Diversifying Capital Raising Strategies for Startups

Navigating the VC Winter: Diversifying Capital Raising Strategies for Startups

In the face of a VC winter, startups find themselves at a crucial juncture, requiring innovative approaches to secure funding. We will embark on an exploration of the myriad avenues available for raising capital beyond the traditional venture capital (VC) sphere. We dive into anecdotes of how private companies have creatively accessed funds, emphasizing the importance of not being tethered to a single source of capital. The focus is on the JOBS Act and its provisions, which offer startups a variety of options with potentially more favorable terms than VC funding. We’ll tackle the challenges companies face in this endeavor, from navigating regulatory landscapes to attracting investors. Additionally, we outline seven strategic steps to diversify funding sources, reinforcing the necessity of a well-rounded understanding of all available options. By the end, startups and established companies alike will be equipped with the knowledge to navigate the capital raising process effectively, leveraging regulations to their advantage and working with trusted advisors to ensure success.

The Landscape of Raising Capital

Raising capital for private companies is an art form, with various avenues from VC and angel investments to friends and family, bank loans, government grants, and the provisions under the JOBS Act. Each source has its narrative, shaping the journey of a startup in unique ways. These stories reveal a broader landscape of funding opportunities, illustrating that the path to securing capital is not linear but a web of interconnected routes.

Beyond VC: The JOBS Act and Other Avenues

Entrepreneurs must look beyond VC to fuel their growth, especially in times when VC funding becomes scarce. The JOBS Act emerges as a beacon of hope in such times, offering three distinct regulations (RegCF, RegD 506c, RegA+) that provide startups with options for funding. These options often come with better terms than traditional VC deals, underscoring the importance of a strategic approach that blends various funding sources. This strategy not only mitigates the risk associated with relying on a single source but also broadens the potential investor base.

Navigating Capital-Raising Challenges

The journey of raising capital is fraught with challenges, from understanding the regulatory framework to choosing the right partners for issuance and attracting potential investors. A significant hurdle is the lack of awareness about the diversity of funding sources. Many companies do not realize the breadth of options available to them, limiting their potential to secure the necessary capital. Familiarity with each source’s regulatory roadmap, working with trusted FINRA Broker-Dealers, and leveraging technology partners for issuance are crucial steps in this process.

Understanding Sources of Capital

A comprehensive understanding of all sources of capital is essential. Each source, from VC and bank funding to government grants, friends and family, and the JOBS Act, comes with its own set of advantages and disadvantages. For instance, while VC funding can offer significant capital and mentorship, it often requires giving up a portion of equity and control. On the other hand, JOBS Act funding may provide more favorable terms but requires navigating a regulatory landscape and a totally different approach in attracting investors to your company.

Seven Steps to Raising Capital

  1. Educate Yourself on Regulations: Understanding the legal framework is paramount. This knowledge will guide which investors you can target and how.
  2. Build a Diverse Funding Strategy: Combine different sources of funding to minimize reliance on any single avenue.
  3. Select the Right Partners: Work with trusted advisors, such as FINRA Broker-Dealers and technology partners, who understand your business and the regulatory environment.
  4. Prepare a Compelling Pitch: Your pitch should resonate with the specific investors you’re targeting, whether they’re angel investors, VC firms, or the public through a crowdfunding campaign.
  5. Leverage Government Grants and Loans: Explore and apply for grants and loans that may be available for your industry or for innovation.
  6. Engage Your Network: Friends and family can be an initial source of capital, often willing to invest in your success.
  7. Utilize JOBS Act Provisions: Understand and leverage the specific regulations under the JOBS Act that best suit your company’s stage and needs.

In the challenging terrain of capital raising, knowledge and strategy are your best allies. The regulatory landscape, embodied by the JOBS Act, provides a roadmap for startups and established companies alike to navigate their way to successful funding. Educating oneself on the myriad sources of capital, understanding the pros and cons of each, and crafting a diversified funding strategy are essential steps. By working with trusted advisors and carefully selecting funding sources, companies can weather the VC winter and emerge with the capital necessary for growth. Remember, the journey of raising capital is complex and multifaceted, but with the right approach and resources, it is navigable. There are no shortcuts, but the path is rich with opportunities for those willing to explore beyond the traditional routes.

 

 

What is Entity Management?

In today’s fast-paced business environment, private companies face a myriad of challenges as they scale and seek capital. A crucial, yet often overlooked aspect of their growth trajectory is effective entity management.

This blog post covers the essence of entity management and distinguishes between cap table management and equity management, highlighting the significance of each for private companies.

Entity Management: What does it mean?

Basically, entity management simplifies how organizations track, organize, and manage all details related to their business entities. An effective process helps to ensure compliance and streamline operations, impacting positively in decision-making.

In the next sections, we’ll explore the role of robust entity management software, underscore the potential pitfalls of neglecting this area, and provide insights into selecting a reliable technology partner. Our aim is to equip you with the knowledge to navigate the complexities of entity management, ensuring compliance and facilitating your company’s growth and success.

The Role of Entity Management Software

As private companies expand, particularly those leveraging the JOBS Act Regulations for capital raising, the complexity of regulatory compliance and entity management escalates. Strong entity management involves not just the maintenance of corporate records but ensuring that these entities meet all regulatory requirements timely. This is where the adoption of a comprehensive entity management software becomes invaluable. A technology partner who is adept at understanding the growth dynamics and regulatory landscape can be a linchpin in maintaining compliance, thereby avoiding the repercussions of missed filings or non-compliance.

The Challenges of Inadequate Entity Management

The consequences of not employing effective entity management software can be dire. Missed filings or regulatory non-compliance can severely impact a company’s ability to raise capital, pursue mergers and acquisitions (M&A), or even go public. For sectors like real estate, which typically involves managing multiple entities for various projects, the ripple effects of non-compliance can be even more pronounced. These challenges underscore the necessity of a vigilant approach to entity management.

Choosing a Trusted Entity Management Software Partner

The importance of selecting a trusted software partner cannot be overstated. This partner should not only possess a comprehensive understanding of managing multiple entities but also ensure their software facilitates time and cost savings while keeping up with regulatory deadlines. Here are three red flags to watch out for when choosing an entity management software partner:

Compliance Assurance: Ensure the partner operates with end-to-end compliance. The lack of a robust compliance framework is a major red flag.

Understanding Private Company Challenges: The partner must have a proven track record of understanding and addressing the unique challenges faced by private companies. Lack of expertise in dealing with private company-specific issues is a significant concern.

Reputation and Reliability: Investigate the partner’s reputation and reliability. A partner lacking in trusted testimonials or case studies may not be able to provide the level of service your company requires.

The process of finding a trustworthy company may take some time, but is essential in different aspects of the business. So it’s worth to spend time

Cap Table Management vs. Equity Management

Distinguishing between cap table management and equity management is essential for private companies. Cap table management involves tracking the ownership stakes, types of equity owned, and the dilution effects of future funding rounds. It is a snapshot of who owns what in the company. Equity management, on the other hand, encompasses a broader scope, including managing equity compensation, issuing new shares, and ensuring compliance with tax laws and regulations. Both are critical for effectively managing a company’s equity and ensuring stakeholders are correctly accounted for and rewarded.

Effective entity management is not merely a compliance requirement; it is a strategic imperative for growing private companies. Understanding the nuances between cap table management and equity management, and the importance of each, is crucial. Equally important is the selection of a robust entity management software partner that understands the unique challenges faced by your company and can ensure compliance and efficiency.

Educating yourself on the key considerations and red flags in choosing a technology partner will empower you to make informed decisions. Ultimately this facilitates your company’s growth and success in the complex landscape of private capital markets. Remember, the right questions lead to the right partner, ensuring your company’s entity management is in capable hands.

Digital Asset Ecosystem: Ultimate Guide

Overview of the Digital Assets Ecosystem

In an era where digital assets are redefining the boundaries of technology and finance, understanding the complex landscape of the digital assets ecosystem becomes paramount for companies aiming to leverage these innovations.  We will dive into the critical importance of aligning with a compliant and trusted digital assets ecosystem, offering insights into its transformative potential for private companies in the capital markets.

We explore the historical challenges faced by digital assets, emphasize the necessity of a compliant regulatory framework, and provide practical steps for selecting the right ecosystem. Through anecdotes and expert analysis, we aim to educate and guide you towards making informed decisions in this rapidly evolving sector.

Why Ecosystems for Digital Assets Are Essential

The journey of digital assets in the marketplace is a tale of innovation, ambition, and, unfortunately, a learning curve steeped in regulatory missteps. The initial excitement surrounding Initial Coin Offerings (ICOs) gave way to disillusionment as scams proliferated. Similarly, the Non-Fungible Token (NFT) phase, while showcasing the potential for unique asset ownership on the blockchain, also faced its challenges in market acceptance and regulatory clarity. These historical lessons underscore the imperative need for a robust compliance ecosystem from the outset of any digital asset venture.

For private companies venturing into the private capital markets through digital assets, the right ecosystem is not just an advantage—it’s a necessity. This ecosystem must strike a delicate balance between advanced technological frameworks and stringent regulatory compliance.

Practical examples

Also, a good digital ecosystem should encompass a comprehensive regulatory framework, partnerships with legal experts, collaboration with FINRA Broker-Dealers, and blockchain technology that has been vetted and qualified by regulatory bodies.

A prime example of such diligence is KoreChain, which stands out as a pioneering entity that has navigated its blockchain infrastructure through SEC scrutiny, achieving a qualified status under the JOBS Act. This milestone not only highlights KoreChain’s commitment to regulatory compliance but also sets a precedent for what constitutes a trustworthy digital assets ecosystem.

Regulatory frameworks

The digital assets sector faces unique challenges, primarily due to its turbulent history and the evolving regulatory landscape. The shift from ICOs to NFTs and now to a new, regulated phase illustrates the sector’s dynamic nature. The clear message from regulators like the SEC is uncompromising: engagement in digital assets must be 100% compliant. This underscores the critical need for companies to align with digital assets ecosystems that have not only embraced but have been validated by regulatory frameworks. The onus is on companies to rigorously vet potential ecosystems, ensuring they do not fall foul of regulatory mandates.

Collaborating with a trusted digital assets ecosystem instills confidence that your offerings are compliant and that your partners are fully versed in securities law. Such ecosystems prioritize regulatory compliance and include all necessary intermediaries to ensure adherence to securities law.

Trustworthiness in digital assets ecosystem

It is essential for companies to demand evidence of compliance before engaging in any digital assets ecosystem, thereby safeguarding their operations and reputation.

Selecting the right digital assets ecosystem involves a meticulous approach:

Key points Why it matters?
Regulatory Compliance First Prioritize ecosystems that have proven regulatory approval or qualification, such as those that have engaged with regulatory bodies like the SEC. This ensures the foundation of your digital asset ventures is built on solid regulatory ground.
Technology and Infrastructure Scrutiny Evaluate the technological infrastructure of the ecosystem, ensuring it not only supports your operational needs but has also passed regulatory scrutiny. This includes assessing the blockchain technology for security, scalability, and compliance features.
Partnership and Support Ecosystem Look for ecosystems that offer a comprehensive network of partners, including legal experts, regulatory advisors, and broker-dealers. This network is invaluable for navigating the complexities of the digital assets market while ensuring compliance.

As we can see, navigating the digital assets landscape requires a well-informed approach, prioritizing regulatory compliance above all. The lessons learned from the ICO and NFT phases highlight the perils of overlooking regulatory requirements.

Digital Assets Ecosystem: Key Takeaways

As we venture into a new, regulated era of digital assets, the selection of your digital assets ecosystem should be guided by rigorous scrutiny of its regulatory standing, technological robustness, and the support network it offers.

