The Securities Regulations
CEO and Co-Founder
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.
Carman Lehnhof Israelsen
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.
Lex Nova Law
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.
Sara Hanks, CEO of CrowdCheck and Managing Partner or CrowdCheck Law, is an attorney with over 30 years of experience in the corporate and securities field. CrowdCheck and CrowdCheck Law together provide a wide range of legal, compliance and diligence services for companies and intermediaries engaged in online capital formation, with a focus on offerings made under Regulations A, CF, D and S, whether of traditional or digitized securities. Sara’s prior position was General Counsel of the bipartisan Congressional Oversight Panel, the overseer of the Troubled Asset Relief Program (TARP). Prior to that, Sara spent many years as a partner of Clifford Chance, one of the world’s largest law firms. While at Clifford Chance, she advised on capital markets transactions and corporate matters for companies throughout the world. Sara began her career with the London law firm Norton Rose. She later joined the Securities and Exchange Commission and as Chief of the Office of International Corporate Finance led the team drafting regulations that put into place a new generation of rules governing the capital-raising process. Sara received her law degree from Oxford University and is a member of the New York and DC bars and a Solicitor of the Supreme Court of England and Wales. She serves on the SEC’s Small Business Capital Formation Advisory Committee. She holds a Series 65 securities license as a registered investment advisor. Sara is an aunt, Army wife, skier, cyclist, gardener and animal lover.
Dodson Legal Group
Specialties: Contract Law Business Development Real Estate Syndication Investment Opportunities Wealth & Succession Planning
Bull Blockchain Law
Finding Bitcoin in 2011, I have a deep knowledge of blockchain as a technology as well as how the current regulatory framework applies to the industry. As a result, my legal practice aims to help businesses and individuals be regulatory compliant regarding cryptocurrencies and blockchain technology.
Oscar Jofre 00:01
All right, well, good afternoon, everyone and welcome back. I hope you enjoyed the lounge. I know that it’s fairly new, I know someone called it date to dream. Well, okay, but it was really for you get an opportunity to connect with the speakers. Just as a reminder to everyone, all the sessions are recorded, they’re going to be available for you, as well. If there’s a speaker you want to connect with, and email them, and or, you know, connect with them on LinkedIn, you can go to KoreSummit.io, click on speakers, click on you can search by them by name or by, you know, specialty, their bio will be their headshot LinkedIn link, and including their email address. We want to make it as easy as possible for you to engage with them. So this next panel, I know most of you out there are thinking, you know, the lawyers, the regulations, how do they make our dreams come true? You know, they truly do. They truly do. Sara and I we were just getting started, she goes, but I’m always telling them you’re doing a wrong and I go, that’s how you make our dreams come true by telling us that what we’re doing is wrong. And you’re going to help us do it. Right. That’s why it’s so important. So today, I have the pleasure of having a phenomenal panel colleagues that I’ve worked with over the years and continue to work with as this ecosystem will evolve. So I’m going to give them an opportunity to introduce themselves, so you can meet them. And then of course, we will dive into the great discussion of these regulations under the Jobs Act. So as they say, ladies, first Sara.
Sara Hanks 01:39
Well, thank you, and thanks Oscar for, for setting this up. I’m Sara Hanks, I’m CEO of CrowdCheck Inc and managing partner of CrowdCheck law. Between the two entities, we do a wide range of Legal Compliance, disclosure and diligence for all of the jobs act exemptions, and happy to be here.
Oscar Jofre 02:04
Nathaniel Dodson 02:11
Hi, Nate Dodson, crowdfunding lawyers. Very similarly, all we do is represent the securities generally on the issuer side, I love working with entrepreneurs and really trying to help people reach their dreams, and kind of a little bit different than that saying, you’re doing it all wrong. I’d like to take the approach. What’s your goal? And that’s the main thrust. How do we get there? And I don’t know what’s going on with my screen. It looks a little fuzzy. So I’ll work on that as well.
Oscar Jofre 02:45
Yeah, no, you look good. All right, Marty.
Marty Tate 02:48
Yeah, hi, I’m Marty Tate. I am a securities lawyer that’s been doing this for over 20 years. I represent issuers, platforms, service providers, broker dealers, in this in the crowdfunding space and have been doing that for since the honestly, since prior to the inception of the Jobs Act, representative for a peer to peer lender back in in 2008. When we didn’t have regulations that were helpful in that it didn’t allow entrepreneurs to dream as well, I guess. But yeah, I’ve been working with other with Oscar and Sara for a long time, and I’m happy to be here.
Oscar Jofre 03:38
Perfect. Thank you, Andrew.
Andrew Bull 03:41
Hey, everyone. I’m Andrew Bull. I’m the founding partner of bull blockchain law. It’s a law firm that specializes in blockchain technology, pretty self explanatory. We work with a lot of clients that are usually using these exemptions to launch digital assets, whether they’re representing some element of ownership in a company or some other economic right. That’s really we’re just handling kind of the legal side of it. That as well as representing other clients in the technology space as well.
Oscar Jofre 04:08
Perfect. Thank you. Great to have you, Mark.
Mark Roderick 04:11
Yeah, hi, this is Mark Roderick, I’m actually Sara’s boss over at CrowdCheck. Not actually. I am a lawyer with a firm called Lex Nova Law and I have been doing nothing but crowdfunding for about the last eight years, represent all kinds of issuers and all kinds of offerings and a whole bunch of the funding portals out there, although only the ones who are complying with the law. Which is a minority I should say, but yeah, so yep, that’s what I do represent everyone involved in that. Wonderful, emerging, crowdfunding sector.
Oscar Jofre 05:06
My perfect Mark. Thank you. So today, the regulations is such an important piece of the Jobs Act. And so there, there’s, there’s three regulations. And we’re going to cover all three of them. And I’m gonna ask each of you to kind of give just a high level overview of each of the regulations, because I think it’s important that people understand that it wasn’t just one there were actually three that obviously, we’re going to talk about today. And there’s going to be one that’s going to, we’re going to keep it with a twist or so I’m just going to go through each of you to kind of start it. So Andrew, I’ll start with you, if you can go through Regulation D for us. So you can give us a high level overview of that regulation, from a company perspective, the investor and then therefore, and of course, the activity that goes with it from a company raising capital, please.
