What Due Diligence do I need for my RegA+
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.
Founder and Managing Partner
Founder and Managing Partner
James C. Row, CFA, is the Founder and Managing Partner of Entoro Capital, LLC, a middle-market investment bank based in Houston, TX. Mr. Row has over 25 years of experience in capital raising, deal structuring and energy finance, including project finance, equity and debt securities, risk management and digital securities. He has originated and arranged funding, in excess of $10 billion. Mr. Row is a Chartered Financial Analyst and maintains Series 7, 24, 28, 63, 79 and 99 FINRA securities licenses. He serves as a member of leading industry groups such as the Houston Society of Financial Analysts, Houston World Affairs Council, and Houston Producers Forum. Mr. Row is the author of several oil and gas issues and a featured speaker at global industry conferences.
Theresa Hyatte is a securities attorney focused on capital raising transactions under Regulation A, Regulation CF, and Regulation D. Her practice includes clients that are established companies as well as startups, and includes advising on corporate governance, ongoing disclosure requirements and communications matters.
Oscar Jofre 00:01
All right, so we’re just getting ready to go on YouTube Live. For our attendees, we’re ready to go at 330. So just bear with us just 30 seconds. Okay, so let’s get started. And welcome, everyone for once again, the core summit webinars series. 2021. Good afternoon. My name is Oscar Jofre. And I am so delighted again, that you are joining us for a great discussion this afternoon with a great panelists, which I’ll give them an opportunity to introduce themselves today. But before we do, I just want to tell you the format for those who have not attended before, we normally do them for about an hour, 45 minutes of us talking. That’s right, no presentations, we get a little wild. And we do get derailed. And it has happened to us already. So but bear with us. And of course, there’s a little button there on the screen where you can click raise your hand, and we will take your question and ask it away. We’ll give you 15 minutes to ask all the questions from these great experts. And if you want to see the information, go to www KoreSummit.io. You can see the speaker’s information, their their LinkedIn link, and of course their email addresses so you can connect with them directly. We’re not trying to trying to make it easy. Today, I’m joined by two great panelists. I’m going to get them to introduce themselves first, and then we’re going to dive directly into the heavy duty topic. Ladies first reason
Theresa Hyatte 01:34
everyone, I’m Theresa Hyatte, I’m counsel at CrowdCheck. We work on Regulation A offerings, regulation CF offerings, as well as private placements and regulation D offerings. I’m excited to be here. Thank you, Oscar, and excited to talk about how we can help you with your due diligence and how to look for pitfalls and make the process go a lot more smoothly.
Oscar Jofre 02:00
Like that. Perfect. I like the background, by the way, I like it. It Frankly, I love it. All right, Mr. Row, the one and only.
James Row 02:09
Good afternoon, everyone, Jim Row with Entoro, actually, from I’ll speak from the broker dealer perspective Entoro securities. And so in total overall investment bank broker, dealer, valuation service array, etc. I myself, am the Chief Compliance Officer, and person that’s ultimately ultimately responsible for due diligence and compliance. So, look forward to a good panel here, Oscar, and thank you for the invitation.
Oscar Jofre 02:45
It’s always great to have the day experts. I mean, today, the earlier session we had was about, you know, what do I need to prepare? And obviously, it’s always high level. And people wonder why so many webinars around RegA? Because so many questions get asked by clients, and what we’ve done help with the help of our partners and our ecosystem. We took all those questions, we make them into a webinar, and they do cross but we’re bringing it in from that point of view. I know the other day, we got a little derailed, and one of them do apologize in advance, but it does happen. So today’s topic is, what due diligence Do I need for RegA and this is, at first some people were even the ecosystem, saying Oscar, there’s no due diligence for RegA, and I go, Well, I’m gonna put it, I call it due diligence to get people’s attention. But what it really is, is that companies need to know what is going to be the regulatory compliance items they need to have prepared and ready for when they go in to do this to follow the form when we we keep using the word form one a and I was leading that in the last conversation, people keep thinking for money, ask her job free, sign my name, and I get file. And we’re going to demystify that today with Lisa and of course, the broker dealer. You know, the other question I get asked, you know, broker dealers charge a fee. I mean, what do they really do? What are they? So we’re going to cover those two items in depth, because I think it needs to be unique for the audience today. You need to appreciate the amount of work that they’re going to do for you. But more importantly, is to inform you, what do you need to do to be prepared? So we’re going to start with illegals first, and we’re going to hop back and forth in there. I’m going to put trees on the spot because so in full in full disclosure for everyone, a CrowdCheck is my law firm as well. So full disclosure, everybody we work with here, but and I’m going to a RegA. So I know when I got that list from Sarah, my jaw dropped from here to the ground. Yeah, I’m going I need a session just I’m not I mean, you call it the RegA questionnaire. Right, so tell me what’s beyond I see it as a due diligence. But let’s start with that.
Theresa Hyatte 05:06
Well, it is a form of due diligence. It’s also a form of getting your documentation in order. so that it’s easier to prepare your form one a, the form one a, as you mentioned before, that’s the document that gets filed with the SEC. And it has a lot of items in it, that require everything from executive compensation to just a plain old description of your business to risk factor disclosure and your financial statements. But going back to the checklist, it is a lot of documentation. Not all of it applies to every company. What I like about it in particular, is it gives me a chance to really get a top view of the client before I’ve even had a conversation. But more importantly, it gives the client a chance to really think about the offering statement that they’re preparing and think about who their stakeholders are, if there’s one common denominator, I’ve heard from clients that are approaching regulation, a, it’s that they really wish that they had thought about getting their stakeholders on board early in the game to kind of smooth the process over. So when I talk about stakeholders, I’m talking about in particular, let’s say I with my lawyer, I always say go start first, with your contracts, go to your material contracts, go to go to anything you have with vendors, with suppliers, manufacturers, go through those see what they have, what information is in there? Is there sensitive information? Is there trade? Are there trade secrets? Is there in that just from your side, look at it from your Counterparty side, and be aware that you those have to be filed? If they aren’t material? We can talk more depth about that. But I think that’s a good place to start. And also be aware that as you look through that if you have to approach a particular Counterparty about this contract and say, Hey, we may have to file this with the SEC, are you okay with that? What do you see in this contract? That or agreement that has sent that sensitive for your company or for your business? There may be a lot of back and forth on that. And some counterparties, believe it or not, will seek to take leverage over that and maybe renegotiate a few terms or a few items. So it’s good to be aware that that’s a possibility.
