SEC Approves Increases to RegCF Maximum Offering and Investor Limits

On Monday, November 2, 2020 the SEC approved updates to Regulation Crowdfunding significantly increasing the limits of offering under this regulation. These changes will go into effect at the beginning of the coming year, January 2, 2021. This move will introduce new business opportunities to companies looking to raise capital. In their Monday press release, the SEC stated that “today’s amendments are the next step in the Commission’s efforts to improve the exempt offering framework for the benefit of investors, emerging companies, and more seasoned issuers.”

At the introduction of RegCF in Spring 2016, companies could raise a maximum of $1.07 million within 12 months.  Sherwood Ness, the principal of Crowdfund Capital Advisors, said: “When we began lobbying for Reg CF, we artificially set a low maximum target of $1 million so that we could test the model and make sure there was no fraud. Under those limits, more than 2,800 companies in 430 industries, across 50 states have raised over 500 million dollars in just 4 years, with no fraud.  The model is working incredibly well.” Now, this limit has increased to $5 million, which will allow more business access to the capital they need to grow, create jobs, and launch innovative products and services.

In RegCF’s initial form, the total amount of securities sold to an individual investor could not exceed $107,000 within 12 months. For accredited investors, this limit has been removed. For investors with either a net worth or annual income less than $107,000, investments in RegCF offerings were limited to $2,200 or 5% of the lesser of their annual income or net worth. With the November amendments to the regulation, for non-accredited investors, the limit was changed to the greater of their annual income or net worth.

In addition, companies raising capital through RegCF offerings are now permitted to “test-the-waters” before filing their offering with the SEC. “Demo day” communications are also now permitted and are not deemed to be a general solicitation or general advertising. Lastly, through this update to the regulation, Special Purpose Vehicles are permitted to facilitate investments in RegCF issuers. 

This update comes at a critical time in the US economy. For companies around the country, turning to their customers to invest the funds necessary to keep their doors open, the increase to RegCF will enable them to raise larger sums of capital in the new year.

FINRA BD Requirements for RegA+ & Digital Securities

FINRA BD Requirements for RegA+ & Digital Securities

The private markets are receiving a much updated revamp by the SEC which is having a major impact on registered FINRA Broker-dealer firms.  Here are two (2) of the most common activities for which FINRA Broker-dealers (BD) are approached by companies.  Most BD’s are not aware that in order to help companies raise capital utilizing these regulations, there is a registration they must first do with FINRA.

We went to the source that has been helping many FINRA Broker-dealers and put the responses in a simple way.  Ken Norensberg, Managing Director, Luxor Financial provides the answers to which all BDs need to pay extra attention to make sure you are fully compliant.

RegA+ (Regulation A)

Broker-dealers today have the ability to help companies that are using either Regulation D (RegD) or regulation A(RegA+).  Now what they are not aware of is that in order to allow them to help companies with RegA+ they do need to be registered with FINRA. If that registration isn’t done, they are not allowed to proceed in offering those services. This process can take anywhere from 60 to 90 days or it could happen sooner.  Most firms are not aware that when they take on a RegA+ client, they must apply to FINRA to represent them in the offering. This is done at the same time the company is filing their Form 1A with the SEC for their RegA+ offering.

Digital Securities

Digital Securities are now becoming main street language and most Broker-dealers want to offer this to investors. Unfortunately, if they do not have FINRA approval for digital securities, it’s not a product they can represent or offer to investors.  Digital Securities require registration. The process is like putting a full new member application, and it will take anywhere up to four (4) months.  Your firm must file with FINRA for each of the exemptions you want to use for Digital Securities (RegD and or RegA+.  Here is what your firm will be required to answer to FINRA in its application.