Andrew Bull 05:55
Absolutely. And I appreciate Oscar kind of giving me the softball question of the three regulations. So
Oscar Jofre 06:05
I figured you would know this one. Yeah,
Andrew Bull 06:07
It’s easy. It’s easy. So the commonly known is reg D, it’s the most utilized exemption typically in this industry, for sure. But the largest consideration is who is your investor pool. And under both the provisions, both 506 B and 506. C, for REG D, you’re really targeting accredited investors primarily in 506. B, you have a pocket of 35 non accredited investors, but that carries some additional requirements as well to implement but from a high level perspective, if somebody is looking to offer, say, equity in their company, or some type of debt offering, or anything along those lines in regards to a dividend right, or whatever the economic interest is, they’re most likely going after accredited investors in the traditional sense, and REG D really offers kind of a streamlined process for simply filing an exemption and making sure you’re in line with the anti fraud provisions of the Securities Act. So a high level, it’s probably the most common offering that at least we see in the industry, and is very highly utilized and can be very efficient from a starting point to getting the market. And as a result there, there are a lot of areas in the industry that utilize this exemption.
Oscar Jofre 07:22
Well, that’s perfect, thank you. And it wasn’t that easy. Because I’m we’re gonna come back to you seriously, I will. Because even though you simplified it, so many people misunderstand how to use it correctly. And, and this is going to be a discussion between you and Sara because there’s a reg D and a little s that comes right after it. So Alright, so let’s go to the next regulation. This is a tough one. So I’m gonna give it to Marty, tell us about regulation CF.
Marty Tate 07:53
Andrew and I were on a panel last week or so. And they thought they’re giving me a softball question and just said, Hey, so what’s a security? Honestly, I haven’t been asked that before that directly. So this is a little easier. So regulation crowdfunding, part of the Jobs Act. It’s uh you know, I guess reg D is more common is, you know, the most common reg reg CF continues to, to gain momentum. And I think it was when people think of crowdfunding, this is kind of what they they reference even though all three exemptions can be used to do quote, unquote, crowdfunding, but reg CF allows issuers to raise up to $5 million from accredited and non accredited investors, there are some parameters to that the offering has to be done through a licensed intermediary through so through a funding portal licensed funding portal or through a broker dealer. There are limitations on how much each investor can add how much non accredited investors can invest. And the benefit is that non accredited investors can invest. And it really is a good way for it, there’s not a lot of expense to it. You know, it’s fairly inexpensive, and allows issuers, companies, entrepreneurs, startups to go out and raise, especially if they’re good at marketing and get it working their networks to go out and raise capital from those from those networks.
Oscar Jofre 09:43
Alright, thank you. It was a tough regulation I could tell you were really good. You know, it’s, it must be all those years you guys go to law school that they give you something so it can’t be that simple. All right. Regulation A. All right. So Regulation A obviously we all know where that came from. So I, we owe it to Sarah to bring that on, who helped coordinate that and rewrite what we now have Regulation A plus, Sarah.
Sara Hanks 10:16
All right. So um, I’m going to start by sort of putting all of the the three regs in context, because all three of them are exemptions from registration with the SEC. Basic rule that we’re dealing with here is if you sell securities, however, Marty defines them. In the United States, that sale must be either registered with the SEC, or made pursuant to an available exemption. And these three exemptions are the available exemptions that apply to to crowdfunding. So Regulation A is probably you know, the big sister of all of them. And you’ll notice that Oscar had mentioned regulation A plus, if you go looking in the SEC rules, and you go searching for Reg A+, you’re not going to find it because that’s a nickname. RegA+ got its name. When original RegA, which has been kicking around since 1938, believe it or not, was upgraded, because nobody was using it. And David Weild, who you heard from earlier, he was among the people who said, look, you’ve got this great exemption, you should use it, you should make it easier for people to use it to raise money. So earlier, RegA was limited to $5 million. And if you did a RegA, you have to go through state not just to get reviewed by the SEC, but also by the states. New Regulation A, a plus, that lets you raise, since March, up to $75 million. Assuming that you use tier two of Regulation A, and you’ll notice when I’m talking, I’m always going to ignore tier one, because it doesn’t work for startups. If you hold real estate assets, and you’re selling in a number of limited number of states might work for you, it will not work for most startups, I tried it once it was a nightmare. So tier one, the rules there, I can raise up to $20 million. You don’t need audited financials, according to the feds, you probably do according to the various states. And you have to be reviewed by the SEC, and also every state into which you sell. So I’m setting that one aside, tier two of Regulation A raise up to 75 million, you file with the SEC and they review their all of the the financials and all of your material contracts, they push back that all of the disclosure, it’s a proper review process. But you do not have to go through any kind of state review, you just have to file state notices. You can sell to anybody accredited or non accredited. If you sell to non accredited, you have to make sure that they have represented to you that they are not investing more than 10% of their income or their net worth. And you can rely on their statement, you don’t have to individually look into it. The biggest piece of all of RegA, of course, is getting everything ready to go through the SEC because it’s not like registration. But it’s not just like, you know, fill in the boxes or answer a question here and then file it. It is it’s a substantive review process. And we’ve been through the process, I think 126 times though, and qualify 126 of them. So I am a huge fan of RegA, I think it is a very appropriate level of disclosure for early stage companies. And I would love it if the SEC would use RegA to be the basis for full registration for early stage companies. So they don’t have to file all the stuff about the blood diamonds and they have to have audit committees. It’s it’s perfectly pitched for early stage companies. Back to Oscar.