Oscar Jofre 07:29
It’s a great comment, you know, when I when I received the checklist, and I mean, I’ll get to you, and Jim, because obviously the broker dealer was somewhat of a similar, obviously not duplicating, but it was, I mean, it’s 57 pages. I mean, I’m just looking at ours right now, as we’re preparing I’m going. I mean, it is, if you’re, if you’re not prepared for it, it will catch you off guard, because you have this mindset in your head that, you know, because we’ve we’ve been simplifying, all you got to do is follow form when it I mean, I hear ourselves in conversations with clients, right? All you got to do is go, you know, he came a lawyer and form your form when they can do it in 30 days, 45 days. But it’s a little bit more than that you’ve talked, you’ve touched on it a little bit on the agreements, but it’s digging deep into all aspects of the business. The, from what I can tell, can you go into more detail some of the I mean, we’re not going to go too deep in but all the high level points because I think it’s important for the audience to understand being prepared to come to law firms like Boucek is critical for them to get to a to b quicker, right.
Theresa Hyatte 08:37
So that brings an excellent point up one of the other pieces of it is you’re right it, it can be overwhelming. In particular, if for some reason it seems to be a difficult point is the capitalization cable, getting that and your meeting minutes so that everything jives together because most companies, most startups, most small companies end up paying equity to employees or to other consultants in order to when they want to conserve cash or put the cash into the business and give people an incentive to help grow the business by giving them equity. If you’re not keeping track of that you could have problems. You may not know how many shares you have left that have been authorized on your initial articles of incorporation or certificate of incorporation. That can be a problem. You may not know where your shares are or who has them or helmet. They’re outstanding. And you know, one of the things that CrowdCheck does is we really try to make sure your capitalization table is thorough so that you aren’t going to run into that problem. And we also go through your meeting minutes make sure you have the board authorization and board consent and we’re required the shareholder consent as well for the various authorizations and issuances. So, that’s one piece of it and it is a big piece. That is a lot. I will confess I’ve spent more probably more time than I want to confess there. capitalization tables and going back and forth between documents and trying to make the numbers add up. That’s a big piece of it. The other piece of it that is a lot I find is the testing the waters materials. This is another stakeholder, you want to get on board early, and make sure they understand the rules, that would be your marketing folks. They spend a lot of time carefully crafting and designing materials to make your company look great to have your brand out there and have it be distinguished. And all of a sudden, you approach them with these very large legends that are in all caps, and can really muck up their artwork, and that can be frustrating for them as well. So you need to keep track of that one, they need to know what that is. Because as you proceed through the one a process, those disclosure requirements, the legends or links that you have to provide it changes. So it’s really important to have those folks on board so that they know when what they have to include and when they have to change it. And they know to run it past either in House Counsel or run it past us.
Oscar Jofre 11:09
Okay, I’m going to get back to you, because I’m going to get you some time to go through that massive checklist you guys gave me. So thank you. I’m very happy. I’m excited. Thank goodness, I gave it to her Jason a laugh because, like, Yeah, get to assign it to someone. So Jim, I’m going to talk to you because, you know, the broker dealer role in RegA up until recently, it’s been I think, in better words, mountain, it’s been treated as a commodity. And it’s sadly so it was done because people didn’t truly understand the value. So we’re going to talk about the value of the capital race, of course, we’re bringing in but at the beginning stage, what what part are you undertaking to to look at this company that you’re bringing in, obviously, the law firm is going to do a heavy load, what more additional is the BD going to need in order to satisfy your requirements?
James Row 12:08
Well, it that many of the things that Theresa and her shop would need same things we would need, right? So there is a fair amount of duplication. RegA does differ from a, you know, reg D, or reg CF offering, or even a public offering. Every exemption has its little quirks to it. But you know, at the end of the day, a lot of the material is the same for us, you know, it’s we still have to do a lot of, you know, checks and background activity as well. You’re not released from FINRA and the SEC about you know, KYC and AML. And, you know, all the rest of the things, you still have a lot of those duties to perform your point about. You know, commoditization is an interesting one year, right, historically, the broker dealer just did kind of, you know, very simple task. And, you know, it was kind of left to the, to the issuer to raise their own their own funds. But the differentiation between broker dealer some offer different services, we do we do some things that are different. So there’s, we do a little bit more extensive due diligence and compliance work and maybe some others. That could be either good or bad. But broker dealer record functions a bare minimum. And that’s usually what you’re implying with the commoditization aspect of it. But that’s Yeah.
Oscar Jofre 13:40
But what else? Are you looking? I guess, maybe let me let me be more specific. And I do I mean, this is a I brought this subject up because somebody in another webinar asked something really interesting. And I didn’t have an answer. I really didn’t. And I, and I, and I even said, You know what, I’m going to create a webinar. And even Sarah was asking me, Well, what are you doing? What are you talking about? I said, it was an interesting question, and I think it needed we talked about preparation, but what are we preparing for? Right? So this is, what are we preparing for? So I get the broker dealer record, but from a tourist point of view, I come to you you obviously know I’m with Project Okay, that’s great as a lawyer, but from a broker dealer, you have some fiduciary compliance requirements you need to meet as well. So what do I need to come to you with prepared? So because remember, I haven’t followed my form one eight yet. The reason I’m talking to you is because I want to do that. And you need to do your work as well to satisfy your requirements.
