The Broker-Dealer’s Guide to Due Diligence process

In the realm of private capital markets, due diligence is not just a procedure but a pledge—a commitment to uphold integrity, trust, and compliance.  This guide serves as a beacon for Chief Compliance Officers (CCOs) and their compliance teams, guiding them through the complexities of due diligence process in private company capital raises. From leveraging technology to navigating an ever-evolving regulatory landscape, to understanding the nuanced roles of FINRA Broker-Dealers, we delve into how these crucial processes safeguard the private capital markets, ensuring a secure and transparent investment environment for all parties involved.

Due Diligence by Chief Compliance Officers

Imagine a world where investments flow seamlessly, underpinned by an unshakeable trust between investors and companies raising capital. This is the reality that CCOs strive to create through meticulous process of due diligence on companies and investors. Through their diligent efforts, such as scrutinizing a company’s financial health, operational strategies, and leadership integrity, CCOs not only protect investors from unforeseen risks but also build a foundation of trust that is paramount for successful capital raises.

Empowering CCOs with Technology

The digital age has revolutionized due diligence process, providing CCOs with tools to gather and analyze vast amounts of data efficiently. Technologies tailored to regulations like RegCF, RegD, and RegA+ enable CCOs to customize and have still best practices in due diligence processes. Therefore, ensuring that each investigation meets specific regulatory standards. This not only streamlines compliance but also allows CCOs to allocate their resources more effectively, focusing on strategic decision-making rather than getting lost in a sea of paperwork.  CCO’s are the backbone of the firm, and as such technology needs to be part of their overall strategy for the firm to be successful, tools such as Compliance Desk provide the necessary and regulatory requirements of making sure data is collected, tracked, and maintained for CCOs. 

Navigating Challenges of due diligence process in a Dynamic Regulatory Environment

The landscape for FINRA Broker-Dealers is fraught with challenges, from navigating a complex web of regulations to ensuring that compliance teams are equipped with the necessary tools. The advent of technologies like the Compliance Desk represents a significant leap forward, enabling CCOs to maintain organized records in a FINRA-approved facility to meet Rule 17a-4 requirements. This capability is crucial for broker-dealers to manage their compliance efficiently, allowing them to focus on expanding their business while maintaining strict regulatory adherence.

The Critical Role of FINRA Broker-Dealers

FINRA Broker-Dealers are the guardians of the private capital markets, and their role extends beyond initial best practices on the due diligence process; they help to ensure the safety and integrity of transactions for investors, companies, and intermediaries alike. Once an offering goes live, they are responsible for continuous oversight, including KYC, AML, suitability, and investor verification. This dual focus on company and investor due diligence is essential for preventing bad actors from entering the market, thereby protecting the investment ecosystem.

7 Steps for Effective Due Diligence on Private Companies

For those aiming to enhance their due diligence processes or embarking on the journey to become a FINRA Broker-Dealer,  consider the following steps:

  1. Comprehensive Regulatory Understanding: Gain a deep understanding of the relevant regulations (RegCF, RegD, RegA+) and their implications for your due diligence process.
  2. Robust Data Collection and Analysis: Leverage technology to efficiently collect and analyze company data, focusing on financials, management, and operational integrity.
  3. Risk Assessment: Develop a framework for assessing and categorizing potential risks, including financial, legal, and operational risks.
  4. Management and Operational Evaluation: Conduct thorough evaluations of the company’s management team and operational capabilities to ensure they have the necessary expertise and resources.  Always do bad actor checks on the company and the principles of the company.
  5. Legal Compliance Verification: Verify the company’s compliance with all applicable laws and regulations, including securities laws and industry-specific regulations.
  6. Continuous Monitoring: Establish processes for ongoing monitoring of the company’s performance and compliance post-investment.
  7. Record Keeping and Reporting: Implement systems for maintaining detailed records of your due diligence process, ensuring they meet FINRA’s Rule 17a-4 requirements for record-keeping.

Best practices on due diligence for broker-dealers

In the rapidly evolving landscape of private capital markets, the importance best practices on due diligence for broker-dealers cannot be overstated.

It is the bedrock upon which trust and compliance are built, safeguarding the interests of investors and ensuring the integrity of the market. For FINRA Broker-Dealers and their compliance teams, staying abreast of regulatory changes and leveraging technology are key to navigating this complex environment effectively.

So, by creating a comprehensive guide of due diligence best practices that align with current regulations and anticipate future shifts, firms can not only comply with today’s standards but also set a benchmark for excellence in compliance and investor protection. As we move forward, education and adaptability will remain crucial for all stakeholders in the private capital markets, ensuring that they can meet today’s challenges and seize tomorrow’s opportunities.

RegD SEC Reporting Obligations

RegD SEC reporting obligations is a theme that causes a lot of doubts, even concerns, among people who are thinking about raising capital. The compliance details required by Securities and Exchange Commission (SEC) have a lot of particularities, which demands attention of all potential issuers.

Regulation D (Reg D) offerings are exempt from the full SEC registration requirements but still require compliance with certain reporting obligations. The reporting requirements under Regulation D vary depending on the specific exemption used for the offering.

 

RegD SEC Reporting Obligations

In this short guide, we will explain practical details regarding SEC reporting for RegD.

Here’s an overview:

 

Rule 504 Offering (Regulation D, Rule 504):
Companies conducting offerings under Rule 504 are generally exempt from SEC registration requirements. However, there are no specific ongoing reporting requirements mandated by the SEC for Rule 504 offerings.

Rule 505 Offering (Regulation D, Rule 505):
Companies utilizing Rule 505 for their Reg D offerings are allowed to raise up to $5 million within a 12-month period.

While Rule 505 itself doesn’t impose ongoing reporting obligations to the SEC, individual states might have their reporting requirements for Rule 505 offerings.

Rule 506(b) Offering (Regulation D, Rule 506(b)):
Under Rule 506(b), companies can raise an unlimited amount of capital from an unlimited number of accredited investors and up to 35 non-accredited but sophisticated investors.

There are no specific ongoing reporting requirements to the SEC for Rule 506(b) offerings. However, if non-accredited investors are involved, some level of disclosure may be required to satisfy anti-fraud provisions.

Rule 506(c) Offering (Regulation D, Rule 506(c)):
Rule 506(c) allows companies to conduct offerings where they can generally solicit and advertise their offerings to the public but are limited to accepting investments only from accredited investors.

There are no specific ongoing reporting requirements to the SEC for Rule 506(c) offerings.

However, companies might need to file a Form D notice with the SEC within 15 days of the first sale of securities.

Take note!

While Regulation D exemptions typically do not impose explicit ongoing reporting requirements to the SEC, companies that conduct Reg D offerings are subject to anti-fraud provisions and should provide investors with all material information necessary to make an informed investment decision.

Additionally, states may have their reporting requirements for offerings made under Regulation D, so companies should consider state-specific regulations when conducting these offerings.

It’s important for companies utilizing Regulation D exemptions to consult legal and financial professionals to understand the specific reporting obligations, if any, and to ensure compliance with all relevant securities laws and regulations.