Oscar Jofre 14:16
Wow. That was good. That’s a great way to it is you’re right I mean, look, I’m a Canadian. And I love the Jobs Act. You all know that. I am the biggest champion I carry a flag telling everybody how wonderful until you live in other jurisdictions you really do not appreciate it. And that’s why every single time I speak to an entrepreneur just be thankful you have three choices. Be thankful you have three national, let me put it this way, national three choices, not just regional, three national wonderful exemptions. So we’re going to get into that dialogue. And I’m going to start with you, Mark. I know you and I’ve been On few panels together, and and I remember way back, we talked about, you know, the the importance of the retail investor and how this becomes a win win. So let’s talk about that right now with the Jobs Act, and in particular with the three regulations that we talked about how it becomes a win win, both for the company and for the investor, because I remember you saying that really eloquently in one of our panels, you may recall, it was only a few months ago. And I got that in you, you had a terminology for it. So I wonder if you could fill that in with that score.
Mark Roderick 15:37
I wish you had recorded that and could play it back, because I’m unlikely to match eloquence again. But actually, I mean, one, one thing that I and I think all these other panelists share, is we are evangelical, about the crowdfunding space. And this is actually part of answering your your question rather than just a speech. But I think I mean, all of us. Although I mean, I know I’m by far the the youngest of this world. But we’ve been doing this long enough to have seen how difficult it is for entrepreneurs to raise capital, under the old fashioned pre JOBS Act, systems. And, simultaneously, I mean, outside our role as lawyers, I think all of us are aware, and you’re aware, Oscar, and your audience is aware of the enormous inequalities of income and wealth that we have in this country and be around the world where, you know, the top 10th of a percent just become extremely wealthy, actually, beyond even belief. And more and more of everyone else gets left behind. And so it’s my view, that crowdfunding can address both things. And indeed has to address both things, we can have a system, a crowdfunding system that is only good for the issuers of securities, meaning only good for the entrepreneurs can’t exist by itself. It can only exist if it’s also good for investors, for ordinary Americans. At a conference in Chicago that I’ve been through several times, there’s a guy who always says, ordinary, hardworking Americans. But anyway, for ordinary retail investors to do well, right, we in the industry, I think too often look through only one end of the telescope, which is the issuer and portal end of the telescope. But you have to look to the other end of the telescope as well, and for the industry to prosper, as I believe it will, the industry has to look equally attractive from the investor end. And so ideally, what is going to happen here, if some of these funding portals will get their act in order either of their own initiative or being policed by government regulators is a system where entrepreneurs for the first time have access to capital, no matter where they live. Whether they live in Silicon Valley or North Dakota, no matter the color of their skin, no matter what their parents do for a living. And at the same time, ordinary Americans will have the opportunity for the first time ever also, to invest in very, very high quality, I’ll use the term institutional quality, investments that can begin to chip away at some of the income and wealth inequality. But the point is, it needs to work for both parties. If we develop a system, which you can, unfortunately, sometimes see the beginning and on some of the large funding portals where it’s sort of let the buyer beware, that’s not going to work over the long term. It may work over the short term, but not over the long term. It has to be everyone getting a good deal. Entrepreneurs access to capital, investors access to good deals, sometimes great deals and if that happens, as I think I and all the other panelists and you hope and expect it will. This is really going to be something big.
Oscar Jofre 20:02
I agree. I agree. You know, it’s interesting. And I want to touch on this and it wasn’t even intended but you brought it up. And we’re gonna hear more on this from Sherwood Neiss. He’s going to share the deep insights, who’s been tracking our ecosystem since day one. What is really, really astonishing with which everyone should really applaud themselves is that the Jobs Act is working, I want you all to know that I minorities are rising, and the crowd is embracing so that that equality is starting to happen, which is, is fantastic. And not only that the the age of the entrepreneur is shifting. It’s not just the millennials is the 40 Plus that are getting the larger rounds as well. So all that deep insight is showing that the work that’s gone into this is is great that the regulations need work. Don’t get me wrong, nothing’s perfect. We all know that we, all of us in this room we’ve all gone through. We need to make this thing work, somehow we do. Because we know that in the long haul, it’s going to make it better. So I applaud you all for for that commitment. And you are right. We’re all evangelist that this state, somebody always says, Well, what stage is this sector in? You know, Andrew Corn says we’re in first base, some people say where we’re only in a percentage, all I can tell everyone, I’m 12 years and like many people, I’m just as excited as I was 12 years ago. And I still believe that I got another 10, 15 years. And I know that it it’s it’s coming faster now. But I don’t know yet where it is because we’re still trying to solve a lot of the unknowns that are starting to arise, which is a good thing. It’s not a bad thing. It’s a good thing. So I’m going to turn the conversation a little bit now, Nathaniel, because, you know, Nate, my apologies. The combination of using regulation is one that comes up a lot by intrapreneurs. This ability, you know, I remember one somebody said, I want to do a reg CF and a reg D and a RegA simultaneously. Okay, I know you’re all laughing but so tell us that you know, the the combinations you think would work and why and which ones you think and just in your humble opinion, of course, which ones would not work?
Nathaniel Dodson 22:28
Well, sounds good. And when somebody says I want to do the reg D, Reg, CF, RegA I want the world, all I really hear is, Well, they’re trying to raise capital for the business. So it comes down to what’s the most effective and easiest way for them to actually reach those goals. And looking at the three regulations. I’m a massive fan of Regulation A, but it does cost a lot more, there’s a lot more work and time behind it. So it’s a fantastic vehicle, but not necessarily for that first round series A capital. Although it is great once the entrepreneur has their legs under them and are looking to take their business to that next level. Now, regulation CF. Again, it’s great for the startups. But there’s a lot of work, audited financials, generally, if you’re trying to hit that $5 million limits, you are working through the third party crowdfunding portals, there’s a lot more that is going on that side. And then to take kind of that, what’s the easiest, Reg D is absolutely the most used exemption, because it’s the easiest one to get it up, going, and start it. So definitely when you talk to the entrepreneurs, they want to see hey, how can I get my money? How can I get my business going the fastest and easiest way, at least in my humble opinion, it always comes down to kind of a reg D kickstarts. While trying to figure out next steps that series B or as it continues to grow, then you may consider a RegA or regulation CF. And to bring up how the different regulatory regimes work together. There’s always a concern, they call it integration. And integration means if you have multiple offerings happening at the exact same time or close in time together is a regulator SEC states. Are they going to look at everything that you’re doing during that time period, mash it all together and figure out hey, did you violate any of the securities rules. Previous to 2021, and really has changed, to helpful extent, it used to be, you had to pay attention to really the structure of the offering, what it’s doing goals, etc, if there’s two separate offerings within a six month time period, and that’s been changed now, at this point they have, they call it a safe harbor. And as long as one offering is closed, a minimum of 30 days before the next offering, then the the offerings don’t get integrated together. And really, you can run them not simultaneously, but it is in successive order. And with that, you could really do whatever makes the most sense, but between the series A, Series B, excetera. Also, we would have clients as an example, with the 506. B, they have greater expectations of the scope of the reach of their network, hit their head, and just, we can’t find any more money, we’ve got to go some other directions. There are some ways to just kind of go under the regulation CF, the 506. C, or even start the Regulation A process. However, no matter what, it’s generally easiest, to have a 30 day, close the offering, reevaluate what’s going on, to reopen and start moving forward. But there’s always those considerations going on as you’re going from round to round.