James Row 14:39
Well, look, there’s for any offering, you always have to have, you know, know your client know your customer rule, right. So you you want to know what the background is of your of your customer. Unlike a public offering or anything else, what do you do with RegA? reg CF for D, you’re much more reliant on the management team. So the success and failure factor is much more reliant on that, that individual or that management team to be successful. So a lot of assessment goes into both the hard and soft components of that assessment. So, but a lot of can be just background checks and kind of the starter kit for that. So, to me, making sure that you do good work on the front end is critical. And then also, you know, from a broker dealers perspective, you can you can maybe have a mistake or overlook certain aspects. But if you fail some of those early, you know, customer hurdles, that’s inexcusable in their eye.
Oscar Jofre 15:44
Yeah, of course, of course. And obviously, this is the part that you know, some people we don’t skip, we don’t go into the details of it. And obviously, FISA, you touched on it on the legals, which I think it goes back and forth between the two of you. This is something that I why I specifically brought a lawyer and a broker dealer to the conversation,
James Row 16:03
because on one thing I can I make a point, though, Oscar, you know, I mean, I know where you’re, at some points to make as far as moderating but you know, the one thing that can never stress enough is, you know, prior planning prevents piss poor performance. And I’ll say that 10 times in this, this webinar is, I’ve never seen, I can tell you, I’ve seen some great management teams, and they think they’ve got it all perfect. And there’s no one that’s ever had a perfect ever, in the recorded history as anything ever been ready to go. And there’s always something and, and, you know, I, I give a hat tip to those groups that get pretty close. But it can take, I’ve seen groups think they have it, right. And ones that jump up and down and swear to God, they have it all ready to go. They’re the ones that are six months later, still trying to figure out how to get to, you know, question 12 on a, you know, 200 questions, you know, 200 point questionnaire. So, it, it takes a lot. And, you know, people Theresa’s point, you know, there’s a lot of things on those checklists. And it takes a long time it I mean, if you’ve been missing some minutes, you got to go back, you got to make sure everything’s in order. These things take time. And obviously, it’s some of the things you learn, you know, when you’re younger, you know, a little bit at a time all the way along, you know, the, you know, do your homework a little bit, all the way through it, don’t try to jam it in on, you know, the night before the test. No,
Oscar Jofre 17:36
I agree, Jim, I think that that’s a great point. I, you know, planning, planning, planning, and I think this is an area that why this was this particular one, I, we created this because we felt that we were getting right to the point with saying follow form one, but we weren’t really telling you anything. And we’re now what we’re now stressing instead, you know, come prepared, and there’s always going to be other things. But these are the basic requirements are going to need to have and, you know, Theresa touched on it, the contracts. That’s an important one, I never, it never even dawned on me that having a material agreement with another party. And it’s rather interesting that you bring this I just shared this with my last panel, I had a client, I’m sorry, we have a client. We have a client in the real estate space, who filed a form one a, I didn’t recognize the lawyer, but they came to us and all that and they go, can you create an invest button for us, and you’ll be the TA and all that. But I want them to sign a nondisclosure agreement before they can view the remaining deal. And I’m going Excuse me. It’s a form one in the data is already in Edgar and because what are you talking about? It’s a public information. I already pulled your filing I already got. How’s that possible? How did you get it? Okay, come prepared your point. These are all the little wakeups. But there is one question I’m going to I’m going to put you in spot reset, because, you know, part of the I’m not going to blame project. But I think part of the commodity aspect that happened in the broker dealer community, part of it came from Desa regulation required to have a broker dealer we all know the answer is no, that isn’t the issue. The issue now is about best practices, and ensuring and proper offering to get to there quicker. So in your view, that’s bringing the broker dealer in early during the phase of during the draft phase, bringing the broker dealer to uncover because the broker dealer will also do their due diligence that items that you may need well, that assist you as well as personally. Absolutely.
Theresa Hyatte 19:41
We work together. It’s crucial because broker dealers often I can’t speak for Entoro. I know they’re a terrific firm, but I have not had the pleasure of working with and Entoro yet. I look forward to doing so one day, but the broker dealer in my experience has been heavily involved in helping the client figure out the offering terms and what makes sense for that particular company. They’re also good at helping them with valuation and trying to figure out share price, or if they want to offer perks or discounts or bonus shares. The intermediary platform and or the broker dealer can be tremendously helpful. And that is crucial on my end, because try writing a document when you don’t know what’s being offered. It’s, you know, that’s like trying to write the document without having the financial statements in front of you. It’s, it’s a key thing.
James Row 20:37
Oscar Jofre 20:37
it definitely is. So, okay, so we thought, obviously, so if everybody’s listening carefully here. So what has changed from our dialogue from over a year ago, two years ago, we’re now saying how imperative is to have the broker dealer because they do get a they have a fiduciary duty to look for things like bad actor. Jim, are you doing a bad actor check as well with it, you’re doing that as well. So does it make sense to coordinate the efforts without with a law firm? In Windows or? Treece? I’ll put you on the spot? Is the law firm doing the bad actor check? Or is that something you rely on the bat to do?
James Row 21:13
Well, I like doing. I like doing bad actors. I like doing a lot of things on my own just because I always feel that there’s a few things that are worthwhile. Making sure you do. As I mentioned, background checks, bad actor chase some of the things just to make sure you like I said you can have a mistake with FINRA and the SEC on the financial thing being inaccurate or something like that. But it’s if it came down to someone that had a track record of fraud or securities violations or anything, and you didn’t catch it. And it was something wasn’t disclosed or something that’s the one that they’ll hang, they’ll hang me for sure. Right. And those are the those are the ones I like to double check, triple check. Those are the low hanging fruit, my, my world to make sure you just do a good job and verify as far as, as far as you know, some of the other things that can be, look, everything’s important that there are orders.
Oscar Jofre 22:25
Yeah, they’re, they’re up. That’s a big one. I mean, we don’t think about what is the bad actor check in, you’re doing it. And that’s great.
