Accredited investor definition and SEC Review

In this special article written by Laura Anthony from Securities Law Blog, we’ll learn more about recent matters regarding accredited investor definition and SEC Review.

Keep reading and discover more about this fundamental topic in the financial markets, especially when you’re looking to raise capital.

On December 15, 2023, the SEC issued a staff report on the accredited investor definition.  The report comes three years after the most recent amendments to the accredited investor definition (see HERE).

The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) requires the SEC to review the accredited investor definition, as relates to natural persons, at least once every four years to determine whether the definition should be modified or adjusted.  The last two reports can be read HERE and HERE.

The current report focuses on the composition of the accredited investor demographic, including since the last definition amendments; the extent to which accredited investors have the financial sophistication, ability to sustain the risk of loss of investment, and access to information that have traditionally been associated with an ability to fend for themselves; and accredited investor participation in exempt offerings.

I’ve included the complete current accredited investor definition at the end of this post.

Background

All offers and sales of securities must either be registered with the SEC under the Securities Act or be subject to an available exemption from registration. The ultimate purpose of registration is to provide investors and potential investors with full and fair disclosure to make an informed investment decision. The SEC does not pass on the merits of a particular deal or business model, only its disclosure. In setting up the registration and exemption requirements, Congress and the SEC recognize that not all investors need public registration protection and not all situations have a practical need for registration.

However, exempted offerings carry additional risks in that the level of required investor disclosure is much less than in a registered offering, the SEC does not review the offering documents, and there is no federal ongoing disclosure or reporting requirements.  The premise of allowing offering exemptions to accredited investors is that such investors are able to fend for themselves and, accordingly, do not need the protections afforded by the registration requirements under the Securities Act because they have access to the kind of information which registration would disclose (SEC v. Ralston Purina Co.).

Diving deeper: Definition of an accredited investor

The definition of an accredited investor has become a central component of exempt offerings, including Rules 506(b) and 506(c) of Regulation D.  Qualifying as an accredited investor allows an investor to participate in exempt offerings including offerings by private and public companies, certain hedge funds, private equity funds and venture capital funds.  Further accredited investors are not bound by the investor limitations set forth in Regulation Crowdfunding or Regulation A, and investors in a Regulation Crowdfunding offering are free to sell to accredited investors without complying with the one-year prohibition on resales.

The concept of “accredited investor” is not limited to exempt offerings but permeates the state and federal securities laws in general.  For instance, a company is required to register under Section 12(g) if as of the last day of its fiscal year the number of its record security holders is either 2,000 or greater worldwide, or 500 persons who are not accredited investors or greater worldwide.  Accordingly, companies must differentiate between record holders who are accredited investors and nonaccredited investors.  For more on Section 12(g) registration see HERE.

Most state securities statutes contain a definition of an accredited investor that either tracks the federal definition, or in some cases, contains higher thresholds for institutional investors ($10 million as opposed to $5 million).  Some states use the accredited investor definition to determine whether investment advisers to certain private funds are required to be registered. FINRA also uses the definition to determine the private placement document filing requirements for placement agents.

Accredited Investor Pool

The SEC has no real source of information on the number of natural persons that are accredited investors but rather must rely on assumptions and general information provided by, for example, the Federal Reserve Board’s Survey of Consumer Finances.  However, the SEC estimates that approximately 18.5% of U.S. households qualify as accredited investors based on income standards.   The SEC estimates that the number of accredited investors has grown steadily, attributing some of this growth to the fact that the definition has never been adjusted for inflation.  According to the SEC report, if the natural person accredited investor thresholds were adjusted to reflect inflation since their initial adoption through 2022 using CPI-U, the net worth threshold would increase from $1 million to $3,037,840, the individual income threshold would increase from $200,000 to $607,568, and the joint income threshold would increase from $300,000 to $911,352, which is s significant jump from the current definition.

The SEC also points out that its estimate does not include the indeterminate additional number of people that would qualify as accredited based on holding qualified professional licenses or being knowledgeable employees at private funds.  Same for the number of individuals that may qualify as a director, executive officer, or general partner of the issuer.

