Oscar Jofre  00:24

All right. Well good afternoon everyone once again and welcome to KoreConX KoreSummit webinars series 2021. For some of us, it’s already December. We’re so grateful that all of you could make it today these, two webinars today are really special because it’s a very deep discussion points that most people kind of bury in the back, but we decided to bring it on in the open. We brought in two great panelists to have a great discussion. And as always, please ladies first, take a moment to introduce yourself.

Sara Hanks  01:05

I am Sara Hanks, I’m CEO of CrowdCheck and managing partner of CrowdCheck Law. And together the two entities provide a wide range of legal diligence disclosure, filing and Compliance Services for issuers and intermediaries are raising funds online.

Joel Steinmetz  01:27

I’m Joel Steinmetz, I’m the CEO of Rialto Markets. We are a broker dealer. And then ATS, an alternative trading system, that is recognized by the SEC and FINRA. We operate specifically in private securities, RegA, Reg D reg CF, in providing all broker dealer services, as well as all secondary market trading services on the ATS.

Oscar Jofre  01:56

Wow, that was a great descriptor. Thank you. That was it. Did you hear about the last webinar where I said you missed a layup? He has. See, but I brought it back to the game. You’re back. Perfect. All right. Well, well, today’s discussion, I’ve seen people where they described the two subject matters. And one long document doesn’t work. I figured that we would split this discussion on section 12 G what the rule 12 g is. So you know, I’m not a lawyer, you’re not a lawyer. Is there anybody here that following up? Sara, you’re it, you get to tell us what

Sara Hanks  02:39

You discovered, you discovered my secret.

Oscar Jofre  02:44

You know, this is a you’re the one that everybody posts to. So it this is an important rule, because it does affect your yes have an effect on him. And people don’t understand what it means and then how it applies. Please,

Sara Hanks  02:58

Exactly. I think part of the problem with the whole of 12 G is people start in the wrong place. So if you start in the right place, it is with the statute in and it’s a section in the Securities Exchange Act of 1934, section 12 G, which basically says, if an issuer has with respect to a specific class of equity securities, it has more than 2000 shareholders no more than 500 of whom can be non-accredited, and it has $10 million in assets. That’s just assets, not net assets, then it must register that class of securities with the SEC and become a reporting company with respect to that class of securities. And that’s always the starting point for any of these there are exemptions under reg CF. There’s an exemption under reg a wonderfully, they are just different exemptions. But exempt there’s a conditional exemption under Regulation A that says if you trigger those things, so you’ve got $10 million in assets, and you’ve sold a class of securities equity securities to more than 500 people. Do you have to register with the SEC? No, provided that you are compliant with your ongoing requirements under Regulation A your public float is the amount of securities traded in your main securities trading place, if you have one, held by non-affiliates is $75 million or less. Or if you don’t have a public float, your annual revenues are less than 50 million and third condition you must use a registered transfer agent if you meet all three of those things. You are allowed not to count count the reg a investors as being holders of securities, shareholders of securities, for the purposes of calculations of section 12, G. And I go through this all the time, because people get sort of the steps or confused. But then the regulation CF is different. Because it’s that the conditional exemption there is you don’t count the reg CF securities, not just the reg CF securities in the hands of the people who bought under reg CF, but also the people they sell to. So you’ve got to keep track of them. But you don’t count them so long as you make the conditional exemption for REG CF, which is conditional upon not having more than $25 million, in assets. So it takes the $10 million asset test and puts it somewhere else. So yeah, they’re completely confusing. And the way all of us would have loved for this to have started out, would be for the SEC to say, don’t need to count. Crowdfunding, you don’t need to count the crowd. But no, it’s more complicated than that.

Oscar Jofre  06:17

Complex. Okay, so first make sure I got it, because my head is twisting in circles. I don’t know about your job, but I always knew it’s over 2000. But I didn’t account for the other elements of it. But I so for every regulation, there’s a different way of approaching it. Right. That’s for

Sara Hanks  06:37

the two regulations where there are exemptions, whether a conditional exemptions, but for REG D, the other one we deal with all the time. Yeah, there’s no conditional exemption

Oscar Jofre  06:49

for that. Okay, that’s the one. Okay, so, um, Reg D, there is no conditional. So once you hit 2000, you become a reporting issuer with the SEC,

Sara Hanks  06:59

if you count those holders of record, remember, it’s 2000 no more than 500 of them can be, you know, nonaccredited now, so that so in reg D, where you’re selling only to non accredited only to accredited investors, you need to keep that number below 2000. But so that we can get into all of the special purpose vehicles and how they come. Yeah, yes. Across the country.

Oscar Jofre  07:26

Yeah, obviously there. But that’s been predominantly the issue, because then, you know, coming to you. Okay, let’s just talk about reg D for a bit. And we’ll go into the other two regulations. Really quickly. Let’s talk about reg D, because that’s been where most of the capital is sitting today in companies, right. You’re the secondary market trading, you’re obviously going to take care of blue sky still applies here. Right. Sarah? For trade requirements? Yeah.

Sara Hanks  07:54

Yeah. The same things already talked about on the other webinar. Yep.