Private Capital Market Regulations – 10 RegA+ Issuers Penalized for SEC Violation: What Can We Learn?

The Importance of Compliance in Private Capital Market Regulations

We’ve discussed compliance at length and how it’s essential for building trust within the private capital markets. But what happens when you’re not compliant?

The SEC will eventually find out and impose penalties to issuers that fail to meet securities regulations, as ten Regulation A+ (RegA+) issuers recently learned.

These recent violations can serve as a cautionary tale to issuers about the importance of adhering to Private Capital Market Regulations.

Regulation A+ and the SEC’s Oversight

Companies selling securities to raise capital generally have to register with the SEC and comply with other rules that can be expensive and onerous for smaller companies, so RegA+ allows exemptions from registration, provided certain other conditions are met. In its press release, the SEC announced that 10 RegA+ issuers failed to comply with these conditions, highlighting the challenges within Private Capital Market Regulations. The SEC reported that each issuer was previously qualified to sell securities under RegA+, but subsequently made significant changes to the offering so that it no longer met exemption requirements. These changes included “improperly increasing the number of shares offered, improperly increasing or decreasing the price of shares offered, failing to file updated financial statements at least annually for ongoing offerings, engaging in prohibited at the market offerings, or engaging in prohibited delayed offerings.”

Private Capital Market Regulations: Protecting Investors and Market Integrity

These regulations are not just arbitrary demands by the SEC; they exist to protect investors and the integrity of the system as a whole. For example, changing the offering price without getting those changes cleared by the SEC is a concern because it could be a vector for fraud or money laundering; issuing securities for a different price conceals the actual amount of money changing hands. Similarly, making unsanctioned changes to offering terms can erode investor confidence. Ideally, each investor conducted their own due diligence before investing – they felt comfortable with the terms listed in offering documents qualified by the SEC. Changing these terms without notifying investors and having changes approved by the SEC just isn’t fair play, and underscores the critical role of Private Capital Market Regulations.

The Consequences of Non-Compliance

The ten issuers cited by the SEC violated these principles, and got caught. Each company agreed to stop violating the Securities Act, and to pay civil penalties that ranged from $5,000 to $90,000. In the press release, Daniel R. Gregus, Director of the SEC’s Chicago Regional Office was quoted saying: “Companies that choose to benefit from Regulation A as a cost-effective way to raise capital must meet its requirements,” reinforcing the significance of compliance with Private Capital Market Regulations.

These penalties serve as a reminder that issuers must be careful when making changes to their offering after qualification. Working with an experienced team can help to mitigate some of this risk, but ultimately, it is the issuer’s responsibility to meet all securities regulations, including those pertaining to Private Capital Market Regulations. And as with most things, 90% of the job is preparation.

How not to fall into the wrong with the regulators checklist

  • Always check with your securities lawyer and FINRA Broker-Dealer who did your RegA+ filing before making any public statements, news releases, or announcements related to investment in your company, as these might be construed as offerings subject to SEC rules and Private Capital Market Regulations;
  • Track all your activities date, time, where distributed
  • Be thoroughly familiar with your company, its business, and how it is structured.
  • Have a clear idea of your company’s funding needs, how much capital you need to raise, what kind of equity or control you are prepared to give up in return
  • Seek advice from qualified experts: securities lawyers, broker-dealers, accountants; being familiar with your own company will help you answer their questions and get better advice.
  • Choose the right capital-raising route for your needs, whether it be a bank loan, remortgaging your house, or using one of the JOBS Act exemptions.
  • READ THE REGULATIONS! Seriously, read the regulations, and any explanatory notes from the SEC on how they apply and what you need to do to comply.
  • Make notes about the parts you’re not sure about, and ask your experts how they apply to you.

It may turn out that the exemption you initially chose isn’t the right one for your needs, so be prepared to go back and change your plans. It’s much easier to change plans before they’re implemented than it is to have to fix something that’s gone wrong with the implementation.

Once you’re satisfied with the regulation you’ve chosen, make a list of all the things you’ll need to do to carry out a compliant and successful raise. You might do this yourself, or with the assistance of your experts, but in any event you should have your experts review it to see if you’ve got anything wrong or left anything out. Execute the plan. You may need to delegate some of the items on the list to others, but ensure that there is always someone accountable to sign off on the completion of every requirement. Maintain a paper trail of who did what and when, not so much to know whom to blame but to be able to identify where something went wrong and how to fix it. Don’t panic. Mistakes happen.

What is an Escrow Provider’s Role in RegA+?

An escrow provider is a neutral party that handles financial transactions between two or more parties. They are often used in the securities industry to ensure that all parties involved in trade receive their agreed-upon share of the investment. Escrow providers in RegA+ play an essential role, securely holding funds investors have paid until those investors can be verified. This article will explain what an escrow provider is, their importance in RegA+, and some of the benefits they offer companies.

 

An escrow provider is a financial institution or company that holds funds on behalf of two other parties until their agreement has been met. In the context of securities offerings, escrow providers are often used in Regulation A+ transactions to hold funds invested by investors until the broker-dealer has completed their due diligence on those investors. This due diligence includes verifying the investor’s identity and ensuring that the investment is legitimate.

 

The escrow provider plays an important role in protecting both the investor and issuer in a Reg A+ transaction. Holding the funds until the completion of the broker-dealer’s due diligence protects the issuer from fraud and also ensures that the buyer receives their money back if the deal falls through. 

 

Escrow providers help to make sure that all of the necessary steps are taken to complete the transaction and that everyone involved is satisfied with the outcome. Part of this process includes making sure that the correct paperwork is filed and that all of the right people have signed off on it and everyone involved is legitimate. 

 

Beyond using an escrow provider to ensure that your Reg A+ transactions are completed smoothly and efficiently, it is also required for companies utilizing equity crowdfunding. Therefore, choosing an experienced escrow provider can provide valuable assistance and peace of mind throughout the process. 

 

Escrow providers play an essential role in Reg A+ transactions by holding and managing the funds until the necessary due diligence has been completed. They also ensure that all parties involved in the transaction comply with securities laws. These factors make escrow providers in RegA+ a necessary component of a successful offering. 

What is a CIK Number?

Recently, we received a question from an issuer who asked what a CIK number is. If you have ever filed a form with the Securities and Exchange Commission (SEC), you have probably come across the term Central Index Key (CIK). The CIK number is a unique identifier used by the SEC’s computer systems to distinguish corporations, funds, and individuals who have filed disclosures with the SEC. 

 

A CIK number is a 10-digit code that is an essential part of the SEC’s EDGAR (Electronic Data Gathering, Analysis, and Retrieval) system, which allows the SEC to collect, analyze and distribute financial information about companies and individuals. CIK numbers are assigned by the SEC and must be included in all filings made with the Commission. This allows the SEC’s computer system to quickly and efficiently identify companies and individuals and analyze their filings. It also helps to ensure that filings made by a particular company or individual are accurate and complete.