  • You will need a detail business plan
  • What entities are the holders of the “private keys” in the DLT network that would be required to gain access to the digital securities, cash-backed digital securities holdings or digital currency? 
  • Are multiple keys needed to gain access or is a single key sufficient?
  • Who controls or has access to the DLT network where the assets are held?
  • What happens in the event of a loss or destruction of assets (either due to fraud or technological malfunction) on the network?
  • If the broker-dealer was to fail and is liquidated in a proceeding under the Securities Investor Protection Act of 1970, as amended, how would customers’ securities and funds be treated, and how would customers access their assets?
  • In instances where firms have established partnerships with other firms to serve as their back-ups and to carry out critical functions in the event of emergencies, what type of access would those back-up firms have to the private keys?
  • How will customers or the Securities Investor Protection Corporation (SIPC) trustee access the customers’ assets in the event of a defaulted broker-dealer? What parties will be involved, and what are their roles and responsibilities?
  • How does the use or application of the DLT network affect the market risk, liquidity or other characteristics of the asset?
  • What information is maintained using the DLT network?
  • What will be deemed as the physical location of the firm’s records maintained on a node of a DLT network that may extend over multiple countries?
  • What parties have control or access to the firm’s records? What are their rights, obligations and responsibilities related to those records, and how are they governed?
  • What is the firm’s (and other participants’) level of access to the data, and in what format would it be able to view the data?
  • How does the DLT network interact with the firm’s own systems for recordkeeping purposes?
  • How would the records be made available to regulators?
  • How will the firm’s traditional exception reporting, used to supervise transactions, be generated from a DLT network?
  • How will the firm protect any required records from tampering, loss or damage?
  • Clearance & Settlement?
  • Anti-Money Laundering (AML) Procedures & Know Your Customer (KYC) Rules?
  • Customer Data and Privacy?
  • Trade & Order Reporting Requirements?
  • Supervision & Surveillance of Transactions?
  • Fees & Commissions?
  • Customer Confirmations & Account Statements?
  • Anticipated Customer Base?
  • Facilities, Hosting?
  • Licensed & Qualified Staff

As the market is evolving to provide more alternatives to companies and investors, FINRA Broker-dealers need to also make sure their licenses are up to date to be able to offer these updated alternatives.  It’s not enough that you are registered with FINRA.

Thank you to Ken Norensberg, Managing Director of Luxor Financial, who provided this valuable information to assist Broker-dealers to stay compliant.  Ken has been helping FINRA Broker-dealers manage these new registration requirements. 

About Ken Norensberg & Luxor

Luxor Financial Group, Inc. a NY based Broker-Dealer Consulting Firm that specializes in setting up Independent Broker-Dealers. We are experts in New Member Applications, Continuing Membership Applications, Expansion Filings, FINRA and SEC Audits, Anti Money Laundering Reviews, Business Development and general compliance and business development services. www.luxorbd.com

Ken is a former Member of the FINRA Board of Governors. FINRA oversees the regulatory activities and business practices of over 4,500 Broker-Dealers, 163,000 Branch offices, 630,000 registered representatives and 3,500 employees and consultants with annualized revenues and a budget of approximately $800,000,000 (Eight hundred million dollars.)

The Board contends with many complex issues that affect large organizations from generating revenues, managing expenses, personnel, legal, regulatory, political and operational issues.

Additionally, Ken was a Member of the following committees and subcommittees:

  • Regulatory Policy Committee
  • Emerging Regulatory Issues (Subcommittee)
  • Financial, Operations & Technology Committee
  • Pricing (Subcommittee)
  • Ex-Officio of the Small Firms Advisory Board (SFAB)

Understanding Digital Assets

There has been a lot of talk in recent years about crypto, tokens, blockchain, ICOs, STOs, Digital Securities, etc.  What does it all mean and why should you care?  In order to navigate the new financial digital world, it is important to first understand the terminology.  Below, I have broken down the typical terms being used in this current digital environment.   In certain sections, I have provided the example of the USA, and its primary regulator, but this is globally applicable.

Distinguishing the types of secondary markets or exchanges where you can trade digital or traditional assets also seems to be confusing.  I have created the following chart to try to distinguish these.