The SEC report delves into the composition of assets for most U.S. households concluding that a disproportionate amount of assets are held in retirements savings accounts and plans that are directed or controlled by individuals, who “may lack experience in building a portfolio that appropriately allocates risk and ongoing management of investments, including preparing for the illiquid nature of private company investments.”  Although the SEC admits there is limited information available to assess the financial sophistication of accredited investors, it still leans towards concluding, they are not sophisticated or protected.

The SEC points to this as a reason to question the continued utility of the current financial thresholds. I flat-out disagree.  Without side-by-side evidence of retirement losses, investors suffering from poor decision-making, investors suing for private investment losses, regulatory actions related to inappropriate private offerings involving retirement accounts, or any other reasonable metrics supporting the alleged inability of U.S. households to make their own investment decisions with their own money, I find this discussion lacking in evidentiary support.

Accredited Investor Participation in the Exempt Offering Market

The SEC has no proper methodology to estimate the participation of natural person accredited investors in the exempt offering market.  However, they do estimate that approximately $3.7 trillion of new capital was raised in exempt offerings in 2022.  Although clearly the vast majority of the investors are accredited, the breakdown between natural persons and institutions or entities is unknown.  The SEC spends several pages espousing statistics based on Form D filings but, as they indicate, many issuers do not file a Form D and even when they do, it may be at the beginning of an offering and contain no information about the offering results or investor composition.

Conclusion

Although the SEC report’s introduction explains that it will examine accredited investor demographics and investment habits, in actuality the SEC has no reliable or aggregated sources of information from which to obtain these facts.  Although I summarize some of the findings, the conclusion is that all information is a best guess and estimate.  With such a lack of information, the SEC chooses to err on the conservative side seemingly leaning towards suggesting raising the financial thresholds.  Laura has a different perspective, disagreeing with this approach.

In general, she considers that the report offered little useful information.

Current Definition of Accredited Investor

Accredited investor shall mean any person who comes within any of the following categories, or who the issuer reasonably believes comes within any of the following categories, at the time of the sale of the securities to that person:

(i) Any bank as defined in section 3(a)(2) of the Act, or any savings and loan association or other institution as defined in section 3(a)(5)(A) of the Act whether acting in its individual or fiduciary capacity; any broker or dealer registered pursuant to section 15 of the Securities Exchange Act of 1934; any investment adviser registered pursuant to section 203 of the Investment Advisers Act of 1940 or registered pursuant to the laws of a state; any investment adviser relying on the exemption from registering with the Commission under section 203(l) or (m) of the Investment Advisers Act of 1940; any insurance company as defined in section 2(a)(13) of the Act; any investment company registered under the Investment Company Act of 1940 or a business development company as defined in section 2(a)(48) of that act; any Small Business Investment Company licensed by the U.S. Small Business Administration under section 301(c) or (d) of the Small Business Investment Act of 1958; any Rural Business Investment Company as defined in section 384A of the Consolidated Farm and Rural Development Act; any plan established and maintained by a state, its political subdivisions, or any agency or instrumentality of a state or its political subdivisions, for the benefit of its employees, if such plan has total assets in excess of $5,000,000; any employee benefit plan within the meaning of the Employee Retirement Income Security Act of 1974 if the investment decision is made by a plan fiduciary, as defined in section 3(21) of such act, which is either a bank, savings and loan association, insurance company, or registered investment adviser, or if the employee benefit plan has total assets in excess of $5,000,000 or, if a self-directed plan, with investment decisions made solely by persons that are accredited investors;

(2) Any private business development company as defined in section 202(a)(22) of the Investment Advisers Act of 1940;

(3) Any organization described in section 501(c)(3) of the Internal Revenue Code, corporation, Massachusetts or similar business trust, partnership, or limited liability company, not formed for the specific purpose of acquiring the securities offered, with total assets in excess of $5,000,000;

(4) Any director, executive officer, or general partner of the issuer of the securities being offered or sold, or any director, executive officer, or general partner of a general partner of that issuer;