Oscar Jofre 26:43
Yeah, I agree. You know, the the one thing that prior to COVID-19, I think that was I think you’re right, everybody would start with REG D. Because it’s such you said it, it’s the easiest one, people go I don’t need audited financial statements, I don’t need this, I don’t need that. But I often wonder like when, when it comes to the total cost and the total component of onboarding, prior to COVID-19, I would get it you can meet the investor face to face, they would be not as reluctant to give you all that personal data that the company would need in order to do the verification or send them to some verification part. But now I’m obviously seeing a little bit differently. The question we’re asking companies, I don’t know if you guys are doing, my apologies, if all of you are asking this question, which is, do you currently have a pool of accredited investors who are going to participate in this round? If the answer is yes, but then, you know, I then let’s proceed with a reg D. I saw a presentation like this by Joel Steinmetz from Rialto, it was a really brilliant question, to ask the company to determine whether a reg CF was the right to go right now or a reg D. And by not having any, the pressure is both on the company and the BD to find investors in in this climate with the better choice was to go to a reg CF, they can still go out to the accredited as Marty alluded to, you can attract both accredited and non accredited and you increase your larger pool. Yes, there’s an initial cost. But that cost is so minimal, compared to the other route. So it we’re solving this, again, I keep going back to the same thing. Having great regulations to to make that happen is the key you you have that flexibility. So used to no you can’t and this is the only way to go. And that’s it. So I have always been caught up in that. So. So Marty, I, I just want to come back to you with one particular question because I know that you’re working with a number of clients. Where are you seeing from back to what Nate indicated from the three regulation? Where do you see the makeup happening within your with your practice? Is it reg CF, RegA is it a reg D reg CF, just give us a little bit of insight of that. And as I go to the other members as well.
Marty Tate 29:15
Yeah. And I think Nate really approached that correctly. I, every time somebody comes to me and says we want to do this offering, you know, do an offering and a lot of times we’ll get that, hey, I want to do a CF, Reg D, and a RegA. You know, I think that the the appropriate question is, you know, how much do you want to raise? And who do you plan on raising it from? And, and I think that there are, you know, we honestly, we, we see people using all three, and it a lot of it, like I said depends on how they plan on marketing and who they plan on raising it from and we I do a lot of fund formation work. And a lot of times these fund managers or experienced, they have networks and they don’t have any use for Reg CF or RegA they, they have their networks, they’re going to go out and, and use a 506, you know, Reg D offering, and that might be a 506 typically is 506 B, but they might say, hey, we have a, we also have a website, and we’re gonna put it up there. And so we’ll do it as a 506. C, for entrepreneurs that are, you know, just starting out, I think, Reg CF provides a really good solution for them, and really good access. And one of the things that’s that we’re seeing is that, you know, platforms, as more and more platforms become available, as broker dealers enter the space, you’re able to kind of direct them to the right spot that will help them raise that capital. And then some people just say, hey, five millions great, but we need more money, we have a good marketing. You know, we have a good marketing team, a good marketing plan, and we’re going to go out and so RegA becomes the answer, or they they just feel like that’s going to get them to where they want to go, eventually, and a lot of times, and other people can chime in on this, it’s you know, we’ll kind of start with both, we’ll say, Great, let’s go out let’s let’s go through the process, you ultimately are going to do a RegA but let’s do a reg CF. Initially, let’s get some of that, let’s get some money in the door to help you fund that RegA or to fund the marketing efforts associated with that. So again, it it really depends on who they are and where they want to go. And, you know, one of the things like I said earlier is a reg CF is not super expensive, and it allows them to, although you can test the waters in a RegA it does allow them to go out and and test the waters and that way and raise some capital that you know, and figure out how much interest they have. A lot of my clients have done RegCF. And they said, Hey, that worked out really well. Let’s go do a RegA because we you know, we feel like we have a lot of momentum. So
Oscar Jofre 32:17
That’s good. So, Andrew, I mean, you’re dealing in digital security. So of all the professionals here on the legal side, your firm has really specialized in a very kind of, I’m not going to call it a niche because it shouldn’t be that and I’m not because I think it we need to start dealing with the fact that if we’re going to have 1000s and 1000s, hundreds and 1000s of investors, the better way to do it is on blockchain. We clearly know that value. But you’ve been right at the forefront with that leading on. So tell us about the use of the regulations you’re moving to I know you and I come to light with Regulation A plus, which is fantastic. But give us your journey that you’re working with, with clients and these three regulations with digital securities,
Andrew Bull 33:00
for sure. Yeah, absolutely. And Oscar and I have had this conversation over a longer period of time of kind of the the misnomer around digital securities and tokenization, and a lot of different terms that are kind of thrown around that aren’t actually accurately describing what it is that someone’s trying to accomplish. So at the end of the day, they’re really trying to digitize the economic right, that would be offered in the traditional context. And so these exemptions equally apply in the digital asset and security space just as they would in the traditional asset space. And up until 2017, we actually didn’t even know that the SEC was going to treat different types of tokens as securities, and they finally weighed in on the subject and gave us some clarity around that, which definitely helped out a lot because that pushed a lot of us based companies and foreign based companies looking to offer in the United States towards these more traditional regulations, and the compliance side of the industry that I’ve been in for a while upticks drastically. So it’s been very, very beneficial that we got that clarity, even though it came through an administrative ruling against the company. So high level perspective is, ans I like to kind of clarify this point as well, is that utilizing Oskar alluded to this utilizing blockchain technology and really digitizing assets, isn’t changing the regulatory landscape by any stretch of the imagination. It’s just utilizing a different technology and more efficient technology to be able to transfer those assets and also verify who owns those assets. So realistically, it’s, and I think that some people in the industry kind of get confused around the lack of consideration over the exemptions because it really is an important step in this process to get to the point of being able to offer a digital security. So thinking about the exemptions, more specifically, back in 2017. When we got this clarity Reg D started really coming