Now, why should you care?  What does this mean to you?  Despite what some people say in the press, blockchain is here to stay.  So understanding the types of digital assets that it hosts is going to be important in making business and investment decisions.

As a co-founder of a company that is focused on revolutionizing the private capital markets, I am not going to get into cryptocurrencies as this is not my area of expertise.  This is for currency experts to discuss.  Similarly, while I know the public listed markets well and how they operate, there are plenty of people who know these markets far better than I.

My background is geared towards the issues faced by private companies. Thus, I will elaborate on the fragmented ecosystem of the private capital markets that sorely need solutions.

Since the SEC and other government regulators around the world started stepping in to ban ICO’s, other alternatives have evolved.  The security token offering or STO is one such term that got some wings in 2018. However, the institutional and traditional investment communities were still leary of the idea of a token or blockchain solution being provided by people without an appropriate understanding of the entire market they are trying to disrupt. Many people from the ICO space were just changing the name and using STO as a new hype to sell the same ideas.

Many of the players (intentional choice of word) in the ICO space were trying to circumvent securities regulations saying they know better how the ecosystem should work.  After decades of scams, the securities regulators know that the current system has built-in checks and balances for a reason.  We all understand there are issues and inefficiencies in the private capital markets, but in order to change securities rules you better have a big budget and strong case for it. As an example, the JOBS Act took well over five and likely closer to ten years to come into place.  The use of blockchain has valuable applications that can certainly provide more efficient and cost-effective solutions to current private capital markets, as long as you work within the existing securities regulations.

There is a lot of exciting stuff being built with blockchain technology. I believe that if you are looking at this as a solution to the private capital markets, you need to consider a few things if you are looking at public chains as a potential solution:

  1. Use of private wallets for sole custody of financial instruments will not work. Securities law requires the use of transfer agents in many situations and transfer agents need to have custody of assets in order to manage them. If the digital securities are being held by individuals in their own wallet, there is no way the transfer agents can have custody of them. Think of public markets: you do not hold the securities (share certificates) yourself, they are digitally represented in your brokerage account and held by transfer agents.
  2. Mining of securities: It is generally not acceptable for unknown miners to verify transactions; even known miners must be eligible to perform business validation of a transaction either because they are parties to the transaction, have fiduciary responsibility, or certified subject matter credentials or otherwise registered and regulated entities.

Gas prices are not acceptable when it comes to securities.  In order for a token to move on some blockchains, a gas price needs to be paid to miners. Transaction fees must be contractually fixed in advance and cannot be uncertain or subject to an auction style of payment (which leads to a form of ad-hoc discrimination). For individual investors, transaction prices need to be certain  and follow execution guarantees.

KoreConX launches $15M Digital Securities Offering using its own Fully-Compliant KoreProtocol

KoreConX is excited to announce its Digital Securities Offering that will utilize its own KoreProtocol. The KoreProtocol is the world’s first complete end-to-end protocol that has built-in AI to manage the entire lifecycle for tokenized securities, from issuance, trading, and all types of corporate actions.

The global securities marketplace is changing, and the future is tokenization. Combining corporate and securities law with tokenization facilitates efficient liquidity and fully-compliant transactions in multiple jurisdictions.

“We are thrilled about developing and launching our Digital Securities Offering on our KoreChain. KoreConX’s AI-enabled blockchain, based on Hyperledger Fabric and hosted at IBM, provides the highest level of security. The KoreProtocol handles the complete lifecycle of the security token, from issuance, secondary trading, and all types of corporate actions,” said Dr. Kiran Garimella, KoreConX’s Chief Scientist and CTO.

KoreConX will be working with established broker-dealers worldwide to make this initial offering of $15 million USD available to accredited investors in multiple jurisdictions (countries).

KoreConX believes in complying with securities regulation and corporate law to protect investors, issuers, and other participants in the global capital markets.

