What is Blue Sky and why does it matters?
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.
CEO and Co-Founder
CEO and Co-Founder
Shari Noonan is Rialto Markets CEO and has more than 20 years of experience in the financial services industry. Shari has extensive experience in building and scaling operations and products with Deutsche Bank, Goldman Sachs, and Instinet and was directly involved in the electronification of the Equities market. She worked to develop many of the initial products in equities electronic trading, including the first ATS’s, advanced algorithms, and electronic negotiations. She received a BS in Accounting from Marquette University and MBA from Columbia University and holds Series 3,7,24,55,63 registrations.
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.
Oscar Jofre 00:30
Good afternoon, everyone. Welcome once again to another KoreConX KoreSummit webinars series 2021. Today, oh, we’re gonna have a great discussion. This is one of my favorites, right? Because I don’t know anything. So, you know, I get to ask all that stuff that I don’t know. Ah, you didn’t know that, right? So it’s gonna be a lot of fun. As always, we’re especially when all [uncertain], right? We’re going to talk about this wonderful discussion. But before we do, I think it’s important for everyone today to meet our guests to great panelists that have been here with us before, but it’s always great. To start with you, sir. Please take a moment Introduce yourself.
Sara Hanks 01:15
Hey, Sara Hanks, I’m CEO of Crowd Check, Inc. and managing partner of Crowd Check Law and together to provide a wide range of legal due diligence, disclosure, filing and compliance services for all forms of online capital formation.
Oscar Jofre 01:34
Thank you, Shari.
Shari Noonan 01:36
Hi, I’m Shari Noonan. I’m the CEO of Rialto markets, Rialto markets as a FINRA registered broker dealer and alternative trading providing primary and secondary services for the private markets.
Oscar Jofre 01:51
Wow, that was funky. Let’s go. This is it. This is the topic of blue sky. Look at that. Everybody looks outside. Yes, it is. It’s March, spring is in the air. So blue skies it is. And so I we’re going to have it, we’re going to take this discussion to three different parallel. So number one, to what is blue sky, and then we’re going to talk about how it affects primary. And then of course, Shari how it affects secondary, right. That’s the big discussion that people are finally going to. So do you know, for everyone? Sara, since you are the one that we all go to? I’m suppose we don’t call you with the Oracle yet, but okay. I know, matrix, please, if you could provide us an overview of the
Sara Hanks 02:44
Okay, so when we talk about blue sky, we are talking about state securities laws. And back in, I just want to give out a bit of like ancient history from when I was a very, very baby associate at a law firm. Back in the very, very olden days, it used to be that if you were doing an IPO, you would need to register with the SEC, and then also go through the 50 states and they would do a 50 state survey and have to get sign off in every single state that changed back in 1996, with some revisions to the laws, and then people started to just kind of ignore blue sky. And it only became a really relevant in the completely private markets and Regulation D, Regulation D, the big, the most used offerings, they’re also preemption for, you know, 506 rule 506 offerings. And so it became a sort of like little tiny backwater. That was just practice by specialty lawyers, then we get Regulation A and regulation CF, because there’s blue sky considerations there. And suddenly, it becomes a bigger issue. Again, just wanted to give you an overview of there are five areas where blue sky impacts our online capital formation. The first one obviously, is tier one, a Regulation A, in tier one of Regulation A, you have a much lighter lift at the SEC, this is for offerings up to $20 million. But you file and get reviewed by not just the SEC, but every state that you are offering it. And some of those rules are really some of the requirements of the state are really very extensive. So for example, if you want to sell in some states who are merit regulation states. So the difference between merit regulation and full disclosure is a merit regulation. They look at your offering to say, Is this good enough to sell in our state? Like, for example, Massachusetts looked at Apple way back when and said, Well, no, you’re much too risky, can’t sell here was for their IPO. But that’s the sort of thing you get with merit regulation, very strong investor protection. But to the extent that sometimes, it is not possible to offer in some states, for example, if the state requires independent directors, and you can’t get anybody to be an independent director in your company, so I’ve done RegA tier one not recommending it, I mean, that the state regulators did try really, really hard to work with us. But compared to a tier two left, much, much, much more burdensome.
Oscar Jofre 05:56
Just sorry, you said something, and I just want to be clear, but when you’re talking about cumbersome we’re talking about when the company’s doing the primary capital, right? Yes. Okay. No, please.