Oscar Jofre  07:58

Okay, so we got blue sky that needs to be followed. But now you got to add another hook to this 12 G. How, I mean, from a secondary market? How do you see that?

Joel Steinmetz  08:11

So from a reg D perspective, from our platform, in a lot of ways, it’s a little bit easier. Firstly, as Sarah explained, it’s less complex, simply because there’s no conditional exemption involved. But second, the reg Ds seem to attract larger investors. So making sure you stay below 2000, in a lot of ways is easier reg D is not really going out to the, to many of the retail investors once you get to RegA and Reg CF where you getting into real crowdfunding, that’s when those complexities and complications come into play. So in one sense, the reg D, even though it doesn’t have those additional exemptions, it becomes easier just because of the manner of which it’s invested. And that’s really what we’re seeing, I think, on the reg D, so

Oscar Jofre  09:05

I’m gonna throw a twist at you because I’m reading felt, you know, accredited investor, it’s, we are going to fractionalize the investment. So when I hear the word fractionalization, and on the reg D, because you’re right, traditionally, it’s been institutional, big players. And now we want to bring it to all the accredited, but you really can’t because you’ve got to keep it under 2000. So there isn’t too much fractionalization happening with that. I mean, I just want to make sure people understand that because they think that when I go fractionalization it’s only the first holder. Somebody described it to me this way. Oh, Oscar, that’s okay. As long as the first holders are 2000, the fractionalization under that individual.

Sara Hanks  09:53

That might count that might work in some cases, but it gets super complicated.

Joel Steinmetz  10:01

The fractionalization aspect of it is supposed to enable just a lot of other people to get involved. But the very nature of reg DS, almost requiring you to be an accredited investor lends itself to say, I’m going to people who are going to invest more. And if it’s going to invest more then you’re going to have fewer investors, because the entire undertaking is going to be taken up by a lot fewer people who are investing more. And still, even within the fractionalization world, Reg D can still be fractionalized, but you know, if I have the Mona Lisa that’s fractionalized, and it’s for accredited investors as a reg D, you’ll get people investing $100,000 or $50,000. That’s an accredited investor, they won’t be that many of them to get to whatever, you know, million or $10 million painting I have, and I’m fractionalized. Whereas if it’s a RegA, and I’m going into the $1,000 a $500 investment. Now I’m getting into a completely different universe, that is, by nature, probably going to go above 2000. And that’s when you start getting into can I get to some of the conditional exemptions? Sorry, I took actually, just to go back, you know, with one thing that Sarah was was was talking about is the complexities that exists, and the starting point is very important. And Sarah laid out the starting point, that is a crucial starting point, where do you start from? The second idea is, what kind of security are you starting from? Are you dealing with a reg D Reg, a or reg CF. Because that forget the legal stuff right now, that’s going to determine the business approach that you have. And if it’s a reg D, or RegA or reg CF, it’s going to have a different business approach, it’s going to attract a different clientele. And if that’s potentially, and if that’s the case, then you have to concern yourselves with some of the rules, regulations, and exemptions that exist in the different, different entities.

Oscar Jofre  12:17

Okay. And that’s fair. And that is true, depending on the regulation, I That’s why I picked reg D. And the only reason I’m doing that is that the 12 G discussion really comes up in the reg D world. And it comes up a lot. Right. So I’m reading an article right now, that says that the way to bypass Well, g is to follow with a reg s. So

Joel Steinmetz  12:45

see, you’ll see, you know, when we get those questions, we send them right to Sarah.

Oscar Jofre  12:50

Well, I know. But I

Sara Hanks  12:52

know, look, it doesn’t make any sense.

Oscar Jofre  12:54

I know in all fairness to people they keep on Oh, listen guy. And I’m reading this because people are trying to find ways to sell to more accredited and you know, but that but the bottom line is there’s that if the starting point is Regulation D, right, whether it’s 506, B or C, the rule is 2000. That’s it, there’s after that you become a reporting entity with the SEC and everything else that entails. If your starting point now becomes reg CF. That’s your starting point. That is the starting point you’re coming at. So here’s what I’m going to throw if let’s say I did do a reg D, and then I add a reg CF. How does one precede the other? Or are they are these two securities, even though they’re both sold as common shares, but I sold them two different times. How does that work in this window?

Sara Hanks  13:52

Well, the starting point is always going to be counting you start with counting. And so what do you count? If you sold them under reg D, you count those holders and we can get into what the definition of holders of record is and that the tearing that you mentioned, but start with the holders how many holders for REG D you count them if they are on your books, they get they count with respect to the Raguet, RegA or CF. The question is, do you count them or not? And you don’t count them if they fall into the conditional exemptions if the company is not compliant with the conditional exemption or let’s take a really bizarre example the company raised under reg D then it raised under CF and then it raised under an actually not so bizarre and for whatever reason it forgot to file its form ca Rs. It did the CF got you know 2000 investors 1500 investors in the CF and then it did a RegA and it’s compliant with right Okay, so what do you count, you count the DS, all of them, you now have to count the CF because oops, you are not in compliance with the conditional exemption. And then you look at the A’s, and you’re like, Oh, I’m in compliance with that. I don’t count them.