“KoreConX has been a fully operational all-in-one platform for several years helping many clients worldwide with compliance activities. The opportunities are tremendous for using tokenized securities to create efficiencies, reduce costs, and provide stronger governance for private companies. Our unrelenting focus is on ensuring the safety, security, and investor protection in global private capital markets,” said Oscar Jofre, co-founder, CEO of KoreConX.

For more information visit www.koreconx.io

Minimizing Failure Vector Surfaces for Digital Securities

Modern capitalists and ancient Chinese may disagree on many things, but the one thing they do seem to agree on relates to security of the realm. George Washington, back in 1799, said, “…offensive operations, often times, is the surest, if not the only (in some cases) means of defence.” A similar sentiment can be seen in Sun Tzu’s writings. It is now a common saying in football: The best defense is a good offense.

If digital securities are to play an innovative and differentiating role in modern capital markets, the one thing they have to support is the trend towards democratization of capital. Ironically, Main Street retail investors have been sidelined in the ‘public’ markets that ostensibly were designed with the general public in mind. 90% of households are generally unaffected by the gyrations of the stock market.

Decentralization of capital brings with it several risks. Inefficiencies aside, some of the financial risks are poor governance, insecure transactions, hacking, and architectural instabilities in the financial platforms. The general public will never be able to store their own private keys safely. Public blockchains are still too new and fragile to support widespread adoption by the vast majority.

The most important lens through which we need to look at this is that of the lay investor, whose primary need is safety. They may not say it, but they definitely think it. For financial systems and in particular digital securities, we need to minimize the number of ways in which the security of digital securities is compromised. Security experts have a fancy term for this, ‘attack surface’, which is the entire set of vulnerabilities possible through all the ‘attack vectors’, each of which is one method of attacking applications or networks.

Unlike the usual attack vectors such as phishing, email, pop-ups, attachments, chats, etc., digital securities can be compromised by non-traditional vectors such as forking, hacking, and adverse selection by miners’ activities, and commingling of cryptocurrencies and digital securities. Adverse selection, in particular, is not criminal activity, but the net effect is that retail investors suffer the consequences since concentration of mining power centralizes points of failure or throttles securities transactions.

All of the ways in which digital securities can fail are the ‘failure vectors’. The collective magnitude of these failure vectors defines a failure vector surface. The surface area, in some intuitive sense, captures the magnitude of potential failures. The larger the surface area, the higher the risk. (Move your mouse onto the various surfaces for color highlights.)

The spider chart above shows various failure vectors, some of which are outright attack vectors, while others represent potential failures not from attacks but due to the inherent nature of the underlying blockchain. Such a visualization is useful only when comparing two or more subjects of evaluation and that too in a relative way and by ignoring the actual values.

One caution: Do not conclude from this chart that public blockchains are necessarily bad. This chart is not an evaluation of the technology or the competence of the developers. It just speaks to the potential problems that developers and users must keep in mind when using it for this particular use case, that of digital securities.

Can public blockchains systematically reduce the magnitude of all these failure vectors? There is certainly awareness of these failure vectors. However, all current reengineering in public blockchains, such as the ERC20-based protocols, is a defensive strategy.

Keeping to the wisdom of the ages about offense being the best defense, another approach is to start with a blockchain that has been engineered from the ground up to specifically minimize the failure vector surface as much as possible.

For this reason, we chose Hyperledger Fabric as the base blockchain on which we built the digital securities platform. The risk of failure is mitigated because some of these failure vectors either don’t apply or they are considerably minimized due to the nature of the Fabric blockchain. We prefer to let Fabric deal with a number of these failure vectors, while we focus only on those failure vectors that are specific to KoreChain, the digital securities blockchain application.

Meet the KorePartners: David Benizri, Rivver

This post is part of a series of short interviews about the companies and faces that are part of the KorePartners Ecosystem*.

We believe that behind every great company there are people, and behind every person, there is a story to tell.