Educating oneself on these aspects is not just advisable; it’s essential for success and compliance in the dynamic world of digital assets.

Remember, starting with technology without a clear understanding of regulatory requirements is a pathway to failure. Instead, choose wisely, ensuring your digital assets journey is both innovative and compliant.

Capital Raising Process: 4 Steps to Start Funding Now

In the dynamic world of private capital markets, raising capital is both an art and a science. We will demystify the capital raising process for private companies, outlining a four-step approach that harmonizes regulatory compliance, technology utilization, and strategic storytelling to attract and engage investors. From navigating the regulatory landscape to leveraging technology for efficient capital raises under the JOBS Act (RegCF, RegD, and RegA+), we explore how to transform the complex journey into a streamlined pathway to funding. By highlighting anecdotes from successful capital raises and the critical role of trusted partners, this guide aims to equip entrepreneurs with the knowledge and tools necessary to embark on their capital raising journey confidently.

Anecdotes of Successful Capital Raising

The journey of capital raising is punctuated with stories of entrepreneurs who turned their visions into reality. From tech startups that secured seed funding through strategic pitches to established companies that leveraged equity crowdfunding for expansion, these stories share a common thread: the ability to articulate a compelling narrative that resonates with investors. These anecdotes not only inspire but also illustrate the practical application of strategic planning and regulatory navigation in the capital raising process.

Leveraging Technology for Compliance and Efficiency

In today’s digital age, technology plays a pivotal role in streamlining the capital raising process. Platforms like KoreIssuance offer a seamless solution for companies to manage their capital raises, ensuring compliance with JOBS Act regulations (RegCF, RegD, RegA+). Post-offering, technologies for shareholder communication and online e-voting, such as Shareholder Communications tools, are invaluable for maintaining transparency and engagement. Additionally, cap table management software is essential for tracking equity ownership and ensuring accurate record-keeping. These technological tools not only simplify compliance but also enhance the investor experience, making it easier for the crowd to invest in promising companies.

Navigating Challenges in Capital-Raising

The path to successful capital raising is fraught with challenges, from understanding the regulatory landscape to attracting potential investors. Entrepreneurs must work with trusted partners, including FINRA Broker-Dealers and technology providers, to navigate these hurdles effectively. One of the most significant challenges is crafting a narrative that captures the essence of the business, reminding companies that investors invest in people first. The story behind the company, its mission, and its vision is what ultimately draws investors in, not just the potential financial returns.

Working with Trusted Partners

The importance of selecting trusted partners for the capital raising journey cannot be overstated. These partners, including regulatory experts, technology providers, and FINRA Broker-Dealers, ensure that the process remains compliant, efficient, and transparent. By providing essential information and guidance, they help companies navigate from start to finish, ensuring that the capital raising process is not only successful but also builds a strong foundation for future investor relations.

Four Steps to Raise Capital

For companies looking to embark on their capital-raising journey, the following four steps provide a roadmap to success:

  1. Understand Regulatory Requirements: Start by gaining a thorough understanding of the JOBS Act regulations (RegCF, RegD, RegA+) and how they apply to your capital raise. This knowledge will guide your strategy and help you select the right regulation for your investor target market.  Here is a great library to get started.
  2. Leverage Technology Platforms: Utilize technology platforms for issuance, shareholder communication, and cap table management. These tools will streamline your process, ensure regulatory compliance, and enhance investor engagement.
  3. Craft a Compelling Narrative: Develop a compelling story that communicates your company’s mission, vision, and value proposition. Remember, your narrative should resonate with potential investors on a personal level, showcasing the people behind the company.
  4. Select Trusted Partners: Work with trusted advisors, intermediaries, and partners who understand the private capital markets and can guide you through the regulatory and operational complexities of capital raising.

Raising capital for a private company, whether a nascent startup or an established entity, requires a blend of strategic planning, regulatory navigation, and genuine storytelling. Understanding the regulations is the first step, providing a framework within which to operate and target the right investors.

Leveraging technology and working with trusted partners streamline the process, ensuring compliance and efficiency. However, the heart of capital raising lies in the ability to connect with investors on a personal level, sharing a vision that inspires and motivates them to join your journey.

As the regulatory landscape and market conditions evolve, continuous education and adaptability remain key. Remember, there are no shortcuts to raising capital, but with the right approach, tools, and partners, your capital raising journey can be a successful and rewarding endeavor.

 

2024 Funding Guide: Top 7 Loan Alternatives for Startups

Loan Alternatives for Startups

Getting money to start a business is a critical issue that entrepreneurs have to deal. Sometimes the landscape seems so uncertain that a lot of them think of paying astronomical taxes to get the capital and get the idea off the drawing board.

But beyond traditional bank loans, there are a lot of loan alternatives for startups waiting to be explored. This guide will show you different funding options, empowering you with more knowledge to unfoggy the landscape.  Therefore, you’ll have more resources to think about which alternative may fit your business.

From innovative crowdfunding to strategic partnerships with angel investors, we’ll delve into the diverse funding ecosystem, equipping you with the knowledge to make informed decisions.

For startups and companies looking to get money to fund their business, there are many different options. While not every option may be best suited for every company, understanding each will help to choose which one is best for them. 

Family and friends

In the early stages of seeking loan alternatives for Startups, investment from family and friends can be both a simple and safe solution. Since family members and friends likely want to see you succeed, they are potential sources of funding.

Unlike traditional investors, family and friends do not need to register as an investor to donate. It is also likely that through this method, founders may not have to give up some of their equity. This allows them to retain control over their company. 

Angel investors

Angel investors and angel groups can also be a source of getting capital to fund your business.  Angel investors can be either non-accredited and accredited investors, for accredited investors there is an additional step to meet SEC regulations to make sure they have been verified. Angel groups are multiple angel investors who have pooled their money together to invest in startups. Typically, angel investors invest capital in exchange for equity and may play a role as a mentor, anticipating a return on their investment. 

Venture capital

Venture capital investors are SEC-regulated and invest in exchange for equity in the company. However, they are not investing their own money, rather investing other people’s. Since venture capital investors are trying to make money from their investments, they typically prefer to have some say in the company’s management, likely reducing the founders’ control. 

Strategic investors

Strategic investors may also be an option for companies. Typically owned by larger corporations, strategic investors invest in companies that will strengthen the corporate investor or that will help both parties grow. Strategic investors usually make available their connections or provide other resources that the company may need. This makes them our forth alternative to loans for startups.

Startup accelerator programs

Another way to get money for your business without getting a loan, is through startup accelerator programs

For some companies, crowdfunding may be useful for raising money. With this method, companies can either offer equity or rewards to investors, the latter allowing the company to raise the money they need without giving up control of the company. 

Getting capital to fund your business: Regulations for crowdfunding

Through the JOBS Act, the SEC passed Regulation A+ crowdfunding, which allows entities to raise up to $75 million in capital from both accredited and non-accredited investors. Crowdfunding gives access to a wider pool of potential investors, making it possible to secure the funding they need through this method. 

Alternatively, Regulation CF may be a better fit. Through RegCF, companies can raise up to $5 million, during a 12-month, period from anyone looking to invest. This gives an important opportunity to turn their loyal customers into shareholders as well. These types of offerings must be done online through an SEC-registered intermediary, like a funding portal or broker-dealer.

In the March 2021 update to the regulation, investment limits for accredited investors were removed and investment limits for non-accredited investors were revised to be $2,500 or 5% of the greater of annual income or net worth. It is also important to note that now, issuers (those seeking funding) can now “test the waters” to gauge interest before registering the offering with the SEC. Additionally, the use of special purpose vehicles (SPVs) within RegCF offerings was permitted.

Regulation D is another method that private companies can use to raise capital. Through RegD, some companies are allowed to sell securities without registering the offering with the SEC. However, if you choose to raise capital through RegD, you must electronically file the SEC’s “Form D.” By meeting either RegD exemptions 506(b) or 506(c), issuers can raise an unlimited amount of capital. To meet the requirements of the 506(b) exemption, companies must not use general solicitation to advertise securities, can raise money from an unlimited number of accredited investors and up to 35 other sophisticated investors, and must determine the information to provide investors while adhering to anti-fraud securities laws. For 506(c) exemptions, companies can solicit and advertise an offering but all investors must be accredited. In this case, the company must reasonably verify that the investor meet the SEC’s accredited investor requirements  

Direct offerings

Another loan alternative is to utilize direct offerings to raise money. Through a direct offering, companies can issue shares to the company directly to investors, without having to undergo an initial public offering (IPO). Since a direct offering is typically cheaper than an IPO, companies can raise funding without having major expenses. Since trading of shares bought through a direct offering is typically more difficult than those bought in an IPO, investors may request higher equity before they decide to invest. 

Security tokens

Companies can offer security tokens to investors through an issuance platform. Companies should be aware that these securities are required to follow SEC regulations. It is becoming more common for companies to offer securities through an issuance platform, as it allows them to reach a larger audience than traditional methods. This is also attractive to investors, as securities can be traded in a secondary market, providing them with more options and liquidity for their shares. 

Getting funds with a broker-dealer assistance

Additionally, companies looking to raise capital can do so with the help of a broker-dealer. Broker-dealers are SEC-registered entities that deal with transactions related to securities, as well as buying and selling securities for their own account or those of their customers. Plus, certain states require issuers to work with a broker-dealer to offer securities, so working with a broker-dealer allows issuers to maintain compliance with the SEC and other regulatory entities. This makes it likely that a company raising capital already has an established relationship with a broker-dealer. 

Funding through website

Lastly, companies looking to raise capital can do it directly through their website. With the KoreConX all-in-one platform, companies can raise capital at their website, maintaining their brand experience. The platform allows companies to place an “invest now” button on their site throughout their RegA, RegCF, RegD, or other offerings so that potential investors can easily invest. 

 

Whichever loan alternatives for startups you choose, it must make sure that it aligns with the company’s goals. Without understanding each method, it is possible that founders may end up being asked to give up too much equity and lose control of the company they have worked hard to build. Companies should approach the process of raising capital with a strategy already in place so that they can be satisfied with the outcome. 

 

*Disclaimer: This article was last reviewed in January 2024. Please note that regulatory landscapes and requirements are subject to rapid changes. The information provided here is reflective of the early part of 2024.

What is a Broker-Dealer?

We are diving into the world of FINRA Broker-Dealers – a crucial component in maintaining the integrity and trustworthiness of the private capital markets. We’ll explore their role, significance, and the technology that powers them, providing an overview of the challenges they face and their importance in safeguarding investors, companies, and intermediaries. 

We’ll also offer practical steps for those interested in becoming a FINRA Broker-Dealer, highlighting the ongoing responsibilities and the necessity of understanding the compliance landscape.

What is a broker-dealer?

Basically, a broker-dealer is a critical player in the financial landscape, serving as an intermediary that buys and sells securities for both clients and their own accounts. In essence, they facilitate the flow of capital by connecting investors with opportunities.

For people aiming to raise capital or just wanting to deep their knowledge, understanding the function and value of broker-dealers is important. As we’ll see in the next section, broker-dealers not only ensure transactions are executed efficiently but also uphold regulatory compliance, safeguarding the integrity of the capital markets and enhancing investor confidence.

Roles of a Broker-Dealer

Imagine you’re planning to climb a challenging mountain. Would you go alone or with an experienced guide? In the world of capital raising, FINRA Broker-Dealers are akin to these indispensable guides.

Therefore, one of major roles of a broker-dealer is to bring expertise and trustworthiness, ensuring that companies operate in compliance with regulations while securing capital.

An excellent example is when a startup, brimming with innovative ideas but new to the regulatory landscape, partners with a FINRA Broker-Dealer. This partnership not only enhances the credibility of the startup in the eyes of investors but also ensures adherence to the stringent regulatory framework, building a foundation of trust and reliability.  