(5) Any natural person whose individual net worth, or joint net worth with that person’s spouse or spousal equivalent, exceeds $1,000,000 excluding such person’s primary residence (both on the asset and liability side except that indebtedness in excess of the fair market value of the primary residence shall be included as a liability);

(6) Any natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person’s spouse or spousal equivalent in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year;

(7) Any trust, with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the securities offered, whose purchase is directed by a sophisticated person as described in § 230.506(b)(2)(ii);

(8) Any entity in which all of the equity owners are accredited investors;

(9) Any entity, of a type not listed in paragraph (a)(1), (2), (3), (7), or (8), not formed for the specific purpose of acquiring the securities offered, owning investments in excess of $5,000,000;

(10) Any natural person holding in good standing one or more professional certifications or designations or credentials from an accredited educational institution that the SEC has designated as qualifying an individual for accredited investor status. Under this category the SEC designated persons holding the following licenses: (i) Series 7; (ii) Series 82; and (iii) Series 65.

(11) Any natural person who is a “knowledgeable employee,” as defined in rule 3c–5(a)(4) under the Investment Company Act of 1940, of the issuer of the securities being offered or sold where the issuer would be an investment company, as defined in section 3 of such act, but for the exclusion provided by either section 3(c)(1) or section 3(c)(7) of such act;

(12) Any “family office,” as defined in rule 202(a)(11)(G)–1 under the Investment Advisers Act of 1940:

(i) With assets under management in excess of $5,000,000,

              (ii) That is not formed for the specific purpose of acquiring the securities offered, and

             (iii) Whose prospective investment is directed by a person who has such knowledge and experience in financial and business matters that such family office is capable of evaluating the merits and risks of the prospective investment; and

(13) Any “family client,” as defined in rule 202(a)(11)(G)–1 under the Investment Advisers Act of 1940 , of a family office meeting the requirements in paragraph (a)(12) of this section and whose prospective investment in the issuer is directed by such family office pursuant to paragraph (a)(12)(iii).

 

* Disclaimer: The data presented in this article is based on the information available at the time of the publication. For updated data and specific questions, reach professional help.

RegD SEC Reporting Obligations

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

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

 

RegD SEC Reporting Obligations

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

Here’s an overview:

 

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

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

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

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

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

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

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

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

Take note!

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

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

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

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.

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

The Importance of Compliance in Private Capital Market Regulations

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

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

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

Regulation A+ and the SEC’s Oversight

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

Private Capital Market Regulations: Protecting Investors and Market Integrity

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

The Consequences of Non-Compliance

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

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

How not to fall into the wrong with the regulators checklist

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

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

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

What is a CIK Number?

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

Approaching the 11th Anniversary of the JOBS Act

Eleven years ago, the Jumpstart Our Business Startups (JOBS) Act was signed into law in a White House Rose Garden ceremony. Looking back on this landmark legislation, we see its impact has been far-reaching. From increased access to capital for small businesses to the rise of new markets for investment opportunities, the JOBS Act has reshaped how companies raise funds and spur economic growth. In 2022, $150.9 B was raised through Regulations A+, CF, and D, showcasing the tremendous power of these regulations for companies. As we mark the 11th anniversary of this game-changing law, let’s look at what it has accomplished and how it is (still) changing the capital formation landscape.

 

David Wield: The Father of the JOBS Act

 

David Weild IV is a veteran Wall Street executive and advisor to U.S. and international capital markets. He has become well known as a champion of small business as the “Father of the JOBS Act”. Signed into law by President Barack Obama in April 2012, the Jumpstart Our Business Startups (JOBS) Act has opened up access to capital markets, giving small businesses and startups the ability to raise money from a much larger pool of investors. Wield has remarked that this was not a political action; it was signed in “an incredibly bipartisan fashion, which is really a departure from what we’ve generally seen. It actually increases economic activity. It’s good for poor people, good for rich people. And it adds to the US Treasury”.