into the fray in that context, but at the same time because of some of the underlying principles and theories behind blockchain technology, Reg CF and Reg A, tier two specifically, really lends support to this general notion that I think David was describing in depth earlier about trying to open up to the retail investor in a kind of a regulated way. Because for those of you who know the cryptocurrency industry, there is a significant amount of non regulatory actions going on by companies in that space. And unfortunately, that leads to potential issues and run ins with governmental agencies like the SEC. So high level, we’re now seeing an uptick as well in the reg CF context, as these FINRA approved third party portals now start to integrate the technology into their platform, which really allows somebody that would traditionally just go through that platform anyways to do a reg CF, to be able to digitize whatever the economic right is that they’re offering. And you then take that and I want to go back to I think it was Marty’s point about the reg CF as a precursor to the Reg A. I think that’s such a good point. I wanted to just kind of overemphasize that, because especially what we’re seeing in the digital security space, there’s an educational hurdle for prospective investors more so than in the traditional security space, because they’re like, oh, do I have my own private keys? Like, do I need to create a crypto wallet, there’s all these questions that are not really prevalent in the traditional side. And Reg CF in that context also allows for that preliminary kind of process to go through of educating prospective retail investors in that context, which leads into then going to Reg A. I found a Reg A application in 2017 for a blockchain company that was tokenizing their assets. And it was, we think we got like 250 questions back from the SEC. Company clarity, they just pivoted and went to reg D. And luckily, that’s not the reality of today. And we’ve seen a large tranfers transformation. And the fin hub has been super helpful with the SEC. But But yeah, I think that just kind of harping on that notion that these exemptions that allow for this expansion of the investor pool really align with the way that blockchain technology is utilized in the traditional sense. And as a result, we’re seeing a massive uptick in the usage of those exemptions.
Oscar Jofre 37:22
Yeah, I, I’m glad you teed it off that way that it’s not a separate thing, it’s just gonna make things more efficiently. Today, the closing of the day is about secondary market trading. So it all starts, you know, the lawyers help you create your offering and make sure it’s fully compliant. So if you want your dream to come true, you have to start with a word, it has to be fully compliant. Because just because you got the money in the bank, doesn’t mean you won’t have to return it. And then you’ll have to wear a nice, pretty little orange outfit. So now we need to start really thinking about this. Yes, we, we now have the ability to trade. So you need to put that in your mindset. So all of that is the new considerations as you’re using these regulations. And I’m going to bring Mark in because there is something really interesting about these regulations. That wasn’t brought up. And I’m going to put the put it in here, which is, you know, we now know that secondary market is available. Now we have these wonderful regulations. And we obviously know Reg A is the ideal. But we’re also using reg CF as a stepping stone. But sometimes we’ve seen this and I know that Mark has spoken with Marty and all three of us we’ve had an interesting opinion on this, where sometimes that what’s happening here, a new vehicle has been introduced. So I’m going to give you an opportunity Mark to talk about the SPV notion, and I know you’ve shared your thoughts on with me previously with Marty, you know, do we need it? And where would be the cause when you would use it, knowing now that we got secondary market trading, please?
Mark Roderick 39:05
Well, yes, I am. I’m an SPV skeptic. You’re the SPV is a solution to a problem that doesn’t exist, but it’s a real problem. It’s a psychological problem. Many issuers, I guess, particularly those on the west coast to, you know, kind of surrounded by Silicon Valley, folks have come to believe or used to believe at least that if you do crowdfunding it, to use a technical term screws up your cap table. And so we can’t do crowdfunding. And because we, you know, we want to raise real capital in the future from the VC community. And so, you know, we don’t want to do anything to jeopardize that. Now, that’s just not true. You don’t screw up your cap table. Through crowd funding, you throw up your cap table by issuing the wrong kinds of securities. So as an example, if you issued securities to your 10 closest friends, and give those people all kinds of control rights, pre emptive rights, you know, the right to elect directors, blah, blah, blah, you have probably screwed up your cap table. Whereas if you give 1000 Reg CF investors a non voting stock, you have not screwed up your cap table. It’s not the number and it’s not the mechanism for selling the securities. It’s the terms of the securities. Nevertheless, there has been this fiction that crowdfunding screws up your cap table. And so how do we fix that? Well, we create an SPV special purpose vehicle where all the crowdfunding investors, you know, will congregate and they’ll have shares of the SPV. And the issuer will just issue shares to one entity. And that’s the SPV. So the issuer has one entry on its cap table rather than 1000. And now we’ve solved the problem. So the SEC in its in its almost unbelievable desire to help crowdfunding created this SPV, it became effective in march along with all these other great changes to Reg CF. And so companies can now as of today, you use SPVs rather than issuing shares directly. So on the one hand, it’s great, because we can now if we do have an issue where that thinks it’s gonna screw up its cap table, we can we can use an SPV. Instead, however, there are some issues and one of the issues but equally technical legal issue is the way the SEC wrote this SPV regulation as part of the Investment Company Act. It says if you invest in the SPV, you have to have the same rights that you would have if you invested in the primary issuer. And as an astute commenter named Sara Hanks pointed out to the to the SEC. Well, you know, for example, what if the issuer is a corporation and the SPV is an LLC? Or what if the issuer is a Mississippi LLC and the SPV is a Delaware LLC, you know, state laws differ. And the SEC kind of blew off that comment. Blew off Sara’s comment in a not quite intellectually honest way. And I personally have had conversations with the SEC about it, and sort of asked them well, did you mean to blow it off? Are you really saying that anything goes and you’re just gonna look the other way? And they say, No, no, no, we didn’t mean to blow it off. We what we really mean is that all the material rights have to be the same. But it begs the question, you know, if the difference between an LLC on one hand and a corporation on the other, there are definitely differences in material rights. So without going into any more detail, there is a nagging question as to whether SPVs as they are currently being used by the large funding portals are actually disqualifying all of these offerings. So that’s, that’s a thing to be concerned about. And then, of course, SPVs, actually, you know, don’t really solve any problems and they just add one more layer. A lot of people when they think about SPVs, Think, for example, well, boy, I’d