The Pillars of the Private Capital Market

With over 3,000 registered FINRA Broker-Dealers in the USA, these entities are not just numerous; they are vital cogs in the financial ecosystem. They play a critical role in ensuring that capital markets operate smoothly, efficiently, and, most importantly, within the boundaries of securities law. Their presence bolsters investor confidence, knowing that there’s a regulatory watchguard ensuring fair and transparent transactions.

At KoreConX we only work with registered FINRA Broker-Dealers to utilize our infrastructure to make sure we provide and end to end compliant transactions for all participants in the transaction.

Broker-Dealer Compliance

The advent of the JOBS Act brought about a seismic shift in how private capital is raised, particularly for startups and small businesses. FINRA Broker-Dealers have been at the forefront of adopting technology to leverage these regulations efficiently. They use sophisticated platforms from KoreConX for tasks like conducting due diligence, monitoring transactions, and ensuring compliance with the JOBS Act and crowdfunding regulations. This technological integration not only streamlines processes but also enhances the accuracy and effectiveness of compliance measures.

Navigating Current Challenges

Despite their expertise and technological prowess, FINRA Broker-Dealers face an evolving landscape of challenges. The rapid pace of regulatory changes, the increasing complexity of financial products, and the need for advanced cybersecurity measures to protect sensitive data are just a few of the hurdles. Adapting to these changes while maintaining the highest standards of compliance and investor protection is a balancing act that requires constant vigilance and adaptability.

Safeguarding the Capital Market Ecosystem

The role of a FINRA Broker-Dealer transcends mere compliance. They are the guardians of market integrity, playing a pivotal role in ensuring a safe and fair environment for all participants – investors, companies, and intermediaries. Their work upholds the principles of transparency and fairness, which are fundamental to the health and stability of the private capital markets.

How to become a FINRA Broker-Dealer: Step-by-Step

  1. Understand the Regulatory Framework: Before embarking on this journey, it’s crucial to have a thorough understanding of the FINRA rules, SEC regulations, and other relevant laws. This knowledge is the foundation upon which your Broker-Dealer operations will be built.
  2. Obtain the Necessary Licenses: Register with FINRA, pass the required exams (like the Series 7 and Series 63), and meet the net capital requirements. This step is about more than just fulfilling legal obligations; it’s about equipping yourself with the tools and knowledge necessary for effective compliance and operation.  Once you have the people the firm also needs to add business line items such as RegCF, RegA+, digital securities to be able to transact in the private capital markets.
  3. Implement Robust Compliance and Technological Systems: Set up systems for ongoing compliance, including technology for record-keeping, reporting, and monitoring transactions. Remember, becoming a Broker-Dealer is not just about starting; it’s about maintaining and continuously improving your operations and compliance posture.  FINRA has requirements where information can be hosted that FINRA Broker-Dealers must follow, we are KoreConX follow these guidelines so FINRA Broker-Dealers can transact with confidence.

 

Educating for a Better Financial Future

Embarking on the journey to become a FINRA Broker-Dealer is not just about fulfilling a regulatory role; it’s about committing to the ongoing responsibility of maintaining licenses, staying abreast of regulatory changes, and undertaking permissible activities. This role is crucial in safeguarding the interests of all parties involved in the private capital markets, thereby ensuring a stable, transparent, and fair financial ecosystem.

Understanding the requirements and responsibilities of being a FINRA Broker-Dealer is vital for anyone considering this path. It’s a commitment to excellence, continuous learning, and an unwavering dedication to maintaining the integrity of the capital markets. As we navigate the ever-evolving landscape of private investing, the role of the FINRA Broker-Dealer remains more important than ever, acting as a beacon of trust, compliance, and stability in the dynamic world of finance.

 

How to choose the right trusted cap table provider

In the dynamic landscape of private companies, managing and maintaining an accurate and reliable capitalization table (Cap Table) is paramount. A Cap Table is a detailed ledger that outlines the ownership structure of a company, showcasing the distribution of equity among shareholders. As private companies grow and undergo various funding rounds, mergers, and acquisitions, having a trusted cap table provider becomes indispensable. 

What most entrepreneurs do not realize is the importance of the cap table until they are engaging in a transaction of raising capital, M&A, or going public.   Your company’s cap table becomes the deal breaker if you are not ready. 

This blog explores the significance of a reliable Cap Table and the advantages it brings to private companies when working with a 3rd party provider.

What is a Cap Table Provider?

A Cap Table Provider is a third-party entity that specializes in maintaining and managing your company’s cap table. Their primary role is to ensure that your cap table is accurate, up-to-date, and compliant with all relevant laws and regulations.

This service is especially crucial in the context of raising capital online, where multiple investors may be involved. 

A cap table provider has to follow securities and privacy laws, also assuring companies of Trust, this is not any law but its clear that you are trusting a provider with your most valuable assets to manage. 

What Do They Provide?

Cap table providers need to offer a range of services designed to streamline the complex process of cap table management for private companies. These services typically include:

→ Initial Setup: They will help you create your cap table from scratch, ensuring that all equity and securities are accurately recorded from day one.

→ Transaction Tracking: Providers keep a detailed record of all equity transactions, including investments, stock issuances, option grants, warrants, safe, saft, notes, digital securities, NFT, and more.

→ Compliance Monitoring: They ensure that your cap table adheres to all legal and regulatory requirements, including securities laws, tax laws, and accounting standards.

→ Scenario Modeling “Waterfalls”: Cap table providers can help you run “what-if” scenarios to understand the impact of various financial decisions on equity ownership and dilution.  This is often referred to as “waterfall” modeling.

→ Shareholder Reporting: They generate reports and statements for your investors, making it easier to communicate and maintain transparency.  Very important element to make sure reports such as K1, dividends, AGM etc are delivered in a timely manner.

Valuation Management: Providers assist in tracking the valuation of your company over time, which is vital for determining the worth of individual equity stakes.  For private companies 409a reporting is critical and also mandated.

→ Exit Planning: As your company grows, they help you prepare for exit events such as mergers, acquisitions, or initial public offerings (IPOs).

Why It’s Important to Work with a 3rd Party Provider

Choosing a trusted cap table provider is not just an option; it’s a strategic necessity for any private company, especially those raising capital online and utilizing the JOBS Act Regulations such as RegCF, RegD, and RegA+. Here’s why:

1. Expertise and Accuracy

Cap table management requires specialized knowledge of securities laws, tax regulations, and accounting standards. A third-party provider brings expertise to the table, ensuring your cap table is accurate and compliant, reducing the risk of costly errors.  Today, the movement of securities such as transfers and trades you need experts to maintain your book of records accurate.

2. Scalability

As your company grows, managing your cap table becomes increasingly complex. A provider has the resources and tools to handle the growing complexity, allowing you to focus on your core business operations.

3. Transparency

A third-party provider adds a layer of transparency between your company and its investors. This transparency fosters trust and confidence, vital for attracting and retaining shareholders.

4. Security and Confidentiality

Your cap table contains sensitive information about your shareholders and the financial health of your company. Trusting a third-party provider with this data ensures that it remains secure and confidential.  TRUST is not technology, TRUST is not regulations, TRUST needs to be the DNA of the company.

5. Regulatory Compliance

Securities laws and regulations are constantly evolving. A cap table provider stays updated with these changes, helping your company stay compliant and avoid legal issues.

Choosing a trusted cap table provider

Perhaps the most critical aspect of choosing a cap table provider is TRUST. Your company is entrusting the provider with one of its most valuable assets: its shareholders. Here’s why trust is of utmost importance:

Factor Description
Confidentiality A trusted cap table provider understands the importance of keeping your shareholder information confidential. They have robust security measures in place to safeguard this data from unauthorized access or breaches. Not only managing securely but making sure the provider is not using your data.
Accuracy Errors in your cap table can lead to disputes, legal issues, and even damage your company’s reputation. Trustworthy providers have rigorous quality control processes in place to ensure the accuracy of your cap table.
Responsiveness In the fast-paced world of business, you need a provider who is responsive to your needs. Trustworthy providers prioritize client communication and support, ensuring your concerns are addressed promptly.
Compliance Trustworthy providers are well-versed in securities regulations and take compliance seriously. They help your company stay on the right side of the law, reducing the risk of regulatory trouble. A cap table provider should provide your company with a TRUST document that is beyond external regulatory compliance.
Reputation A provider’s reputation matters. Check their track record, client testimonials, and industry reputation to ensure they have a history of delivering quality service.

For CEOs, Presidents, CFOs, COOs, Chief Legal Counsel, and Lawyers, selecting a trusted cap table provider is a strategic decision that can greatly impact your company’s success, especially when raising capital online.

The right provider offers TRUST, expertise, scalability, transparency, and security. Above all, TRUST between your company and the provider is paramount, as they safeguard your most valuable assets—your shareholders. By choosing a reputable provider, you can navigate the complex world of cap table management with confidence, knowing that your financial records are in capable hands.

Reg S vs online offerings: key issues

In the complex sphere of securities, the SEC’s Regulation S holds significant importance, but it is frequently misunderstood by many in the industry. Therefore, having a clear understanding about its role is essential for to be well-informed and avoid misconceptions.

 

Introduction

We often hear suggestions that a Reg S offering be added to an offering being made under one of the online offering exemptions (Reg A, Reg CF or Rule 506(c) under Reg D). This is very rarely a good idea. Reg S sits very uneasily with the online exemptions. Although the conditions under which such offerings can be made using general solicitation vary, each of them can use general solicitation. Reg S offerings cannot.

Reg S requires that offers and sales be made in an “offshore transaction”, which means no offer can be made to a person in the United States and that you have to know or reasonably believe that any buyer of securities is physically located outside the United States. Additionally, “directed selling efforts” in the United States are prohibited.

Eye on compliance!

Directed selling efforts are much broader than general solicitation, including any activities that “condition the market” and would include not just advertising, but also person-to-person sales communications.

The type of communications permitted under the online offering exemptions would generally blow both the offshore transaction requirement and the directed selling effort prohibition. As we all know, the term “offer” is interpreted very broadly in US securities law.

If you are making an offering under multiple “exemptions”, even if you don’t mention the Reg S offering, the SEC is likely to take the view that general solicitation activities will result in conditioning the market for the Reg S offering. The Staff has certainly asked issuers making offerings under several exemptions contemporaneously for an “integration” analysis – explaining why various communications should not be treated as resulting in the several offerings being treated as essentially one plan of financing.

Efforts to argue to the Staff that one communication relates to one offering, and another communication relates to an offering under a different exemption have been met with a robust skepticism, and the Staff have often seemed to take the view that communications for multiple offerings cross-market each other. This would be even more the case if one of the offerings were being made under Reg S, where the “market conditioning” prohibition is baked into the rule.

Mentioning the Reg S offering in communications in the United States, would of course be a violation of the “no offers in the United States” requirement. But if you didn’t mention it, you would run the risk of omitting disclosure of a material fact.

Reg S and Online Offerings: think twice

Although its technically possible, is rarely adding a Reg S element to any offering being made under an online offering exemption. It’s reasonable consider that if you did want to add Reg S, you would need a geofenced offering site accessible only to persons outside the United States.

You need a separate set of offering docs (to comply with the other conditions of Reg S, which I haven’t even touched on here). And you would need to ensure that no-one who invested came to the offering because of all the communications you used in the other offerings – the LinkedIn ads, the TikTok videos, the Insta pics, the You Tube videos. And that’s a difficult task.

And bear in mind that even if you were to structure an offering to meet the requirements of Reg S, you would still need to consider compliance with the securities laws of the countries your investors are from, as you would with any of the other “exemptions”.