 

The easiest way to find a company’s CIK number is by using the SEC’s online database. You can search for CIK numbers using keywords such as the company name or ticker symbol. The search results will provide a list of entities matching your search criteria and their CIK numbers. Keep in mind, the entity’s name may be listed differently than expected.

 

It is also important to note that not all companies that offer stock for sale are required to file disclosures with the SEC, such as some companies raising capital through Regulation D. Small companies may be granted exemptions from regular SEC reporting and, therefore, may not have a CIK number. However, a CIK number is mandatory for companies that file disclosures.

 

CIK numbers are essential for the SEC to monitor and regulate the financial markets. By requiring companies and individuals to use CIK numbers when filing disclosures, the SEC can efficiently identify companies and detect potential fraud or other illegal activities to take appropriate action.

 

CIK numbers are also important for investors and other stakeholders. By providing a unique identifier for each company and individual, CIK numbers allow stakeholders to easily access relevant filings, financial data, and other information. This makes it easier for investors to make informed decisions and for regulators to enforce the rules and regulations that govern the financial markets.

 

In conclusion, CIK numbers are a critical component of the SEC’s regulatory framework. They are used to track and monitor companies and individuals that file disclosures with the SEC, and they enable investors and other stakeholders to access important financial data and other information. 

 

We believe that education is an essential part of the capital-raising process, so don’t hesitate to reach out to our team with any other questions that could help you along your capital-raising journey.

Veni, Vidi, Verify

More than two millennia ago, Julius Caesar said the famous phrase, “Veni, Vidi, Vici”, triumphant in battle. This translates to, “I came, I saw, I conquered.” While the Roman Empire has long since fallen, these powerful words continue to ring true today – only in a different context. When it comes to investment opportunities, there is a simple way to “conquer” the investment process: Veni, Vidi, Verify.


I Came: The Search for Investment Opportunites 

 

With Regulation CF or RegA+, investors have more investment opportunities available to them than ever. Many of these investment opportunities are in startups that have a promising future, ranging from collectibles, MedTech, real estate, and many other growing industries. This is the time to start thinking about how you can use these opportunities to grow your investment portfolio while aligning your risk tolerance with your investing goals.

 

I Saw: Seeking Legitimate Investments

 

The abundance of options available to investors can be considered both a blessing and a curse. Despite the many opportunities available, you must ensure that the company is legitimate and the way you invest. For issuers, the same could be said about making certain investors are who they say they are to protect your company. When investing, it is good to analyze the risk versus the reward of a particular investment. You want to ensure that everything is above board in terms of your investment and there are no underlying additional risks. 

 

I Verified: Confidence Through Verification

 

Verification allows investors and issuers alike to verify the information provided by all parties to help confirm the transaction is legitimate and complies with regulatory requirements. Verification can ensure the quality of an investment with the assistance of data and information, such as:

 

  • ID verification
  • KYC and AML
  • Regulatory compliance
  • Transaction information
  • Company information and history

 

This gives investors the peace of mind to pursue assets knowing that they are making an informed decision and letting issuers know that investors are who they say they are. Additionally, tools such as the KoreID mobile app enhances the process of verification during the investment process. With KoreID, investors can securely manage their investments and personal information to meet KYC requirements. 

Veni, Vidi, Verify helps both issuers and investors ensure that they are making secure investments. Ultimately, verification and adherence to securities regulations create trust between investors and issuers during the investment process.

Avoiding Scams

Scams come in all shapes and sizes but share the same goal: to take someone’s hard-earned money. At KoreConX, we talk a lot about the importance of compliance with the regulations, because our platform is built to make it as easy as possible for companies to raise capital compliantly. But we haven’t talked all that much about why the regulations themselves are so important, and one of the main reasons is to protect against scams. In this and future posts, we’ll discuss some general and specific scams and their effect on investors and issuers. 

 

The internet has made it easier for criminals to reach potential victims, but compliance with regulations is an excellent protection against potential scams out there such as identity theft and investment fraud. There are, of course, many sorts of scams that the SEC regulations don’t directly touch, but understanding the reasons for the regulations can help you adopt best practices that will protect you against other scams as well. 

 

Regulations such as KYC (Know Your Customer) and AML (Anti Money Laundering) require participants to be properly identified – this alone can cut out much fraud before it even starts. Simply put, bad actors cannot be held accountable if they cannot be identified, so they often try to use a fake identity, or steal someone else’s. Similarly, companies seeking investors must make available financial and other information, an offering circular, and other data available, so potential investors know their money is going to an actual registered company with identified directors and officers. 

 

Who is Affected by Scams?

 

Scams hurt almost everyone indirectly by adding mitigation costs, driving up insurance premiums, and harming investor confidence, but the most obvious damage is financial: Online fraud in 2022 accounted for $41 billion stolen globally, with this number expected to rise to $48 billion in 2023. The burden of this loss does not fall evenly across all age groups. Adults between the ages of 20 and 29 reportedly have the lowest loss per person, at $2,789. Individuals in their 50s suffered the highest losses on average per person, with a total loss of $9,864 each. Those in their 30s lost an average of $5,570 each, and those in their 40s lost $7,832. Interestingly, the data shows that, on average, older Americans lost the most money to online fraud.

 

It may be that younger people may have lost less money on average simply because they have fewer financial assets. However, the report emphasizes that it is important to take these figures with a pinch of salt, as the FBI’s numbers include businesses, which can suffer much greater losses than the average person. Nonetheless, these statistics highlight the importance of online safety and the need for targeted prevention measures for different age groups.

 

Scams to Look Out For

 

There are many scams to be aware of, especially online, here are just a few of them:

 

Phishing: Phishing is sending deceptive emails or messages that appear as though they’re from a legitimate source to get personal information. You may receive an email asking for sensitive information, such as your credit card number or bank account details. The scammers use this information to make fraudulent purchases, withdrawals, or transfer funds. Cybercriminals may also try to use phishing emails as a way of getting you to click on malicious links that will download malware onto your computer. Malware can be used to steal personal information and passwords or even lock up all the data on your computer until you pay a ransom.

 

Pyramid Schemes: Pyramid schemes are a form of fraud that involves promising participants large returns for recruiting others into the scheme. Despite the promises, none of the money invested by new participants ever makes it back to them. Instead, it is funneled upwards to those already in the scheme, who will eventually take all of the money and disappear.

 

Crypto Schemes: Many investors are eager to get in on the crypto market, but the crash of FTX reminds us of the importance of due diligence. New technologies are always especially rich breeding grounds for scams, when people don’t wait to find out how it actually works because they are afraid of missing out on the next big thing.  

 

What Can You Do To Protect Yourself?

 

The best way to protect yourself from scams is by educating yourself about them and being aware of potential signs that something might not be legitimate. Here are a few tips you can use when someone contacts you:

 

  • Verify the identity of anyone who contacts you. Do not send money or account details until you have verified their identity.
  • Be suspicious if someone is asking for personal information, such as passwords or bank account numbers. Legitimate businesses and organizations should never ask for this type of information via email or phone call.
  • Be wary of any offers that seem too good to be true. If someone is offering you something for free or an unbelievable return on investment, it’s likely a scam.
  • Research the company or individual before making any investment decision. Look at reviews from other customers and check with the Better Business Bureau if necessary. 
  • Don’t give out personal information online. Be cautious when sharing your name, address, or other identifying details on websites, as this can make you a target for scammers. This includes answering “just for fun” quizzes on social media that can be used to figure out your mother’s maiden name, the name of your first pet, and other likely security questions.