rather only send out one K1, if I’m an LLC, then 1,000 K1s. But the SEC does or the SPV doesn’t solve that issue. Yes. You’re going to issue one K1. One to the SPV. But you’re going to issue issue it. The SPV’s not going to issue 1,000 K1s. So you’re actually gonna issue 1,001 K1. So with all that said, that’s why I’m not an SPV thing. But for practical reasons, it just adds another layer of complexity. And for this very significant legal reasons that, you know, by using an SPV and might be undermining the the integrity of the reg CF offering in the first place. However, there is one reason to use SPVs. I personally don’t think it’s a compelling reason. But it’s a reason. And here’s the reason, as all of you know, there’s this rule, under the securities laws that if you have too many shareholders, you have to start filing publicly as if you were a fully public company. So that’s the rule. There’s an exception to the rule, if you do a reg CF offering the shareholders who buy shares in that offering don’t count toward those thresholds. So that’s a good rule. But of course, this is the government. So there’s an exception to the exemption. If you get too big, if you have too many assets on your balance sheet, then you’re back to the first rule, you have to do public reporting. For reasons that I do not understand, but it doesn’t matter. The SEC says that, if you issue shares through an SPV, then you are not subject to that exception to the exception. So you can have as many assets as you want and all those SPV security holders out there don’t count toward the threshold. Well, you know, that’s something. Now, the likelihood, I think that most, for almost any reg CF companies are going to end up exceeding the threshold, you know, before they would start public filing anyway, or would have an exit, I think it’s going to be extremely rare. But it is a reason. So I think I’ve probably now confused the whole thing. Not a fan of SPVs for legal and practical reason. But there is this one thing, the section 12 G of the Exchange Act, thing that could cause people to think differently.
Oscar Jofre 47:29
I appreciate that you know it, I share your concerns, My concerns are a little bit more, they’re not more from the legal side, more from the practical side from an investor. I’m always trying to put that, let’s all not forget this, that we’re still dealing with, you know, investors that are not so much learning about investing, that’s not right. It’s just that they’re not familiar with all these terminology, safe, crowd safes, you know, convertible debentures, and all these things, which is very common, when you’re dealing with accredited investors. Well, even then you still need to provide level of education. But if you have to do to 30,000 50,000 people, it’s very difficult. But the biggest challenge I see is that if a company has already raised capital, and it already has a crowd, you know, and it has an ambition, I think Marty said it, Andrew said it, that to raise additional capital. Now you have this arm over here, investors, let’s say 1000, because you brought in the capital of the SPV. Now you do a Reg A you know, these people here are not going to be able to participate the same way the ones that are coming in Reg A. So I’m looking at it more from just a How does it look from the optics point of view from an investor’s, how they feel about that? [Uncertain] over here with that, I thought I invested in the company directly. And that’s another thing. The SEC should be paying a little bit more close attention how that is disclosed. But you know that we’ll get to that hurdle. So but yeah, it is an interesting component of regulation CF that I want to bring up. And I’m going to bring another one now. And I’m going to let you all chime in. But first, we’re going to start with Sara. So I don’t know how many of you are familiar with this. And I know the audience here I got asked this question a few times. And I want to make sure that I address it and we definitely have the time. So I want to take advantage of it. And we’re going to talk about Regulation D with S. And so but I’m going to give you all heads up okay. So before you say anything, regulation S is regulation Sara Hanks, okay, good. So now you know, so just remember that. So let’s talk about regulation. So I’m going to go to you Sarah, give us an overview. And then you and I have spoken very candid about what people need to watch out for and then I’d be interested to hear please jump in ask questions from from Marty. Nate, Andrew, obviously, you’ve all used this part of it. How does that fit in with what we’re with the insight that Sara’s gonna bring out. Sara?
Sara Hanks 50:12
First of all, part of the question, it really doesn’t work very well. It’s fits incredibly uneasily with any of the exemptions that we use for crowdfunding. And the reason is that Regulation D 506. C, regulation a, regulation CF, all permit general solicitation, regulation S does not. Now what regulation S is, is it’s an exclusion of the securities of the application of registration requirements of the Securities Act. It’s not technically an exemption. It is an exclusion that says when you are selling securities outside the United States, United States registration requirements don’t apply. And you might think, Well, yeah, duh, you know, obviously, but the reason that reg s had to exist, and it’s based on release 4708 before it and wrote no action letters based on that regulation, the reason it had to exist is that section five of the Securities Act says if you sell securities to the public doesn’t say, in the United States, and so you needed that clarification. US law applies when you’re selling in the US when there is a jurisdictional link. And so what reg s is saying if you’re selling euro bonds, which is what it was designed for selling euro bonds in Europe, pursuant to European regulations, not required to register with the SEC. And so you know, it was used in very large offerings or multibillion dollar offerings, Euro bond offerings for years. And then, of course, we come round to crowdfunding and everybody’s Yeah, I’m doing ICOs, and I’m going to sell them in Bermuda. And I’m using regulation s, and I’m going, but you’ve got the offering here on your website, and I in the US can see it. And so you’re offering to me. So that doesn’t actually work. Because regulation s is supposed to be completely outside the United States, no directed selling efforts in the US and directed selling efforts isn’t exactly the same as general solicitation, but it’s almost a complete. If you are generally soliciting, you’ve almost certainly done some directed selling efforts. And direct selling efforts can be even broader. And you’re not allowed to do directed selling efforts under reg S, which means if you’re going to do reg s alongside a reg D, you have got to geo fence, the reg s, you put all of the material there, it is not accessible in the United States, US persons can’t get to it, and you’re offering materials in the US should not say anything at all really about regulation s. The most we ever say is we’re simultaneously doing offerings outside the United States. People know what that means. But that’s the maximum you should be doing. It really does have to be completely offshore. And not have people say, oh, yeah, I’m definitely offshore. You know, I’m seeing that. I’m seeing the offering on my computer. Yeah, I’m, yeah, I’m in Cayman Islands, or I’m in Bermuda. Just don’t, don’t let don’t permit that to happen. And so even though it’s my baby, I love it. It took a few years out of my life, it is not something you really want to be doing together with Regulation D.