In most cases, from a practical point of view, you are better off relying on the usual online offering exemptions, even to accommodate non-US investors.

 

* Credits: Sara Hanks, CrowdCheck.

Canada 45-106 Reporting Obligations

Raising capital as a company can be an exciting step, but understanding some particularities of the area is not always so easy. One crucial aspect is understanding prospectus requirements, detailed legal documents outlining a security offering.

Regulation 45-106, a game-changer for Canadian companies by offering “exemptions” from this requirement, but it’s not a free pass, it has specific conditions.

Curious? Keep reading and check practical aspects about Canada 45-106 Reporting Obligations.

Introduction

Regulation 45-106, also known as National Instrument 45-106, is a key piece of Canadian securities law that governs exemptions from issuing a prospectus (a detailed legal document) for companies raising capital.

It outlines specific scenarios where companies can offer and sell securities without a prospectus, often referred to as “exemptions.” This streamlines the process for both companies and investors by reducing documentation and administrative burdens.

However, using these exemptions doesn’t mean companies get a free pass. Regulation 45-106 also imposes reporting requirements on companies that utilize these exemptions, typically those raising capital through private placements (selling shares to a limited group of accredited investors). These reports serve two main purposes:

 

  • Transparency: Provide investors and regulators with detailed information about the company and its securities offering, enabling informed investment decisions and ensuring everyone has access to essential facts.

 

  • Investor protection: Uphold a high standard of market integrity by deterring fraud and ensuring investors are treated fairly.

 

Therefore, Regulation 45-106 balances streamlined capital raising with essential investor protection by allowing exemptions under specific conditions but requiring reporting to maintain transparency and safeguard investor interests.

Filing Form 45-106: don’t forget this!

As we talked in the previous section, the National Instrument 45-106 is a securities regulation in Canada that governs prospectus and registration exemptions for issuers and investors. 

In this context, it sets out various exemptions from the prospectus requirement for the issuance and trading of securities, along with specific reporting obligations for companies that rely on these exemptions.

The reporting requirements for companies under Regulation 45-106 primarily apply to issuers who issue securities under specific exemptions, such as the private placement exemptions. The reporting obligations aim to provide investors and regulators with information about the issuers and their securities offerings, ensuring transparency and investor protection.

What is 45-106 filing?  

Summing up, the 45-106 filing is a mandatory reporting process in Canadian securities regulations. It involves submitting a form with detailed information about the issuer, security, exemptions, offering amount, and investors. 

Let’s take a closer look.

  • Form 45-106F1 – Report of Exempt Distribution:
    • Issuers who rely on certain prospectus exemptions (e.g., private placements) to issue securities in Canada must file a Form 45-106F1 – Report of Exempt Distribution.
    • This report must be filed with the applicable securities regulatory authority in each Canadian jurisdiction where the distribution occurred.
    • The Form 45-106F1 contains details about the issuer, the type of security issued, exemptions relied upon, the offering amount, and information about the investors.

Regulation 45-106 Compliance: best practices

Seeking professional assistance to fill out the forms and solve questions about your business and 45-106 is a key aspect and might be considered since the beginning of the process.

It’s crucial for companies and issuers to understand the specific reporting requirements associated with the exemptions used and to ensure timely and accurate filings to meet their regulatory obligations. Compliance with reporting requirements under Regulation 45-106 contributes to maintaining transparency in the Canadian capital markets and supports investor confidence. Companies should seek guidance from legal and financial professionals familiar with Canadian securities regulations to navigate these obligations effectively.

 

RegS SEC Reporting Obligations

Regulation S (RegS) is a Securities and Exchange Commission (SEC) regulation that provides a safe harbor from the registration requirements under the Securities Act of 1933 for certain offerings and sales of securities outside the United States. Regulation S applies to offerings that are conducted entirely outside of the United States, targeting non-U.S. persons.

Under Regulation S, there are no specific ongoing reporting requirements imposed by the SEC for companies conducting offerings and sales of securities to non-U.S. persons. However, there are certain provisions and considerations associated with Regulation S offerings:

  • Safe Harbor for Offshore Offerings: Regulation S provides a safe harbor exemption for securities offerings and sales that occur entirely outside of the United States. This exemption applies to both equity and debt securities and allows companies to conduct offshore offerings without registering with the SEC.
  • Restrictions on Resale of Securities: Securities sold in compliance with Regulation S have restrictions on their resale into the United States for a specific period. Typically, there’s a holding period of one year for restricted securities sold in offshore transactions under Regulation S.   The securities must be offered only to non-us citizens and the offering must be IP blocked if the company is raising its technology online.

 

  • Disclosure Requirements: While Regulation S exempts offerings from SEC registration, companies are still subject to anti-fraud provisions. Companies conducting offerings under Regulation S should provide all material information necessary for investors to make informed investment decisions.

 

  • Securities Act Compliance: Even though there are no specific ongoing reporting requirements to the SEC for Regulation S offerings, companies are required to comply with other provisions of the Securities Act of 1933, particularly regarding anti-fraud and anti-manipulation provisions.

 

  • Compliance with Foreign Jurisdictions: Companies conducting Regulation S offerings might need to comply with the securities laws and regulations of the foreign jurisdictions where the offerings are made. This may include filing requirements or compliance with local laws.  Companies need to make sure they are checking with local securities regulators or securities lawyers to ensure they are not offside with using Reg S.

It’s important for companies engaging in RegS offerings to understand the specific requirements of the regulation and ensure compliance not only with SEC regulations but also with the securities laws of the foreign jurisdictions involved. Companies should seek guidance from legal and financial professionals experienced in cross-border offerings to navigate the complexities and compliance obligations associated with Regulation S offerings.

What are blue sky laws and why are they important?

When it comes to investments, people like a clear sky rather than clouds of uncertainty. That’s where the Blue Sky Laws come in – a set of state regulations and rules to maintain a clear and safe financial atmosphere. From registration requirements to anti-fraud measures, these laws have a big impact on investor protection.

Keep reading and learn all the details.

Table of Contents

 

What are blue sky laws?

Basically, Blue Sky Laws are state regulations made to safeguard investors from fraudulent securities activities. This legislation controls the sale of securities, such as stocks and bonds, within a specific state. Overall, it refers to a key instrument for ensuring transparency and protecting investors in the market.

Originating in the aftermath of the Great Depression, “blue sky laws” were made possible by the Uniform Securities Act of 1956. Leading up to the stock market crash of 1929, the SEC did not exist to regulate offerings and many investment deals offered great profits to increase their sale.

Today, this legislation plays a central role in regulating offerings and safeguarding investors against fraud. For companies offering securities to investors, understanding the role they play will be key to a successful offering. 

The purpose of the Uniform Securities Act was to provide individual states the ability to implement their own securities laws. As some securities may not be covered at the federal level, giving states the power to enact blue sky laws to protect investors .

Today, 40 out of the 50 states have implemented blue sky laws based on the Uniform Securities Act.

Ensuring investor protection

The blue sky laws also create provisions for liability and may allow investors to bring lawsuits against issuers in the event of fraud.

Since the blue sky laws were established to protect investors, the laws enacted by each affect the registration of securities, registration of issuer and brokers, as well as the state’s ability to regulate and enforce restrictions.

Companies must register securities in both their home state and any other state in which it intends to do business. However, laws can vary between states; while the language they use can be similar, the interpretations may vary.

For issuers, this is an important fact to note, as they must meet each state’s requirement for each state they intend to sell securities in. 

Blue sky laws vs. regulations

In 1996, Congress passed the National Securities Market Improvement Act which exempts certain securities from state regulation and returns the regulation of broker-dealer registration to federal control. As a reaction to transactions being more difficult for companies because of the requirement to comply with blue sky laws, the Act reduced the power of individual states to regulate securities. 

While the federal government plays a major role in securities regulation, understanding the laws in each state which a company intends to sell securities is still essential.

For companies looking to raise money through Reg A+, Tier I offerings must be reviewed and registered with both the SEC and state governments.

Tier II offerings do not need to be reviewed by the state for them to be sold. In both cases, states retain the ability to investigate and charge issuers with fraud, so maintaining compliance will promote not only investor protection but will protect the company too.

Additionally, issuers and brokers must still adhere to notice and filing requirements set for each state. 

Your Shield Against Investment Fraud

With an understanding of blue sky laws, companies can plan for a successful offering by following regulations set in place by each state. Failure to comply with the laws can result in severe consequences and penalties.

While it may seem like an overwhelming task, state securities regulators can be contacted to ensure that your offering meets their requirements or better yet reach out to your securities lawyer who will guide you through depending on what regulation your company wants to use for its offering such as RegCF or RegD or RegA+, each one will have different provisions that you will need to follow to make sure you are compliant with your offering.

What do I need for a Reg A+ Offering to be successful?

A successful Regulation A+ (Reg A+) offering requires careful planning and execution. Understanding the key components needed for a successful RegA+ offering is crucial for companies seeking to raise capital.

The comprehension of these components and how to utilize them effectively is a game changer.  This way, the future issuer can significantly increase its chances of making a compelling and successful offer.

In this blog post, we will explore key aspects for companies seeking growth through RegA+, providing valuable insights for companies navigating this fundraising strategy.

 

Hands-on: Reg A+ Offerings

If your company is looking to raise funds, you’ve probably considered many options for doing so. One notable development in the financial landscape is the introduction of Regulation A+ by the Securities and Exchange Commission (SEC) through the JOBS Act.

This regulatory framework has empowered companies to raise substantial amounts of up to $75 million in funding rounds, with participation open to both accredited and non-accredited investors. This expansion presents a significant opportunity for businesses to access capital from a wider range of potential backers.

If you have decided to move forward with a RegA+ offering, you’ve probably become familiar with the proces. However, what are the essential components that will contribute to the success of your offering?

Companies that are using RegA+ as a way to raise capital for their companies are successful.  However, in 2022 and 2023 we saw increased activity by the SEC targeting RegA+ companies.  So, to be truly successful, you need to read the items below so you do not fall victim to the SEC.

 

Compliance: Secure Your Reg A+ Offering

It’s important to understand you can have the best company ever and the most successful offering, but if you do not follow the regulations while you are raising the funds, your company might be sanctioned by the SEC or the company will need to refund investors.  

To be 100% compliant you need to be working with partners (legal, audit, FINRA Broker-Dealer, technology, marketing and PR) that can assure you that none of their RegA+ clients have been penalized by the SEC. This is a major Red Flag if they are associated.

Remember this, your partners for your offering do not get the penalties from the SEC. Rather, you and your company do! You get listed as a “Bad-Actor”. Now you need to do your homework and only work with partners who will not introduce risk into your offering.

 

* Bad Actor: (…) those who seek to evade regulatory requirements and harm investors for their own personal gain.

Font: Financial Industry Regulatory Authority (FINRA)

 

Marketing strategies for issuers 

Since the SEC allows RegA+ offerings to be freely advertised, your company will need a  marketing budget to spread the word about your fundraising efforts. If no one knows that you’re raising money, how can you actually raise money? 

Once you’ve established a budget, knowing your target will be the next important step. If your company’s brand already has loyal customers, they are likely the easiest target for your fundraising campaign. Customers who already love your brand will be excited to invest in something that they care about. 

After addressing marketing strategies for attracting investments in your company’s offering, creating the proper terms for the offering will also be essential. Since one of the main advantages of RegA+ is that it allows companies to raise money from everyday people, having terms that are easy for them to understand without complex knowledge of investments and finance will have a wider appeal. Potential investors can invest in a company with confidence when they can easily understand what they are buying. 