Oscar Jofre  15:16

Okay, so what an eye-opener for me today that was. I’m like a kid in a candy store right now, Joe? Sorry, because you and I are going to be encountering this. We have a number of issuers where they have bees, and they have CF, and they have A’s. So if I just got you correctly, the only way you get to utilize that exemption for C or D, is that you also have to file your AR, which is the annual Is that what you’re referring to? That’s right,

Sara Hanks  15:47

that’s the annual it’s, it’s the baby equivalent of the 1k. And any company that’s done these filings that that’s done these raises, has ongoing reporting requirements, which may or may not be ended. So for example, let’s say this company did the D and sold to a certain number and the D, then it did the A, and it sold to 299 shareholders under the CF, and then it did the A, and it sold to 501 shareholders under the A. So we got the CF, that the analysis that you have to do with respect to do we count the CF holders or not? Is are you in compliance? Are you compliant with the CF requirements of CF requirements? You’re going to look and you go, okay, is a form. Here’s a form car for 2018. Here’s one for 2019. Then there’s this CTR thing don’t know what that is. But they didn’t file for 2020. What’s going on? Well, it could have been that they had, because they only have that 220 299 shareholders, which is less than 300. You can exit the reg CF are reporting requirement if you have fewer than 300 shareholders. So that’s another thing that you still because they’re still compliant, right? Still compliant, but they have not. If they still haven’t got total assets in excess of 25 million. So compliant, you still don’t count them. It just becomes very, very complicated. You need, you know, a law degree and a math degree to do that stuff.

Oscar Jofre  17:39

Well, I’m lucky because I pride y’all and from what I understand he’s got a PhD as well on ATS nine under his belt, see, I haven’t forgotten that nine. Okay, yo, so all my bad. I mean, how does this thing work? Then on a second? Like, I get all these bunch, so I’m breaking them apart? You will you need to break each of these securities and be able to make sure that they’re fully compliant and each way like there’s no way to enter into combine them, right.

Joel Steinmetz  18:14

So, yeah, I’m just gonna go down the path of what we the way we sort of look. And again, it’s going back to Sarah’s original original statement, because this is really important. You have to know where your starting point is. Right? The starting point is the rule, let’s just call it the 2000 rule, right? It’s the rule of having 2000 investors like staying under 2000. That’s number one. Number one is That’s my number. Then once I get to that number, I then have to figure out what am I doing a RegA reg? CF reg D. Depending on which one I have, I then say how do I count to the 2000. Then I go to respective exemption. If it’s reg D, there is no exemption. If it’s reg day a it’s exemption one if it’s reg CF, it’s Exemption two. And that’s how I get to my number of 2500 Aside from 300, Sarah was talking about the 2500. That’s how we get to that number. So I start off saying I know the rule. Then I go and say what’s the security I’m doing? And then I go and say is there an exemption so I can determine how many I deal with. What’s important is that each one of them can be looked at in a silo. So when I’ve done my RegA I look at in a silo and say Have I do I have the exemption in order not to count these from my RegA. I do the same thing from my reg CF. And then I can determine whether I have to for the reg CF, I have to count these people for the RegA maybe I don’t have to count them. Did I get the exemption here? Did I get the exemption there? But it’s it has to be done step by step. I think that’s the In that’s the key component for any issuer is to look at it step by step and not try to get too complicated by putting them all together just one step at a time.

Oscar Jofre  20:12

Obviously, yeah, that’ll be pretty tough for some, the way people look at things, right, they see the whole list. And, but not only a step by step, splitting them, but also making sure that each of those securities, each independent security has been properly filed with the SEC, to meet the requirement to, you know, to list or to be able to be usable. The exemption, I got that correct. Right. So,

Sara Hanks  20:43

yeah, I’m yeah, I’m gonna, like, rephrase it, you know, with respect to each exemption, make sure that the filings have been made by VSU with respect to that exemption in order to be able to rely on that specific conditional exemption. So a specific type of offering.

Oscar Jofre  21:07

Why is it so then, you know, you go out there everywhere, there’s a lot of conversation on it. Confusion on it. I mean, we run into companies where it, oddly enough, they think they know the regulation, but they get their formula confusing. Why has this become so confusing? Because it didn’t get wrapped up? It’s crowdfunding and it’ll be there? Or is it because if you have 10 million in assets, if you’ve got X number of folder, it’s all these different conditions? Like you said, you need a mathematic, a PhD, and a psychological and legal degree. Is that is that the way it works?

Sara Hanks  21:44

The problem is that I mean, this was one of the issues that the SEC raised in 2019 when they put out their concept release, and they said, Look, we understand all these exemptions, they’re super complicated. You’ve got registration over here, and that’s complicated enough. But then you’ve got the exemptions, you’ve got the three different flavors of D, you’ve got S you’ve got CF, you’ve got a and all of them have restrictions on who can invest or them have restrictions on how much can be raised. All of them have issues with respect to whether they’re restricted, nonrestricted. And let’s try and make it all easier. And all of us commenting on the concept release said yes, absolutely. Yeah, a complete rewrite, start from the beginning, this stuff has been around for, you know, how many years since 1933. And it’s just, it’s got so many barnacles on it, there are so many rules on top of rules. And let’s just start from the beginning. And my preference would have been, you know, throw out the regulation of office and just regulate sales. And there were a lot of suggestions made. Unfortunately, when the SEC came to do the revisions that went into effect last week. They just did this simple stuff. They said, Look, you know, there’s enough people who kind of think that this is all okay, all of whom are security slaves. By the way, you know, the American Bar Association’s mostly Yeah, yes, fine. Yeah, we’re making plenty of money interpreting these things. And so they did just so they attack the low hanging fruit. So some things have been coordinated and smoothed out. Investor limits in RegA, Reg CF, are a lot closer than they were, which is good. But there’s still a lot of different reasons for different offerings, which are not necessarily obvious to the external observer. And you know, you can’t do any of this stuff. Without a securities lawyer.