Oscar Jofre 53:57
I was on mute, here I was talking. You know, that’s a great insight. You know, Sara, I get into conversations with people that think I just want to get your thoughts on this as well. And please, anybody else that wants to tie into this, but often people get the assumption that because you follow reg S, now I can go outside of the United States, and then I can target non accredited investors because that’s what reg S allows, can you bring some clarity into that?
Sara Hanks 54:27
Yeah, that’s that’s, it’s good thing you raised that because that’s another really common mistake. Regulation s tells you how to avoid the requirements of us securities laws, by making yourself not subject to them. It does not at all affect what’s happening over in France, Bermuda, Barbados, wherever are in all securities offerings in all developed countries. There are usually some form of rules about how you can make securities offerings. Who can make those offerings. So the equivalent of, you know, registration under the 33 Act, and registration of broker dealers or similar people and people making financial promotions, regulation s doesn’t help you with any of that. You’ve got to go to French law, if you’re selling in France to non accredited, you’ve got to go to French law and say, Can I offer this sort of thing in France? And what do I need to register or qualify or get approved? And am I allowed to do it? Or do I need to go through some regulated person, all regulation s ever does is say, the US registration provisions don’t apply to this transaction. And by the way, just the registration provisions, anti fraud always applies. If there is any Nexus at all, the SEC is going to get you for saying misleading things.
Oscar Jofre 55:52
I don’t know about the rest of you. But that’s see, yeah, it’s, it’s a good eye opener for everyone. It’s not the past that everybody, I was in a previous call just to this i with a company out of Florida, and I live in Canada. So I already know, if I can sell to non accredited, and not again, you. And so that’s why we we operate the way we do. So here. I’m going to go around. I want to get your your your predictions, because we’re closing off 2021. So think back each of you just take a couple minutes. Think back of the work that you’ve been doing. Where do you think it’s going to be now for, you know, for the audience that’s coming in, of course you’re going to listen to but based on what the work that you’re working on right now, where do you see it? Is it going to be a mix of reg CF Reg A or you can still be doing the one over more than the other? I’m really curious to hear that. Obviously, this is just your your insights into to the regulations, because I’m also going to show you right now on stage, this is what the audience is saying. So the audience is right now that we that participated 44% of them are saying that they want to do a reg cf, 33% are saying Reg A so right now, it’s it’s almost like 75% of the of the what, wait a minute, the votes are coming in. But as you can see, so based on that, I’m going seriously. Don’t you guys love this new tool? We never had this before. We can ask a question and and then we see what’s right there. You guys can’t see it. It’s on the screen. Oh, I’m sorry. I see the question. Oh, yeah. So it says that. So reg CF right now 41%. Reg A is 41% Reg D is 16%. So based on that, Andrew, Bo, I’ll go to you first. Where do you? Yeah, tell me about 2020 22.
Andrew Bull 57:54
Yeah, absolutely. I, I really think that. I mean, going back to your point about the impact of the pandemic, and face to face conversations and how crucial those were in the traditional sense. I see Reg A, and REG CF really kind of skyrocketing in terms of adoption, maybe not skyrocketing, but increasing in adoption. And also, because of the recent increase in the amount that people can raise. I think that’s also another massive contributing factor, that we’re gonna see a pretty large uptick there. And as more and more people kind of see this movement going on in specially in US society in terms of access to investments, and so on and so forth. Those are going to be more interesting from the perspective of people looking on which one to choose.
Oscar Jofre 58:39
I’ll leave it at that. Perfect. Thank you. All right. So Nate.
Nathaniel Dodson 58:48
In this case, very similarly to Andrew, I do think that reg CF and especially Reg A are exponentially going to catapult over the next year, if not more, I think a big driver is actually going to end up being the tax laws with everything that people are talking about in Congress. I know one of the big concerns with the economic disparity is the the top 1% the accredited investors, top 10% have access to investments that the regular people don’t. And there there’s been the story earlier than the year that Peter Till’s Roth IRAs worth $4 billion. And I’ve heard the rumors and the arguments and the discussions about well, why don’t we just not have qualified accounts, the IRAs be able to invest into the private deals. And I think eventually, they’ll probably do something along those lines, but they’re going to draw a line because it’s really to allow everybody to participate and know everybody to benefit, which reg CF and Reg A plus, absolutely do. And so I think if they do ever come down with those laws, I think they’re going to carve out the reg D options, but still allow the qualified accounts, the IRAs, to invest into reg CF and Reg A. And at least kind of going from past experience and working with issuers that some of them have large amounts of IRA investors, if that’s their only avenue, that’s where they’re going.
Oscar Jofre 1:00:36
Perfect. And it actually that coincides with where people that are attempting these, where they’re thinking their mindset. And Marty, you’ve been sitting there quietly, my friend, I was what I was wondering if you were gonna step into the Reg S discussion, but please give us your, your, your insights where you’re heading for 2022.