 

The best way to protect yourself from scams is by staying informed and knowing the warning signs of fraudulent activities. Keep following this series on scams to learn more about different types of scams and how to protect yourself from them. If you have any questions or topics you’d like to see discussed in more detail, please reach out and share your ideas with us!

What is an Escrow Provider?

If you’ve bought a home, you’ve likely heard the term escrow. In the homebuying process, escrow can be used to hold a good faith deposit while the contract is being finalized. It can also be used after the home is purchased to pay for property taxes, homeowners insurance, or mortgage insurance. In these instances, money held in escrow is managed by an independent, third-party intermediary. However, escrow is also common during the process of investing in a company, where the escrow provider takes custody of funds and assets until specific transaction conditions are met. But what exactly is the role of an escrow provider in a transaction? What responsibilities do they have? And when should they be utilized? 

 

What is an Escrow Provider?

 

An escrow provider is an independent third-party intermediary which ensures that a transaction is completed in accordance with the rules of the agreement. An escrow provider collects, holds, and distributes funds on behalf of the individuals involved in a transaction. The help of certified escrow providers ensures that both parties meet their obligations and bring confidence to complete a transaction reliably. 

 

In many cases, the buyer and seller agree to use an escrow provider for several advantages, such as:

 

  • Mitigating the risk of nonpayment or fraud
  • Ensuring that all funds are securely handled
  • Being an impartial third party to the transaction

 

The process when utilizing an escrow provider generally includes:

 

  • Creating a contract outlining the obligations of the buyer and seller
  • Depositing funds into an escrow account
  • Ensuring that all conditions of the agreement are met before releasing funds

 

At the same time, technology can play an important role in the escrow process. For example, smart contracts that leverage blockchain technology can be programmed to automatically transfer assets between two parties once the conditions of the contract have been met. This can automate some of the escrow process, which can help to streamline the escrow process.

 

JOBS Act and Escrow

 

The Jumpstart Our Business Startups (JOBS) Act has since become a major factor in creating a secure capital-raising environment in the private capital markets. To raise capital, issuers must follow securities regulations to ensure compliance in the capital-raising process. This provides an additional layer of protection for investors and startups raising capital.

 

An essential component of compliance includes finding an escrow provider to administer transactions. This ensures that all funds are handled securely and that a third-party intermediary manages the transaction. Putting investors and issuers at ease by bringing peace of mind to the transaction. 

 

Escrow providers are essential for any type of business transaction where an impartial third-party intermediary is involved. With an increase in accredited and nonaccredited investors alike being involved in the private capital markets thanks to the JOBS Act, it is crucial to ensure that one is involved in the capital raising process. Whether you are an investor or issuer, using an escrow provider guarantees all funds are handled correctly while avoiding financial risk or fraud. 

Form C-AR filing time again!

Hi everyone; a reminder that we are just over a month away from the deadline to file Form C-AR by May 1.*

We wanted to flag some issues:

  • If you sold any securities under your Form C, even if you didn’t sell them until this year, and even if you didn’t sell them until April 30, a Form C-AR with 2022 financials is due by May 1.
  • Even if your current Form C already includes 2022 financial statements, a Form C-AR is due by May 1.
  • If you do not have an open offering or otherwise have audited or reviewed statements available, the financial statements do not have to be audited or reviewed, but they do need to be in US GAAP format. This means balance sheet (as at December 31, 2021 and 2022), P&L, cash flow and changes in equity (for 2021 and 2022) as well as footnotes.
  • QuickBooks is not US GAAP.
  • If you used a “crowdfunding special purpose vehicle, it is an “issuer” under Rule 202 (the rule that says you have to file annual reports) and must file its own financial statements too. (See General Instructions to Form C.)

As a reminder:  if with this filing you are eligible to exit the Regulation CF ongoing reporting regime, remember, you must file your Form C-TR within 5 business days of the due date to notify investors, otherwise you may get to do this all over again next year!

As always, this isn’t legal advice, but feel free to call us if you need advice.

*If you do not have a fiscal year ending on December 31, your Form C-AR is due 120 after the end of your fiscal year, and dates above should be adjusted accordingly.


This article was originally written by our KorePartners at CrowdCheck. You can view the original article here.

5 Things You Need to Know About Transfer Agents

When a company issues securities, it is vital to keep the official record of ownership and distribution accurate and up-to-date at all times. This process is managed by transfer agents who in addition to assuming responsibility for maintaining accurate records of security transactions, can also handle shareholder inquiries, distribute shareholder materials, and more. In this blog post, we will discuss the five critical things that companies need to know about transfer agents before embarking on their next capital raise.

 

1. Protecting Issuers and Investors

 

Transfer agents protect issuers and investors by ensuring that the issuance of securities maintains a high degree of accuracy and reliability, and is consistent with the applicable regulations, thereby protecting both the issuer and the investor from the risk of disputes and expensive litigation. Transfer agents play a critical role in maintaining the integrity of the security issuance process, closely monitoring any changes in ownership or other company-specific details. This helps to prevent fraudulent activities such as double ownership or over-issuance of securities.

 

2. Issuing and Canceling Certificates

 

Another crucial function of transfer agents is to issue or cancel certificates reflecting shareholder ownership in the company, to ensure that the shareholders receive accurate documentation of their investment. The certificates are tangible evidence that shareholders own securities in the company and that they have the right to vote or receive dividends. Transfer agents must also cancel and decommission certificates to reflect trades or company-specific events such as stock splits, mergers, or acquisitions. Canceling or decommissioning certificates is a vital task in maintaining a current and accurate representation of who owns what within the company.

 

3. Managing the Cap Table

 

Transfer agents play a crucial role in managing the cap table. The cap table is the official record of the ownership structure of the company, including the number of shares held and who holds them. It is essential to manage the cap table effectively to avoid conflicts, confusion, or discrepancies among shareholders. The transfer agent ensures that the cap table stays up to date with any changes that may occur due to equity issuances or mergers and acquisition activity involving the company. The effectiveness of the cap table management is critical for companies raising capital or going through mergers and acquisitions, for helping investors conduct their own due diligence, and for tracking the company’s overall value and growth.

 

4. Legal Compliance

 

Another significant responsibility of transfer agents is ensuring the company’s compliance with specific securities laws and regulations. The transfer agent makes sure that the company is aware of and adhering to the legislative guidelines and rules governing the issuance and transfer of securities. Transfer agents must comply with both federal and state regulations, making this a complex task. Companies need to work closely with their transfer agents to ensure they are clear on aspects of the legal requirements that affect their business. Navigating the regulatory landscape can be daunting, but a transfer agent can help make it smoother for companies.