Oscar Jofre  23:42

Yeah, that’s it. That’s clearly one thing that we will always try, no matter how much easier we’re making it that isn’t making, getting, removing the intermediary that’s really essential to providing the guidance and understanding of the regulations. So, you know, from a secondary point of view, though, you’re I mean, that, I mean, pushing the roll off to Sarah, it sounds like a good idea. I mean, you’re not the only one, we do it too. But at the same time, I almost feel like love earlier this morning, I Sarah, we were talking about blue, sky wise blue sky, because everybody’s now talking about secondary market trading. And then now we’ve got trading we get so you got to think about the primary as you’re bringing in investors to make sure you’ve done it fully compliant. And then obviously, where we got this off RAM venue, which as we all know, markets, a secondary market, a platform to be able to allow me to take my security, only to find out that you know, I may not be able to do so because if everything hasn’t been done accordingly, how do you as as a secondary market, I mean for blue sky know how you’re covered. How does the secondary market cover itself to ensure the other elements are also being met to make sure that training can be done employee compliant the rule 12 do, right?

Joel Steinmetz  25:07

Yeah. So, in essence, firstly, it’s making sure you have all the parties that need to be involved. And from our perspective, there are two major parties that have to be there a Sarah said, it’s very important to get a securities lawyer involved, I would add to that, and say, it’s very important to get a securities lawyer who’s actually knowledgeable within the what you’re doing RegA, Reg CF reg D. securities lawyer that’s not as knowledgeable in these particular rules and regulations, is not going to really do you justice, you need to make sure they’re really experts in this particular area. The second thing is also working with the transfer agents, who are the ultimate arbiter arbiters of ownership, and making sure that the transfer agents are aware and inclusive of the numbers and the counting, right, we’re all talking about the counting here. That’s the first component, it’s really just working with the issuer to make sure that the external, when I say external, I mean external to the ATS. The external parties are also included, like the lawyers like the transfer agents as examples. And if those are included, then at least from the beginnings perspective, starting point, the issuer is going to get go down the path that we expect them and need them to go down. The second component of it is, can you build this into the issue itself, so that the system recognizes the issue, and all its component parts. So with digital securities, for example, it’s possible to build into the issue itself, these restrictions and limitations, so that when a new buyer comes into the system to try to purchase that particular security, the rules and limitations and filters are part and parcel of the security. And in that way, it will reject the order, or it’ll inform what has to be done, it’ll check if it has to check. But we’ll go through the steps in order to make sure that compliance that was written into the security is adhere to. And those are really the two elements of the ATS will come and the broker-dealer actually will put into play in order to assure that these rules are complied with.

Oscar Jofre  27:44

Yeah, it’s it when you have regulated parties. You’re I agree, I think, enough regulated parties in the room part of the transaction, you will clearly know, you know, everybody’s asking all the right questions is compliant. Have you made your filing requirements? Have you filed this? Have you followed that? So everything’s to be but you know, the reality is that we know that that’s not always the case. Right? And that is not always the case. And when you see someone’s cap table, and we, we see a lot of capital votes, and what I’m the reason why this is I’m asking this question very strangely, to all of you is that what you’re seeing and what we’re seeing doesn’t always matter. And, and, um, you know, last night, it 11 o’clock at night, I’m getting a call, because everybody’s hustling right now to reconcile their stuff. And I’m scratching my head, like on one hand here, because that’s 3000. And I’m going to, unlike you, I separated in buckets. I didn’t even know I had to but I did it just for my sake. And the numbers just weren’t adding up. See, even Maximus doesn’t think they’re at you know, you know, even he agrees with me. So, what, what is? Okay, so what is happening to where’s the safety net gets in the problem with REG D? As we all know, the company doesn’t need a transfer agent. At least I could be wrong, right, sir.

Sara Hanks  29:20

That’s right. You don’t have to have a transfer agent. And you don’t technically have to have a transfer agent for a or CF either. It’s just that if you don’t, you are not going to ever get that conditional exemption. So the moment you go above, you know, 500 nonaccredited investors. Oops, uh, you know, you’re required to register. But Reg, Reg D does not require any, any kind of transfer agent and we do. We do see this a lot.

Oscar Jofre  29:48

So big. So then we’re relying on the issue itself, to self-regulate itself somehow to make judgment calls on that. 2000. Right.