Marty Tate 1:00:54
I don’t want to, you know, step on Sara at all, I meant to let her go. I did want to poke Mark a little bit on his SPV of the passion as a SPVs. But we had another panel discussion about that, um, you know, one of the things that I’m excited about is just the is the evolution of both of these offerings, and especially with the increased amounts. You know, I think that a lot of offerings before that, we would kind of say, well, I think your only option is trying to do either a reg D or a Reg A offering, you know, you can now we’re going to say, Well, I think it makes sense, let’s do a reg CF, I mean, with the 5 million limit. And on the Reg A side, you know, we’re seeing some really kind of fun and creative Reg A, people doing things that are, you know, out of the box using Reg A, which I think is is fun, you know, you’re seeing stuff on the digital security side, we’re seeing stuff on you know, one client, we’re we’re doing like a rewards program. And we’re doing that all through a Reg A. So I’m just excited to see how that they use and, and creativity will continue to expand.
Oscar Jofre 1:02:16
Perfect. So that’s the, you know, it is it is important to note that, of course, all of you, I’m gonna get to Mark here is that you’re seeing the power. And it is interesting how shifting the discussion point from, you know, we want you to have the best success, and the best success is now rethinking the strategy of the exemption, not to worry about what it is, I think it was, yeah, Sara started it. All three exemptions, including the accredited investor is crowdfunding, general solicitation lets get it through everybody’s mind. So you don’t get hung up. It is crowdfunding. And someone even wrote a book wrote an article that all venture capital money is crowdfunded. That’s what they do that grabs on. So Mark, the I, I bring come back to you, I hear your comments for 2022 on the regulation side, I know you’ve been there from the beginning. So love to hear your comments.
Mark Roderick 1:03:13
Yeah, I know exactly what’s going to happen in 2020. No, the as I tell people every single day, so we what we are witnessing is a, a real shift a seismic shift in how, you know, private American companies raise capital, up until March of 2021. Reg D you know the the old fashioned private placement I think a small slice of that in terms of dollar value and 506 C what we call crowdfunding, you know, most of it just private placement after private placement among accredited investors, you know, using private money and, and private sponsors that that has how capital has been raised by private companies for you know, certainly since 1982, when Reg D was issued. Reg CF is now is going to be is becoming and in 2022 will continue to become the place where American companies raise capital. Every day, I’m sure all my colleagues on this panel, get calls from prospective issuers. You know, this is what I want to do. How should I do it? And in the past, it’s been more complicated. We’ve had reg CF now for five years, but it has basically, it was tiny and almost useless for most of that time. So he talks about, you know, 506 C Yes, you can advertise it great but can’t have a non accredited investors and 506 C and 35. And Reg A is too expensive. But increasingly I find myself coming to the conclusion as I’m having the conversation, and then communicating to the issuer. It’s reg CF, what’s the downside? What is the downside of reg CF these days? You know, most companies that go out to raise capital are raising less than 5 million. And you can always raise more on a side by side offering for quite easily from non US investors using Reg S, Sara. And you know, and you can include non accredited investors, checks another box, and accredited investors can invest as much as they like, checks the last box. So there’s no downsides, or very, very few downsides to reg CF. So I see the entire market of private capital moving to reg CF, I just, I don’t see any reason not to use it, you know, otherwise, of course, if you’ve already got your investors lined up, and you’re just, you know, you’ve got a handful of accredited investors, and you just need someone to prepare paperwork, that’s a different thing. Because you don’t want to pay the funding portal. It’s commission. But lots of times, that’s not the case. And therefore, I think reg CF, will increasingly become the place.
Oscar Jofre 1:06:57
Thank you. Thank you. And, Sarah, you’re right at the heart of this. You’ve been there. We’re knocking off I won’t say decade plus two. There you go. You’re on?
Sara Hanks 1:07:08
Yeah, it is almost 10 years since I started tracking all of this. Um, the one thing I would say with respect to Mike’s prediction on reg CF, is there are some companies, Canadians, for example, investment companies who are relying on an exemption from the Investment Company Act who can’t use reg CF, so they are automatically pushed into Reg A. But the on the looking forward basis, what I’ve seen in the last maybe six months, and I think this is going to be a big part of our future is we’re in a period of consolidations and mergers and buybacks. I have done more in terms of mergers and trying to apply the roadblocks that are imposed by rule 145, which says basically, if there is a vote, there is an investment decision. Therefore, you’ve got to comply with the offering rules. With respect to acquisitions, as many of these early stage companies are merging, are also seen some buybacks. Also, I have seen a bunch of precision offers. And I think we’re gonna see more of them. Because, like, is it to take us back right back to the beginning, I spent a lot of time going, y’all are doing it wrong, you got to fix this, otherwise, this industry is gonna go die. So rather than not being the, you know, dare to dream, I’m like, I am trying to avoid your nightmares for you. And that’s a lot of what we’re doing.
Oscar Jofre 1:08:44
I love that. Actually, that is, that’s a great Hey, that’s how, you know, they’re nothing worse for an entrepreneur, if you all know what it’s like, at night views, you wonder if it’s working if it’s not working. And one thing that I do want to mention, Mark brought it up for regulation CF, which you’re all going to hear this afternoon, there is another option, the funding portal is not the only option anymore, which is really a testament to this work that all of you have done today. So Sara, Nate, Marty, mark, and I know Andrew Bull had to step away. Thank you so much for a great, great session. I, you know, I know that we’re going to need to continue to keep doing this journey of educating entrepreneurs. And I almost feel like that, you know, we just regarded reg s for a long time. We thought that everybody got it. I think it’s time to we need to rekindle that. Bring it out to make sure that if you’re going to use it, use it properly. That’s it just use it properly. Because doing the other way is very, very painful, more costly than you could ever imagine. Lawyers are not here to make your dreams fizzle away. They’re actually trying to make it so they become a reality. The reality is this been able to attract investors to be able to do it compliantly. So it goes in your bank account so you can grow your business. That’s the reality. The reality isn’t where you do whatever you want, bring the money in, and then you got to do with the SEC, because that is not a reality because you have to do penalties. Bring the money back. That’s not where anyone’s want to see. So thank you so much, everyone looking forward to 2022. Just as a little heads up January 26, is the next event, which is as you dare to dream, now we need to get into the work. The goal is what do you need to do to get it done? Thank you, and we’ll see everyone in the next panel. Thank you. Thank you all