James Row 22:32
I mean, it’s people, you know, even in today’s age, I’ve had people, you know, you go through a thing, and I’ve had had one guy that, you know, I’ve kind of cruise along and kind of looks like it’s okay, and you just kind of made come to find out the guy had not only been convicted and gone to jail once, but twice for securities fraud. Right? So you don’t you know, you’d let somebody like that slip through what the heck has been we’re gonna do or the SEC, you know, they’re gonna look at me and go what, you know. Right? So yeah. Oh, sorry, you can’t make it you can’t make you can’t take anybody’s word for it. You can’t trust anybody in this category. A lot of issuers feel offended, you know, all that kind of stuff. First of all, don’t worry about these regulatory things. And just, you know, don’t get your panties in a knot, you just got to, these are steps you have to take, and we have to do them. And it’s just good. Just good practice. Sorry, sorry.
Theresa Hyatte 23:38
That is something that CrowdCheck does, it comes with our verified and foundation reports. It’s a very key piece of information. One, it is crucial, as Jim pointed out, just because you need to know who you’re dealing with. And you don’t want to turn someone loose like that in the markets taking advantage of people. And you don’t want to get in trouble yourself either. Also, you want to run this because it determines eligibility, you cannot do a Regulation A offering. If you have something in your background, there are certain things that the rule covers, if you have had a securities law violation in the background, you know, that’s a, you know, you can’t use these exemptions. That’s just the way it is. So it’s wise to look through those and I find them also helpful. I find it interesting, Jim, I’ve had the same experience where people have been offended by this. It’s often oftentimes I’ll get the document requests back and we attach certain authorizations including the bad actor check to the back. And when you ask for it, there’s a certain amount of offense and they’re like, well, what if there’s something there that disqualifies it and like you would know they’re like, well, what if I don’t know like, it would have had the worst day of your life. Okay, you won’t forget that.
James Row 24:58
We’re not looking for your parking ticket or
Oscar Jofre 25:01
just gonna say that Thank you. Yeah, in our not topical bad actors. So let’s define who would need to go through. So for sure all the management board of directors, what is the percentage of ownership in a company that would need to go through it as well. So that’s another component as well, under Rule 503. Right?
That brings us back to the stakeholders. So you want to go talk to anyone who’s a 20%. holder. And interestingly enough, if it’s, you know, if it’s an LLC, or a partnership, we’re going to not just look at the entity and run a background check on the entity, although we will do that, we will look through them to whoever is those the control person for the LLC, or for the partnership? Thank you for that. So I will, I will continue up that chain till we finally hit flesh and blood. flesh.
Oscar Jofre 25:50
Thank you. Thank you. So and the reason, it’s good for everybody to hear that it’s if there are any Canadians. See, I’m picking on Canada, because in Canada, we’re known for hiding behind companies, and we’ve been able to do that for years. But under you under this regulation, that you’ll keep digging and digging and digging up. There is Joe Smith. Right? If there is a Joe Smith out there, I mean, did you so anybody over only 20% or more, the Board of Directors, the senior management team and senior management team meaning sea level officers, correct?
James Row 26:28
Well, it can be dependent, depends on how they’re defined, right? I mean, it It could also be somebody that’s a senior vice president of finance, or somebody that may have control of a checkbook or depend depends on you just you have to use common sense.
Oscar Jofre 26:42
Yeah, of course, it’s just the you know, people are does it exclude john is glue Joe, he’s a director of marketing. He’s not really up here. So it just it sometimes it gives a better, better clarity. So we’ve covered the contract the cap table, the team, the bad actor, working so what other elements within the we’re constructing this massive document, right? It’s bits and pieces is the audited, the audit financials, obviously, you guys are not auditors, so we’re not going to go into there, they’re going to do their own thing, I
would like to bring something up, I’m sorry, Oscar, just something on the finances. eyebright. I’m not an accountant on it. But something that I would like to mention is to, if you’re going to be you know, obviously, you have to have audited financials for RegA offering, it’s better to start the process early and just be prepared, that you’re even if you’ve had reviewed financial statements, for example, if you’ve done a CF offering, they are going to look very, very different. Because the rules are going to treat your finances differently. So your reviewed financial statements are going to look very different, or could potentially look very different as audited financial statements, the stock compensation that I mentioned earlier, that you’re paying to people, consultants and employees to get them on board. Those have to be expensed. Now, there are a number of things that can really change your look at your financial. So another stakeholder you want to keep informed and make sure they are aware of what’s going on with your company would be your bank. If you have a credit facility, if you have anybody, lenders who are even people holding debt securities, your day, you might look at these new financial statements and say, hold up, you know, and you may have to have a conversation with them about how the fundamentals of the company haven’t changed what’s changed or the way the rules apply to the company.
Oscar Jofre 28:31
But that is, you know, it’s rather interesting than in it. I’ve heard this before, from your firm, from Andrew and other conversations, talking to your stakeholders, and people think of stakeholders, your shareholders and your staff. But you’re going beyond that we’re talking about partnerships, other arrangements, financial arrangements that could have been impacted by your RegA offering, because it is filed in it is made made available to the general public, right. And a lot of information gets disclosed, that some people may not want but it may change the whole playground that Whoa, this is not what I thought it was.
Theresa Hyatte 29:10
Transparency is key. And you know, that’s really key. management needs to understand that their employment agreements like the CEO, CFO, their employment agreements, any agreements with the directors, those you know, certainly with CEO, those are going to be filed. If you know any related party transactions if you have relatives working for you, and if you trip the test, I think it’s like 1% of assets or $120,000 for tier two RegA. Now their their agreement has to be filed and you have to disclose it and describe your relationship to them in the offering statement and some people believe it or not, don’t want known beverages have been outed.