KorePartner: David Benizri, CEO & Co-Founder at Rivver

Born in: Montreal, Canada
Based in: Tel Aviv, Israel

What was your first job?
Ice hockey referee

How and when did you get involved in the tech industry?

July 2016, I was hired as a sales associate in an e-commerce startup in Montreal. I then fell in love with the dynamic nature of the Hi-Tech field and began launching my own ventures in both Canada and Israel.

How do you see the Tech industry today, especially when it comes to the new Digital securities wave? In that aspect, is it possible to have an idea of what the next five years will bring?

To me what is beautiful about the tech industry as a whole is the fact that there are always new technologies being discovered, which by association ensures that there is always room for startups to build applications on top of that new technology and monetize. The last big innovation which we knew was technologically unprecedented was Blockchain, so we decided to apply it to securities. Within 5 years time, we see a securities industry where the use of distributed ledger technology is a given.

What does your company bring to the KorePartners Ecosystem?

Rivver brings the first blockchain-based fund issuance and administration platform, specialized for Private Equity funds. By building the first fund administration platform for the digitized fund ecosystem, Rivver’s goal is to ensure that KorConX Private Equity clients and the entire Digitized Fund ecosystem can scale.

What is it about the partnership with KoreConX that most aligns with your company strategy?

For Digital Securities to achieve adoption, industry leaders will have to provide a solution which is adoptable for legacy players today and not just in 10 years. By us both building on top Hyplerledger Fabric, we at Rivver saw obvious synergies and are certain that our partnership with KorConX will help materialize this mission.

*The KorePartners Ecosystem is a group of organizations that follows our governance standards and share with us the same goal: to provide entrepreneurs with the tools they need to grow their business.

Webinar sheds light on Digital Securities Terrain

The regulator’s message is clear: there’s no room for tampering with the regulation when it comes to capital raising, and many companies that invested time and energy on ICOs (Initial Coin Offering) are now facing the consequences.

But that doesn’t mean that the private capital markets are dead when it comes to digital assets, on the contrary. Companies have been tirelessly researching to find an alternative to ICOs that is compliant with regulations.

The private market industry is now being inundated by terms such as Digital Securities, Tokenization, STOs, ICOs. To decide the fate of their business in the digital arena, entrepreneurs need to be on top of the game and know the concepts, the differences, and who are the stakeholders behind every new term.

Having all this in mind we, at KoreConX, put together a Webinar “An Industry Evolving: Digital Securities, Tokenization, STOs, ICOs… What are they? How do they differ? Who’s regulating them?“.

To provide the public with the most up-to-date information about the topic, we invited two experts in the field. Oscar Jofre, CEO and Co-Founder of KoreConX, and Darren Marble, CEO and Founder of Issuance, will discuss the landscape for traded securities utilizing different forms of distributed ledger technology.

The webinar will happen this Wednesday, April 17th, at 11 am EDT.

Click here to register for free.

Click on the link below to watch our previous webinars:
Marketing Your Raise From Traditional Capital to Digital Securities

Meet the KorePartners: Peter Woodard, DLTMI

This post is part of a series of short interviews about the companies and faces that are part of the KorePartners Ecosystem*.

We believe that behind every great company there are people, and behind every person, there is a story to tell.

KorePartner: Peter Woodard, DLTMI

Born in: Toronto, Canada
Based in: London, UK

What was your first job?

My first proper job was for a London based Adtech startup which went onto be supported by Google Ventures

How and when did you get involved in the business industry?

Moving to London in my early 20’s I quickly needed to get moving. I luckily found my footing in the startup world and progressed into Fintech

How do you see the Digital Security’s scene today? In that aspect, is it possible to have an idea of what the next five years will bring?

There is a lot of noise in the industry currently and (rightly so) not a lot of action. Once regulators and ecosystem partners come online we will see an uptick in promising issuances. Next 5 years I see debt products focused at institutional players as the major winner. Biggest hurdle to this happening is getting said institutions comfortable, most importantly their compliance departments.