Sara Hanks  29:57

Well, you’re relying on the issue. To know that there’s an issue to know that if they go above that number of holders, that, that they’re going to be in trouble. And, and as your says, I mean, a lot when you’re dealing with a lot of accredited investors, and especially when you’re dealing with, you know, tech startups and the like, there is, the VCs don’t want to have a lot of people on the cap table anyway, they want big checks, they don’t want to have a lot of little checks. So sort of self regulator there. And then we can also get into the use of SPVs in reg D, because you know that that’s an important part of this whole thing. But yes, you are relying on the issuer, frequently a startup to know that there is an issue here that they have to keep an eye on, and to actually keep an eye on it. And we know that so,

Oscar Jofre  31:01

yeah. Yeah, I just bring it up. I’m just curious. Because [uncertain] cf and RegA. You’re right. I mean, people don’t think twice about it, they automatically get it for inspiration. bring clarity. But, um, I mean, there are issues, but it’s not for this discussion. But you brought up an interesting point to take the discussion to the next stage SPV. Here’s a vehicle that we’re now talking about a lot. Because of reg CF. You hear it a lot. And Reg D. I’m going to come back to you. You’re How do you trade that? So the SPV vehicle? You mentioned that as a vehicle that okay, well, how is it that in that vehicle, I can put more than I do in the entity what makes us special to be able to do that?

Sara Hanks  31:48

From the point of view of reg D. Now, let’s assume, which is not always a correct assumption, assume that the SPV has not been created purely to avoid the credit requirements of regulation 12 G? Because if you did that, for example, do we remember Google way back when, like 15 years ago, it was Goldman Sachs took a whole bunch of people stuck them into an SPV purely so that they wouldn’t trigger the number, which was different back in those days, but purely so that they wouldn’t go over the wrong number. And, and require registration before the company was ready. So you can’t just bundle them up and say here, we just want to stick them in an SPV. Because the thing is, if you have an entity like an SPV is not created for the purpose of avoidance of securities laws, that’s going to count as one holder. And many cases, these investments are a people get together, they get a gang together in order to invest, they’re assigning that they’re basically their little VC funds, right. But you know, there’s somebody out there who is the lead investor, somebody out there with a carry, and they’ve got, you know, some kind of two and 20 structure and they’re charging wealthy investors a fortune for the privilege of being invested. But providing that that wasn’t created, just avoid the securities laws that counts as one, which, of course, means that if anybody wants to be trading later, and they come to your, you’re gonna have to suck all of us securities out before they could ever be traded.

Oscar Jofre  33:44

But, okay, so Alright, so the SPV, I get it, it becomes one holder in the entity. But the SPV still has the same rule of thumb, it cannot exceed 2000. So the idea is

Sara Hanks  33:57

even more complicated, even more complicated, because if it were to have more than 2000, then it would have problems, but it’s going to run into its own problems if it has more than 100 holders, if it’s a fund because it is going to be a fund. So it’s subject to all of the fund exemptions, which say no more than 100 holders, or 250, if you fall into this very special bucket of funds. Okay? Enough yet.

Oscar Jofre  34:24

What you know, look, everybody makes it sound like Oh, Oscar, we’re going to be looking at an SPV. I’m going Oh, my God, you just still trying to figure out how to run this company. Now I’m gonna add another one. I mean, that’s the way I look at it, right? You’re just this is complicated enough. This is not going to give me a pass on that. It just now gave me another thing that I need to manage to make sure that it’s there from a secondary market point of view. I mean, I mean, you’ve seen all of it. All this stuff happened before in the market. You’re Have you seen holdings inside SPV to be able to, can an SPV trade?

Joel Steinmetz  35:05

First of all, you can, but to Sarah’s point, a lot of times when it wants to trade, you have to then reach in and pull out the securities, and have those come into the investments. So, you know, it sort of gets back to the previous discussion, you know, in a regulated environment. That’s, that’s the way we want to operate. We want to operate in a regulated environment where everyone’s considering the regulations. The problem is, it’s not people doing things illegally, out of being evil, it’s lack of education. And that’s really the challenge. The challenge is just making sure that this example is a great example, people just say, You know what, I’m going to create an SPV. And they don’t necessarily recognize the repercussions and consequences of grading the SPV. It doesn’t solve all your problems. And a great example is the one Sara just, I think happened to come by. And that is when you hit 100. So people start thinking, Well, I’ve gotten rid of the problem that I was trying to deal with the SPV. And now I have 200 investors, my SPV, this is great. And you don’t realize it, you just created a whole new problem for yourself. Right. And that’s the education that needs to be incorporated. And it is very complex. I, we don’t expect the regulators to make it necessarily easy or non complex. But recognize that when you’re doing one thing to solve problem A, you better be knowledgeable enough not to run into problem B while doing

Oscar Jofre  36:41

that. No, that’s a great point. And the only reason I bring it up is because you know when you talk about people, oh, yeah, that’s easy workaround. I’ll just get an SPV. It that’s a throwback, right. So this was a great point for them to hear that. The SPV has its own limitations. And, Andre, I mean, this is just not a lot of trading in there.

