Canada 45-106 Reporting Obligations

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

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

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

Introduction

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

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

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

 

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

 

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

 

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

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

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

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

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

What is 45-106 filing?  

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

Let’s take a closer look.

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

Regulation 45-106 Compliance: best practices

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

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

 

Online Capital Formation for Private Companies

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

Table of Contents

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

 

Making Capital Formation Accessible for Private Enterprises

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

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

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

The Complexity of RegCF and RegA+

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

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

Beyond Conventional Crowdfunding

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

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

Seizing the Future with Online Capital Formation

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

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

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

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

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

Final insights

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

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

The Importance of Compliance in Private Capital Market Regulations

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

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

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

Regulation A+ and the SEC’s Oversight

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

Private Capital Market Regulations: Protecting Investors and Market Integrity

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

The Consequences of Non-Compliance

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

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

How not to fall into the wrong with the regulators checklist

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

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

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

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

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

 

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

 

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

 

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

 

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

 

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

What Does Direct Listing Mean?

Recently, we received a question from an issuer wondering what “direct listing” means. In short, a direct listing, also sometimes referred to as a direct public offering, is an offering in which an issuer raises capital directly from investors without a third-party intermediary like a broker-dealer or funding platform. 

 

Direct listings can occur in both the public and private markets. In the private market, companies raising capital often do so under JOBS Act exemptions for SEC registration, such as RegA+ or RegD. Companies may opt for a direct listing because it lowers the costs of capital as there are often fewer fees that would otherwise be paid to an intermediary. Issuers can also use a direct listing to allow investors to invest through the issuer’s website, which can prevent investors from being directed to other offerings. This often gives issuers more control over the investment. In contrast, RegCF offerings cannot be conducted without using an SEC-registered intermediary.

 

However, there are significant downsides to opting for a direct listing. Some states require issuers to utilize an intermediary like a broker-dealer or funding portal to sell securities. Additionally, some Tier I RegA+ direct listings require the issuer to register the security in every state that it intends to sell the security, making the offering more burdensome and costly. Additionally, a direct listing can make it easier for companies to miss essential aspects of regulatory compliance, creating additional risks for themselves and investors. This, offerings made via a direct listing require a higher level of due diligence from investors to ensure they aren’t falling victim to fraud.

 

When using a registered intermediary like a broker-dealer or a funding portal, these entities often have defined processes and compliance requirements that ensure capital is being raised in accordance with securities regulations, protecting both issuers and investors. An SEC-registered intermediary ensures that an issuer has gone through due diligence like bad actor checks to validate that it is eligible to be listed on a portal.

 

Ultimately, any company seeking to raise capital through a JOBS Act exemption should talk to a broker-dealer and a securities lawyer to understand how they can compliantly and successfully raise the capital they need to grow in the private market. 

Private Equity vs. Venture Capital

For companies looking to raise capital, there are many options on the table. From raising capital from friends and family and crowdfunding to private equity and venture capital, not every option is suited for all entrepreneurs. In this context, the question “Private Equity vs. Venture Capital” is becoming popular.

So in this article we will explore the difference between venture capital and private equity, as well as some alternatives for companies looking to secure funding in the private capital markets. 

 

What is Private Equity?

Private equity firms are investment firms that raise capital from accredited investors to make investments in private companies. In the case of private equity, these firms generally seek to take a majority stake in portfolio companies – which means that the firm will obtain greater than 50% ownership. Another characteristic of private equity firms is that they generally prefer to invest in established companies that have operational inefficiencies. The goal is to reduce these inefficiencies so that the company can turn profitable. If the firm sells a portfolio company or it goes public, it distributes returns to investors. 

 

What is Venture Capital?

Similar to private equity, venture capital (VC) firms raise capital from accredited investors. However, they take a different role in the private capital markets. VC firms seek to invest in early-stage and startup companies with high growth potential. They often control less than 50% ownership and take a mentorship role. Once a portfolio company is acquired or goes public through an IPO, it can distribute returns to investors. 