 

Cost of Raising Capital

The cost of doing an offering for RegA+ has spiked once again in the past few years. Here is what you need to know and watch out for.  It’s the small items that add up.  Do not be fooled by statements like “you are high risk.” Remember, you are NOT high risk.  You have been qualified by the SEC to raise your capital compliantly

Description Costs
Legal Form 1 A Preparations $35,000 – $75,000 (unchanged for the past 4 years)
Audit $2,500+ (unchanged for the past 4 years)
FINRA Broker-Dealer 1-3% (some firms offer capabilities beyond compliance)
FINRA 5110 Fees unchanged
Escrow $1,000 (fees decreasing; paying more is excessive)
Credit Card Max 2.8% (no company qualified for RegA+ should pay more)
ACH Max 0.80% (no ACH NSF fees)
ID, AML Investor screening for US citizens <= $1.50 per investor
eSignature No fees for adding eSignature to subscription agreements
Wire Transfers Flat fee from a bank; percentage charges are a red flag

Pay attention to the above in blue. In many cases, this is where some providers will take from 4-10% or even more of your capital raise amount.

After completing a Reg A+ offering

For a successful offering, companies should also keep in mind that they need to properly manage all their regulatory obligations once the offering is completed.
KoreConX makes it simple for companies to keep track of all aspects of their fundraising with its all-in-one platform.

The platform enables companies to easily manage their capitalization table, selling securities, and awarding equity to shareholders. Integration with a transfer agent facilitates the issuance of electronic certificates.

Even after the round, the platform provides both issuers and investors with support and offers a secondary market for securities purchased from private companies.

Final thoughts

Knowing your audience, establishing a marketing budget, creating simple terms, and having an accurate valuation will give your Regulation A+ offering the power to succeed and can help you raise the desired funding for your company.

Through the JOBS Act, the SEC gave private companies the incredible power to raise funds from both everyday people and accredited investors, but proper strategies can ensure that the offering meets its potential. 

Successful companies are those who are 100% compliant with their offering and have partners who are not only 100% compliant but also protect you and your investors..

 

Reg A+ SEC Reporting Obligations (part 2)

Introduction

Welcome back to our RegA+ reporting journey! In the first part we decoded SEC reporting obligations, highlighting Tier 1 and Tier 2 offerings. We also broach crucial forms and compliance essentials. If you didn’t read, click here and learn all about the beginning of this special content that envelops Reg A+ compliance.

What to expect in part 2 regarding SEC forms for Reg A+?

In this article, we’ll delve into specific SEC forms vital for Regulation A+ compliance.

From Form 1-POS to Form 1-U, we’re decoding each form’s purpose, filing process, and significance in your RegA+ journey.

We will also discuss the yearly audit of Form 1-K, the semi-annual reports of Form 1-SA, and Investigate the role of Form 1-U.

 

SEC forms for Reg A+: Form 1-POS

When the subject is SEC forms for Reg A+, it’s essential to understand some of the key forms involved in the process, let’s begin with SEC Form 1-POS.

Also known as Form 1-POS AM, is a filing used by companies that are registering securities under Regulation A of the Securities Act of 1933. It is a part of the registration process for securities offerings conducted under Regulation A, which provides an exemption from the full registration requirements of the Securities Act.

Form 1-POS is a “post-qualification amendment” to an offering statement filed on SEC Form 1-A. It is submitted after the initial filing of Form 1-A but before the offering is finalized. This form contains information updates or amendments to the previously filed offering statement (Form 1-A) that reflect changes or additional details related to the securities offering.

Key aspects of Form 1-POS include:

Aspect Description
Amendments and Updates The form includes updates, corrections, or revisions to the information in the initial Form 1-A filing. It covers changes in offering terms, financial information, business operations, risk factors, or other material information.
Filing Process Companies file Form 1-POS through the SEC’s Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system. The form is subject to SEC review and comments, similar to the original Form 1-A filing.
Timing Form 1-POS is filed after the initial Form 1-A but before the SEC qualifies the offering statement. It allows issuers to provide updated or corrected information to potential investors and the SEC during the review process.
Purpose The primary purpose of Form 1-POS is to keep the offering statement current and accurate by disclosing any changes or additional material information that has arisen since the initial filing of Form 1-A.
 

Unlocking Reg A+ : Form 1-POS

Form 1-POS is part of the regulatory process involved in offering and selling securities under Regulation A. Companies intending to conduct offerings under Regulation A should work closely with legal and financial professionals to ensure compliance with SEC regulations and to provide accurate and up-to-date disclosures to potential investors and regulatory authorities.

 

Form 1-K – Annual Audit

Annual audit on Form 1-K requires disclosure and discussion of information regarding business operations, related party transactions,  compensation data, beneficial ownership of voting securities, identification of directors, executive officers, and significant employees, management discussion and analysis (MD&A), and the audited financial statements for the year ended (at the US GAAP level). The  Annual Audits must include updated information about Regulation A+ offerings conducted in the year covered.

Being a part of SEC forms for REG A+, Form 1-K must be filed within 120 days after the issuer’s fiscal year-end

Semi-Annual Reports on Form 1-SA (for companies that are not listed on the NASDAQ or NYSE) require disclosure and discussion of financial statements covering the applicable six-month period, including MD&A using the US-GAAP format. No audit is required on the financial statements included in a Form 1-SA.

The  Form 1-SA must be filed within 90 days after the end of the first six months of the issuer’s fiscal year-end.

Reg A+ compliance: Form 1-U – Current Report

SEC Form 1-U, also known as the Exit Report Under Regulation A, is a filing submitted by issuers to the Securities and Exchange Commission (SEC) to report certain events and information upon the conclusion or termination of a Regulation A offering.

Key points about SEC Form 1-U include:

    • Reporting Certain Events: Form 1-U is used to report specific events or material changes that occur after the qualification of the offering circular under Regulation A but before the termination or completion of the offering.
    • Information Included: The form typically includes details about the occurrence of events such as a fundamental change in the nature of the business, a change in control of the issuer, bankruptcy, the departure of directors or executive officers, or any other significant events that could affect the company.
    • Filing Process: Companies file Form 1-U electronically through the SEC’s Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system. The Form 1-U must be filed within 4 business days after the event. 
    • Purpose: The primary purpose of Form 1-U is to promptly notify the SEC and the public about significant events or material changes that could impact the issuer or the offering.

Form 1-U is an essential filing that issuers must submit to the SEC to fulfill their reporting requirements under Regulation A. Companies engaging in Regulation A offerings should work with legal and financial professionals to ensure compliance with SEC regulations and to promptly report any material events or changes that occur during the offering process.

Reg A+ reporting: Form 1-Z – Exit Report

SEC Form 1-Z is a filing used by issuers to report the termination or completion of an offering of securities under Regulation A of the Securities Act of 1933. Regulation A provides an exemption from the full registration requirements for certain securities offerings, allowing smaller companies to offer and sell securities to the public without undergoing the traditional and more extensive registration process.

Form 1-Z, officially titled “Exit Report Under Regulation A,” is filed by issuers to notify the Securities and Exchange Commission (SEC) about the conclusion or termination of a Regulation A offering. This form serves as a final report to the SEC, providing information about the completion of the offering.

Key points about SEC Form 1-Z include:

Termination Report Form 1-Z is used to report the conclusion or termination of a Regulation A offering, indicating that the offering is no longer ongoing.
Filing Requirement Issuers who have conducted a Regulation A offering that has concluded must file Form 1-Z with the SEC within 30 days after the termination or completion of the offering.
Information Included The form typically includes basic details about the offering, such as the issuer’s information, details about the securities offered, the offering amount, the offering start and end dates, and other relevant information related to the completion or termination of the offering.
Filing Process Companies file Form 1-Z electronically through the SEC’s Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system.
Purpose The primary purpose of Form 1-Z is to inform the SEC and the public that the Regulation A offering has concluded or been terminated. It helps maintain transparency and compliance with reporting obligations under Regulation A.

Best practices for Reg A+ : Form 1-Z

Form 1-Z is an essential filing that issuers must submit to the SEC to fulfill their reporting requirements upon the conclusion or termination of a Regulation A offering. Companies engaging in Regulation A offerings should work with legal and financial professionals to ensure compliance with SEC regulations and to fulfill their reporting obligations accurately and in a timely manner.

At least, for best practices for Reg A+ reporting, it’s important to understand all the details and requirements when using the JOBS Act regulations such as RegA+ to make sure you on always compliant.

Reg A+ SEC Reporting Obligations (part 1)

Regulation A+ offers great fundraising chances for companies, but understanding SEC reporting obligations might be confusing sometimes.

This guide highlights the key forms, deadlines, and compliance measures associated with Tier 1 and Tier 2 offerings. Essential info to empower you to navigate the landscape of SEC reporting obligations for Reg A+ with more clarity.

No more deciphering cryptic acronyms or wrestling with mountains of paperwork. We’ll demystify Forms 1-K, 1-SA, and 1-U, providing a clear roadmap for accurate and timely filings. Whether you’re a budding Tier 1 startup or a seasoned Tier 2 company seeking expansion, this guide equips you with the knowledge and tools to build investor trust, ensure regulatory compliance, and unlock the full potential of your RegA+ offering.

Ready to step into a world of informed decision-making? In this article you’ll discover:

  • A comprehensive breakdown of essential SEC reporting forms for Tier 1 and Tier 2 offerings.
  • Clear explanations of filing deadlines and compliance requirements.
  • Practical tips and best practices for optimizing your RegA+ reporting strategy.
  • Insights about investor trust and transparency through effective reporting.

Keep reading and join us on the first part of this journey.

Contents

Reg A+ SEC Reporting obligations

With all the talk about Regulation A+, we often overlook what a company (Issuer) must comply with in order to use the regulation. There are a number of  mandatory requirements that an Issuer must comply with when using Regulation A+ (RegA+).

RegA+ reporting requirements entail periodic and ongoing reporting for companies that have conducted offerings under RegA+ of the Securities Act of 1933. These requirements differ depending on whether a company has completed a Tier 1 or Tier 2 offering under RegA+.

Here are the general reporting requirements for RegA+:

 

Tier 1 Offerings

  • Companies that conduct Tier 1 offerings (up to $20 million within a 12-month period) are subject to fewer ongoing reporting requirements.

 

  • Following the offering, Tier 1 issuers must file a Form 1-Z exit report within 30 days after the offering is terminated or completed. This form includes information on the termination or completion of the offering and the proceeds received.

 

  • It should be noted that there have been zero (0) companies using this Tier.

 

Tier 2 Offerings

Companies conducting Tier 2 offerings (up to $75 million within a 12-month period) are subject to more extensive ongoing reporting requirements.

General reporting requirements 
Form 1-K (Annual Report): Tier 2 issuers are required to file an annual report on Form 1-K within 120 days after the end of the fiscal year covered by the report. Includes: audited financial statements, management’s discussion and analysis (MD&A), information about the issuer’s business operations, and other disclosures.
Form 1-SA (Semiannual and Quarterly Reports): Tier 2 issuers must file semiannual reports on Form 1-SA within 90 days after the end of the first six months of the issuer’s fiscal year. Quarterly reports on Form 1-SA are not required.
Current Event Reports: Tier 2 issuers must also submit certain “current event” reports on Form 1-U to report specified events promptly, such as fundamental changes, changes in control, or bankruptcy proceedings.

These reporting obligations aim to provide investors with timely and relevant information about the issuer’s financial condition, business operations, and material events that could impact their investment decisions.

It’s essential for companies that have conducted Regulation A+ offerings to comply with these reporting requirements to maintain regulatory compliance and transparency with investors.

Additionally, the specific reporting requirements and deadlines may vary, and companies should ensure they adhere to the regulations outlined by the Securities and Exchange Commission (SEC). To help in this process is important to seek guidance from legal and financial professionals to navigate these obligations effectively.