Joel Steinmetz  37:03

Right? In that way, because of it, it’s not really going to solve your problem. Probably not unless you’re at 2050. Right. But if you’re already getting to a point where you’re way above 2000 an hour, you’re, you’re at 4000. And you say well, let me get rid of these and put them into an SPV. So I get under 2000. It’s just not gonna work. Right. It’s only when you just a little bit up above it. And like Sarah said, you have to make sure that you’re not doing it just to avoid the law. But it has its own hair, that you better be ready to deal with.

Oscar Jofre  37:41

Yeah, I, you know, I’m thinking all the different questions that I’ve got. That’s why I’m putting them towards both of you. Because these are now fully, these two points are fully together. Now. The before, it wasn’t such a big deal. I think everybody knew about it for the issue. So now comes to hard question. I’m gonna ask Sarah. So what happens when a company is over? A nobody knows?

Sara Hanks  38:08

Well, if nobody knows, that’s great. But if the SEC knows, they’re not so great. Because then the next step is, you know, the company has violated at some stage the the requirements of section 12 G that, you know, when you reach these limits that you get registered with the SEC. And so the, the obvious solution would be go register with the SEC that the next follow up would be well, why hadn’t the company already done this? Possibly, because it’s an early stage company that really couldn’t cope with the whole being public thing. But if you don’t, you violated the law. So what you know, I always say the SEC doesn’t have handcuffs. They just sue people. And they can, they can try and force you to get registered. If they thought you did it criminally. They can hand it over to the Department of Justice, but they are the ones with the power and that stage. And when you have that where it’s really going to come up is when the company is in fact ready. So let’s say you know, nobody notices. They’ve just done this. Nobody’s keeping good good records. They’ve got you know, the cap table on the back of an envelope. Everything’s chaotic. They come to do their IPO. They want to register on an S one. They give the whole history of the company and the SEC and the investment but we’ll probably the investment bankers before that. Look at the whole history and go do you think you should have registered earlier How do we fix this? And you’re going to have a whale of a time with the SEC trying to work it all out?

Oscar Jofre  40:08

Yeah, I, you know, I? I don’t I would say the company we run into, I don’t think they’re doing it on purpose. I think most of them just don’t know. Or they’re too afraid to ask because they think, you know, they they read enough or they do the math and they go well, these counters employees and this that and somehow they make the math look proper. Or they’re hoping that the minute they fall for a reg CF and RegA goes away. Does it ever go away? If they do that?

Sara Hanks  40:38

No, it’s not going to make it better. could make it worse, but it’s certainly not going to make it better. Yeah, acquiring more shareholders is not going to solve the problem of having too many shareholders.

Oscar Jofre  40:51

No. And okay, so you know that that’s a good lesson. I mean, look, we talked to right from the beginning, we said, you started a properly, what direction you’re going to take on your strategy and your race. And it’s going to, it’s going to be helping you as to what you need to follow. And your from you guys said a reality. Really, it sounds to me, like when it comes to this particular rule, you are relying heavily on the legal aspect of it for certain legal opinions required, and particularly with accredited investors. If a company only has that, in order for you to have the assurance, that there’s only, let’s say, 1000 shareholders in your room? I mean, is that part of one of the requirements are you looking at,

Joel Steinmetz  41:37

we’re not we have not run into anyone who’s really sort of asked for specific legal opinions in order to be able to get involved in any of the investments in these securities. I think people are relying on others, we definitely rely very heavily, particularly in this aspect on legal teams, the attorneys and their opinions. And we suggest that’s our first suggestion every time is make sure you get yourself. As Sarah said, Good securities, we say a good RegA or reg D or reg CF lawyer, someone really good to be able to do that. And it’s very important to go down that path to make sure the issuer is comfortable. It doesn’t we don’t have to go back far. It’s particularly over the last couple of years, that the FCC has been looking a little more carefully to make sure that issuers are complying and is investor protection. They are doing this for the benefit of the markets. And we should recognize that they are doing this for the benefit of the markets. As such, there are loads of people out there to help whether it’s broker dealers like Rio alto, or attorneys like Sarah or transfer agents like KoreConX it doesn’t matter who you go to someone needs to help you. And you need to make sure that you have that in order to assure you’re going down the right path. Once down that path. Your approach to the investor investor community now has a different look and feel. You don’t have to necessarily say here’s my opinion later. You can just say yes, we have attorneys that have worked on it. These are the attorneys. And with RegA, it’s publicly filed. They can say these are the attorneys is to broker dealer this to transfer agent, it’s covered. And that is generally sufficient.

Oscar Jofre  43:28

Yeah, it’s I, I do agree with you now it’s become look this morning, we discussed blue sky, right. And the difference between blue sky and foggy to me there’s no gray, this is purely black and white. Right? It’s black and white, or gray. And she’s smiling.

Sara Hanks  43:48

I think there’s some gray in the creation of SPVs. And right in I think there always has been it’s all been a little squirrely, the rest of it. No, no, it’s kind of Yeah. And when you’re dealing with numbers, you know, the numbers and the numbers,

Oscar Jofre  44:03

the numbers of the numbers. And if you’re going to play with the SPV, you better hope you got a good fund administrator, who knows what the heck they’re doing. And they work. I mean, the bottom line is that whenever you think you’re going to find a way, another way around it, you’re going to come right back to the same problem as your kid saying, it doesn’t make the numbers go away. And that’s probably the I think that’s the rule. And you also said something earlier today as well that this year we’re going to see more enforcement and you just set it you’re because the regulators have increased the limits. So they’re going to know they’ve increased the limits to reg CF and RegA. So I’ll throw something at you will that means there’ll be more there will be enforcing more of the RegA deals who have not met their see our or their or their car, their annual report.