What does your company bring to the KorePartners Ecosystem?

DLTMI provides information disclosure and market intelligence framework which is then hosted on our closed-loop platform for select sponsors. We are backed by vertical agnostic capital groups in the EU  and APAC region focused on blockchain and digital securities. Both demand and supply side are leveraging our experience to ultimately see a successful issuance life cycle.

What is it about the partnership with KoreConX that most aligns with your company strategy?

I have worked in proxy with KoreConX during my Fintech days and am very happy to see them enter the digital security ecosystem. They have laid a lot of the necessary groundwork to be a compliant and successful player. Exactly the type of company we are wanting to partner with.


*The KorePartners Ecosystem is a group of organizations that follows our governance standards and share with us the same goal: to provide entrepreneurs with the tools they need to grow their business.

The Right Technology – The Case of Mercury Cash

Nothing proves the wisdom of choosing the right technology for the right job than the case of Mercury Cash, a hosted-wallet solution for real-time liquidation and transfer of cryptocurrency and fiat assets. Recognizing the importance of being prepared for a new cryptoworld, Mercury Cash set out to explore various blockchain protocols to find the one that can stand the test of the real world.

The real world is full of messy complexities. We may think the mess is unnecessary and we should sweep it all away and usher in a new world order, but we do have to recognize that regulation and corporate law make it possible to protect investors and shareholders.

As someone pointed out regarding the tragic debacle of QuadrigaCX, Canada’s own Mt. Gox, “When was the last time your banker died and you lost access to your money?”

I’d add, “When was the last time you forgot your bank account password and your money became irretrievable?”

Can regulation and corporate legal processes be more efficient? Yes.

Are some of the regulatory requirements onerous or unnecessary? Yes.

But pretending that all regulation is unnecessary is like pretending that protections are unnecessary. Disruption with technology is good, as long as it doesn’t lead to destruction!

Click here to download Mercury Cash Case Study.

Many issuers are finding out the hard way two fundamental truths about how the real world works:

One, transactions don’t exist in atomic silos, least of all in securities; every transaction is connected with others and impacts multiple entities at various points in time in an ever-expanding ripple effect. One buy/sell securities trade requires validation of participants, ensuring protection for all parties, recording changes to captables, distribution of dividends, exercise of rights, filing reports, getting notifications of corporate events, voting, etc., all of it over a long time cycle.

Two, choosing a technology based on hype, popularity, and promise is not the way to go; instead, understand the characteristics of the problem and then identify the technology to solve it effectively.

In the case study, Mercury Cash describes the capabilities that will keep their business processes humming in a fully compliant manner. Most importantly, they found that ERC20-based protocols are inadequate for full lifecycle management of securities. This is not a knock against Ethereum, which is a fine platform for many types of DApps; much of the technology work is praiseworthy. But a Ferrari, no matter how shiny or powerful, cannot sail the high seas.

Many of our clients are coming to the same realization. Interestingly enough, a company could conduct its main business using public blockchain, while managing its security tokens on KoreChain. There is nothing wrong with that – it’s just like transporting a car on a ship. In many conversations with some of these technologists, I point out that the issue is not that ERC is inadequate for securities, just that it’s not the right tool. The same can be said if someone tries to use KoreChain for building cryptokitties.

When many companies are coming to us abandoning ERC20 protocols for various reasons, it validates our own approach to technology: first understand the problem you are trying to solve, then carefully pick the technology stack to solve it. In doing so, some of us have to leave our technology egos behind to move forward.

Click here to download Mercury Cash Case Study.

KoreChain & KoreContract

What is the KoreConX blockchain strategy & why choose KoreChain?

In this video, KoreConX Co-Founder and CEO, Oscar Jofre, and our Chief Scientist/CTO, Kiran Garimella, share the details of our permissioned blockchain. Built on the Hyperledger Fabric, it is secure and governed with the ability to have full lifecycle management of contracts for tokenized securities for global private capital markets.