 

Alternative Capital Raising Opportunities

However, many companies find it difficult to secure VC or private equity funding. Since 2022, VC funding has dropped by more than 50% and late-stage investments have plummeted even more dramatically, down 63%. Still, there is hope for companies seeking to raise capital. During this time, the amount of capital being raised through JOBS Act exemptions had grown considerably, providing viable opportunities for entrepreneurs seeking capital. Through RegA+, companies can raise up to $75 million, and through RegCF, companies can raise up to $5 million. This capital can be raised from both accredited and nonaccredited investors, creating a wide pool of potential investors. At the same time, the minimum investment is typically much smaller, which allows everyday people to get involved with promising companies. It is also more cost-effective to raise capital through these alternatives than traditional VC or private equity firms, or going through an IPO.

 

Now that you know the key-points on Private Equity vs. Venture Capital, it’s easy to understand that learn about the differences can help you identify what capital-raising options may be best suited for your company. However, if you need additional guidance, reaching out to a broker-dealer or securities attorney can help point you in the right direction for your capital-raising journey.

What is an Option?

Like warrants, options are a form of security called a derivative. As a derivative’s name suggests, these securities gain their value from an underlying asset. In the case of options, this is the underlying security

 

There are typically two primary forms of options; call options and put options. Both are governed by contracts; a call option allows the holder to buy securities at a set price while a put option allows them to sell. However, options contracts do not come for free. They can be bought for a premium, which is a non-refundable payment due upfront. Once options have been purchased, the holder has a certain amount of time during which they can exercise their options. On the other hand, options do not require the holder to purchase the shares contracts allow. When options are exercised, the price paid is referred to as the strike price.

 

In buying call options, the holder is guaranteed to buy securities at a certain price, even if the underlying security significantly increases in price. A put option works more like an insurance policy, protecting the holder’s portfolio from potential downturns. If a security was to decrease in price, the shareholder would be able to sell at a set price specified by their option contract, even if the market price was to fall lower than what the option allows it to be sold at.

 

In addition to being a way to minimize investment risks and maximize profits, options are becoming a popular incentive for employees, especially in startup companies when looking to attract employees. In addition to options that can be bought, options also refer to the ones issued to employees by their employer. This gives employees the chance, but not the obligation, to buy shares within a specified time. Employee stock options either come as an Incentive Stock Option or Nonqualified Stock Options, with the difference being the tax incentives that go along with exercising the options. 

 

Whether you have call or put options, they are a useful way to protect your portfolio from downsides or benefit from being able to purchase more shares at a discounted price. They are just one of the many forms of securities available, which should be considered carefully when making investment decisions.

 

What is a Burn Rate?

Recently, we received a question from an issuer, asking what a burn rate is. 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 questions that could help you along your capital raising journey.

 

The word “burn rate” gets thrown around a lot in the realm of startups and early-stage businesses. But what exactly does it mean, and why is it so important? In this blog post, we’ll explore the ins and outs of burn rate, including what it is, why it matters, and how you can keep it under control.

 

Simply put, the burn rate is the rate at which a company is losing money. It takes into account the company’s operating expenses and revenue, measuring it monthly. This metric shows how much cash a company needs to continue operating for a certain period of time. For example, if a company has monthly expenses of $100,000 and revenue of $50,000, its burn rate is $50,000 per month. This means that the company is losing $50,000 each month, and if nothing changes, it will run out of cash in two months. It’s important to note that the burn rate can fluctuate based on several factors, including:

 

  • Investments in development
  • Advertising and marketing costs
  • Research and development costs
  • Operating expenses (e.g., wages, rent, etc.)

 

By monitoring the burn rate, businesses can make informed decisions about how to use their resources and budget.

 

Why is Burn Rate Important?

 

Understanding and managing burn rate is crucial for any startup or early-stage business. A high burn rate suggests that a company is depleting its cash supply at a rapid pace, which puts it at a higher risk of entering a state of financial distress. This can have serious consequences for investors, who may need to set more aggressive deadlines for the company to realize revenue, or inject more cash into the business to provide more time to reach profitability.