Sara Hanks  44:58

That’s that So reg CF, once they say they will mean in, one of the comments that we made in their proposals were with respect to putting up the limit is okay, if you want to put the limit up, you should, you should enforce the rules that you have, because nobody’s complying with them. I mean, this is a cesspool of non compliance, you. And so the SEC really needs to start looking at both initial disclosure, compliance and ongoing reporting. Compliance, and I think we’ll see more focus on the see that the the CFX offerings, then on the eggs, because the A’s have the the investor protection, there is the SEC reviews them. There is a legal opinion in there. There is audited financials that we know are audited, and their financials. And there’s, you know, an auditors consent, I mean, there’s a whole bunch of audit of investor protection in a that does not exist in C, because in C, you just file it, and then nothing happens. So I think the SEC is going to start looking at those and I would expect there to be more enforcement on the CF side than the A.

Joel Steinmetz  46:14

Yeah, I I’m sorry, just to jump in from from again, the perspective, let’s say of the broker dealer, when people are asking, or just trying to find out what’s the best avenue to take, should they go for REG CF for RegA? Generally, the thought process is just on money. Well, how much are you raising. But in reality, there are a bunch of other things that have to be considered, including the amount of best investors you get to have what might be the exemptions that you can come across, what’s the time period it’s going to take, what financials you have to deliver, all of those become component parts of the decision making of which avenue you want to take. Once again, it just comes back to an education process, we should we should really be very proud of ourselves as an industry for getting this job Zack and all the things that are in there as far as we have, but not fool ourselves into thinking that this is, you know, this has been going on for everyone ever, and everyone should know about it. A lot of these things are coming up new look today, we had more stuff coming in new there. They’re always new things that are coming and people are still getting up to speed on the education of what this means and what the exemptions are and what the rules are. And it’s just an education process till people figure it out.

Oscar Jofre  47:41

Yeah, I do agree with you. I think there’s we’re still in the early stages of the education but at least we’re having the the honest discussion with people that you got to split the regulations, you got to look at a I made the mistake, maybe even me in the early days, I was combining it all together. Right. I, I do I will be the first to tell you I I remember one thing, and I did apologize to everyone and I was that I, I made the assumption that, you know, since you have read the indexers, and you get a RegA it all gets under the wrapper. But you know, Sarah set me straight. She taught me anything. She said, Don’t ever do that again, you know. So. So I, you know, it is a it’s an evolution of that this education needs to continue to make sure people do it right. And even when you do get the exemption as we have it in reg CF and RegA. The reg CF is the one that probably concerns Sara the most I know that she’s she’s been very vocal about it. And I, in fact, not only she vocal, I concur it because I see it. So her and I will share the commonality. And I don’t think what’s really, what were the reason I brought this up is because I’ve been going to the issuers that are failing to do it. And they go, what’s the worst thing that can happen to me and said, Well, your violation of rule 12 G goes, What’s that? I did a reg CF round. That doesn’t apply to me. And I’m going, Wow, this is so weird. So we this is where we need to enter as beneficiary is going to be the year of enforcement. You know, the SEC likes making good example of people in order for people to learn. There’s nothing wrong with that. Right. So I think it’s a good discussion. And obviously, the reason I view all abroad, secondary is because people want to need it to their kid. You know what I mean? This discussion, these discussions never came up before, but it it holds all your activities for off ramp for your investors to monetize. It puts a dead halt on everything. Because you go in and say Hey, I can’t touch this, right? You got to go back and reset Do something about this before I can. So it will, it can have a material effect all the way around for everyone to make sure that you know, each security yourself. So let me let me ask each of you a closing, I mean 12 G’s in all rule, I have read it somewhere. It’s one of the oldest rules. It’s boring. Nobody likes talking about it. And only us, we’re going to make it like a circus. We’re going to make it fun. But what would what would be your last comment to this discussion? What would be some advice you would give people you’re when you’re in? When considering everything? I know, you’ve said it before some items. But what would you be your closing remarks on this?

Joel Steinmetz  50:43

Well, from my perspective, from our perspective, I should say, from our perspective, yes, the fact that there is a secondary market now in the securities aside from a primary one makes a real marketplace. And that’s really what we want for the securities, we want it to be a real marketplace with not only the on ramp that allows you to get involved in the securities invest in them, but an off ramp in order to be able to monetize. And that is an essential element of the three things that I’d say are really most important, are number one, make sure you get a good lawyer, make sure you have a lawyer that really understands us. Number two, get educated on any one of the offerings, whether you’re doing one, two or three of them doesn’t matter. Make sure you are fully educated on what that means. And all its nuances, complexities and repercussions. And Number Number three, would be to to just assure that when you’re getting involved in this, whatever it is that you’re doing, that you’ve incorporated the entire community to help you do it. You know, you need to you need to be educated in what’s going on. But then you’re going to need help. And recognize that that help is going to come in the primary markets and in secondary markets. And there are plenty of people out there who can perform whatever functions you need to help you get through this whole idea. And if we do that, right, we will actually have a very robust marketplace in the primary and secondary markets for private securities, ones that will not only meet but probably surpass what we have in public securities, as long as we’ve assured that we’re doing it the right way.