Oscar Jofre 29:57
That’s right. I’m taking an annual salary of one day find my way. I know, I know. You guys haven’t heard that before, have you? But no, that’s a very good point. See, it’s, this is part of that preparation element that comes in. So I’m going to come back to you, Jim right now. So, you know, the bad actors one element, what other specific things that you look? What do I need to give you? I’m doing a RegA. What else do I need to give you? I mean, I haven’t filed my form money yet. I mean, so you need to get some comfort as well. Obviously, the company goes, well, what’s your fees and all that, but it’s not just that you need other things. What other specific items?
James Row 30:38
Well, for me, I, you know, it also depended on me just doing the the basic. You know, compliance materials are one thing, if you’re also looking for us to be a active placement agents as well, you know, I’m going to be looking for a real, you know, different kind of equity story. And, you know, I really want to know, more than just what’s kind of the Standard material. So, to me, I want to hear the equity story as well. So I have a lot of interests and really understanding that that history. So that’s kind of beyond and above the, just the basic due diligence, if you’re looking from if your question is specific, and only to the due diligence aspect of it. I mean, Theresa’s going to her list is gonna almost be mirrored exactly to what mine is. So, in fact, Earth is probably slightly more extensive than mine. So so
Oscar Jofre 31:39
on that point, can ask a question here. I’m not if, if I am working with project and I, I’m now being introduced to you as a broker dealer, does it make sense instead of me to plug it in? Obviously, this is the other issue that I want to help intrapreneurs. Right. But knowing that everybody needs this information, that is there any issues with the law firm giving it to you? I mean, that’s a level of trust, right? Does it matter? Who’s giving it to you, as long as you get it?
James Row 32:05
I actually like it coming from the if it’s the same material, I don’t mind it coming. I just want to I actually would rather receive it from the management team myself. And it’s not that I just trust the the law firm, quite the contrary. I would rather have it come from the management team. Okay, so I know that sounds crazy, but I would rather have it come from the management team.
Oscar Jofre 32:27
Yes. What I’m trying to get at is, you know,
James Row 32:32
if it’s the same data room, let’s just say there’s a Google Docs or there’s a, a vdr that they’ve compiled, and they’ve put all of their stuff in an organized form, which would be, you know, I think Theresa, and I would both do cartwheels. But let’s just say that there was somebody so professionally organized, you know, and you can pull from that same data source. Fantastic. Because the things that I’m going to have, she’s going to need the same thing, but I have to retain, retain those same records. People say, well, can’t you just get it from them? Are we? Well, we have to as a as a FINRA, licensed sec regulated entity, we have to maintain those records ourselves for six years. So for FINRA audits, so I have to maintain my own separate records for those So initially, doesn’t appreciate it, but we have to have those. Now also leave
Oscar Jofre 33:25
me we appreciated it. See now I’m just gonna speak as an issue. It’s, it’s not an issue, not understand why you need it. And the problem where we’re doing today, the panel was about how big of a team we’re seeing a lot of one man shots. I mean, one
James Row 33:42
one person do and it goes back to the Oscar winner. This is what I’m advocating is that, instead of having it out of a shoe box and one file cabinet, you know, there’s plenty of ways to have it organized in a filing. Oh, and whether or not that list comes from somebody like Theresa shop, or ours, we actually have, you know, there’s only so many ways you can do due diligence, and certainly so many I mean, I think we’re Ours is a 12 folder process, you know, I mean, real basic financial statements, I mean, you go through the Theresa is going to have a similar list, I believe I’ve seen there’s
Oscar Jofre 34:18
34 pages, I just put it that
James Row 34:24
the basic concepts are the same, whether or not we’re splitting hairs here, but the point is, is that if somebody is organized, it doesn’t matter. You can get them filed and what have you now, we do things a little differently from the broker dealer we like actually, what we do is encourage our issuers to upload it into our system directly. So we actually have an online portal ourself that I actually encourage the issuer to go and then upload it directly into our system. And I I like that for two reasons. One is they can see exactly what But they have filled in, so they can take ownership of that. Also, no one can say, I emailed it to you. And I’d rather not at all sitting in an email anywhere, and they’re having to upload it directly into the system, and it’s just much more secure, and it’s much easier to manage. And given all the cybersecurity issues, etc, I’d rather have that structure anyway.
Oscar Jofre 35:23
No, this was very helpful. And I do concur with all of you that on. So I’m glad to hear that I got a smile on my face for a reason. But I’ll tell you guys, it wasn’t here could be a product placement or anything like that. But So continuing the discussion, obviously, we’ve, we’ve dove in really nicely. I like this, because I think it’s now clear to people that these are the elements. But again, you need to share, you need to give comfort everybody there’s a due diligence. And that needs to be done. And we’re calling it due diligence from the legal side. But it’s actually collecting all this information. So they can file your form on a in a way that they understand the business. And the the structure of the company made sure there’s no pitfalls or anything like that. So I’m going to want to spend a little bit of time to sit just you’ve given a couple of examples of some of the things you’ve seen, that could have been prevented. I was wondering if you could share without obviously sharing any company and of course, privilege. But in general, what are the other things that companies can watch out for? So you mentioned agreements? You mentioned the cap table? You mentioned the few year audited financial statements and all that. What else could you think of that you’ve seen that kind of gets derailed during the process?
Theresa Hyatte 36:49
Well, making sure that you have the correct corporate entity. If you are an LLC and you want to go into RegA and issue common stock, you need to think about how you’re going to change yourself from an LLC and then reincorporate into a C Corp or a regular Corporation. Are you in the right state? Are you in a state that you would rather be in Delaware? Or your corporate counsel advises you moving from one state to another state for whatever reason, maybe something in particular about your business? But yeah, look at your corporate entity, make sure you’re in the right place and in the right vehicle?