Sara Hanks 06:07
Yeah, so so so this is all primary, the first four things I’m going to talk about a primary. So that’s tier one, tier two of regulation, a, again, primary issuance, the states are preempted from review. But a couple of things. Number one, they still have oversight over anti fraud. And so we have had situations where we’ve done a tier two offering, where you’re not supposed to be reviewed by the various states and the states have come have approached us and said, You know what, you didn’t disclose this thing. And it’s very frequently something to do with the background of one of the principals of the company. Because what they do is they see these filings go through, and they do a little bit of Google searching. And if they find that somebody is going to be offering in their state, and has not confessed to being not necessarily a bad actor, because a bad actor is completely disqualified. But if they have some kind of history, we’ve seen a couple of states and Arkansas pays a lot of attention to this. So there’s, you know, different states have different specialties, but the states are not asleep, they are paying attention to this. So they have anti fraud jurisdiction, if they think somebody is be acting fraudulently. And then they also have state notice filings. Most I think it’s something like 3840 of the states have state notice filings. The great thing recently is now we can do online filings for some of those great, we don’t have to stuff envelopes anymore. But the the price you pay for the preemption of state review is they can require you to make a notice filing saying we’re selling in your state, and then you pay a fee. And those fees can range from they can be fixed fees, they can be variable fees like 140 1% of the amount you’re seeking, but pay attention to the amount that you have filed for because the states that have various variable state filings, Texas is one. There’s lots of investors in Texas if you originally file for $100,000. In Texas, if you’ve sold $150,000 in Texas, you need to update your Texas State notice filing, so that’s tier two, anti fraud, and state notice filings. Third thing I wanted to mention was issuer dealer rules. If you are not using a broker like Rialto, there are some states that you need to register yourself as an issuer dealer. And as of today, those are Florida, Texas, North Dakota and Arizona. Any moment now we’re going to drop Arizona off that list because we’re waiting for the governor to sign a new piece of legislation that a crowdfunding fan pushed through. That’s going to make it easier in Arizona. But if you do issue a dealer, you’ve got to deal with Texas, Florida. And those aren’t that’s not it’s not a meaningless thing. You do have to actually apply you for Florida you need fingerprinted. So make sure that if you’re not using a broker that you that you comply with issuer dealer rules for thing, still primary regulation CF. Everybody’s like heck no, that’s the they know the rules were completely preempted of the state’s not exactly because if you sell more than half of your securities in the state, or if you’re from a state, they can require a state notice filing, shout out to Ohio, if you are from Ohio, they are expecting a reg CF company to be filing a state notice filing. And then the final thing, switching over to secondary, all of the preemptions that I mentioned before, were for the primary offering the reg D or the reg CF or the reg. A, there is no preemption for secondary trades. Under state securities laws, so if you want to be trading, you are going to need to have an exemption from state law for every single trade that you do buyer and seller, every single state. So those those are the five areas where right? Where state securities laws still really, really relevant to the new online world.
Oscar Jofre 11:01
What do you know, I learned a lot. Thank goodness, we’re recording it. I’m gonna, you know, make that into a blog for everybody. What an eye opener, right? Seriously, I mean, we take it for granted that we go to lawyers, and oh, yeah, don’t worry, we’ll take care of it. But what exactly is being taken care of? I think it’s important. And we’ve been emphasizing primary, primary primary. Good, any, it’s just the first phase, there are two phases. The second part is the investor has to security now they want trading. And, boy, we’re walking into it right now. So in all of them, everything you said does not apply now. So now we’re talking about Blue Sky really doesn’t have an effect? And let can we cover some areas? I guess from from your perspective, Shari? Because, I mean, you’re the secondary market, right? So without that, I don’t even know where to start. So we’re, we’re now that you have to follow every step how does Shari protect herself, how does the secondary market know that I did it? How does the secondary like, how does that happen?
Shari Noonan 12:14
I’m going to make this very, very easy, we all good. We use, we use the service. And that provides for all of the filings. So trade check, right. But you know, the issuers use a service that do all of the blue sky filings. But really, that’s the most efficient, easy way to to handle all the blue sky requirements.
Oscar Jofre 12:40
So to make sure that you’re covered in all 50 states in and then Sara coming back to you on this, the what is considered a trade. Um, you know, we know this, there are companies who I created an intranet, I invite all my shareholders to go in there. And I let Shari go in and sell is that a secondary market? What? That is a secondary?
Sara Hanks 13:04
Yeah, I mean, they the to go back to the absolute fundamentals of securities law, every single offer, or sale of a security must be registered or exempt at both the federal and state level. And, you know, when I was teaching securities law to baby lawyers way back, when I’d have to keep coming back to that principle, that is Section Five of the Securities Act and the equivalent at the state level. That is, if you’re trading on Robin, trading on Robin Hood, I’m buying GameStop or some damn thing. And am I what am I doing? You’re in that case, you’re actually relying although you don’t know it, on section four, a one of the Securities Act, which is one that says, you know, for security, if a security is traded by someone who’s not the issuer, underwriter, or dealer, that’s what you on Robin Hood are relying on. But the fundamental doesn’t change every single offer, and sale or security must be registered or exempt under federal and state laws.
Oscar Jofre 14:10
So it says needless to say that what has happened, we all know that most cases most people have not done that. What is there a major consequence. It’s no different than breaching SEC rules, right?
Sara Hanks 14:25
Well, I mean, in the case of Robin Hood, for example, you know, your your average, you know, your trader down in his basement, his mom’s basement, who’s trading these securities, he’s not violating anything, because you know that the company is listed Gamestop I’m not sure but you know, if they’re on the the the NASDAQ or New York Stock Exchange, now you’ve got you’ve got an exemption for that, and that’s what he’s relying on, even though he doesn’t know it, and that’s right. I mean, he shouldn’t have to bother about that. But then when you come to privately play securities, it is a little bit more on a case by case. Because some some companies are on OTC and some companies just do RegA. And so anyone who’s selling should be thinking to themselves I’m, I’m going to trade. How do I know that? I’m not violating any securities laws? Yeah, yeah, I will trade on Rialto. So that’s what I’ll do.
