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While the costs of preparing an offering under Reg CF are significantly lower than other types of securities offerings, they can still be expensive in terms of professional and marketing fees prior to having any sense of whether the offering will be successful. The SEC heard the complaints from issuers on this point and have adopted a testing the waters provision that is substantially similar to that used in Reg A.

Under new Rule 206, issuers contemplating an offering under Reg CF may make written or oral offers to test the waters (“TTW”) prior to filing a Form C. Once the Form C is filed, the offering is live and no more TTW can be done. There is no restriction on the content of TTW communications, as there are for solicitations after the Form C has been filed under Rule 204(b), however, any TTW must include a legend containing the following:

(1) That no money or other consideration is being solicited, and if sent in response, will not be accepted;

(2) That no offer to buy the securities can be accepted and no part of the purchase price can be received until the offering statement is filed and only through an intermediary’s platform; and

(3) That a person’s indication of interest involves no obligation or commitment of any kind.

Rule 206 also provides that the information that may be received by the issuer includes “name, address, telephone number, and/or email address” of any prospective investor. While the language is permissive, which would allow for additional information to be collected, such as pricing or other rights that prospective investors would want, this permissiveness would likely not extend to collection of payment information.

Issuers should note that any TTW materials used must be filed as part of the Form C under new Rule 201(z). This requirement is meant to ensure that all prospective investors gain access to the information that the issuer has made publicly available before the offering, as well as to provide a record of compliance with Rule 206.

Going forward, funding portals will need to evaluate whether any issuers have complied with Rule 206. If an issuer approaches a funding portal having already undertaken TTW without the required legend, the funding portal would likely have to deny access to that issuer for at least some period of time, because the issuer has not complied with the conditions of Reg CF, and thus violated Section 5 of the Securities Act. Likewise, an evaluation of whether all TTW materials have been included in the Form C is necessary. If not everything is included, then, again, the issuer has not complied with Reg CF and may be in violation of Section 5.

Further, TTW materials are still subject to the anti-fraud rules of federal and state securities laws. Misleading statements regarding projections, business plans, risks, financial condition, etc. during the TTW phase can still be a source of liability for an issuer and funding portal if the offering goes forward. These are certainly going to be matters that FINRA will be evaluating in funding portal compliance with Reg CF.

In its rulemaking, the SEC has also created a concept of “generic” TTW not tied to any particular type of exempt offering, which is new Rule 241. An issuer could use Rule 241 prior to a Reg CF offering, but would be wise to follow the filing requirements as if the TTW was conducted under Rule 206. We note that Rule 241 is unlikely to be used widely, since any such communications would be subject to state law, which is not preempted.

CrowdCheck, as a leading provider of due diligence, disclosure, and compliance solutions for online securities offerings, including crowdfunding, is ready to help you navigate compliance with the changes to Reg CF.

With the recent launch of the KoreConX all-in-one RegA+ platform, KoreConX is happy to
feature the partners that contribute to its ecosystem.

With over 20 years of experience in financial services, Shari Noonan has been instrumental in
the electronification of the equities market. Shari began her career in the ‘90s at an electronic
trading pioneer called Instinet and was excited about making a change in the market. Shari
joined Goldman Sachs after her years with Instinet and then moved on to Deutsche Bank. At all
these stops, Shari’s focus was on creating efficiencies, implementing effective governance, and
delivering technology to create greater efficiencies and solve a wide variety of capital markets
issues. Firsthand experience with the issues and solutions in the public markets gave Shari
important and unique insight into the inefficiencies within the private placement market.

Shari and the co-founders of Rialto Markets saw an opportunity to leverage their experience to
create new capital formation and interaction capabilities that reduce friction, expand access, and
lower the overall cost of capital. As a FINRA registered Broker-Dealer operating an SEC
recognized Alternative Trading System (ATS) for Private Securities (including those issued as
digital asset securities), Rialto helps issuers meet AML and KYC requirements, onboard
investors, and navigate numerous other services throughout every phase of the capital
formation process. Additionally, Rialto’s ATS enables secondary trading for private securities.
This gives investors a powerful opportunity to monetize without waiting for a private company to
go live through an IPO and affords opportunities for new participants to invest in these private
securities.

This industry has many aspects that excite Shari. She sees it at the intersection of capital
markets and technology, which will make processes both scalable and cost-efficient no matter
the size of the capital raise. Shari says, “What excites me the most is we have the unique
opportunity to open a new market.” The introduction of various regulations in private securities –
like Reg A+, Reg CF – allows companies like Rialto to implement solutions that democratize
private capital markets. With efficient platforms that attain necessary scale, all investors can be
serviced effectively and more investors can participate in private securities, thereby expanding
and diversifying their respective portfolios.

Of their partnership with KoreConX, Shari Noonan said: “KoreConX offers the ingredient we need to
facilitate our vision.” Tools such as Cap Table Management form the necessary infrastructure
and ecosystem to facilitate everything in the middle.

For companies, both private and public, a transfer agent plays a vital role in financial success. With everything a company needs to keep track of on a day-to-day basis, maintaining an accurate record of shareholders is one of these important tasks. However, it is also time consuming, so having a transfer agent or share registry provider that can keep accurate and timely records may be a convenient solution.

One of the main functions of a transfer agent is to issue and cancel certificates. When someone purchases shares in the company, the transfer agent issues a certificate of their ownership, either physically or electronically. As shares are issued to investors, the transfer agent also records all transactions, keeping a record of who the investors are and what they own. When shares are transferred to a new owner, typically through a secondary market, the transfer agent cancels the certificate issued to the original investor and issues a new certificate to the new owner.

The transfer agent must maintain an accurate and up-to-date record of all investors, as the company will need it to maintain its capitalization table (also known as the cap table). When it comes to future business deals, having the equity distribution clearly outlined in the cap table will be essential to know how much equity remains for future investors. Additionally, accurate records of investors’ shares are essential to facilitating smooth secondary market transactions. 

It is also the transfer agent’s responsibility to work as an intermediary for the company they represent. If dividends are to be paid to shareholders, the transfer agent pays the distributions due to each investor. As an intermediary, the transfer agent also communicates on behalf of the company with investors. They are responsible for mailing any reports and proxy materials released by the company. If the company were to hold a vote, shareholders with voting rights would communicate their choice to the company through the transfer agent. 

In addition to issuing and canceling certificates, the transfer agent is also responsible for handling lost or stolen certificates. If an investor were to lose their certificate, they would need to contact the transfer agent. The transfer agent would then place a “stop transfer” on the shares so that they cannot be transferred from the investor to another individual. 

Companies can choose to issue certificates electronically and may choose to use software such as KoreConX’s Transfer Agent. Completely integrated with their all-in-one platform, the KoreConX Transfer Agent is SEC-registered, ensuring compliance with worldwide securities regulations. Streamlining and simplifying the process, the KoreConX Transfer Agent updates records in real-time and is seamlessly integrated with the company’s cap table. Reducing errors that may result in manually filing and updating information, the KoreConX Transfer Agent creates reliability and transparency for both investors and issuers. 

Understanding the role of a transfer agent and share registry provider is essential for successfully managing shareholders and the many forms of securities that companies can choose to offer. Choosing the right transfer agent will enable companies to provide real-time information to their investors, without unnecessary expenses. More importantly, a good transfer agent allows for integration with other capabilities, allowing them to manage their data more efficiently.