 

Conversely, a low burn rate can indicate that a company has a stronger financial position and are in a better position to become profitable. Low burn rates are also more attractive to investors since their investments can go further.

 

Keeping Burn Rate Under Control

 

Now that we understand the importance of burn rate, let’s look at some strategies for managing it effectively.

 

Layoffs and Pay Cuts: If a company is experiencing a high burn rate, investors may seek to reduce expenses on employee compensation. While layoffs and pay cuts are never easy, they can help a company achieve a leaner strategy and reduce operating expenses.

 

Growth: One way to reduce the burn rate is to project an increase in growth that will improve economies of scale. For example, some startups are currently in a loss-generating scenario, but investors continue to fund them to achieve future profitability.

 

Marketing: Investing in marketing can help a company grow and expand its user base or product use. However, startups are often constrained by limited resources and budgets, making paid advertising a challenge. Instead, they can use low-cost or no-cost tactics to achieve growth, such as email marketing or social media.

 

Burn rate is a crucial metric for any startup or early-stage business. By understanding and managing it effectively, companies can improve their financial health and position themselves for long-term success. Whether it’s reducing staff or compensation, investing in growth, or using low-cost marketing tactics, there are a variety of strategies for keeping the burn rate in check. And for investors, keeping a close eye on the burn rate can help you make informed decisions about funding and supporting startups.

Veni, Vidi, Verify

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


I Came: The Search for Investment Opportunites 

 

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

 

I Saw: Seeking Legitimate Investments

 

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

 

I Verified: Confidence Through Verification

 

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

 

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

 

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

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

My Company is Based in Canada: Can I Use RegCF to Raise Capital?

Recently, we received a question from an issuer, asking if Canadian companies can use RegCF to raise capital. 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 questions that could help you along your capital raising journey.

 

Crowdfunding is a popular way for small businesses, startups, and entrepreneurs to raise capital without necessarily needing the support of venture capitalists or angel investors. Regulation Crowdfunding (RegCF) provides an avenue for companies to legally raise capital through equity crowdfunding in the United States and is regulated by the Securities and Exchange Commission (SEC). 

 

Although RegCF is available to US companies, many Canadian companies have questions regarding whether they can also use this exemption to raise capital. This article will answer those questions and provide insight into the legal requirements and structures that work for Canadian companies.

 

Legal Requirements for Raising Capital Through RegCF in Canada

 

In short, the answer is yes, Canadian companies can use RegCF. However, certain requirements must be met for a company outside of the U.S. to take raise capital through this exemption.

 

The main legal requirement is that the company must establish a US entity, such as a corporation or a limited liability company (LLC), which will be managed from within the U.S. The SEC states that “the issuer’s officers, partners, or managers must primarily direct, control, and coordinate its activities from the U.S., and its principal place of business must be in the U.S.”

 

It is also recommended that Canadian companies considering using RegCF to raise capital should provide evidence of their plans to engage the US market. This could include investing in marketing and advertising initiatives, setting up offices or physical locations within the US, hiring personnel from the US, etc.

 

Using RegCF in Canada

 

There are a few different ways that Canadian businesses approach a RegCF offering. One option is to create a wholly-owned subsidiary in the United States that will operate the business and raise funds through RegCF. This subsidiary must have its own business plan and financials, and cannot simply be a shell company. Alternatively, Canadian companies can create a US-based holding company that will own the Canadian entity and operate the business in both countries. This structure can be beneficial for companies looking to expand their operations into the US market while also raising capital from US-based investors. Canadian companies can also create a new US-based company that licenses the product or service of the Canadian company. 

 

Ultimately, a Canadian company seeking to raise capital using RegCF must create a US-based entity with a primary place of business in the US. The company raising capital cannot simply be a shell company that directs capital raised back to the parent company.

 

Alternatives for Canadian Companies

 

There are several other options for raising capital for Canadian companies that cannot or do not wish to use RegCF. These include traditional venture capital and angel investing, as well as debt financing from banks and other lenders. Additionally, many Canadian provinces have their own provincial securities commissions that offer exemptions from the registration requirements for businesses looking to raise funds from investors within their jurisdiction. But because of RegCF’s benefits of allowing companies to advertise offerings, as well as its low minimum investment requirements, it is certainly worth considering for Canadian businesses looking to raise capital.