 

As such, Weild is seen as a leading figure in the JOBS Act movement, inspiring the startup community to break down barriers and build the future. He has helped make it easier for companies to become public, empowering a new generation of entrepreneurs looking to start or grow their businesses. Furthermore, Weild’s efforts have allowed more investors to participate in capital markets.

 

Benefitting from the JOBS Act

 

At the inception of the JOBS Act in 2012, non-accredited investors were only allowed to invest up to $2,000 or 5% of their net worth per year. This was designed to protect non-accredited investors from taking on too much risk by investing in startups, as these investments would likely be high risk and high reward. Since then, the JOBS Act has expanded to allow non-accredited investors to invest up to 10% of their net worth or $107,000 per year in startups and private placements.  

 

For companies they were initially allowed to raise:

 

  • Up to $50 million in RegA+ offerings
  • $1 million through crowdfunding (RegCF)
  • Unlimited capital from accredited investors under RegD

 

These numbers have grown significantly since 2012, with:

 

  • Reg A allowing $75 million to be raised
  • Reg CF allowing $5 million to be raised

 

These rules have opened the door for startups to access large amounts of capital that otherwise may not have been available to them. This has allowed more companies to grow, innovate and create jobs in the U.S.

 

How Much has Been Raised with JOBS Act Regulations?

 

The JOBS Act regulations have revolutionized how capital is raised by companies and how investors access new markets. According to Crowdfund Insider, companies have raised:

 

  • $1.8 Billion from July 2021 to June 2022 with RegA+
  • $2.3 trillion with RegD 506(B)
  • $148 trillion with RegD 506(C)
  • $506.7 million with RegCF

 

Since its formation in 2012, the JOBS Act has opened up a variety of avenues for entrepreneurs to access capital. The exempt offering ecosystem has allowed innovators to raise large sums of money with relatively fewer requirements than a traditional public offering, while still requiring compliance and offering investors protection. This has enabled companies to stay in business and grow, allowing the US economy to remain competitive on the global stage.

 

Insights from Industry Leaders

 

Expanding the discussion about capital formation, KoreConX launched its podcast series, KoreTalkX in April 2022. Through this platform, we’ve hosted many thought leaders and experts to share their insights on capital-raising strategies and compliance regulations. Guests have included renowned thought leaders including David Weild, Jason Fishman, Shari Noonan, Joel Steinmetz, Jonny Price, Douglas Ruark, Sara Hanks, and many others. Each of these episodes has explored topics in-depth to provide entrepreneurs with the tools they need to be successful when raising capital from investors.

Reforms to RegD

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

 

Current Regulations Under RegD

 

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

 

Commissioner Crenshaw’s Proposed Reforms

 

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

 

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

 

Effects of These Changes

 

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

 

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

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

 

5 Tips for Frictionless Capital Raising

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

Use Mobile Apps for Online Investments

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

Utilize Affinity Marketing

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

Seek the Crowd

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

Have a Plan and Tailor Your Pitch

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

Prioritize Compliance

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

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

 

SEC Amends Broker-Dealer Record-keeping Requirements

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

 

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

 

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

 

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

 

What is Rule 145?

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

 

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

 

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

 

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

 

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

 

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

 

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

What You Need to Know About RegCF

Raising capital is always a challenge, especially in the startup sector, which means that it’s vital to understand all the options available and how they can help you attain your goals. We will discuss Regulation Crowdfunding (RegCF), which has proved to be an increasingly popular method among early-stage companies looking for funds due to its exemption from SEC registration and access to a vast pool of potential investors, in addition to being cost-effective. This blog post will outline some essential things you need to know before taking advantage of RegCF as a form of raising capital. Understanding what challenges you may face along the way and what resources are at your disposal will hopefully give you greater insight into whether this capital option is right for your business.

 

What is RegCF?

 

  • RegCF refers to equity-based crowdfunding.
  • This type of financing method raises money through small individual investments from many people.
  • Startups and early-stage businesses can use RegCF to offer and sell securities to the investing public.
  • Anyone can invest in a Regulation Crowdfunding offering, but there are limits based on annual income and net worth for investors who are not accredited.

 

What do you need to know about RegCF?