 

5. Investor Relations

Finally, transfer agents are essential for providing service to shareholders. Often, they are the first point of contact when shareholders have questions, concerns, or problems that require resolution. They help to answer any inquiries shareholders may have and maintain a clear line of communication. Excellent customer service is key to maintaining a positive relationship with shareholders. Shareholders who feel valued are more likely to remain invested in the company and can become valuable brand ambassadors. This, in turn, can lead to more significant investments in the company, improving overall shareholder value.

A transfer agent plays a critical role in ensuring that securities transactions are processed accurately and reliably, protecting the interests of the issuer and the investor. Using an experienced and knowledgeable transfer agent has many valuable benefits for companies. They provide companies with a comprehensive solution for managing securities issuances, maintaining shareholder relationships, and navigating the complex regulatory landscape. Transfer agents are an essential part of the securities industry, and companies who work with them are better positioned to succeed.

Reforms to RegD

With Regulation D (RegD) offerings, companies are exempt from registering securities with the SEC. Under RegD, companies can raise capital from accredited investors (and a limited number of nonaccredited investors in some cases) to support the growth of their business. This has become a popular method for private companies to raise capital, and can often be a starting point for larger capital raises under Regulation CF or Regulation A+. This popularity and the minimal disclosure requirements of RegD have prompted SEC Commissioner Caroline A. Crenshaw to propose changes to RegD disclosure requirements in January. Let’s see about these reforms to RegD.

 

Current Regulations Under RegD

 

The objective of RegD was to enable small and medium-sized businesses to seek capital-raising opportunities, without the cost-prohibitive disclosure requirements of a public offering. Under current regulation, companies may make private offerings of securities without having to register with the SEC, provided that they comply with certain disclosure requirements. These include filing Form D (which provides information about a company’s executives and its financial condition) and providing investors with a private placement memorandum outlining the terms of the offering. However, as this method of capital raising has been leveraged by multi-billion-dollar companies for whom it was not originally intended, the SEC is looking to update the disclosure requirements.

 

Commissioner Crenshaw’s Proposed Reforms

 

Commissioner Crenshaw has proposed a two-tiered framework, similar to Regulation A (RegA) which also provides an exemption from SEC registration requirements. Under the proposed reforms, companies offering securities through RegD would be required to provide more disclosure than is currently required, with the burden of disclosure increasing based on company size. Smaller companies (up to a threshold) would only need to provide basic information about their business operations such as management, operational updates, and financial statements. Larger companies (over the threshold) would be required to provide additional, heightened financial disclosures similar to those that are required under an S-1 filing. 

 

This reform could have far-reaching implications for small and medium businesses that wish to access capital markets and would largely depend on where the threshold is set. It remains to be seen whether these proposed reforms will move forward, but it’s clear that Commissioner Crenshaw is interested in modernizing and streamlining the process of raising capital.  

 

Effects of These Changes

 

The SEC’s proposed reforms would require issuers to provide more extensive disclosure and adhere to certain standards that are typically only associated with public offerings. This could potentially be a costly endeavor, as it would involve additional filing fees, legal expenses, and accounting costs.

 

The proposed reforms could also limit the ability of small businesses to access capital through Regulation D, as the costs associated with meeting the new requirements may be too high for some companies. For example, smaller companies may find it difficult to pay for the necessary accounting and legal fees, or they may not be able to generate enough interest from investors due to the higher thresholds that must be met to qualify for RegD. Small start-ups trying to raise only $250,000, these companies may not have the money to prepare the audited financials and Form 1A level disclosures.

The SEC’s proposed reforms of Regulation D are a step in the right direction toward protecting investors and ensuring that issuers adhere to certain standards. However, these reforms could potentially be harmful to small businesses seeking to raise capital through RegD offerings. The SEC needs to consider the potential effects of its proposed reforms and ensure that they are not overly burdensome on companies whose access to capital is already limited.

 

7 Things You Need to Raise Capital Online in 2023

. ising capital online can be a great way to a vast pool of potential investors. With the JOBS Act exemptions and many online funding portals available, it’s easier than ever to get started. Here are 7 Things You Need to Raise Capital Online in 2023.

 

1. Know Your Options

 

From Regulation D 506(c) offerings to RegCF and RegA+ offerings, it’s important to understand the differences between them. Each option has different requirements for time, cost, and resources. Plan accordingly for whatever option you choose by considering the trade-offs. Many issuers start with a RegD, then move on to a RegCF, and then a RegA+ because of the costs and compliance efforts required with each exemption.

 

2. Plan for a Higher Cost of Capital

 

Raising capital can be expensive. Especially when doing so online, you should plan on paying more than you usually would because of the additional costs associated with marketing, platform fees for using a crowdfunding platform, etc. These costs, along with fees for broker-dealers and legal counsel, can add up quickly, but understanding the potential costs will help you to plan accordingly. While raising capital online will cost more than a brokered or VC deal, you will retain greater ownership and control and suffer from less dilution, which may be a valuable tradeoff.

 

3. Find the Best Online Capital-Raising Platform

 

Before you embark on your journey to raise capital online, you need to find the right platform for your needs. You will want to make sure that you are working with the best platform possible. The first step is to do your research and find out which platform suits you best. You should look into the fees each platform charges, their customer service ratings, and whether or not they have any special features such as automated investing tools or portfolios with pre-set risk profiles.


Be wary of platforms that promise unrealistic returns or make promises about how easy it will be to raise capital in a short amount of time. Seek out platforms that have built up a good reputation and are transparent with their fees and services. Platforms do not raise money for you. Be sure to have a clear strategy in place before you launch your capital-raising campaign, and do not use a platform that promises too much. You can explore the list of FINRA-regulated funding platforms
here.

 

4. You’re Responsible for Marketing

 

You’ll need to craft an effective message and have the resources available to get it out there – whether that’s through social media, email campaigns, print ads, or other forms of advertising.  When you sign up for a capital raising platform, they do not help you with marketing or getting investors. This is left up to your organization or you can hire a marketing firm that is experienced in marketing for online capital raises. Ensure you know your target market and audience so that your message resonates with the right people who will invest in your cause or project. Researching trends in the current market can help you refine your strategy over time as well. Focus on building relationships with potential investors by providing value upfront before asking them for anything monetary related – this can go far towards building trust and credibility between both parties when marketing for your capital raise.

 

5. Launch with an Announcement and Target Multiple Investors

 

Announce the closing of your last smaller raise and its success when launching your next round. You can create a sense of urgency that will attract investors and help drive interest in your offering. This proven strategy can be rinsed and repeated as often as needed (though it can be overdone, and your audience will eventually catch on that this isn’t really the last chance to invest). Another way to maximize your chances for success when raising capital online is to target multiple investor types. While it’s important to target self-directed investors online, you can also retain marketing partners to reach out to family offices and institutional investors. By targeting multiple investor types simultaneously, you’ll improve your chances of raising more capital.