James Row 37:30
Can I echo that Oscar, please? Like, there’s an I’m not going to name the state. But there’s one state I won’t even sign an NDA under. There’s that so I totally echo that a lot of issuers just kind of, you know, they, they don’t get the letter form, they’re enter the LLC or Corp, in whatever jurisdiction they’re at, without giving a lot of thought to it, because that’s where they live. And it really impacts things negatively. When it comes to a capital raising, if you’re not sure what you should be doing. The default is always Delaware. In my opinion, the default in the future should be Wyoming. But that’s a whole other argument. You know, there’s other friendly jurisdictions out there that I think are good to have. The default is Delaware. Wyoming is a great jurisdiction. You know, other ones that are pretty good, you know, South Dakota, there’s Nevada. There’s Texas. I mean, there’s some that are good. And then that I have a list that I just, you know, and then some states have a good history and Maryland for reads. And yeah, I mean, there’s there’s, there’s, you know, there’s a couple of, you know, exclusions and, you know, differences, Arab Theresa is better equipped to articulate that than I am. But there’s just some, there’s a couple states that are no goes right. And I won’t get into that right now. I don’t think that’s appropriate for this dialogue. But just know.
Oscar Jofre 39:08
I think it’s great. I mean, we’ve added another item again, that I’ve never even thought of that you said it structure, or were you Incorporated, what are
James Row 39:20
you and I’ve talked about this in prior webinars? I, I think there should be you could do it two or three part, just webinars, series, router, structuring series on you know, I mean, really the intricacies of things. I mean, just embedding options, optionality, theories, real options, structures. mean, these things are a little bit of a lost art. And a lot of people really don’t know what the hell they’re talking about. And, you know, people just kind of take the flavor of the day and they really don’t understand, you know, the depths of they kind of just don’t get it. They don’t understand the long term implications. They understand. Yeah, I mean, it’s, anyway, I’m kind of pat About structure.
Oscar Jofre 40:01
Don’t listen to it, it’s an important part that the deals are going to get more complicated. Now. You know, we started with vanilla, we added a little bit of sprinkle in the last few years, but you know, we’re going to get something different, right? But you know what vanilla sells, man? No, I know, I get sprinkles. We were now able to raise 75 million. So we’re gonna get a different type of issuer that is wanting to do not so much something different, something they’ve been accustomed to that.
James Row 40:31
But but they aren’t. But if you want to sell it, let me let me be selfish. If you’re gonna if you’re the issuer, or you’re the broker dealer, I mean, Theresa, can paper, anything you want, right? It doesn’t mean you’re gonna sell it. Okay, she can put 50 boxes on a piece of paper, I used to do that in a prior life, I could structure any damn thing in the world. I mean, I can make it so complicated. You couldn’t figure it out? You know, month Fridays, okay? But did you know, I mean, you could sell it, okay? Make a note of that. If you can’t, if you can’t sell it in 45 to 60 seconds, you can’t sell it with three bullet points and five words per bullet point, and can’t sell it to your grandmother with a piece of paper and a pencil. It’s too complicated. Okay. So you got to be thinking about who your who your buyer is, and respect their, their, their concepts, their ideas? And how sophisticated is this is a RegA? Okay, this isn’t, you know, you’re not in a billion dollar corporation, you know, doing all kinds of, you know, options. And, you know, you got to think about your buyers, you got to think about you got I I undertake the kiss theory myself.
Oscar Jofre 41:46
I think you know, I agree with you, we got to keep it simple, without a doubt. But we have treason I have had the experience now working where people are without thinking and again, inexperienced counsel can get companies into trouble as well. I mean, that’s another thing we all need to pay attention. That’s why part of this is uncovering What do you need to be prepared? And I think you’re right, Jim, I do, we are going to do a webinar series just on structuring because structuring is not just about jurisdiction, we noticed a flaw immediately when somebody wants to do a RegA and wants to issue warrants. I mean, that’s one that nobody saw coming. Luckily, for CrowdCheck, they were experienced, and they knew what they were doing. But I’ve seen it in other cases where, you know, it’s in and again, that why is that important, because it’s part of restructuring and how it’s dealt with. And so it’s part of all these different elements said, when you’re coming to this table, and you’re coming with your contract, your cap table and all that, you also need to come in with your proposed terms, because that will also have an impact on what they’re looking behind. It’s it, does that make sense? Risa?
Theresa Hyatte 43:04
It does. Um, I wanted to add a point here, though, and, you know, obviously, issuers, companies, they’re my client, I represent them. But at the end of the day, for all of us, whether you are the broker dealer, the accountant, the client, the attorney, the stock transfer agent, whoever it is, let’s not lose sight of the fact that when we sell these securities, we are selling them to people. And as I you know, I not give a tip my hat to Jim, because we’re talking about people with varying levels of sophistication, who are out there looking at these documents. And I agree, keep it simple. Clear disclosure, is the best disclosure because not only does it help the investor, that also protects the client, or my client, and it protects the issuer. It protects everybody else as well, the accountants, it protects the broker dealer if you have good disclosure, clear disclosure. And I think that’s really, at the end of the day, what I like to think is I’m playing a fundamental role in in serving that need.
Oscar Jofre 44:10
I agree. And it’s interesting that as an industry as an ecosystem, we’re now moving in that direction. quietly, already, it’s already starting to happen the industry, some of the participants are already talking about best practices. And to your point, these are things not the regulator mandating us we’re doing it because it’s for the greater good. This thing has got such great momentum, they increased it to 75. Clearly, we want 100 million, and we want more, but we need to step up the game in all different aspects of it and helping companies and these webinars series are going to definitely help people out but right now I want to give everybody an opportunity who’s here. There’s a button right there below you can click Raise your hand if you’ve got some questions regarding you know from Jim, from enteral Capital regarding what a broker dealer needs or from pre sale From CrowdCheck regarding, you know, get the lawyers preparing your offering, and what items you need to have prepared. And again, we’re going to continue talking until I see somebody stand schools up. But so I’m gonna throw another one in here. So you guys, you guys don’t think I’m ever ready, but I am. So now I hopefully, I think it was pretty simple that up until now the entire scope you were looking at was an American company. So now I’m going to throw in a loop, Canadian company into all this. And the reason why I throw that in, because obviously, the regulation allows both the US and the Canadian company to proceed. And in Canada, there’s a lot of the stuff that America needs that is never required or ever to provide. So it’s a wake up call. But what additional items from a legal side, do you think a Canadian company, in this case would be considered for an issuer using the regulation? which it can do you think it would be needed as well, along with all of this items that we’ve already spoken?