 

RegCF is a type of securities-based crowdfunding that allows startups and early-stage businesses to offer and sell securities to the investing public. This type of financing method raises money through small individual investments from many people, and it has seen a surge in popularity since its enactment in 2012. In 2019, the SEC passed amendments to RegCF, making it even easier for companies to raise capital, such as increasing the offering limit to $5 million. As of 2021, over $1.1 billion has been raised through RegCF.

 

Who can invest in a Regulation Crowdfunding offering?

 

Any person can invest in a Regulation Crowdfunding offering. However, there are certain restrictions based on annual income and net worth for those who are not accredited investors. According to the SEC, an individual will be considered an accredited investor if they have earned income that exceeded $200,000 ($300,000 together with a spouse or spousal equivalent) in each of the prior two years and reasonably expects the same for the current year, have a net worth over $1 million (excluding the value of their primary residence), or hold certain professional certifications.

 

What are the investment limits for non-accredited investors?

 

For non-accredited investors, the amount they can invest in a RegCF offering depends on their net worth and annual income. If an individual’s annual income or net worth is less than $124,000, then during any 12 months, they can invest up to the greater of either $2,500 or 5% of the greater of their annual income or net worth. If their annual income and net worth are equal to or more than $124,000, then during any 12 months, they can invest up to 10% of annual income or net worth, whichever is greater, but not to exceed $124,000.

 

What Are the Benefits of RegCF?

 

Any startup or early-stage business can use RegCF to raise capital. This financing is beneficial for companies that do not have the resources or connections to access traditional forms of financing, such as venture capital or bank loans. RegCF also provides an alternative to Initial Public Offerings (IPOs) for companies that are too small for a public offering.

 

RegCF is an excellent way for startups and early-stage businesses to access capital. It offers increased access to capital and no restrictions on who can invest. RegCF is expected to reach $5 billion in raises in the future, and with the popularity of this financing only growing, it’s clear that RegCF is here to stay. By understanding the basics of Regulation Crowdfunding, startups and small businesses can make informed decisions about when and how to raise capital to achieve their business goals.

What You Need to Know About RegA+

If you are an entrepreneur looking to raise funds, you may have heard of Regulation A+, often referred to simply as Reg A+. This alternative to traditional venture capital, private equity, or other funding sources allows companies to sell securities to the public without going through the lengthy and costly process of registering with the SEC. Since it was expanded in 2012 with the JOBS Act, Reg A+ continues to evolve, facilitating increased capital formation for companies within the private capital market.

 

What is Reg A+?

 

The goal of Reg A+ is to make it easier and less expensive for small businesses to access capital while still providing investors with the protection of an SEC-qualified offering. The offering is exempt from complete SEC registration, allowing companies to raise up to $75 million in capital, with certain restrictions and requirements. To qualify for this exemption, a company must file an offering statement (Form 1-A) with the SEC that includes all pertinent information about the business and the offering. The company must also provide ongoing disclosure about its business, including financial statements and other material information.

 

Who is Reg A+ for?

 

Reg A+ is aimed primarily at small and medium-sized businesses looking to raise funds from the public, but larger companies can also use it. Because there are fewer restrictions and requirements than traditional SEC registration, Reg A+ offers a more affordable option for companies that do not have access to venture capital or other significant funding sources. Because Reg A+ is such a robust option for companies looking to raise capital, many companies stay private longer instead of going public through an IPO. 

 

Advantages of Reg A+

 

Beyond lower costs than going public, Reg A+ offers additional benefits for issuers and investors alike. It is a unique opportunity for investors to get involved with early-stage companies since the offering allows both nonaccredited and accredited investors to invest. At the same time, these investors can benefit from the potential for higher returns and the ability to diversify their portfolios. Investors also benefit from SEC oversight, which aims to protect them and ensure that they are investing in legitimate investment opportunities. Investors may also have options for liquidity, as securities purchased through a Reg A+ offering can be traded on a secondary market.