Oscar Jofre 15:24
And that’s why I brought Shari to this discussion. People go wonder why not just because this is this is a real life example, and I’m going to putting you in the hot water. This is me. I mean, I already know a few companies, I’m counting in my hands, what they what you just said, and what they don’t have we already know. Obviously, the the report that Shari you’re alluding to is the trade check report that covers all 50 states. But let’s talk about secondary market trading. I mean, now everybody’s talking about it. These are the things that nobody has ever brought up and none of the discussion, nobody’s talking about blue sky, the importance of it, what does it really mean? From like it, the everyday investor just wants to sell their shares, right? They have no way of knowing. So what’s the what’s what’s Rialto doing that with the issuer to make sure that that onboarding is done correctly to to a source point.
Shari Noonan 16:20
I mean, it’s really simple, every issuer that comes on as part of the, you know, requirements, they go through trade check, and, and so we know that they’ve met all of their blue sky requirements. And I think, you know, it’s really important. I just wanted to kind of rewind and emphasize something that Sara mentioned, you know, if we rewind maybe 15 years ago, and think about what the world looked like, it really was the trading markets, or the markets really were NASDAQ and New York Stock Exchange. And so people really looked at those and said, Well, there’s an exemption for those for blue sky. And now we’ve got this, this sort of grassroots growth of all these other things that have been in, you know, that have been around but really have been not looked at, but it sort of an explosion, because of a confluence of events. And, but there’s no framework. And so we really tried to put a framework together to make sure that anyone coming on our system, that that comes with the price of admission, so that it’s not, oh, you can come on. And we’ll we’ll figure out what states you can be in No, here, you’re in all 50 states, this is the price of admission, this is how it works. Because otherwise, you won’t be able to manage, you won’t be able to manage it effectively, and you’re going to do a disservice to your issuers and to your subscribers.
Oscar Jofre 17:51
That is the key. Right? Shari? It’s like the internet, how do you put gates around where there’s no borders? Now you’re saying, Oh, you only operate in five states? Well, it’s hard to transact that way.
Shari Noonan 18:04
Exactly. And so if there’s going to be there’s going to be every error I ever dealt with on a trading desk was because, you know, someone agreed to some manual process, someone agreed to something, you know, a long time ago, not every year many years. And you know, you forgot about it, you something was done off the system, something was done. If everything, you know, comes in in a standardized format, it makes it that much easier to make sure you’ve created a framework within which you can get processed appropriately.
Oscar Jofre 18:40
And, and I think I would like to add that I think part of the reason why we’re all having this discussion is that blockchain in itself, when it first came out with the ICO, it elevated it expedited. We’ve been so busy trying to educate people on the primary, which now people aren’t standing now, they’re all getting excited about the secondary. But again, a lot of people are overlooking the part that even with secondary, there still additional steps that need to be dealt with, as Sara alluded to. So there is one question I have a US is not just 50 states, right? There is more than 50 states. Yeah. Can you elaborate on that? Like, obviously? Yeah. Can you give us some background on that?
Sara Hanks 19:25
Yeah, the the there’s a few territories as well plus DC. Luckily, most of them not none of the non states are particularly problematic if I could summarize it that way. I’m most most states follow the same kind of patterns in any case. And so you know, that the exemptions that Shari talked about our trade check product, the exemptions that we’re looking at, primarily, are you reporting with the SEC, well, that’s a bunch of states Are you in one of the security’s manuals? Okay, a bunch of others. A few outliers like Tennessee, and California, California, of course, always an outlier. That one, you have to actually go and do an actual filing for. But the the non states, I can’t think of any of them that are problematic, less than.
Oscar Jofre 20:23
So the Okay, so you brought up another term in their securities menu. And we’ll we’re going to see I’m paying at the industry knows all the lingos, the general public is lost, right? I mean, so the secondary market, the way you’re gonna operate, or you’re sorry, the way you are operating Shari is you’re onboarding the companies that are abused these regulations either RegA, Reg D, Reg CF, which are, these are the private exemptions to allow them to provide your investors a way to monetize, you’re an off ramp, venue for that. And one of the onboarding, is going through this using the tray check. And that covers all the states. And but how do you know I did it? How do you? I mean, look, it’s like anything else? It’s great. I got the trade check report. How do I know? How do I? How does the you know, I’m gonna play the skeptic in this crowd? Because this is the thing that’s happening right now. There’s too much information. It’s coming up people and people go, how do I know? So if it’s a regulated thing? I don’t want to touch anything. That’s how do I take your word for it? There’s a great trick. What’s the other and she mentioned securities, Manny? Is is that something that’s available to the public? For everybody to know?
Shari Noonan 21:40
Do I talk about the securities manual emerge?
Oscar Jofre 21:42
Oh, yeah, yeah, yeah, let’s dig into it. Come on.
Shari Noonan 21:46
So there are securities manuals, and I mean, now, I think there were probably more in the past. And I know there were more in the past. And now it’s sort of winnow down to one in particular, it’s called Mergent. And it’s a securities manual, and you can go and have your security place there for for a fee. And, Sara, I’m gonna have you expand on that.