SEC Reporting Requirements – Form 1-A

SEC Form 1-A is an offering statement that companies use to register certain securities offerings with the U.S. Securities and Exchange Commission (SEC) under Regulation A of the Securities Act of 1933. Regulation A offers an exemption from full SEC registration requirements and allows smaller companies to offer and sell securities to the public without going through the traditional and more extensive registration process.

 

Form 1-A consists of three distinct parts, each serving a specific purpose:

  • Part I – Notification: This section includes basic information about the issuer, the type of securities being offered, and the intended use of proceeds from the offering. It provides an overview of the offering and the company’s business operations.

 

  • Part II – Offering Circular: This section contains the detailed disclosure document, often referred to as the offering circular. The offering circular includes comprehensive information about the company, its management, business operations, financial statements, risks, intended use of proceeds, and other material information relevant to potential investors. It is similar to a simplified prospectus and aims to provide investors with enough information to make informed investment decisions.

 

  • Part III – Exhibits: This part includes various exhibits and additional documents that support the information provided in Parts I and II. It may include financial statements, legal agreements, consents, and other relevant documents that help to substantiate the disclosures made in the offering circular.

 

Companies planning to offer and sell securities to the public under Regulation A must file Form 1-A electronically through the SEC’s Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system. After the SEC reviews and qualifies the offering statement, the company can proceed with the public offering.

Form 1-A filings are subject to SEC review and comments, similar to the registration process for larger offerings. However, Regulation A offerings generally have less stringent disclosure requirements compared to traditional registered offerings, allowing smaller companies to access the capital markets more easily.

It’s important to note that Form 1-A is specifically tailored for Regulation A offerings and differs from other SEC forms used for different types of offerings and securities registrations. Companies seeking to conduct Regulation A offerings should work closely with legal and financial professionals to ensure compliance with SEC regulations and to prepare the required disclosures accurately and effectively.

Today, we’ve wrapped up the first part of our journey into SEC reporting obligations under Regulation A+. We’ve covered some crucial points regarding REG A+ SEC reporting obligations. So, what’s next?  In the upcoming article, we’ll dive deeper into the intricacies of these reporting requirements. We’ll help you navigate the waters of Regulation A+ and gain a better understanding of its implications for companies.

Stay tuned for Part 2!

Online Capital Formation for Private Companies

In the fast-paced private company landscape, understanding Online Capital Formation dynamics is not just a strategic advantage – it’s imperative. As we commemorate the twelfth anniversary of the JOBS Act in 2024, it’s evident that evolving capital-raising regulations have paved the way for a transformative approach to business financing. In this ever-changing scenario, everyone in the private market needs to grasp the significance of Online Capital Formation to unlock myriad opportunities for their ventures.

Table of Contents

  1. Making Capital Formation Accessible for Private Enterprises
  2. The Complexity of RegCF and RegA+
  3. Beyond Conventional Crowdfunding
  4. Seizing the Future with Online Capital Formation
  5. Final Insights

 

Making Capital Formation Accessible for Private Enterprises

At its core, the democratization of capital is a driving force behind Online Capital Formation. Gone are the days when crowdfunding merely conjured images of Kickstarter campaigns. Today, it has evolved into a sophisticated financial tool, especially with the maturation of Regulation CF (RegCF) and Regulation A+ (RegA+) over the past decade.

RegCF and RegA+ are two sets of rules established by the U.S. Securities and Exchange Commission (SEC) to govern equity crowdfunding. They were both introduced as part of the JOBS Act (Jumpstart Our Business Startups Act) and their primary goal is to make it easier for businesses and startups (from small to enterprises) to raise capital by offering and selling securities online.

The concept of digital securities involves representing traditional financial instruments (such as stocks or bonds) in digital form using blockchain technology. Digital securities enable more efficient and transparent transactions, and they can be traded on digital securities exchanges.

The Complexity of RegCF and RegA+

RegCF and RegA+ transcend the traditional crowdfunding model, where entrepreneurs pitch ideas for product launches. Instead, they empower companies to transform investors into shareholders. The focus has shifted from merely selling stories to selling stock – a nuanced shift that goes beyond the conventional understanding of crowdfunding.

In order to fit in each of these regulations, companies must pass the eligibility criteria for each of them and provide certain disclosures to investors, including information about their business, financial condition, and the terms of the offering. The level of disclosure required is less extensive compared to traditional IPOs, but it aims to provide investors with enough information to make informed investment decisions.

Beyond Conventional Crowdfunding

These regulations are more than regulatory frameworks; they’re a paradigm shift that offers private companies a more expansive and flexible avenue for raising capital. They allow them to raise capital from both accredited and non-accredited investors, which includes their own clients and employees. RegCF allows them to raise up to 5 million dollars while with RegA+, it’s possible to raise up to 75 million dollars.

Equity Crowdfunding is an alternative pathway to access capital markets, offering a more cost-effective and less burdensome option than a full IPO. It has helped more people invest in early-stage funding, making investment opportunities available to a wider range of investors. With these regulations, you can leverage the internet and technology to connect with more investors and grow the business.

Seizing the Future with Online Capital Formation

While the term “crowdfunding” remains rooted in popular imagination, it falls short of encapsulating the depth and complexity of RegCF and RegA+. We must recognize these exemptions have matured into a robust mechanism that demands a more nuanced understanding. They must carefully navigate the regulatory requirements and considerations as this is monitored by the SEC aiming to ensure investor protection and maintain market integrity.

To shed light on this evolution, we have collaborated with industry experts, including Sara Hanks, CEO/Founder of CrowdCheck, and Douglas Ruark, President of Regulation D Resources, now known as Red Rock Securities Law. Together, we aim to redefine the landscape by emphasizing what we believe heralds a new era in crowdfunding: Online Capital Formation

Additionally, success in equity crowdfunding often depends on effective marketing, transparent communication, and a compelling value proposition for investors.  From accessing diverse investors to increasing brand visibility, this overview highlights seven key benefits. Take a look at the chart.

# Top 7 Benefits of Democratizing Capital Formation
1 Access to Diverse Investors
2 Engagement of Customers
3 Increased Brand Visibility
4 Flexibility in Fundraising
5 Gathering Early Feedback
6 Cost-Effectiveness
7 Potential for Liquidity

A Closer Look at the Top 7 Benefits of Democratizing Capital Formation

Final insights

As private company owners and managers, the onus is on you to comprehend the evolving dynamics of Online Capital Formation. It’s not merely a trend. Embrace the opportunities, stay informed, and position your venture at the forefront of this new era in crowdfunding. The journey begins with understanding. If you’re looking to raise capital and want to know more about your company’s suitability and which steps to take first, book a call with one of our specialists.

Subsidiaries using RegCF

Subsidiaries using RegCF: introduction

This came up no less than three times last week, so I figured it was worth a blog post.

Subsidiaries can raise funds under Reg CF, even if they are subsidiaries of companies who cannot use Reg CF themselves, because they have a class of securities registered with the SEC, or they are not US companies. To determine eligibility, you look at the status of the potential issuer. Is it a US company? Have you confirmed it’s not an investment company? If it’s raised funds under Reg CF before, is it in compliance with ongoing reporting requirements?

We need to add another element to this determination: is the US sub genuinely the issuer under Reg CF, or is there a “co-issuer” in the picture? And if there is, is the co-issuer prevented from using Reg CF because it’s an SEC-registered or foreign company?

There’s no useful definition of “co-issuer” under securities law (and if you go looking for one, what you will find will only confuse you) but when faced with the issue, we often ask clients to take a step back and ask themselves: “Whose performance is the investor relying on when they make their investment?” If the funds raised are going to be used at the subsidiary level, and the subsidiary is a genuine operating company, with employees, and a business plan, then everything may be ok, even if some portion of the funds end up at the parent level; for instance, payments for contracted support functions, or as license payments. But if the US sub is being effectively used as a finance sub, has no employees, and the funds are sent upstream to the parent, then you probably have a co-issuer, who is subject to the same eligibility, financial statement, and disclosure requirements as its sub.

It’s always going to be a matter of judgement, and as the SEC loves to remind us, dependent on facts and circumstances. It is worth going through the above analysis with your counsel to determine if the subsidiary is eligible to raise funds under Reg CF.

 

 

* Subsidiaries using RegCF was originally published on Crowdcheck.

Communications and publicity by issuers prior to and during a Regulation CF (RegCF) Offering

The idea behind crowdfunding is that the crowd — family, friends, and fans of a small or startup company, even if they are not rich or experienced investors — can invest in that company’s securities. For a traditionally risk-averse area of law, that’s a pretty revolutionary concept.  

In order to make this leap, Congress wanted to ensure that all potential investors had access to the same information. The solution that Congress came up in the JOBS Act with was that there had to be one centralized place that an investor could access that information — the website of the funding portal or broker-dealer that hosts the crowdfunding offering (going forward we will refer to both of these as “platforms”). 

This means (with some very limited exceptions that we’ll describe below) most communications about the offering can ONLY be found on the platform. On the platform, the company can use any form of communication it likes, and can give as much information as it likes (so long as it’s not misleading). Remember that the platforms are required to have a communication channel — basically a chat or Q&A function — a place where you can discuss the offering with investors and potential investors (though you must identify yourself). That gives you the ability to control much of your message. 

So with that background in mind, we wanted to go through what you can and cannot do regarding communications prior to and during the offering. Unfortunately, there are a lot of limitations. Securities law is a highly regulated area and this is not like doing a Kickstarter campaign. Also, bear in mind this is a changing regulatory environment. We put together this guide based on existing law, the SEC’s interpretations that it put out on May 13, and numerous conversations with the SEC Staff. As the industry develops, the Staff’s positions may evolve. 

We do understand that the restrictions are in many cases counter-intuitive and don’t reflect the way people communicate these days. The problems derive from the wording of the statute as passed by Congress. The JOBS Act crowdfunding provisions are pretty stringent with respect to publicity; the SEC has “interpreted” those provisions as much as possible to give startups and small businesses more flexibility. 

What you can say before you launch your offering 

US securities laws regulate both “offers” and sales of securities; whenever you make an offer or sale of securities, that offer or sale must comply with the SEC’s rules. The SEC interprets the term “offer” very broadly and it can include activity that “conditions the market” for the offering. “Conditioning the market” is any activity that raises public interest in your company, and could include suddenly heightened levels of advertising, although regular product and service information or advertising is ok (see discussion below). 

Under new rules which went into effect on March 15, 2021, companies considering making a crowdfunding offering may “test the waters” (TTW) in order to decide whether to commit to the time and 2 expense of making an offering.1 Prior to filing the Form C with the SEC, you may make oral or written communications to find out whether investors might be interested in investing in your offering. The way in which you make these communications (eg, email, Insta, posting on a crowdfunding portal site) and the content of those communications are not limited, but the communications must state that: 

  • No money or other consideration is being solicited, and if sent in response, will not be accepted; 
  • 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 though the platform of an intermediary (funding portal or broker-dealer); and 
  • A person’s indication of interest includes no obligation or commitment of any kind.2 

You can collect indications of interest from potential investors including name, address, phone number and/or email address. The rule does not address getting any further information, such as the manner of any potential payment. If you do make TTW communications, you must file any written communication or broadcast script as an exhibit to your Form C. And TTW communications are subject to the regular provisions of securities law that impose liability for misleading statements. 

Before the point at which you file your Form C with the SEC, the TTW process is the only way you can make any offers of securities, either publicly or privately. This would apply to meetings with potential investors, giving out any information on forums which offer “sneak peeks” or “first looks” at your offering, and public announcements about the offering. Discussions at a conference or a demo day about your intentions to do a crowdfunding offering must comply with the TTW rules and you should read out the information in the bullets above. Any non-compliant communication made prior to filing the Form C may be construed as an unregistered offer of securities made in violation of Section 5 of the Securities Act — a “Bad Act” that will prevent you from being able to use Regulation CF, Rule 506, or Regulation A in the future. 