 

Reg A+ benefits companies because it offers a relatively simple and cost-effective way to access the public markets while accessing an increased pool of potential investors than a traditional offering. Unlike conventional VC or private equity funding routes, issuers can also retain more ownership over their business while finding investors who share the vision for the mission and direction of the company. Issuers can also benefit enormously from building brand advocates out of their investors, which can, in turn, inspire new investors or customers. 

 

Reg A+ offers an excellent alternative for small businesses looking to raise capital without going through the lengthy and costly process of registering with the SEC. With a maximum offering cap of $75 million, Reg A+ can be used for companies of all sizes and offers investors the opportunity to access early-stage companies that they may not otherwise have access to. 

What are the Differences Between Regulations A, CF, D, and S?

When it comes to raising capital, there are various ways you can raise money from investors. And while they all have their own specific compliance requirements, they all share one common goal: to protect investors while still providing them with opportunities to invest in private companies. Let’s look at the four most popular types of equity crowdfunding; through Regulation A, CF, D, or S. 

 

Regulation A+

 

Offering size per year: Up to $75 million

Number of investors allowed: Unlimited, as long as the issuer meets certain conditions.

Type of investor allowed: Both accredited and non-accredited investors.

SEC qualification required: Reg A+ offerings must be qualified by the SEC and certain state securities regulators and must also file a “Form 1-A”. Audited financials are required for Tier II offerings.

 

This type of crowdfunding is popular because it allows companies to raise up to $75 million per year in capital and is open to accredited and non-accredited investors. Offering the ability to turn current customers into investors and brand ambassadors (like several JOBS Act regulations promote) can bring a company tremendous value and help to grow the business. A Reg A raise is excellent for companies that have a wide customer base or need to raise a large amount of capital. Compared to other regulations, Reg A+ is a bit more complex and time-consuming to implement. Yet, it still offers a great deal of potential with the ability to market the offering to a wide pool of potential investors.

 

Regulation CF

 

Offering size per year: $5 million

Number of investors allowed: Unlimited, as long as the issuer meets certain conditions.

Type of investor allowed: Both accredited and non-accredited investors

SEC qualification required: The offering must be conducted on either an SEC-registered crowdfunding platform or through a registered broker-dealer. Audited financials are required for companies looking to raise more than $1,235,000. Companies must fill out a “Form C.”

 

Compared to other regulations, Reg CF is one of the most popular due to its lower cost and ease of implementation. Regulation CF offers companies the ability to raise up to $5 million per year and allows accredited and non-accredited investors to invest in the company. Companies that need a smaller sum of capital while still leveraging the power of marketing can benefit from utilizing this type of regulation. 

 

Regulation D

 

Offering size per year: Unlimited

Number of investors allowed: 2000

Type of investor allowed: Primarily accredited investors, with non-accredited investors only allowed for 506(b) offerings.

SEC qualification required: Reg D offerings do not need to be registered with the SEC but must still meet certain filing and disclosure requirements.

 

A Reg D offering must follow either Rule 506(b) or 506(c). Both allow up to 2000 investors but differ slightly in that 506(b) offerings allow up to 35 non-accredited investors. Additionally, 506(b) offerings do not permit general solicitation. This means that companies will have to rely on their own network of investors to reach their goals. While this type of offering is more restrictive than others, it can be attractive to companies that need a smaller sum of capital and have access to a network of accredited investors. 

 

Regulation S

 

Offering size per year: Unlimited

Number of investors allowed: 2000

Type of investor allowed: Foreign (non-US) accredited and non-accredited investors

SEC approval/qualification required: Reg S offerings are not subject to SEC rules, but they must follow the securities laws in the countries issuers seek investors from.

 

An excellent complement to Reg D, Reg S allows companies to raise capital from foreign and non-U.S. investors. This regulation was made for big deals, allowing companies to reach a larger and more diverse pool of investors. Reg S is great for companies looking to raise a large amount of capital or to break into foreign markets. Issuers must be careful not to make the terms of the offerings available to US-based people.

 

Depending on the size of your offering, the number of investors you’re looking to attract, and the type of investor you want, one regulation may be better suited for your needs than another. Still, it is important to consult with a professional when making these decisions to ensure that you meet all necessary compliance requirements.