Sara Hanks 22:10
Yeah, that’s, that’s basically it. I mean, really, it’s just like, you know, a telephone directory, and it did, I assume that it’s still available in, in paper form in some in some universe. But you know, literally used to be, you know, you’d look it up, the brokers would have to look up to see if there’s information there. And basically, it is, you know, here’s the basics of the information about the company. This is where they are, this is who the directors are, here’s the extracted information of the various pieces of financial information, your balance sheet, free cash flow, that kind of thing. All of that packaged up in standardized form, and stuck in a book, which is now of course, online. And is anybody ever going to look at that in? Nope, the only people who are the compliance officers, the various brokers and ATS, so we’re gonna make sure that something is in the manual. And that’s one of the things that trade check does is for the states that have a securities manual requirement, it’s in there. We put that information there. And the retail investor, where do they look for information that well, it’s not going to be there really, it’s going to be if they’re a little bit sophisticated, they’re probably going to look on Edgar, which is where the more fulsome filings are not just a balance sheet.
Oscar Jofre 23:38
Sorry, we’re suggesting we’re suggesting retail investors are gonna go there.
Sara Hanks 23:47
That’s a really good point, it’s more likely that they’ll go to Edgar, then they’ll go to the securities manual. And yeah, okay. Stop laughing.
Oscar Jofre 23:59
No, no, no, no.
Sara Hanks 24:04
The SEC would love it. If people did actually go to Edgar more. It’s it’s not a very user friendly system. For one thing, also, I just found out if, if when you originally filed on the SEC, is EDGAR system, somebody put a period in the wrong place in the company’s name, you’ve got to know that that typo is part of the company’s official Edgar name, because otherwise you’re never going to find that company. It’s not a forgiving system. Ideally, the SEC would love it if a retail investor would not just look at the at the offering page on one of these securities platforms, but would go to to the go to Edgar and actually read the one case and the one A’s and the one essays and the one us. Yeah, I’m living in a fantasy world right?
Oscar Jofre 25:00
Yeah, no, no, I’m not. I’m not. I’m not mocking Edgar, I’m not mocking it just the reality is that we know that’s not going to happen. They’re not even clicking on the one age right now to go there because they get scared the minute because the way they lay it out, you, you don’t know what the heck you’re clicking on. It’s even though it’s a safe website. But it does bring up the issue, though. I mean, obviously, the regulator shouldn’t punish the everyday investor because they bought something legally, they’re trying to sell it to another person legally, it’s not their responsibility to know whether the company has done this. But there has to be a visibility and obviously, obviously, for this is what’s really great about reality, I think in from the general public point of view, is you are that visibility, to bring both the trade check report the securities manual component to it, rather than them trying to buy privately from someone else, which has been the way it’s been done. Now, I am suspecting that’s the way it is, or these internets that companies are building to allow their shareholders to sell their shares. You’re doing something fully compliant. So there’s no reversal of fortunes going on, correct? That’s correct. Okay. So. So how impactful for you then, can blue sky be if if the if the industry doesn’t even understand it, so I’m going to throw both a wrench for both of you, I got into an argument with a lawyer that says that now, you don’t have to worry about with REG when a here too. You don’t need that. I have a client right now, I recommend that they use an internet and their trading. Everything you just said just now, today contradicts all a lot. So where is the missing link here? From your sharing? Aqua? Sara?
Sara Hanks 27:00
Shari Noonan 27:01
I’ll just I’m sure Sara has a better point of view. From my, my vantage point, you know, I encounter this quite a bit from issuers and others. And, you know, I can I can just pass on the information. I think there’s really, from a macro perspective, what’s been happening in finance over the past? I don’t know how many years but but there’s sort of been this, you know, amazing. Sea Change. And some of it when you think about, you know, some of the things that have come up have been blatantly you know, I want to be out of the regulatory regime, I want to be outside of the regulatory regime and outside of this box. And we understand that, however, I think there are some people that say I want to be in the regulatory box, but they don’t understand the nuances of the regulatory box well enough. And so they’re just missing some key points in it. So I think it’s really about understanding the details. Really, really well. And I think that’s what’s missing is there’s just been so much activity in this space across several different sectors. And now let’s go.
Oscar Jofre 28:20
Whoa, okay. All right. I’ll ask you please, sir.
Sara Hanks 28:23
Okay. That be Yeah, I totally agree with Shari. I mean, what one of the interesting things when Reg, a, in its current form went to effect in 2015. Is, and we had some debates along these lines, where some lawyers were saying, no preemption is complete, you know, preemption is preemption, not just for the offering, but also the people doing the offering in a broker broker dealer was not easy to deal with stuff that I discussed. And then some of them would take that next step and say, also, for the secondary trading, and you know, we’d have this debate about No, I really don’t think that’s true. But in the end, it’s not what Sara says, that actually matters. It’s totally irrelevant what the state say. And if the state say, you know, you you you are not exempt, you know, the person doing the offerings not exempt, then that’s those are the people who are going to sue you. I have no power in this. But Texas does. And don’t mess with Texas. So there have been those debates. And I think we might see the states, especially with the the increases in the offering limits under reg CF and RegA. I think the states are going to pay more attention to this in general. And I think we will see some enforcement I think we’re probably going to see a different regime over at the SEC. I think we’re going to see more enforcement of the rules that are kind of being ignored. But I would, I would expect that we will seem more coming from the states to?