Theresa Hyatte 46:09
Well, the form requirements, the, you know, as far as I, as far as I understand it, I mean, Canadian companies can use international financial standards, rivers for their financial statements instead of us gap and us auditing standards. So you have that. I’m not aware. And this could be my downfall. You know, there might be other places where Canadian companies get breaks in the disclosure, but I have not.
Oscar Jofre 46:37
No, I don’t. I’m really curious how you guys do a bad actor chap on a bad actor check on a Canadian.
James Row 46:45
With all your privacy laws?
Oscar Jofre 46:48
Well, that’s why I’m asking I, hey, I’m, I’m bringing it up. Because, see, in Canada, you can commit a crime in British Columbia, moved to Alberta and do it all over again, nobody knows about it, go to the next province until you can hit all 13 provinces in Europe, nobody will ever know. So I’m really curious how, because one of the requirement lists or one of the things that project does, right, of course, you speak to legal counsel in Canada or the company, right? That’s one of the I believe that’s one of the requirements. But what other elements Do you need in order to satisfy I know, the financial statement? I know for us, but is there anything else you need? From a law firm perspective, bringing this client on that is now not in a soil where you can easily get the information you need to satisfy your requirements?
Theresa Hyatte 47:39
Well, we run a bad actor check. Yeah, when we read about after check, we have a database that we use, or multiple databases where we enter the person’s name, date of birth, we don’t take very sensitive information. But we do want like a name, date of birth address, because some names are very common, and you want to hopefully not have to peel through 25,000 pages for every john smith. Presumably those, you know, again, I have not represented a Canadian company, but presumably those go through I mean, I just won’t go to Canada.
done a lot of bad actor check.
from Montreal, you know?
Oscar Jofre 48:26
Oh, yeah. Yeah, no, no. Real France? Yeah, we all right, Jim, on to you. I mean, you hate being in our waters, so?
James Row 48:39
Well, you know, I’m not, Sean’s actually working on a couple right now. So he would have a better say, from our team right now. Me personally, I haven’t worked one directly. So I’m gonna, I’m gonna have to punt on that question myself. Oscar, I
Oscar Jofre 48:59
James Row 48:59
no problem. I would do a disservice trying to guess exactly what that would be. We have been working on them. I just can’t say exactly what the specific details are.
Oscar Jofre 49:09
Yeah, no, I got on camera. I just thought I’d throw it in there. Because I mean, these are the two primary jurisdictions that can use this regulation and Canadian companies, you will you still need to do all the things we discussed earlier, you still need to have your contract to your cap table, your IP. And I think one item that Theresa mentioned that on your cap table, if you’ve got a holding company holding, they’re gonna want you to dig deeper. And this is where it gets a problem in Canada, right. So we do have our privacy provision. And so if you’re in British Columbia, it’s okay. If you go to Alberta, it’s not okay. If you go to [uncertain]. It’s got a different rule about how far they can go. They haven’t standardized and so and a lot of the times, that’s what Certain parties do. We found we found a RegA offering that had a Canadian on bad actors, but we knew the the entity. We knew it from historical records. Don’t Don’t ask me how this brain just kind of get and then I just started Googling it. And I just remembered it. We have a bad actor database that the the regulator’s publish, but it’s not picked up by any search engine, it’s prohibited to be picked up by search engines. How to help? Don’t you just love investor protection in Canada? So yeah, it’s it’s. So that’s why you can have somebody hopping from province to province. And that’s where the regulator’s are it is. I mean, it’s interesting, it’s got its pitfalls. But that being said, the requirements still need to be met. For the US, regardless of all that, and you need to deal with it. It’s the way you said it, if you’ve got sensitive contract agreements, you got to put it out there, because otherwise you’re not going to get through right, regardless of where you’re from?
Theresa Hyatte 51:06
Well, you have to analyze, you know, is it, you know, there’s a difference between material agreements that are outside the ordinary course of business, like a significant asset purchase. That’s one thing. Another thing, if you’re talking about the three PL company that does, you know, your packaging for you, or if you’re talking about some type of a manufacturer, where they are sensitive specifications in the agreement itself, when you drafted it, you’re both private companies, you want to make sure they manufacture it the way you want it manufactured. So you put the specifications in the contract. Now, your circumstances have changed. So you have to think about that. I’m harping on that. Because there you could you have to look at this, some companies might come back and say yes, but it’s a material. It’s a material agreement, but it’s in the ordinary course of business. So I don’t really have to provide it. Take it down another level. Okay. So it’s a material agreement, but it’s in the ordinary course of business, is this agreement were to suddenly be cancelled? Or if something were to happen with that particular supplier, vendor manufacturer or whoever? How easily could they be replaced? And even if you replace them, would it cause a disruption in your business? Would it? Would there be a problem with supply? Would you have a problem with inventory that in itself could make something that can overcome that whole ordinary business into the point where Yeah, it is really material. And investors do want to know, they’ve may not have an interest in knowing about the pricing, or how things are stitched together? Or what kind of paper you use in your packaging. But they do want to know, they will want to know if you’re kind of hanging in the balance. If that agreement is coming up for renewal. I mean, that’s something else. That’s a big thing. When you look at your agreements, when you look at your contracts, even your insurance policies, look at the expiration dates, your license your permits in the different states and for the various jurisdictions, when do they expire? You want to get ahead of that, because you that’s a last minute headache, you don’t need, you’re trying to run a business, you’re trying to assemble all these documents and build this, this offering statement, you don’t want to have to suddenly go back out and go, Oh, I forgot to renew my, my, you know, whatever kind of insurance it is, whether it’s a general services insurance, or you know, you know, via employee disability insurance, I forgot. You don’t want to lose track of things like that.