 

Deciding whether or not to use RegCF for a Canadian company is ultimately a decision that should be made on a case-by-case basis. Although US securities laws may present some additional regulations, there are many benefits to using this platform if it is done properly. The ability to access capital from a larger pool of investors, as well as the streamlined process of RegCF, can make it an attractive option for Canadian businesses looking to raise funds.  Ultimately, Canadian companies should discuss their capital raising options with a securities attorney if they have questions about the process and their options.

April Investment Crowdfunding Sees Near-Record Levels

The last couple of months have been a turbulent time for the financial sector. In March, we first saw the collapse of Silicon Valley Bank, the largest bank by deposits in Silicon Valley and favored by tech startups. This was followed a couple of days later by the collapse of Signature Bank. The third collapse this year was that of First Republic Bank, the largest banking failure since the financial crisis in 2008. These events have been coupled with stagnation in the venture capital market that has highlighted the stability of the investment crowdfunding industry. Ultimately, April demonstrated a resilient interest in investment crowdfunding.

 

Investment Crowdfunding Proves Appetite for Deals

 

In a recent newsletter, Sherwood Neiss, Principal at Crowdfund Capital Advisors, was quoted saying, “A large amount of capital and number of investors flowing into Investment Crowdfunding offers proves that there is a massive appetite for these deals.” Neiss continues, “While there might have been fewer deals in April, the reality is startups still need capital, and Investment Crowdfunding is where they will find it. We expect to start to see an uptick in deals in May as these issuers realize opportunity exists here.” 

 

Investment Crowdfunding Sees a Decline in New Deals, Rise in Capital Commitments

 

In April, there was a decline in new deals, with only 91 being launched, compared to 147 in March 2023. This marked the lowest number of crowdfunding deals since June 2020. However, capital commitments reached an impressive $65.4 million in April, the second-highest level of commitment since March 2021, when investment crowdfunding was reaching a high point of interest during the pandemic. 

 

There were also 54 issuers that raised over $1 million each during April, while six raised the maximum of $5 million. With the 54 issuers that closed their raise during the month bringing in an impressive $131 million, it was the second-highest monthly close of capital, despite ongoing challenges faced by the private capital markets. 

 

More Investors are Making Investment Decisions

 

The number of checks written by investors in April 2023 increased by 92.9% compared to the prior month but dropped by 4% compared to the prior year. The average check size dropped to $1,174 in April 2023 due to a large number of active deals compared to March. 

 

The investment crowdfunding industry is growing rapidly and shows no signs of slowing down. As investors become more comfortable with deploying capital in private markets, despite current challenges in the private market, it will only continue to fuel this growth trend.

 

What is an Escrow Provider?

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

 

What is an Escrow Provider?

 

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

 

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

 

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

 

The process when utilizing an escrow provider generally includes:

 

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

 

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

 

JOBS Act and Escrow

 

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

 

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

 

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

Shedding Light on the Secondary Market

The private capital market is an important component of the economy and has seen considerable growth since the JOBS Act exemptions came into play. However, the public markets have the advantage of a strong underlying infrastructure, one that existed long before the advent of the Internet (the first public company was the Dutch East India Company which began stock trading in the early 1600s). In contrast, the private markets historically have fewer options for liquidity other than an exit or an IPO. 

 

Technological advancements have had a profound impact on the secondary market, transforming the way trading is conducted through the use of electronic systems for order delivery and execution. On the public side, entities like the New York Stock Exchange and Nasdaq have automated many functions that streamline the process of buying and selling stocks. In addition, broker-dealers and institutional investors have been leveraging powerful computer systems and sophisticated applications to manage inventory, order flow, and risk while receiving market data, research reports, and company information electronically. 