Oscar Jofre 30:05
Okay, so I understand people having different points of view. I mean, the three of us can be in a room having a discussion about something. You see yellow, icy red, Shari sees orange because she’s in Florida, right? So I mean, we obviously different I get that. But if the rule says That’s purple, it’s purple. It doesn’t matter what we see. So what I’m missing here is that, as you just said, the state clearly outlining. So let me ask you this is is, is there no fear? Is that what it is? I mean, I maybe I’m putting you under the Kotze right now, but I’m trying to figure out why. Because that’s to share his point sharing or you’re dealing with this right. You and I are dealing with this misinformation right now. We’re trying to tell people and we say, no, no, no, my lawyer said I’m okay with it. You know, there’s nothing to worry about it. I can have secondary. In fact, I’m gonna build a little internet here like a Craigslist, and I’m going, Are you kidding me? So what am I missing here? So that they can’t be there’s no fear to the penalty. Right? Is that what it is?
Sara Hanks 31:05
I think we really are going to have to see the state step in and do this, this enforcement. But I think we’ll also see, they talking about the you know, that the bulletin boards and their own little internet, that there’s a very important development, I think that people need to be aware of which is to give, again, some more ancient history here. For a couple of decades, the American Bar Association has been asking the SEC for guidance as to what it means to be a broker dealer, what it means also to be an ATS, under what circumstances are those regulations triggered? And there has, you know, the guidance has been very piecemeal, you know, there’s a no action letter here saying, if we, if you do that, we won’t take action. But that happens very rarely, there’s been a few quasi investment and enforcement investigations that haven’t really gone anywhere, where they, the Enforcement Division folded, but a lot alongside the, the constant request by lawyers for guidance as to what it means to be a broker dealer, we’re seeing the SEC actually come out with some guidance there. And we see I’ve seen it reading between the lines, and sometimes explicitly. Late last year, the Commission came out with a proposal for an exemption for finders. And that’s basically the dude at the golf course, who knows some other guys, and they have some money, and he can introduce them, but he wants a piece of the take. And that’s been happening forever at every country club been in the country. And that’s, you know, in many cases violated, because if he’s taking a piece of the take, that’s actually broker dealer activities, he’s introducing people. So the SEC said, Okay, let’s, let’s try and regulate this. We’re making a proposal that people in these circumstances don’t need to register if they follow these rules, that only applies to the dude at the country club. But when you look at the discussion that they put into that release, it talks not just about a guy who takes a piece of the take, but also people who are soliciting and soliciting can just be online, anyone who’s online. So to bring this back to the bulletin boards, and all of those things, I think that we are going to see a lot more enforcement by the broker dealer guys over at the SEC, with respect to unregulated non broker, online platforms in general, and online trading forums, in particular.
Oscar Jofre 34:05
So the SEC can step in, because, look, the reason I brought Shari into it, because blue sky matters to both of us, right, we’re trying to educate the market. And I feel like I got it, but I also feel like there’s still this gray. And I don’t want to, I always thought things shouldn’t be as gray as they are. But this one seems to be a big gray one. And, and I’m trying to make sure that, you know, we should never get to the point where we get a regulator to enforce it. Right. I mean, that’s pretty. I think it’s pretty pathetic in this day and age, but you got to wait for that for for people. So. But Shari, I mean, you and for you, I mean for reality markets, the the trying to get companies to understand this, even though if you tell them about the trade check report, how are you overcoming that objection, or are you I mean, are you overcoming it? Is it? Is it getting to the point that they understand is that their legal counsel? It’s just them that they want to go off the grid? Or just curious,
Shari Noonan 35:08
we explained it is it’s a it’s a cost of doing business. It’s a it’s a cost of being on the platform.
Oscar Jofre 35:16
Okay, okay. Oh, I see. I see. So you’re, it’s, it’s a, it’s a non starter, it’s not forget about whether it’s regulated or not. It’s just the cost of doing here’s what the requirements are for us. You want to be in this venue to offer your investors to monetize this would you require, you need to create check report, which will provide the blanket and then. Okay, so that’s really the key here is, so I guess that’s one way to beginning. But at the same time, you know, we’re trying to stimulate others who already have the market. If they’re set in their ways, they’re setting the way. So I guess that’s really what it comes down to. Right.
Shari Noonan 35:55
And I think yeah, I think that’s the the challenge is, you know, is changing someone’s mind about, you know, changing, they’re changing their workflow, changing their behavior once, once they’re already doing something. But from from our perspective, this is this is a gating factor to coming on to it’s a prerequisite to come onto the ATS.
Oscar Jofre 36:19
Okay, so let’s talk about your ATS for a moment. Um, so I tried to get Joel to do it last time. He, he missed the layup you ever been in better you will know basketball? Right? He missed the layup complete? Go ahead. I missed the layup. Yeah, to say he. I mean, we had Linda Lerner on the on the webinar. So he goes, let’s clean that let’s have Linda answer it. So you know, what we need to do is get Linda and Sara together. Now there’s that food. But onboard us, walk us through the the the client side, and then the investor, this is the one that I want to highlight. They’ve invested but go through the issuer part first, because the audience you know, blue skies, you know, people are getting my lawyer to deal with it, why does it matter? Because the two I want to trade, I want to be able to be placed on your secondary market.
Shari Noonan 37:12
So you want me to walk you through the process? Absolutely. So you can be on boarded a variety of different ways. You walk through KYC AML, you couldn’t go through that either on the primary issuance side, when you first invest if if we also use either the primary broker of record, or we have a partnership with the primary broker of record. Or, for example, it’s a it’s a KC X security or issuer. So there are a variety of different ways that you can go through that initial KYC AML. But we need to process that if you’re coming in fresh sort of off the street, which we don’t really do that we you know, we don’t we’re taking people into pipelines right now. So you would go through a very traditional like you see it many of the other broker dealer websites, that KYC AML process, you get verified, you get your banking relationship established. You come in, you can see your holdings, all of the securities that are held with you. accounts need to be pre funded. So prior to making any vi transaction you actually need to have the the money sitting in the account. You put your orders in it’s very similar to a traditional think e trade think other types of traditional easy order entry ticket, you need to put a limit on your order. Put the order in and you can trade issuer do want me to go through issuer Was that was that what you were looking for?