How Can an Update on RegD Impact Private Markets?

Far larger than the initial public offering (IPO) market, Regulation D is incredibly important within the private capital markets, facilitating over $1 trillion in capital every year. Now, the SEC is considering updates to the accredited investor definition, which would have a significant impact on Reg D offerings, the private market, and the economy as a whole.

 

Understanding Regulation D

 

To understand how an update to RegD could impact private markets, it is important to have a brief overview of the regulation. There are two types of Reg D – 506b and 506c. Both offer exemptions from Securities and Exchange Commission (SEC) registration requirements for securities offerings and require investors to be accredited. An accredited investor is an individual who meets certain financial criteria, such as earning $200,000 or more a year or having a net worth of over $1 million. The main difference between 506b and 506c is that 506b does not allow the issuer to solicit generally or advertise the offering to potential investors.

 

Changes on the Horizon

 

The SEC is currently considering updates to RegD, including changes to the definition of an accredited investor. Some changes could include raising the income or net worth thresholds, although it is still somewhat unclear as to what the SEC envisions. Raising these thresholds would mean fewer individuals would qualify as accredited investors and therefore have access to private securities offerings. The impact of these changes could affect different types of investors differently. Still, they will likely have a significant impact on private capital formation and the ability of entrepreneurs to access funding.

 

The update could also impact companies that use Reg D offerings as part of their fundraising strategy. Currently, these companies can access a much larger pool of capital than they would through an IPO or traditional venture capital, as nearly 15 million Americans qualify under the current definition. But if the definition of an accredited investor is narrowed, this could limit access to capital for smaller or startup companies. 

 

What Does This Mean for the Private Market?

 

Even though the SEC says that these changes are to protect investors, net worth and income are not the only way to determine whether an investor is accredited or not. The ability to make an educated investment decision also relies on the education and experience of the investors, which isn’t considered in the definition of an accredited investor. Some organizations, like the Investor Choice Advocate Network, believe that the definition should be updated to reflect non-financial measurements such as the professional certifications required for CPAs, registered investment advisors, financial planners, and other professionals. 

 

Updates could also mean that fewer individuals from underrepresented groups may be able to participate in a Reg D offering. With these groups historically facing obstacles to participating in capital markets, these updates could dramatically reduce investment opportunities for some individuals as well as make it more difficult for companies who are looking to raise capital from underrepresented communities.

 

Of course, it is difficult to say exactly what the impact of updated Reg D would be on private markets when we still do not know what those updates will be. Hopefully, we will have more information soon.

Celebrity Endorsements of Investment Opportunities

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

 

Celebrity Endorsement and Investment Opportunities

 

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

 

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

 

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

 

Kim Kardashian and the SEC

 

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

 

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

Howey Test: What is it?

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

 

Utilizing the Howey Test

 

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

 

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

 

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

 

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

 

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

 

Bringing it All Together

 

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

 

What is the Role of FINRA?

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

 

What is FINRA?

 

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

 

Who does FINRA protect?

 

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

 

Why is FINRA important?

 

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

 

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

 

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

 

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

 

SEC Charges Eight in Scheme to Fraudulently Promote Securities Offerings

On September 30, 2022, the SEC announced charges against 8 CEOs and CFOs for fraudulently promoting Regulation A+ securities offerings.  The companies named by the SEC include Elegance Brands Inc. (now Sway Energy Corp.), Emerald Health Pharmaceuticals Inc., Hightimes Holding Corp., and Cloudastructure Inc.

 

This is not a good day for those who flout the rules, but we are glad the SEC has taken decisive action.  Reg A+ is gaining great momentum in the marketplace and this type of scrutiny by the SEC is necessary to keep it clean.

 

There are so many great companies and intermediaries working hard and being compliant. This only reminds us that we must continue to be diligent and keep our eyes open so that no further damage happens in the private markets.

 

It is not enough for the broker-dealers of record to simply do KYC ID verification; you also need to keep asking the hard questions.