 

6. Focus on Marketing and Platforms

 

It is essential to have a well-structured marketing plan. That will help you reach your target audience and create awareness of your offering. It’s also important to focus on choosing the right platform for your capital-raising efforts. Consider your capital-raising goals, the platform you plan to use to meet those goals, and the availability of resources to help you achieve success. Will your campaign primarily use affinity marketing? Or will you utilize tools such as advertising, email campaigns, and social media?

 

7. Get a Valuation Report and a Securities Attorney

 

During the process of raising capital online, understand the value of your assets and make sure that you are compliant with security laws. A 3rd-party valuation report can give you a better understanding of your company’s worth and help inform investors about its potential. These reports are available from many reputable firms, and retaining one can help you to make a more convincing case for the worth of your company. It is also essential to hire a securities attorney to ensure you comply with JOBS Act exemptions. Without a lawyer experienced in securities law on your side, you could be risking legal violations and hefty fines.

 

5 Tips for Frictionless Capital Raising

Raising capital can be a tricky process. Fortunately, with the JOBS Act and its exemptions from SEC registration under RegA+, RegCF, or RegD, entrepreneurs can now access capital raising 24/7/365. Here are five tips to help you make the most of this opportunity and enjoy frictionless capital raising.

Use Mobile Apps for Online Investments

Mobile apps are becoming an increasingly popular way to access capital markets and make investments online. When a company raises capital under a JOBS Act exemption, a mobile app can streamline the investment process for investors. For example, the KoreID Mobile App allows investors to manage current and pending investments and reinvest with ease. KoreID allows investors to securely manage their personal information so that they don’t have to reenter the same information each time they go to invest.

Utilize Affinity Marketing

What better way to raise capital than to leverage your existing network of customers? Customers that align with your company’s mission and values can become powerful brand ambassadors when they invest. This type of marketing also helps give potential investors a sense of trust and familiarity, which can be invaluable when it comes to securing investments. By utilizing affinity marketing, you can easily create an affinity network and unlock new capital-raising opportunities.

Seek the Crowd

Over the last year, the amount of venture capital funding has dropped significantly. Instead, online capital formation facilitated by the JOBS Act has become a powerful player in the private capital market. RegA+ and RegCF allow companies to raise capital from the general public, creating a wider pool of potential investors. And, since online capital raising is open 24/7/365, these sources of capital can be a valuable alternative to traditional funding routes.

Have a Plan and Tailor Your Pitch

Before you even consider approaching potential investors, you should always have an airtight business plan in place. This includes your stated objectives, financial projections, and any other details that provide an in-depth look into your venture. Once you’ve mapped out the specifics of your venture, it’s time to start crafting a tailored pitch that resonates with potential investors. Creating a compelling presentation with the right balance of facts, figures, and storytelling can help draw investors in and establish trust. Think about the investors you are pitching to and tailor your pitch accordingly. Are they venture capitalists and angel investors? Or are you targeting family and friends or seeking equity crowdfunding? Each type of investor has different requirements, so it’s key to understand who you are pitching to and adjust your strategy accordingly. Regardless of who you’re targeting, it’s vital that you fully understand your business plan, because investors will ask you questions that a memorized sales pitch might not answer adequately. By doing this, you can ensure that the capital-raising process is as seamless as possible.

Prioritize Compliance

When raising capital, adhering to securities regulations is essential for success. While there are many components to compliance, using a broker-dealer is one of the first things that any company should consider when raising capital. Broker-dealers can also help you navigate the complexities of securities regulations. By selecting an experienced and reliable broker-dealer, you’ll have peace of mind knowing that the process is compliant and secure. With these raises sometimes having thousands of investors on a cap table, you want to be sure that your investors are managed properly and that your raise is in compliance with the law.

Raising capital for your venture doesn’t have to be a daunting task. By following these five tips for frictionless capital raising, you can make the process as smooth as possible so you can be well on your way to securing the funds needed for growth. 

 

SEC Amends Broker-Dealer Record-keeping Requirements

The SEC’s long-time policy for broker-dealers is to keep records of their business activities in a non-rewritable, non-erasable format – otherwise known as WORM (Write Once Read Many). But with new amendments to Rule 17a-4, broker-dealers are provided an audit trail alternative to keeping data in WORM format. Beginning May 3, 2023, firms will be required to comply with the new record-keeping regulations.

 

The final amendments grant flexibility to broker-dealers when meeting these requirements. They can choose to either: (1) preserve documents in WORM format, or (2) preserve electronic records in a system that maintains a timestamped audit trail. These can take the form of cloud-based systems, distributed ledger technology, or other emerging technologies.

 

This rule can be interpreted in a few different ways. First, firms can retain some electronic records with an audit trail and preserve other records with the WORM requirement. Second, firms may use an electronic recordkeeping system that meets the audit trail and WORM requirements. Either way, broker-dealers should ensure their programs are compliant as of May 3rd, 2023, or face the stiff penalties associated with non-compliance.

 

With the compliance date approaching, broker-dealers should review their record retention practices and expand the review beyond WORM vs Audit Trail alternatives. By proactively evaluating existing record retention practices and identifying any gaps before the compliance date, broker-dealers can ensure that their records are up-to-date and compliant with the new regulations.

 

How Do I Grant Equity to Employees?

Equity to employees gives workers a share of ownership in the company they work for. Ownership in the form of a percentage can be given in recognition of loyalty, hard work, and dedication, or as an incentive to perform.

 

Giving employees equity can be a great way to retain talented staff. It helps motivate them while also providing an additional layer of reward. Let’s explore the basics of employee equity and explain why it’s such a popular benefit for employers and employees alike.

 

What is Employee Equity?

 

Employee equity is a form of stock ownership given to employees by their employers. It allows them to share in the profits and losses of the company. Depending on the type, employee equity can be awarded as virtual shares or in actual shares.

 

Virtual shares are used to reward employees without having to issue actual shares. This can be a cost-effective alternative for companies that would rather avoid the tax and administrative paperwork that come with granting ownership while retaining control over the company, as virtual shares would not possess voting rights. A virtual share is a commitment by the company to pay bonuses that correlate to the share price or declared dividends. 

 

Employee stock options are options to buy actual issued shares at a pre-set price, independent of whatever the market price of the stock might be on the day the option is exercised. They are used to incentivize higher performance and usually come with a vesting period attached. Companies may also include a buyback clause that allows them to repurchase the shares at any time if they choose to terminate an employee’s employment. Restricted stock and restricted stock units are also forms of employee equity. They are shares given to employees with restrictions, such as a vesting period and a minimum number of years that need to be worked before they can claim the stock.

 

Benefits of Equity for Employees and Employers

 

Equity offers numerous compelling benefits to employees. For one, it allows employees to become owners of the companies they work for. This can provide excellent long-term incentives for high-performance workers, as a company that grows in value will raise the ownership stake of each employee. Equity can also be an effective tool to entice talented job seekers who may not be willing to take a role without some form of ownership in the company. Equity is sometimes accompanied by a reduced salary, which can provide more flexibility in tailoring a compensation package to the needs of the employee. For example, sometimes it may be better to take one’s income as salary, sometimes as dividends, sometimes as revenue from the sale of stock, etc. Stocks can also be a means for deferring income for retirement planning.