Oscar Jofre  52:41

It’s good like that, Sarah, to you.

Sara Hanks  52:44

Alright, so there was one thing I wanted to raise that we hadn’t actually really touched on, which is the use of SPVs. In reg CF, which is new from last Monday. Which is if you there is if you meet the requirements of a regulation CF SPV. Then you are able to have all of your shit your regulation CF shareholders go through that SPV. And it will count as one holder of record for regulation for Section 12 G. It does become more complicated, though, to look back to one of the things that y’all had said, you know, trading, because the things that the investors hold are going to be interests in the SPV, not in the underlying company. And so if you ever want to trading in the company securities as opposed to the SPV securities, which you could trade, I guess, you’re going to have to go go into the SPV and and dissemble it at which point all of the shareholders are going to count individually again. And the conditions for use of the SPV are that it can’t be you know, a profit making center in its own you know, there is no carry here. administrative fees can be accepted by the issuer, not by the investor, they can’t be passed on. And the way that we’ve structured these things, is that to comply with the requirements, the economic and voting rights, that are in the shares that the company is selling under CF, have to be absolutely pass through, you can’t change them, charge fees, you know, change the voting terms of the of the underlying securities at all. And when you come to do the registration, sorry, the filing with the SEC, both the SPV and the issuer file, both the SPV and the SU need to have financial statements, if you’re looking to raise $5 million, that is audited financials for both of them And, you know, it’s it’s a fair it’s a very restrictive thing, but you don’t, it only counts as one. Now, the when you have the messy cap table discussion with VCs, there’s no longer a messy cap table for the company. But it’s a messy cap table, special purpose vehicle.

Oscar Jofre  55:20

But the company still has to manage the SPV, though

Sara Hanks  55:23

somebody has to, I mean, there are going to be services out there. But the way we’ve set it up is as a manager, ma’am, a manager managed LLC, in order to sort of pass through as accurately as possible. But anyway, so just throwing that in there, right. To say, hey, you know, here’s another complication. But well, that’s one of the things that we’ve kind of noticed in the whole SPV thing since last week is I think people have not realized that you got to issue is that doesn’t need to

Oscar Jofre  55:57

file? Yeah, it does. What’s the point so that a lot of people don’t realize they think the SPV is not an entity? And that’s support that because they hear the word special purpose vehicle? Or what kind of vehicle Do you think it is come as a rotting? No, but I cannot but seriously, I have to remind them, it’s a legal entity. What do you mean, it’s a legal entity, you have to incorporate it, you have to agree the structure you have to have. So I think it’s a big I mean, for those who have done it before, like in real estate, where it’s common in VCs and and funds, that’s new to them. That’s, this is a brand new audience that they’re still trying to figure out what a want is, right? What options are now we brought in this other instrument? Can I ask you just last question on this one, because you brought up the SPV component? Wait, so the investor invest in company, ABC, ABC is the one that’s all over there. And that’s the company that’s drawing me in. That’s the company that’s telling me all about the Keep in mind that this is not the accredited investor. This is the general public. And all of a sudden, you make the investment or everything there is still John Doe. But now you find out later, it’s never a determined investment, that you are in this SPV. And you actually have no ownership in that company at all, directly. If you know that that’s, I know, that’s room for another discussion. I I brought it up only because it it’s already starting to happen. And I’ve often wondered if the SPVs are only meant for one audience only. And you have to be fully versed.

Sara Hanks  57:40

Yeah, the if you’re going to do an SPV, you’re going to need to do proper explaining is like you know, when I go on to my, my dashboard, on funding portal X, Y, Z, why does it show SPV for, you know, the widget company? Why is it not just the widget company? And how do I sell my shares in the widget company? And the answer is probably not I’m able to do that.

Oscar Jofre  58:11

Yeah, I’m already dealing with a scenario already, where the investor already invested previously. Now I invested the second time. And the second time they even showed us the picture, the video, and the name of the legal entity that was put under was in fine print. And they said, I watched a video I invested in y’all, y’all, I’m just picking on you. I know you. But I’ve just I bring it up. I know that’s another discussion. Obviously these are in love work. All these discussions are meant to stir discussion to make you wonder hopefully provide you enough guidance and understanding that these are not things you just spit out and say Oh, I know how to deal with 12 G or blue sky. The idea is you need professionals. That’s what you know, every every one of our sessions is meant to do that. And if you want to get a hold of Sarah and learn more about how to do things the right way, whether you’re doing a reg D RegA or reg CF. Her contact details are Koresummit.io as well you can find all the leading obviously secondary market who is allowing those who have securities in both reg D reg CF and RegA to allow you a off ramp for your investors to monetize their investment in a registered secondary market. So thank you again both of you for a wonderful discussion today. For a subject matter that often is very difficult. We made it fun I hope so always good to see you both and thank you everyone else. For for all of us. Take care everyone dies