 

If you are an IA firm,   you are creating and delivering the branding, messaging, and content through stories, videos, blogs, webinars, etc.  Each of these activities has far-reaching regulatory consequences. You can’t just simply do whatever they tell you to do; you too must be diligent in ensuring that you are telling the truth on their behalf. 

 

We turn down clients daily because we don’t compromise our ethics, and we only operate with full compliance to all regulations..  

 

There are only two ways to operate in this world:

  • Compliantly, ethically, legally
  • Non-Compliantly, unethically, illegally, and cutting corners

 

The choice is clear.

 

Capital-raising cannot be done by only the Issuer. This caution applies to all the following participants:

  • Issuer (Management, Board Directors)
  • Investors
  • Shareholders
  • Lawyers
  • Auditors
  • FINRA Broker-Dealers
  • Investor Acquisition Firms (Marketing Firms)
  • Call Centers (Boiler Rooms)
  • Transfer Agents
  • Issuance Technology Providers
  • Funding Platforms
  • Research Providers
  • Offering Aggregators
  • Investor Relations
  • Public Relations 

 

If you see any kind of questionable behavior, exercise caution and if necessary, let the SEC know.

 

SEC News Release 30 September 2022

https://www.sec.gov/litigation/litreleases/2022/lr25541.htm

 

Stay tuned for more updates from the SEC.

The SEC Released its 41st Annual Small Business Forum Report

For 41 years, the Securities and Exchange Commission has hosted its annual Small Business Forum. The event, led by the SEC’s Office of the Advocate for Small Business Capital Formation, aims to gather feedback from both the public and private sectors to improve capital raising and sheds light on many issues facing small businesses and investors to help event participants develop policy recommendations.

 

Highlighting the needs of small businesses within the US is crucial, as they play a vital role in the economy and job creation. Over the past 25 years, 2 out of every 3 jobs created can be attributed to small businesses. These businesses serve as the lifeblood of their communities.

 

Some of the key takeaways from the four-day event included the fact that more entrepreneurs need to be made aware of resources available when raising capital, as many have great ideas, but lack the knowledge and experience to raise capital effectively. This also means expanding access to capital to both underrepresented groups and locations, especially outside of major “tech-hub hotspots.” Additionally, panel discussions highlighted the issues minority entrepreneurs continue to face when seeking traditional funding options, such as venture capital or private equity. These funding methods often rely heavily on networks and connections that exclude many entrepreneurs. 

 

According to sources such as Crowdfund Insider, the Commission has addressed past issues such as democratizing the definition of an accredited investor by empowering a more significant segment of the population to gain access to Reg D private securities offerings. However, other suggestions often face political challenges and regulatory obstacles.

 

Even so, Commissioner Hester Pierce urged the Commission and forum participants to be inspired by the JOBS Act. She also commented: 

 

“Heightening the importance of this year’s Forum is the Commission’s current posture of, at best, indifference, and at times, hostility to facilitating capital formation. As it happens, today is the tenth anniversary of President Obama signing into law the Jumpstart Our Business Startups (JOBS) Act. That bipartisan legislation required the SEC to write rules lessening the burdens on small companies seeking to raise capital. Some of the Act’s provisions were things we could have done on our own. Congress and the President got fed up waiting for the Commission to take small business capital formation seriously.”

 

Additionally, Commissioner Allison Lee remarked:

 

“Many investors are business owners and vice versa. And capital raising and investor protection are not at odds with one another or a zero-sum proposition. Rather, investors need appropriate investment opportunities, and investor protection increases investor confidence, which in turn helps promote capital raising. The relationship between the two is symbiotic and we can and should seek to balance the need for both robust capital raising opportunities and robust investor protection.”

 

Hopefully, seeing how the JOBS Act has expanded capital formation will encourage the SEC to continue the momentum and create more tools and resources to support small businesses. In the meantime, companies should explore existing options and opportunities for capital, such as through the JOBS Act. Small businesses should not wait for the SEC to create more opportunities – they should take advantage of the rules and regulations that are currently in place to raise the capital they need to grow their businesses.