 

Employers also benefit significantly from offering equity as part of their compensation packages. For one, it can be an incredibly effective tool for recruiting top talent. Equity attracts job seekers who may not otherwise accept a traditional salary offer alone. Additionally, offering equity allows companies to share the rewards of their growth with the employees who helped create it. This can lead to a more loyal and motivated workforce as employees become invested in the company’s success, and are incentivized to help each other do better. Offering employees equity can reduce costs for employers as they are not paying out large salaries or bonuses. This means that companies can offer attractive compensation packages while still controlling their costs.

 

Granting Equity to Employees

 

When setting up an equity grant program it is important to ensure the program is in line with both industry standards and legal regulations. This requires researching competitive salaries, setting a vesting schedule (which determines how long employees must stay with the company before they receive their full grant), and performing a 409A valuation – an IRS-mandated assessment of your company’s finances, as well as seeking advice from a securities lawyer in your company’s jurisdiction. It is also important to plan for grants and promotions, set an expiration timeline for stock options, and decide whether employees can exercise their equity early. By understanding the basics of granting equity to employees, companies can create an effective grant program that rewards and motivates their team members while remaining competitive with industry standards.

How Do I Know if My Cap Table is Ready?

A cap table (short for capitalization table) is essential for any company looking to raise capital. It provides a detailed breakdown of the equity owned by shareholders, enabling founders to understand how their offerings will be impacted and make sound decisions regarding their finances. When properly managed, cap tables help potential investors feel confident in their investments as they provide a clear picture of the company’s ownership. As such, understanding your cap table and ensuring it is up to date is important when assessing if your company is ready to move forward with fundraising efforts.

 

Must-Haves for Proper Cap Table Management

 

When it comes to cap table management, remember to include this elements:

 

  • Voting rights
  • Share issuance
  • Past and current shareholders
  • List any future projections for additional capital raises or dilution
  • Track all options grants, vesting schedules, and related information
  • The amount of money each shareholder has invested in the company
  • Include details about convertible notes, warrants, and other debt instruments
  • Clearly list all shareholders, their ownership percentages, and the date of their investments

 

All of the above must be taken into consideration and recorded accurately to ensure proper cap table management. With these basics accounted for, founders can feel confident that their cap table contains the necessary information so they can be ready to raise capital. Still, some dos and don’ts should also be observed to ensure the best possible outcome for organizations raising capital.

 

Cap Table Dos: 

 

  • Ensure that all information is readily available in an easy-to-understand way
  • Maintain accurate and up-to-date information
  • Take into account dilution from future funding rounds, options pools, and performance issues

 

Cap Table Don’ts 

 

  • Overlooking the potential for dilution when raising capital
  • Failing to update it when new shareholders invest
  • Hesitating to consult a legal or financial advisor with any questions that arise
  • Neglecting the importance of understanding the cap table and its implications

 

By following these dos and don’ts, organizations can avoid potential pitfalls in the capital raising process and ensure an efficient, effective raise for all involved parties. A well-maintained cap table ensures transparency between investors, founders, and shareholders.

 

Best Practices for Managing a Cap Table

 

Though having a comprehensive cap table is vital, keeping it updated and organized requires consistent effort. To ensure your cap table remains accurate, it’s essential to follow the best practices for managing a cap table, including:

 

  • Updating the tables regularly as new investments come in or out
  • Keeping multiple copies of the tables in both digital and physical form
  • Storing the cap table in a secure location with proper backups for redundancy
  • Utilizing a FINRA broker-deal with knowledge of and experience handling cap tables for JOBS Act raises
  • Monitoring new regulations and laws to ensure the cap table is compliant with all applicable standards

 

By following these best practices for managing a cap table, companies can ensure accuracy, transparency, and compliance when looking to benefit from raising capital. It will also give investors confidence that they have all the information they need to make informed decisions.

What is Rule 145?

The Securities Act, passed in 1933, was created to protect investors following the stock market crash in 1929. It offers protection by ensuring more transparency and creating laws against fraud in the capital market. The Securities Act also requires companies to be registered with the SEC to sell securities to investors. At the same time, the SEC has introduced certain exemptions like Regulation A+ and Regulation CF, which allow private companies to raise capital without having to go through the process of SEC registration.

 

Another exemption is Rule 145, which “registered transactions in connection with reclassifications of securities, mergers or consolidations, or transfers of assets”. This is an especially important rule to be aware of for startups, as possible exit opportunities could include an acquisition. 

 

Ultimately, the rule says that if shareholders vote to accept or reject a merger proposal, it is considered an investment decision with respect to the offer of the acquiring company’s shares. When a company wants to purchase another company that has investors from previous rounds of crowdfunding, it must register its offering under the Securities Act or comply with one of its exemptions such as Regulation A, Regulation D, or Regulation CF. 

 

In addition, Rule 145 requires that all shareholders must approve the merger and receive full disclosure about the terms of the deal before they vote. Some states may also require shareholders with non-voting rights to cast their votes, as they are awarded certain inalienable voting rights in some scenarios. 

 

If the acquirer is not a public company, registration of securities is typically a costly process. However, they can utilize Reg A+ if they have an offering active that can be amended. Regulation D is typically not utilized because investors from a Reg CF raise are likely to include many nonaccredited investors. Alternatively, some companies may opt to use Regulation CF. However, this option will not work if there are already more than $5 million worth of crowdfunding investments from previous rounds. Ultimately, these considerations must be made well in advance so that all shareholders are given proper notice and have enough time to make an informed decision about whether or not to approve the merger agreement before it takes effect.

 

And in some cases, the acquiring company was unable to offer shares to crowdfunding investors, requiring them to cash out these investors. However, many investors believed in the company’s vision and were interested in the long-term progress of the company, so a cash-out can be disappointing. At the same time, a cash-out may be difficult for companies without the available funds. 

 

For companies exploring an acquisition for a potential exit after previous rounds of crowdfunding, these are some of the things that need to be taken into consideration. Just as a securities lawyer can help with initial offerings, they can also help you navigate these types of exits so you can do so compliantly. 

Celebrity Endorsements of Investment Opportunities

When it comes to investing, celebrities are just like the rest of us. They need to do their research before putting their money into anything. Unfortunately, many stars have fallen victim to investment schemes in the past without doing the proper due diligence. However, an issue that is becoming even more prevalent is celebrities who use their influence and followings to promote securities, without including the proper disclosures, to unsuspecting fans and investors.  So, with the SEC cracking down on celebrities and companies, it’s important to know what you’re getting into when dealing with an investment opportunity tied to a celebrity endorsement.

 

Celebrity Endorsement and Investment Opportunities

 

The SEC’s Office of Investor Education and Advocacy (OIEA) has warned investors not to make investment decisions based solely on celebrity endorsements. While celebrity endorsements exist for a wide variety of products and services, a celebrity endorsement does not mean that an investment is legitimate or appropriate for all investors. As the OIEA says, “It is never a good idea to make an investment decision just because someone famous says a product or service is a good investment.”