Normal advertising of your product or service is permitted as the SEC knows you have a business to run. However, if just before the offering all of a sudden you produce five times the amount of advertising that you had previously done, the SEC might wonder whether you were doing this to stir up interest in investing in your company. If you plan to change your marketing around the time of your offering (or if you are launching your company at the same time as your RegCF offering, which often happens), it would be prudent to discuss this with your counsel so that you can confirm that your advertising is consistent with the SEC’s rules. 

Genuine conversations with friends or family about what you are planning to do and getting their help and input on your offering and how to structure it, are ok, even if those people invest later. You can’t be pitching to them as investors, though, except in compliance with the TTW rules. 

What you can say after you launch 

After you launch your offering by filing your Form C with the SEC, communications outside the platform fall into two categories: 

  • Communications that don’t mention the “terms of the offering”; and 1 We are talking here about Crowdfunding Regulation Rule 206. There is another new rule that permits testing the waters before deciding which type of exempt offering (eg, Regulation CF or Regulation A) to make, which does not preempt state regulation; using that rule may be complicated and require extensive legal advice. 2 We advise including the entirety of this wording as a legend or disclaimer in the communication in question. The convention in Regulation A is that “it it fits, the legend must be included” and if the legend doesn’t fit (eg, Twitter) the communication must include an active hyperlink to it. 3 
  • Communications that just contain “tombstone” information. 

Communications that don’t mention the terms of the offering 

We are calling these “non-terms” communications in this memo, although you can also think of them as “soft” communications. “Terms” in this context are the following: 

  • The amount of securities offered; 
  • The nature of the securities (i.e., whether they are debt or equity, common or preferred, etc.); 
  • The price of the securities; 
  • The closing date of the offering period; 
  • The use of proceeds; and 
  • The issuer’s progress towards meeting its funding target. 

There are two types of communication that fall into the non-terms category. 

First, regular communications and advertising. You can still continue to run your business as normal and there is nothing wrong with creating press releases, advertisements, newsletters and other publicity to help grow your business. If those communications don’t mention any of the terms of the offering, they are permitted. Once you’ve filed your Form C, you don’t need to worry about “conditioning the market.” You can ramp up your advertising and communications program as much as you like so long as they are genuine business advertising (e.g., typical business advertising would not mention financial performance). 

Second, and more interestingly, offering-related communications that don’t mention the terms of the offering. You can talk about the offering as long as you don’t mention the TERMS of the offering. Yes, we realize that sounds weird but it’s the way the statute (the JOBS Act) was drafted. Rather than restricting the discussion of the “offering,” which is what traditional securities lawyers would have expected, the statute restricts discussion of “terms,” and the SEC defined “terms” to mean only those six things discussed above. This means you can make any kind of communication or advertising in which you say you are doing an offering (although not WHAT you are offering; that would be a “term”) and include all sort of soft information about the company’s mission statement and how the CEO’s grandma’s work ethic inspired her drive and ambition. 

You can link to the platform’s website from such communications. But be careful about linking to any other site that contains the terms of the offering. A link (in the mind of the SEC) is an indirect communication of the terms. So linking to something that contains terms could mean that a non-terms communication becomes a tombstone communication (see below) that doesn’t comply with the tombstone rules. This applies to third-party created content as well. If a third-party journalist has written an article about how great your company is and includes terms of the offering, linking to that article is an implicit endorsement of the article and could become a statement of the company that doesn’t comply with the Tombstone rules. 

Whether you are identifying a “term” of the offering can be pretty subtle. While “We are making an offering so that all our fans can be co-owners,” might indirectly include a term because it’s hinting that you are offering equity, it’s probably ok. Try to avoid hints as to what you are offering, and just drive investors to the intermediary’s site to find out more. 

Even though non-terms communications can effectively include any information (other than terms) that you like, bear in mind that they are subject, like all communications, to the securities antifraud rules. So even though you are technically permitted to say that you anticipate launching your “Uber for Ferrets” in 4 November in a non-terms communication, if you don’t have a reasonable basis for saying that, you are in trouble for making a misleading statement. 

Tombstone communications 

A tombstone is what it sounds like — just the facts — and a very limited set of facts at that. Think of these communications as “hard” factual information. 

The specific rules under Regulation CF (RegCF) allow for “notices” limited to the following, which can be written or oral: 

  • A statement that the issuer is conducting an offering pursuant to Section 4(a)(6) of the Securities Act; 
  • The name of the intermediary through which the offering is being conducted and (in written communications) a link directing the potential investor to the intermediary’s platform; 
  • The terms of the offering (the amount of securities offered, the nature of the securities, the price of the securities, the closing date of the offering period, the intended use of proceeds, and progress made so far); and 
  • Factual information about the legal identity and business location of the issuer, limited to the name of the issuer of the security, the address, phone number, and website of the issuer, the e-mail address of a representative of the issuer and a brief description of the business of the issuer. 

These are the outer limits of what you can say. You don’t have to include all or any of the terms. You could just say “Company X has an equity crowdfunding campaign on SuperPortal — Go to www.SuperPortal.com/CompanyX to find out more.” The platform’s address is compulsory.

“Brief description of the business of the issuer” does mean brief. The rule that applies when companies are doing Initial Public Offerings (IPOs), which is the only guidance we have in this area, lets those companies describe their general business, principal products or services, and the industry segment (e.g.,for manufacturing companies, the general type of manufacturing, the principal products or classes of products and the segments in which the company conducts business). The brief description does not allow for inclusion of details about how the product works or the overall addressable market for it, and certainly not any customer endorsements. 

“Limited time and availability”-type statements may be acceptable as part of the “terms of the offering.” For example, the company might state that the offering is “only” open until the termination date, or explain that the amount of securities available is limited to the oversubscription amount. 

A few “context” or filler words might be acceptable in a tombstone notice, depending on that context. For example, the company might state that it is “pleased” to be making an offering under the newly- adopted Regulation Crowdfunding, or even refer to the fact that this is a “historic” event. Such additional wording will generally be a matter of judgement. “Check out our offering on [link]” or “Check out progress of our offering on [link]” are OK. “Our offering is making great progress on [link]” is not. Words that imply growth, success or progress (whether referring to the company or the offering) are always problematic. If you want to use a lot of additional context information, that information can be put in a “non-terms” communication that goes out at the same time and through the same means as a tombstone communication. 

The only links that can be included on a tombstone communication are links to the platform. No links to 5 reviews of the offering on Kingscrowd. No links to any press stories on Crowdfund Insider or CrowdFundBeat. No links to the company’s website. The implicit endorsement principle applies here just as with non-terms communications, meaning that anything you link to becomes a communication by the company. 

An important point with respect to tombstone notices is that while content is severely limited, medium is not. Thus, notices containing tombstone information can be posted on social media, published in newspapers, broadcast on TV, slotted into Google Ads, etc. Craft breweries might wish to publish notices on their beer coasters, and donut shops might wish to have specially printed napkins. 

What constitutes a “notice” 

It is important to note that (until we hear otherwise from the SEC) the “notice” is supposed to be a standalone communication. It can’t be attached to or embedded in other communications. That means you cannot include it on your website (as all the information on your website will probably be deemed to be part of the “notice” and it will likely fail the tombstone rule) and you cannot include it in announcements about new products — again, it will fail the tombstone rule. 

We have listed some examples of permissible communications in Exhibit A. 

Websites 

It’s a bad idea to include ANY information about the terms of the offering on your website. However, some issuers have found a clever solution: you can create a landing page that sits in front of your regular website. The landing page can include the tombstone information and two options: either investors can continue to your company’s regular webpage OR they can go to the platform to find out more about the offering on the platform. We have attached sample text for landing pages on Exhibit A. 

“Invest now” buttons 

Under the SEC’s current interpretations as we understand them, having an “invest now” button on your website with a link to the platform hosting your offering is fine although you should not mention any terms of the offering on your website unless your ENTIRE website complies with the tombstone rule. Most of them don’t. 

Social Media 

As we mention above, the medium of communication is not limited at all, even for tombstone communications. Companies can use social media to draw attention to their offerings as soon as they have filed their Form C with the SEC. Social media are subject to the same restrictions as any other communications: either don’t mention the offering terms at all or limit content to the tombstone information. 

Emails 

“Blast” emails that go out to everyone on your mailing list are subject to the same rules as social media: either don’t mention the offering terms at all or limit content to the tombstone information. Personalized emails to people you know will probably not be deemed to be advertising the terms of the offering, so you can send them, but be careful you don’t give your friends any more information than is on the platform — remember the rule about giving everyone access to the same information. 

Images 

Images are permitted in tombstone communications. However, these images also have to fit within the “tombstone” parameters. So brevity is required. Publishing a few pictures that show what the company does and how it does it is fine. An online coffee table book with hundreds of moodily-lit photos, not so much. Also, a picture tells a thousand words and those words better not be misleading. So use images only of real products actually currently produced by the company (or in planning, so long as you clearly indicate that), actual employees hard at work, genuine workspace, etc. No cash registers, or images of dollar bills or graphics showing (or implying) increase in revenues or stock price. And don’t use images you don’t have the right to use! (Also, we never thought we’d need to say this, but don’t use the SEC’s logo anywhere on your notice, or anywhere else.) 

While the “brevity” requirement doesn’t apply to non-terms communications, the rules about images not being misleading do. 

Videos 

Videos are permitted. You could have the CEO saying the tombstone information, together with video images of the company’s operations, but as with images in general, the video must comport with the tombstone rules. So “Gone with the Wind” length opuses will not work under the tombstone rule, although they are fine with non-terms communications. 

Updates and communications to alert investors that important information is available on the platform 

Updates can and should be found on the crowdfunding platform. You can use communications that don’t mention the terms of the offering, to drive readers to the platform’s site to learn about updates and things like webinars hosted on the platform. They may include links to the platform. 

Press releases 

Yes, they are permitted, but they can’t contain very much. Press releases are also laden with potential pitfalls, as we discuss below. Press releases that mention the offering terms are limited to the same “tombstone” content restrictions that apply to all notices. Companies may say that they are pleased (or even thrilled) to announce that they are making a crowdfunding offering but the usual quotes from company officers can’t be included (unless those quotes are along the lines of “ I am thrilled that Company will be making a crowdfunding offering,” or “Company is a software-as-a-service provider with offices in six states”). The “about the company” section in press releases is subject to the same restrictions and if the press release is put together by a PR outfit, watch out for any non-permitted language in the “about the PR outfit” section of the press release (nothing like “Publicity Hound Agency is happy to help companies seeking crowdfunding from everyday investors who now have the opportunity to invest in the next Facebook”). 

You could also issue non-terms press releases that state you are doing an offering (and you can identify or link to the platform) but don’t include terms and still include all the soft info, including quotes, mission statements and deep backgrounds. It’s likely, though, that journalists would call asking “So what are you offering, then?” and if you answer, you are going to make your non-terms communication into communication that fails the tombstone rule. 

Press interviews and articles 

Interviews with the media can be thorny because participation with a journalist makes the resulting 7 article a communication of the company. In fact, the SEC Staff have stated that they don’t see how interviews can easily be conducted, because even if the company personnel stick to the tombstone information (which would make for a pretty weird interview), the journalist could add non-tombstone information later, which would result in the article being a notice that didn’t comply with the tombstone rule. 

The same thing could happen with interviews where the company tries to keep the interview on a nonterms basis. The company personnel could refrain from mentioning any terms (again, it’s going to be pretty odd saying, “Yes, we are making an offering of securities but I can’t say what we are offering”), but the first thing the journalist is going to do is get the detailed terms from the company’s campaign page on the platform’s site, and again the result is that the article becomes a non-complying notice. 