 

In the private market, alternative trading systems (ATSs) have emerged to let investors sell or buy shares on a secondary market. For example, anyone who has invested through RegA+ is then able to transact on the secondary market if the issuer has permitted that option. Still, there are many issues that face the private market. The unfortunate reality is that while a fragmented regulatory environment does allow for some secondary market transactions, issuers are not pre-empted from state securities regulations. 

 

The private capital market is beginning to catch up with the public market in terms of technological advancements, with companies seeking to create digital infrastructure and platforms for the private market. However, to truly unlock liquidity in the secondary markets of the private capital market, there needs to be an overarching system that enables buyers and sellers to identify potential trades quickly, securely, and with full transparency on the secondary market.

 

The lack of visibility in information is a key issue inhibiting secondary marketing trading in the private capital markets. Solving these issues will unlock a huge opportunity for buyers and sellers. To do this, there needs to be an underlying infrastructure similar to that which exists in the public market, allowing companies to quickly and securely connect with potential buyers and sellers, as well as gain access to real-time information about the secondary market. With the right technology in place, this could open up unprecedented opportunities for liquidity in the private capital markets that have long been “dark”.

Why the Private Capital Markets are Outpacing the Public Markets

The private capital market has seen considerable growth over the past few years due to geopolitical tensions, inflation, and interest rate hikes. These factors are driving heightened volatility in public markets, and investors are therefore looking for protection in private market deals. The ability for private companies to raise capital with accredited and nonaccredited investors through regulations like RegCF and RegA+ has also added to this growth.

 

Large Pool of Capital

 

The private capital market is also benefiting from a large pool of capital currently available to investors. According to Preqin, global private capital dry powder stood at around $1.96 trillion in December 2022. Dry powder is the cash that has been committed by investors but has not yet been “called” by investment managers to be allocated for a specific investment. This sizable reserve of money, when deployed, will provide an influx of investment into the private markets.

 

Growth & Flexibility

 

Companies are also opting to stay private for longer durations of time. In 2011, companies typically stayed private for five years before going public. As of 2020, this has extended to a time period of 11 years. Remaining private can give companies greater flexibility as they grow their business. They may find it easier to adapt and make changes in the early stages with private capital, before choosing a public route when they are more mature and established. With the ability to earn up to $75 million in 12 months with RegA+, for example, the ability for private companies to raise capital is unprecedented in the sector. 

 

The Shift from Public Markets to Private Capital Markets

 

This trend is likely to continue into 2023 and beyond as investors seek alternatives to the public markets. As such, understanding the implications of this shift from public to private is essential for any investor looking to capitalize on these opportunities. Private companies are looking to stay private longer because:

 

  • It allows them to keep their business strategies under wraps and maintain control over key decisions.
  • They can gain access to more capital at a lower cost compared to public markets, allowing for accelerated growth.
  • The private capital market has more flexible structures and less regulation compared with the public markets.

 

Private vs Public Market Size

 

McKinsey estimates that in North America, private market fundraising grew by 21% between 2020 and 2021. In the United States alone, there were 7,042,866 private companies. In comparison, there were only 4,000 public companies in the United States as of 2020. These statistics highlight the significant impact that businesses have on the world economy, with diverse markets and industries contributing to growth and prosperity.

 

The private capital market is rapidly outpacing the public market and this trend looks set to continue into 2023. As private companies continue to significantly outnumber public companies, the increase of capital raising opportunities will only help this sector to grow.

What is a Board of Directors?

Recently, we received a question from an issuer, asking to explain what a board of directors is. 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 questions that could help you along your capital raising journey.

 

Without further ado, this article will explore the role of a board of directors and the critical role they play within a company. The board of directors serves as the “operating mind” of the company – providing oversight to shareholders, officers, and employees alike. More importantly, boards can be utilized as a tool to mitigate risk when raising capital. This is because a board of directors typically has experience addressing issues that include:

 

  • Strategic direction
  • Corporate governance
  • Independence and accountability

 

What is a Board of Directors?

 

A board of directors, or ‘board’ is the highest governing body of a company. It is responsible for oversight and providing direction to the organization. The board consists of members who are elected by shareholders, normally on an annual basis. These members act as representatives of shareholders and their interests, ensuring that the company is managed properly. Public companies are required to have a board of directors, and while the same is not true for private companies, many still choose to do so.