Oscar Jofre 53:32
It’s great point, I’ve been taking notes like crazy, because I obviously, the document I have, I think it’s all there, most of it. But there, I think that what I really got out of this, there’s some really important highlights that need to be highlighted. And to understand the importance of it. Because when it says material agreements, like most people, not one, you need to give a definitive answer to it. But not only that, you need to provide an explanation to that, what that means and what the impact would be. Because somebody say, Oh, yeah, I got an agreement with the company, we got an arrangement and this and that, and they may not realize that the terms of that are going to get inputted in the form one, and then the next step, it’s going to be in a public file document. I’m correct. Because it’s an exhibit, correct?
Theresa Hyatte 54:20
Yes, it’s an exhibit, it’s going up on Edgar. Now, you could always seek Well, you don’t have to do that anymore after March 15. You can get confidential treatment is that is changing as of March 15. So it used to be you would have to redact the information, which you will still have to do, but then you would have to submit a letter seeking confidential treatment to the staff that hits certain legal standards and had to make certain arguments in the staff. Basically, it was you had to demonstrate competitive harm. And that’s not always easy to do, though. I mean, that’s that’s kind of an elusive. That’s an elusive piece, you know, that’s it. looser standard in a lot of ways. So now it has been simplified quite a bit. So with the new standard is it’s not about competitive harm, it’s that it’s the type of information that is both customarily kept private and is actually kept private. So they’re trading companies. This maybe I shouldn’t put it this way, treating them more like adults, like grown up people know what’s appropriate to say in public and what’s not appropriate to say in public. So, having said that, bear in mind, the SEC staff has Google just like anybody else. So if you’re trying to keep something out of the public domain, make sure it’s not in the public domain. They’re
Oscar Jofre 55:39
a great point, especially when people say nobody knows about our agreement. And yet, you might have not released it
Theresa Hyatte 55:47
might be a blog post a Facebook, post a Twitter, post, yeah. And you know, that’s the same thing. I’m gonna kind of hop over back to the testing the waters materials in getting your marketing folks on board, it’s so key, we do we get comments from the staff, you have to file those preliminary materials as testing water materials as an exhibit to your offering statement. And the staff does look at that. They do read it, they do click through links, they do visit your campaign page. And they do Google and they look at your website. So you know, you want to have your arms around your information. So it’s consistent. You don’t want to have a press release on your website, saying one thing, and then put out some testing the waters material, this is something different or contradictory. So be you know, just make sure you’ve got your arms around that.
Oscar Jofre 56:39
That’s a great, great point. All right. So we’re getting down to the to the end here. I want to ask your last remarks. Like, I mean, I wrote it, I even circled the day with Jim, they probably you’re going to get started with planning, planning, planning, but the closing remarks to you, and then we’ll close out with Risa.
James Row 56:58
So I would, I would say a couple things. One, you know, planning, planning planning, you can never have enough of it. And you should be as organized as you possibly can. And planned for a lot more time. And then I would also factor in the calendar. calendar time of the year is also an important aspect a lot of people miss read that. I’ve written a couple articles about that, that are published and feel free to look at those. So that also affects how things get done. I would also mention we didn’t touch on it. Due Diligence is not just data collection, it’s data review, and then data assessment. So a broker dealer, much like a law firm has to compile assessments of what we actually did receive. So we do have to write memos to files that says, we did review this and we, you know, etc. And now we’re not going to opine on somebody’s particular marketing thing. And that’s, that’s, that’s a business issue. But we do have to look at activities, and opine and make statements and put active memos in, in our files that said, we did review these. So I would just add that that due diligence as we kind of got off that sounded like all we do is collect, we actually have to collect and review.
Oscar Jofre 58:34
Perfect, can you say your last closing comments. But
Theresa Hyatte 58:39
I understand that this is a large process. And because Oscar, you keep going back to our documentation. One, I want to encourage clients to please pick up the phone, if you are looking at this, if you’re thinking about it, or if you’ve already started assembling the documentation. If you feel like you, you’re not sure what’s going on. If you know, I get it, if you’re assembling all these documents, and you have no idea why we’re even asking for them. Please pick up the phone, call us. And you know, let us put it in context for you. You know, an informed client who can help fend for themselves is the best kind of client. And so that I believe that is very important. We have a lot of helpful materials on our website. So please jump on that and look at resources there. And just remember, it’s not just about you, the issuer. You know there are other stakeholders or other people with interests involved. So always be mindful that you know don’t become so focused on what’s going on internally. I know you’re trying to grow a business and this is really important. You got people you’re trying to pay, you’ve got you want to keep the lights on, but there are other people as well involved and that helps to keep them on board so that they understand what’s going on in the process as well.
Oscar Jofre 59:54
That is that’s perfect and I both of you have been great because this is a subject matter That’s very meaty, nobody wants to talk about it. But we need to bring it out. And again to help intrapreneurs the audience. And I think it’s good for sorry, B investors to know what goes in to an offering before they invest. I think this is wonderful for them to know. Wow, I didn’t realize all of that. So people are getting, they’re doing all that work for me. So when I’m getting there, it’s saving me the time that I can just look at the offering. So great upside. Thank you both today for a great time. I’m looking forward to having you both back in again in different topics. But for everyone else, thank you very much for coming to the core set, cork core summit webinar series. Don’t forget, you can go to the core core summit website. You can view the videos, you can share them, you can contact the speakers directly. Of course you want to have confidential conversations with that with us. But great, we’ll see you next week on Tuesday. We’re on Tuesday, Wednesday, Thursday again next week with great topics. Have a great week. Can you set Jim, thank you. Thank you all. Thank you, Jim. Thank you, Oscar. Oscar, great to see you.