These rules apply to all articles that the company “participates in.” This means that if you (or your publicists) tell the press, “Hey, take a look at the Company X crowdfunding campaign” any resulting article is probably going to result in a violation of the rules. By you. 

Links to press articles are subject to all the same rules discussed in this memo. If you link to an article, you are adopting and incorporating all the information in that article. If the article mentions the terms of the offering then you can’t link to it from a non-terms communication (such as your website) and if it includes soft non-terms information, then you can’t link to it from a tombstone communication. And if it includes misleading statements, you are now making those statements. 

Remember that prior to the launch of the offering you should not be talking about your campaign with the press (or publicly with anyone else). If you are asked about whether you are doing a campaign priorto launch you should respond with either a “no comment” or “you know companies aren’t allowed to discuss these matters.” No winking (either real or emoji-style.) 

Press articles that the company did not participate in 

In general, if you (or your publicists) didn’t participate in or suggest to a journalist that he or she write an article, it’s not your problem. You aren’t required to monitor the media or correct mistakes. However, if you were to circulate an article (or place it or a link to it on your website), then that would be subject to the rules we discuss in this memo. You can’t do indirectly what you can’t do directly. 

Also, if you add (or link to) press coverage to your campaign page on the platform’s site, you are now adopting that content, so it had better not be misleading. 

Demo Days 

Demo days and industry conferences are subject to many of the same constraints that apply to press interviews. In theory, you could limit your remarks to a statement that you are raising funds through crowdfunding, but in reality people are going to ask what you are selling. You could say “I can’t talk about that; go to SuperPortal.com,” but that would lead to more follow-up questions. And following the tombstone rules means you can’t say too much about your product, which rather undermines the whole purpose of a demo day. 

Demo days might be easier to manage when you are still in the testing-the-waters phase. 

“Ask Me Anythings” 

The only place you can do an “Ask Me Anything” (AMA) that references the terms of the offering is on the 8 platform where your offering is hosted. You can’t do AMAs on Reddit. Unless you limit the AMA to nonterms communications or tombstone information. In which case, people aren’t going to be able to ask you “anything.” 

Product and service advertising 

As we mentioned above, once you’ve filed your Form C, ordinary advertising or other communications (such as putting out an informational newsletter) can continue and can even be ramped up. Most advertising by its nature would constitute non-terms communication, so it couldn’t include references to the terms of the offering. So don’t include information about your offering in your supermarket mailer coupons. 

What about side by side communications? 

You are doubtless wondering whether you could do a non-terms Tweet and follow it immediately with a tombstone Tweet. It appears, at least for the moment, that this works. There is the possibility that if you tried to put a non-terms advertisement right next to a tombstone advertisement in print media or online, the SEC might view them collectively as one single (non-complying) “notice”. It is unclear how much time or space would need to separate communications to avoid this problem, or even whether it is a problem. 

“Can I still talk to my friends?”

Yes, you can still talk to your friends face to face at the pub (we are talking real friends, not Facebook friends, here) and even tell them that you are doing a crowdfunding offering, even before you file with the SEC. You aren’t limited to the tombstone information (man, would that be a weird conversation). After you’ve launched the offering, you can ask your friends to help spread the word (that’s the point of social media) but please do not pay them, even in beer or donuts, because that would make them paid “stock touts.” Don’t ask them to make favorable comments on the platform’s chat board either, unless they say on the chat board that they are doing so because you asked them to. If they are journalists, don’t ask them to write a favorable piece about your offering. 

“What if people email me personally with questions?” 

Best practice would be to respond “That’s a great question, Freddie. I’ve answered it here on the SuperPortal chat site [link]”. Remember the Congressional intent of having all investors have access tothe same information. 

Links 

As we’ve seen from the discussion above, you can’t link from a communication that does comply with the rule you are trying to comply with to something that doesn’t. So for example, you can’t link from a Tweet that doesn’t mention the offering terms to something that does and you can’t link from a tombstone communication to anything other than the platform’s website. 

Emoji 

Emoji are subject to antifraud provisions in exactly the same way as text or images are. The current limited range of emoji and their inability to do nuance means that the chance of emoji being misleading is heightened. Seriously people, you need to use your words. 

 

After the offering 

These limitations only last until the offering is closed. Once that happens you are free to speak freely again, so long as you don’t make any misleading statements. 

And what about platforms? 

The rules for publicity by platforms are different, and also depend on whether the platform is a broker or a portal. We have published a separate memo for them. CrowdCheck is not a law firm, the foregoing is not legal advice, and even more than usual, it is subject to change as regulatory positions evolve and the SEC Staff provide guidance in newly-adopted rules. Please contact your lawyer with respect to any of the matters discussed here. 

 

Exhibit A Sample Tombstones

  • Company X, Inc. 

[Company Logo] 

 

Company X is a large widget company based in Anywhere, U.S.A. and incorporated on July 4, 1776. We make widgets and they come in red, white, and blue. Our widgets are designed to spread patriotic cheer. 

 

We are selling common shares in our company at $17.76 a share. The minimum amount is $13,000 and the maximum amount is $50,000. The offering will remain open until July 4, 2021. 

 

This offering is being made pursuant to Section 4(a)(6) of the Securities Act. 

For additional information please visit: https://www.SuperPortal.com/companyx or Invest Button URL Link direct

  • Freddy’s Ferret Food Company is making a Regulation CF Offering of Preferred Shares on FundCrowdFund.com. Freddy’s Ferret Food Company was incorporated in Delaware in 2006 and has its principal office in Los Angeles, California. Freddy’s Ferret Food Company makes ferret food out of its four manufacturing plants located in Trenton, New Jersey. Freddy’s Ferret Food is offering up to 500,000 shares of Preferred Stock at $2 a share and the offering will remain open until February 2, 2021. For more information on the offering please go to www.fundcrowdfund.com/freddysferretfoodcompany. 

 

Sample “non-terms” communications 

  • We are doing a crowdfunding offering! We planning to Make America Great Again by selling a million extra large red hats and extra small red gloves with logos on them, and to bring jobs back to Big Bug Creek, Arizona. The more stuff we make, the greater our profits will be. We think we are poised for significant growth. Already we’ve received orders from 100,000 people in Cleveland. Invest in us TODAY, while you still can and Make Capitalism Great Again! [LINK TO PLATFORM]. 
  • Feel the “Burn”! We are making a crowdfunding offering on SuperPortal.com to raise funds to expand our hot sauce factory. Be a part of history. Small investors have been screwed for years.This is your chance to Stick it to the Man and buy securities in a business that has grown consistently for the last five years. 

 

Sample Communications on Social Media:
Note all these communications will have a link to the platform. 

 

  • Company Y has launched its crowdfunding campaign; click here to find out more. 

 

  • Interested in investing in Company Y? Click here. 

 

Sample Landing Page: 

Thanks to Regulation CF, now everyone can own shares in our company. 

 

[Button] Invest in our Company 

[Button] Continue to our Website

 

CrowdCheck is not a law firm, the foregoing is not legal advice, and even more than usual, it is subject to change as regulatory positions evolve and the SEC Staff provide guidance in newly-adopted rules. Please contact your lawyer with respect to any of the matters discussed here.

Small Businesses Need Capital

Small businesses are essential to the economic well-being of a country, but unfortunately, many find it challenging to obtain the capital they need. It is expensive to access the public capital markets at the best of times, but in times of economic hardship and uncertainty,  traditional financing options become especially scarce as well. Fortunately, private capital markets have emerged as a viable and advantageous solution for small businesses to raise the funds they need to grow, sustain jobs, and contribute to their communities. 

 

Raising Capital is Expensive

 

Small businesses are often faced with tedious and expensive processes when trying to access traditional capital sources. Raising capital for companies when going public compared to private can be expensive and complicated. The costs associated with this type of fund-raising include:

 

  • Underwriting fees
  • Exchange listing fees to launch on the stock exchange or other public markets
  • Professional fees for attorneys, accountants, and other financial advisors
  • Printing and distribution costs for prospectus and registration statements
  • Costs associated with filing regulatory paperwork such as the SEC Form S-1

 

These costs can add up, and the process of going public is also typically long and complicated, requiring a great deal of time and energy from company founders. In addition, many banks impose strict guidelines limiting the amount of capital small business owners can borrow, and it might not be enough to cover the cost of going public.  For small startups especially, the possibility of going public may be decades away, if it exists at all. For organizations that need to raise capital more immediately, the private market is a much more viable option than raising capital publicly.

 

The Solution: Private Capital Markets

 

Fortunately, private capital markets provide a viable solution for small businesses during tough economic times. With private businesses able to use JOBS Act regulations like RegA+, RegD, and RegCF to raise millions in capital from accredited and nonaccredited investors, they need not rely on traditional lenders. The cost of raising capital privately using JOBS Act regulations compared to taking a company public is significantly lower. This is because:

 

  • Although there are still securities regulations to protect investors, the reporting requirements are much lower and less costly.
  • Private capital markets avoid the lengthy legal process involved in taking a company public, thereby saving time and legal fees.
  • Private capital markets offer more flexibility than traditional financing sources, allowing businesses to craft more creative and advantageous terms for the capital they need.

 

This makes it easier for small businesses to access the funds they need without having to worry about high costs and long wait times. Furthermore, leveraging private capital markets provides an opportunity for small business owners to cultivate relationships with investors who can provide valuable insights and advice that they may not be able to access through traditional lenders. And that can open more doors.

Oscar Jofre to Speak at LSI 2023 Emerging Medtech Summit

The LSI 2023 Emerging Medtech Summit is an upcoming four-day conference that will provide attendees a detailed look into the current Medtech industry. From March 20th to 23rd, in Dana Point, CA, attendees can join experienced professionals and investors as they discuss topics such as data dilemmas, how to monetize the digital revolution, and raising capital for your Medtech company. Oscar Jofre, CEO of KoreConX will also be present throughout the event offering his expertise for companies looking to raise capital through JOBS Act regulations. With sessions moderated by highly esteemed individuals in their respective fields and panel discussions led by experts, this promises to be a worthwhile experience for all who attend.

 

Throughout the event, panels include “Precisely Practicing Medicine with a Trillion Points of Data,” “Powering Up Innovation in a Digital, Connected World,” and “What are Medtech’s Leading Investors Looking for Right Now?” The event will include a wealth of opportunities for networking through breakfast, dinner, cocktails, and more. On the third day of the conference, Oscar Jofre will participate in a panel discussion, with a title yet to be announced.

 

The Summit will be an informative event to learn about the various regulations, trends, and challenges in the Medtech space.

On The Silicon Valley Bank Shutdown

On Friday, March 10, Silicon Valley Bank was shut down by regulators. This has an impact on a significant number of businesses, both large and small.  While this unfortunate event impacts many businesses and their employees, we felt it important to inform you that there is no direct material effect on KoreConX.

In the weeks and months to come, we will see how the broader market may be affected. We will continue to monitor our clients/vendors to assess the impact of this shutdown and look to be of assistance where we can.

We do not bank with Silicon Valley Bank – SVB as we work with BMO/BMO Harris Bank. We want to assure our employees, clients, partners, shareholders, and fellow ecosystem partners that our company is not directly affected by the SVB shutdown.

During COVID-19, we all came together with our amazing ecosystem of KorePartners to help thousands of companies through difficult times.

We are here to provide you with any assistance you may need. Our ecosystem of partners is very strong and vast, including partners in the banking sector that are prepared to step in to assist.

Do not hesitate to reach out to me personally, as we are here to assist you.

Watch Oscar’s message here.