 

Celebrities can be lured into participating in a fraudulent scheme or be linked to products or services without their consent. According to the SEC, even if the endorsement and investment opportunity are genuine, the investment may not be good for you. Before investing, always do your research, including these steps:

 

  • Research the background, including registration or license status, of anyone recommending or selling an investment through the search tool on Investor.gov.
  • Learn about the company’s finances, organization, and business prospects by carefully reading any prospectus and the company’s latest financial reports, which may be available through the SEC’s EDGAR database.
  • Evaluate the investment’s potential costs and fees, risks, and benefits based on your personal investment goals, risk tolerance, investment horizon, net worth, existing investments and assets, debt, and tax considerations. 

 

Kim Kardashian and the SEC

 

The SEC’s announcement followed an investigation that found Kim Kardashian failed to disclose that she was paid $250,000 to publish a post on her Instagram account promoting EMAX tokens, a crypto asset security offered by a company called EthereumMax. The post contained a link to the EthereumMax website, which provided instructions for potential investors to purchase the tokens. Since the investigation, she has agreed to settle the charges and pay $1.26 million in cooperation. SEC Chair Gary Gensler noted that “investors are entitled to know whether the publicity of a security is unbiased,” and the SEC’s Director of Enforcement Gurbir S. Grewal added that “Ms. Kardashian’s case also serves as a reminder to celebrities and others that the law requires them to disclose to the public when and how much they are paid to promote investing in securities.”

 

This case highlights the need for transparency surrounding celebrity endorsements of investments. Federal securities laws are clear that any celebrity or other individual that promotes a security must disclose the nature, source, and amount of compensation they received in exchange for the promotion. Without this type of disclosure, investors cannot make informed investment decisions. The SEC’s investigation is ongoing, and it remains to be seen if any additional action will be taken in this case. This case serves as a reminder that celebrities and influencers are not above the law. When considering any investment opportunity, it is important to do your own research and consult with a financial advisor to ensure it is right for you. Be sure to ask questions and demand transparency if you are asked to invest in a security based on a celebrity endorsement.

Howey Test: What is it?

The Howey Test is a simple but important test used by the US Securities and Exchange Commission (SEC) to determine whether an investment contract is a security. Whether you are an investor or a company offering a security, it’s vital to know about the Howey Test and how it applies to securities.

 

Utilizing the Howey Test

 

The Howey Test is used by the SEC to determine whether an investment contract is a security. The test is named after the Supreme Court case SEC v. W. J. Howey Co., which established the test in 1946. The Howey Test has three prongs:

 

  1. There is an investment of money
  2. There is a common enterprise
  3. There is an expectation of profits 

 

If all three prongs are met, then the investment contract is considered a security and is subject to securities regulations. The Howey Test is crucial because it helps to protect investors from fraud and scams. There are many different types of securities, such as stocks, bonds, and mutual funds, and each has its own set of rules and regulations. The Howey Test ensures that all securities offerings are legitimate and that investors are not being misled.

 

The Howey Test applies to any investment contract, whether it is for a physical asset, like a piece of real estate, or a financial asset, like a stock. For the Howey Test to apply, there must be an investment of money. This can be in the form of cash, property, or even services. The second prong of the test states that there must be a common enterprise. This means that the investment must be pooled together with other investors’ money to make a profit. The third prong says there must be an expectation of profits. This means that the investor is relying on someone else, such as a company’s management team, to make investments and profits.

 

The Howey Test is not necessarily a test you can pass or fail. It is one of several tests used in securities law to determine whether an instrument being offered is a security or not. Other tests can also be used, such as the Reves test. Which should be applied depends, as the SEC says, on the facts and circumstances. An instrument is only a security if it meets all three prongs of the Howey Test. 

 

Bringing it All Together

 

The Howey Test is a simple but vital test used by the SEC to determine whether an investment contract is a security. The test’s three prongs allow the SEC to evaluate different types of investments to see if they fit the definition of a security. The Howey Test is important because it protects investors from fraud and scams. Investors want to ensure they are not being misled and that the investments they are making are legitimate. The Howey Test is one way to help make sure that is the case. 

 

What is the Role of FINRA?

When it comes to investment, there are a lot of things to think about. You want to make sure that you’re making smart decisions with your money, and that you’re not being taken advantage of. That’s where the Financial Industry Regulatory Authority (FINRA) comes in. FINRA is an independent regulator for securities firms, and its job is to make sure that all firms operate fairly and honestly, and that investors are protected–giving investors confidence in the legitimacy of their investment while holding securities companies to a high standard. Keep reading to learn more about the role of FINRA and how they help to protect investors.

 

What is FINRA?

 

FINRA is a not-for-profit regulatory organization authorized by the US Congress to protect investors. FINRA oversees all US-based securities firms and is considered the front line of defense when it comes to investor protection. FINRA’s rules and regulations ensure that all securities firms operate fairly and honestly and that investors are given the information they need to make informed investment decisions. Operating under the auspices of the US Securities and Exchange Commission (SEC), FINRA is the largest independent regulator for securities firms doing business in the United States.

 

Who does FINRA protect?

 

FINRA exists to protect investors, which means that they provide rules and regulations that apply to all securities firms to create a level playing field. They do this through a variety of means, including registration and licensing, monitoring and examining firms, conducting enforcement actions, and providing investor education. FINRA also offers assistance and support to investors who have been wronged by a securities firm. By educating investors about their rights and responsibilities when it comes to investing, FINRA helps protect them from being taken advantage of. In terms of security firms, FINRA’s job is to make sure they are adhering to all relevant rules and regulations, and that they are providing accurate and complete information to their investors.

 

Why is FINRA important?

 

FINRA plays an important role in the investment landscape by ensuring that all securities firms operate fairly and honestly. This helps to create trust between investors and the industry, which is essential for a thriving economy. In today’s day and age, with crowdfunding being available to accredited and non-accredited investors, FINRAs role is more important than ever. Giving peace of mind to investors is one of the most important roles that FINRA plays.

 

What is the role of FINRA as it relates to investment crowdfunding?

 

Investment crowdfunding is a relatively new phenomenon, and FINRA has been working to create rules and regulations that will protect investors while still allowing this innovative form of investing to flourish. The role of FINRA in investment crowdfunding is to protect investors by ensuring that issuers are providing accurate and complete information about their offerings, and that platforms are properly registered and compliant with all relevant rules and regulations. By doing so, FINRA is helping to create a safe and transparent environment for this growing industry.

 

One of the key issues that FINRA is concerned with is the disclosure of information by issuers, which is essential to ensuring that investors can make informed investment decisions. When it comes to Reg CF offerings, FINRA Rule 251(a)(3) requires issuers to file a Form C with the SEC before they can solicit investors. Form C must include information about the issuer, the offering, and the use of proceeds. In addition, all materials that are used to solicit investors must be filed with FINRA. These filings give FINRA the ability to review the offering and make sure that it is compliant with all applicable rules and regulations.