Oscar Jofre 38:52
Actually may I’m going to show you guys haven’t played basketball in a while, but that’s okay. You know, you’ve been in hibernation in Florida. I mean, how often do you get to the ocean? I’ve been stuck in this weather. So, you know, I’ll go like this. No, I mean, I know I’m trying to make some fun out of it. But you know, I’ve learned something new but ATS I’ve learned by asking questions like this. It’s the little things that people don’t say it’s that detail wanting to learn that makes we are two different is that Sara Hanks if the issuer had been on boarded with you, so correct me if I’m wrong here, Sara hands can go directly to your platform directly without a broker dealer and go and place her securities or buy for securities on her own. Correct.
Shari Noonan 39:45
Oscar Jofre 39:46
the return Absolutely. I know it But see, that’s a big thing. And I’ll tell you why to beat see. There you go. You’re catching on. It’s a big thing because everybody thinks all the ATS SS operate this way. They do not, they operate. So if Sara wanted to go to another ATS this ATS is also, they say it’s for retail. But it’s you need to go through, Sara first needs to find a broker dealer, who then she gives instructions to the broker dealer to then make her trade for her, and then call me back down. No, yours.
Shari Noonan 40:23
Yeah, so for ours, pay me the ball again, for ours, all you do is you go on to the rate, you go into the realtor site, you sign up for an account, go through KYC AML. Link your bank account, and you’ve got an account. ball back to you.
Oscar Jofre 40:45
Wow, you got your you guys were almost thinking Monday or something like that, right? Yeah. Do you know what I did the last few days, I am going back to a little book that I have is that when whenever you think you’re getting ahead, you go back to the beginning and you go, don’t forget, you got to do it all over again. And you know what do Okay, so what I do here is that whenever I think that everybody should know they don’t. And what you have a rebuttal is so unique. I’m not kidding you. And I know you it, you’re because you’re deep inside like I am in our business, we get caught by the fact that an investor can go directly there. And you’re going to take care of all these components of blue Scott, for the issuer to make sure that they met all their requirements. It’s the price of admission to be part of the reality platform. It is a fully compliant way of off ramping for investors to monetize you see what I mean?
Shari Noonan 41:45
Absolutely. But I mean, from my See, having done this for 20, whatever years. It’s not, you know, yes, it’s blue sky compliant. But it’s also, you know, ATS compliant risk checks, everything, you know, it’s it’s the infrastructure needed, that does not exist in the private markets, which is what I get so excited about the ability to give people the public access, at scale, to private investments, and the ability to monetize those private investments and the ability for issuers to engage in capital formation in very different ways. And lower that cost of capital, because by offering a monetization mechanism that’s going to lower the cost of capital. That’s to me where everything comes together.
Oscar Jofre 42:36
No, I agree. I agree. I just I’m still a baby step. So we’re here, right? You know, getting the getting them to hear I’ve been asked a lot lately. Somebody asked me the other day goes Oscar, what’s with all these ATS? What’s the difference? And I said, Well, it really it’s a really simple question. How do you want your shareholders to be on boarded to a platform? nickels? What do you mean? What would you like them to go directly? Because I thought they all get that. See? Isn’t that interesting? That was their first response? And I said, No, there is another. And I said, you know, this is what you need to ask that. A lot of them didn’t even know that that that little fine print in the middle that layer, which it’s there’s nothing wrong with it. Believe me, I don’t think it’s an issue of right or wrong, there’s a different place. But it’s, it does make a difference. Because, again, we want to remove all this ambiguity, or what people think something is just like, we were saying earlier, people think that we can trade. And we’re just finding out now that you got to fall in the States. For for blue sky. So got to make sure that not only you did it for primer, you got to do it for secondary. So this is where I just go back to the basics. I know that you and your have years of experience building ATS. But the way I look at it is there’s 233 million Americans that never even knew what an ATS was. Yeah, there’s 233 million Americans that didn’t even know what primary capital raising is. There’s 233 million Americans that go, you mean, I can trade them? Wow. You mean just like New York Stock Exchange. See, now comes there. So I that’s that’s the excitement of this discussion with this blue skies. Really, this kind of discussion today was kind of twofold is to make everyone aware from a legal perspective, what it is, why it matters. And yes, it can be dealt with, but you need to deal with it. And then of course, there’s we also I want to be able to place my company there. And you’re saying, this is the price of admission? It needs to be included, and you’re providing that as a complete package, correct? That’s correct. So this is the The intent of the oh, what’s happening in the market? I, we, we can’t overlook that. A the the latest stats, I don’t know if you guys knew this, there’s only one and a half million Americans that have gone through reg CF and RegA. I know, I’ve turned 33 million Americans now the other day, one of the guests corrected me to go Oscar. No, that’s incorrect. There’s not turning 33 million Americans, there’s 20 something million households. So you guys have done really good. My go, let go. But it said 18 or older, I want to they don’t just want to get the dad, they want to get the mom. Some they want everybody to come and invest. Right. But, you know, it’s really interesting. So I’ll go to you, sir. First to somebody there. It’s got their hand up. I think they had a question. But What other advice could you give to blue sky that we haven’t asked? And I’m gonna ask you the same thing? Sure. From your perspective, a second there? What is it that we’re not asking right now? What could we teach clients to ask?
