising money in reg CF is screw up future financing. And so if there’s, they’ll tell you if there’s a 1% chance, you know, that we’ll say, so people are going to use it just because of the wide widely held misconception. I’ve already done, you know, I’ve done forms of SPV agreements for my portal clients, because there definitely is going to be a demand for it.

Oscar Jofre  56:22

Yeah, I agree. As long as the misinformation about it, how to use it properly, and understanding the other implications. But again, that’s where we come in, right? We got to give them the complete playbooks so they understand going in with their eyes wide open. So once again, the two of you have surprised me, like always. Mark, it’s always good to see you your haircut looks amazing, by the way, the black and white are really, you know, and then, of course, Marty just feels like I don’t see enough of you. So just joking. Thank you both. And thank you everyone for another wonderful session of the KoreSummit webinar series, where you can go to KoreSummit.io, or our YouTube channel KoreConX, and you can watch these videos to help you and understand the missed apart. If you want to get a hold of our speakers, they at koresummit.io their LinkedIn profile, or email address are there ready to go for you. Once again, everyone, thank you so much. Have a wonderful afternoon. Take care everyone.

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