Sara Hanks 46:03
It’s a really good question. Because of course, you know, that the the presumption is that if a company comes to us to do a RegA or even a reg CF, we’ve got that sorted for them. And so we have all of these guidelines and memos and things about what you can do and what you can say and who you have to file things with. So really, if somebody comes, so, yeah, basically, come to crap check, because we’ll sort it all out for you, that’s the only answer I’ve got. Because we deal with the Asus, we’re not dealing with the investors, it’s just, if you come to us, we are we are going to make sure you are compliant. Even if you didn’t know that was the thing, you had to be compliant with.
Shari Noonan 46:50
A. And I’ll just add on, and actually, it’s funny, because my last words are going to be in much the same vein, you know, in, in topics like this, you can really get down into the weeds and into a lot of detail, but really edit at a higher level. It’s very nuanced, and really, really complicated and complex. So you need to focus on finding the right advisors, and and in. So it’s really about asking questions to find the right advisors and finding the right service providers. And once you’ve done that, then then you should trust that it’s covered and make sure you’re asking the right questions.
Oscar Jofre 47:35
Well, okay, I’m going to challenge you on that. Sorry, because I, like I said, I, it that’s exactly what I ended up going. My lawyer gave me that advice. So I mean, what is right advisor? I know, I don’t know where this is gonna take us. I know. Sure you and I’ve had a discussion, maybe we need to expand on this. Right. But there’s got to be somewhere, please.
Shari Noonan 47:59
I would, I would, you know, when I said when I the last thing I said was asked as the right questions, you know, definitely interview more than one lawyer. And definitely make sure you’re working with a lawyer that’s done many, many, many of these. So, you know, I think Sara’s firm’s done, what 50%.
Sara Hanks 48:20
It’s actually a 15% market share, but I’ll go with it. 83 qualified so far. Okay.
Shari Noonan 48:28
You’ve done well on them. So, you know, you’ve done a massive, massive amount of these. And so make sure that you’re going with a service provider and a professional service firm that is well steeped in these issues, and is not doing this as an ancillary business. And is sort of doing this as a, you know, why don’t we try this out? This sounds like a neat thing to get into.
Oscar Jofre 48:56
Yeah, no, I do agree with that. I mean, we we grill people on the primary and on the primary, but this is different. This is now affecting on the secondary. So So the question we need to get people to ask is, when you asked about blue sky, is you preface ad on the primary extinction? Carol? On the secondary? Well, were we
Shari Noonan 49:19
on the secondary, I would ask if the issuer’s if, if one interview more than one ATS, and as you do ask the question, if all of the issuers are going to be required to have that covered, and if not, how they’re going to account for how they’re going to handle it. And if they say they’re going to handle it through some sort of technology, you know, I just that’s a problem. I would think that’s a problem that I don’t know if as an issue where I would be comfortable with it If they look at you, like they don’t know what you’re talking about, then,
Oscar Jofre 50:03
you know, no, I, I actually, you know, it’s been some of the ones that share you and I’ve spoken to I’ve gone back to them with this. And they’re like, but you know, the the important thing is, I’m wondering where like, this is a starting point, we’re having this discussion. I’ve actually I don’t know if you guys know, I Googled everything regarding blue sky, where there’s been kind of a course around not, of course, but anything around it. Nothing’s out there. This been stopped is starting to come out now. But it’s so legal least that the average person will go, my lawyer handles that. See, my lawyer handles that in this is not meant this is to educate the issuer. So ask the right question to the people that have been there done that. So one question I’m going to throw at you. I mean, you’ve done a lot of the right case. So what is one of the questions now going to be? Do you plan to allow your investors to off ramp? And if so, you need this? Is that coming up now, part of your kid of the RegA or reg Sia? Or is that going to be something that they’re going to wait till later?
Sara Hanks 51:07
It really depends. I mean, one of the things that you do want to say in the in the One A that you found with the SEC in your plan of distribution, if you are planning to list on NASDAQ be quoted on OTC or seek an ATS listing, you want to say something along the lines of You know, we’re planning to do that, what we usually end up with because you know, the market is still so new. And not everybody has worked out what they exactly want is that we usually have some disclosure along the lines of we are discussing whether or not to seek and ATS quotation, there can be no assurance that there will be any liquidity and then just have some kind of disclosure along those lines. When it becomes more usual to do that, then I think that that is that disclosure will get kind of expanded. But of course, one of the things to sort of go back to the beginning, some companies are just not ready for their securities to be traded. And especially if you have gone out with what we call an optimistic valuation, shall we say? One of the things that worried about is if people really do if there is a significant secondary market trading, people are going to look and say, well, it’s not worth $5, I’ll bid 250. And if somebody is desperate, they might take it. And now you’ve created a ceiling for any future ongoing filings. So you need issuers need to consider all of this, you know that the whole trajectory through the SEC exit trading from the beginning and decide how they want that their life to be shaped?
Oscar Jofre 52:59
Doesn’t the regulation shape that for you? I mean, if the regulation I mean, if Shari bought my securities, she bought them. And it’s free and clear, she’s got no restrictions, other than I may not give her an off ramp. But if she nothing is preventing her to, you know, to go and find a buyer on her own, right. I mean, that’s what’s happening basically now. So, like I, I’ve been conflicted with a few clients who said, well, Oscar, we don’t really want to, then I go to them, Why are you building an environment where they can actually do that? I mean, are you not really Yes, but we’re just letting them meet? Well, doesn’t matter whether you let them meet or not, it’s still, like, I’m trying to find the I, I treat it more like, when is the right time to bring it up in? It almost seems like to me, you know, where how we used to wait to bring the broker dealer after the filing was done. Now we know that to do it right. At the filing, we used to say the escrow provider or all the other stuff, we would wait we’re not doing it, we’re in the beginning. How do you feel that we started bringing that into the equation right at the beginning, saying, Look, you’re gonna provide that, why not have it part of your strategy? And that way, it’s all taken care of, or do you feel that that’s putting them under the pressure gun that these securities will have to be? I don’t know, I’m just spitballing here right now.
Sara Hanks 54:30
It’s gonna be different for every single this urine is going to depend on their own professional advisors as well. I mean, the brokers that who bring them to the market might say that you we think you should stay private for a while truly private with no secondary trading. Others are looking for market immediately. So it’s, it’s really going to depend on what the company wants out of this, and what their professional advisors are telling them
Oscar Jofre 55:01
Okay, and Shari from your ranch. I mean, we’re looking at, you’re doing some primaries to see what it’s like, but also doing the secondary. So how do you feel about that, obviously, from a secondary market, you want people there right away.
Shari Noonan 55:17
Of course, we want people there right away. But we know that there, there are going to be some reasons that are going to temper the secondary market. So for example, if you’re doing a primary raise, you’re not going to want to compete yourself with yourself on the secondary market. So we get securities, and we have other protocols in terms of how we can deal with issues around that. So we’re very used to working with issuers on on those items.
Oscar Jofre 55:45
Okay, so that’s part of the so basically, the secondary market is not just acting like a stock, like a true Stock Exchange, where it just gets listed. It’s on 24/7. You’re you’re working with the issuer and understanding so to put the brakes on when needed in the environment. I love it, we’re going to have more of these discussions, right? There are a lot of different questions thrown at us on a daily basis, where demystifying what ATS secondary market trading is. And, you know, I just got invited to one 24/7, secondary market trading, I couldn’t believe when I saw 24/7, secondary market trading. Because clearly, you know, you go and see who the operator is, they’re not there yet. But I. So I look at the data and I see how it gets amplified. And it makes our jobs harder. I know, Sara, I put you on the hot seat today. And I’m, I’m grateful and and Shari for you every alto. I mean, for us, we’re all working together all of us in this ecosystem to to bring an off ramp, I’d say I’m not using liquidity anymore. Because it isn’t liquidity. I want to make sure we’re also very clear here that the secondary markets are are not liquid. They’re liquid is NASDAQ. That’s, that’s a liquid market. This are illiquid markets. This gives the investors the opportunity to offer themselves to potentially monetize. But this is a legal venue, a fully compliant venue to do it in. And but you need to make sure that these other components are met were part of your regulations. And obviously, a lot of you are going to have a lot of questions today. I’m sure. Based on the emails that I’m getting, you’re going to be asking. So when you get a hold of Sara, very simple to get oh, Sara, you just go to Koresummit.io. Under speakers from him is there a thorough summary email address, that’s probably we don’t hide anything. And then of course, if you want to reach Shari to talk to her and her team, regarding secondary market trading, and how your company can use it, either for REG D, RegA or reg CF, go speaker and find out what the requirements are. What this says is a fully compliant. Today was a bit of an education on blue sky, we just I think we just scratched the surface of it. I’ve been in big discussions, but hopefully it created a discussion point that you should ask, you got two great individuals here that are living it every day. And hopefully, so any last word Shari from you first, to everyone that’s listening from reality’s point of view in secondary in blue Scott.
Shari Noonan 58:37
I just wanted to thank you, Oscar and Sara, for Oscar for putting these together. And Sara, for coming on, just because I think it’s so important to have the education component. There’s so much out there right now, especially, and it’s really a lot of marketing. And so I think the education component is just so critical. It can’t be stressed enough. So thank you for taking the time to put these together and make sure that people get get the education that they need in this market. Those are my last words. Oh, wow.
Oscar Jofre 59:10
thank you note. Well, Sara?
Sara Hanks 59:14
Yeah, I’d like to say thanks to and also Don’t Mess With Texas or any of the other states and just can’t ignore them.
Oscar Jofre 59:24
See, I like that don’t mess with Texas. I like that. See, she said it. Something that needs to be said, as a warning to everybody. And I think I’m gonna say something that her words were done before. Regulators are paying attention. They’re watching social media. If you didn’t see it, the SEC just colored an individual using Twitter on one of these ping tude or whatever it is. They’re monitoring everything. So don’t think for one minute that they do not know what you’re doing. You want advice? Please speak to the experts. Thank you again for both of you. This conversation is just getting started. I want to say that just getting started. And I want to thank both of you today for everyone else. We will see you at the next one 430 This afternoon we’re going to talk about rule section 12 G Yes, we’ll talk