 

The Need for a Board of Directors

 

The board of directors plays a vital role in ensuring the company is run correctly and its goals are met. The board works to ensure that any decisions made by the company are in line with shareholders’ interests, such as profitability and value preservation. A board also protects shareholders from potential risks associated with investing, such as fraud or mismanagement. In addition, having a board of directors can help to ensure that the company is making responsible decisions and staying compliant with legal and regulatory requirements. The board also helps to prevent self-dealing by executive officers or other members of management, as well as helping to set policy for the organization. 

 

One of the main benefits of having a board of directors is its ability to provide risk mitigation when raising capital. The presence of an independent board can demonstrate to investors that the company has taken steps to protect their interests and show potential investors that there is a competent and experienced group looking after their investments. It is important to distinguish between a board of directors and the other roles within a company. Officers are usually C-level executives who report directly to the board when making decisions regarding how the company operates. 

 

Early-Stage Companies and the Single-Person Corporation

 

For start-ups or early-stage companies, it is common for one person to wear multiple hats. In these instances, an entrepreneur likely serves as both an officer and a board member, making decisions from both perspectives. However, this differs from larger corporations who usually have more members on their boards, to ensure that the company is managed properly. As the company grows, so does the importance of electing an independent board.

 

Tools to Mitigate Risk When Raising Capital

 

When it comes to raising capital, boards must have access to certain tools to manage risk. This includes a minute book, cap table, and other documents which provide information about how the company is operating. By having access to this information, boards can minimize the risk of investors losing their money. With the advent of digital technologies that streamline this data management, board directors can have real-time access to company data that allows them to make informed decisions.

 

From start-ups to larger corporations, boards of directors play an important role in managing risk and providing oversight. Ultimately, having a board of directors is an important aspect of the capital raising process that can provide investors additional confidence in an investment after completing their due diligence.

What You Should Know About Investing in Private Capital Markets

Investing in the private market can be a great way to gain returns unavailable elsewhere. With the right research, investments in private companies can yield higher returns than traditional public markets. With the size of the global private markets growing throughout the past two years, notably in North America, investors must know what to consider before investing in a private company. In this blog, we will look at some key considerations for investing in the private market.

 

Pros & Cons for Non-Accredited Investors

 

Investing in privately-held businesses can be an exciting way to:

 

  • Diversify a portfolio
  • Offer access to investment opportunities that are not available through the public market
  • Potentially provide higher returns than traditional stock and bond investments

 

However, non-accredited investors (those who do not meet certain SEC criteria) need to understand the unique regulatory and financial risks associated with private markets before making an investment decision. Consider the cons of divesting in private companies, such as:

  • Requires a higher amount of due diligence
  • Lower liquidity than publicly-traded securities
  • Can be seen as risker investments than public securities

 

Evaluating Potential Investments

 

Before investing, it is important to conduct due diligence and research a potential investment thoroughly. Consider creating a financial plan and closely examining the deal structure, competitive landscape, and why the company needs your investment. Also, take a look at the company’s management team as well. Do they have experience raising capital? Do they pass a bad actor check?

 

Comparing Private and Public Investments

 

Private investments may offer higher potential returns than those found in the public markets, however, they are often riskier. As an investor, you should be aware of the differences between private and publicly-held businesses before deciding to invest. Consider factors such as liquidity, transparency, and financial reporting.

 

Liquidity: Private investments are sometimes illiquid, meaning that it may be difficult to access your money when needed. However, securities purchased through RegA+ are freely tradeable on a secondary market, which can provide some options for liquidity. In contrast, investments in public companies can be sold on the open market quickly and easily.

 

Transparency: Public companies must adhere to strict disclosure rules that allow investors to clearly understand the risks and rewards of their investments. In comparison, private companies do not have the same regulatory requirements and may be less transparent with their operations or provide limited information to shareholders. This means that investors should carefully review materials provided by the issuer to get a better understanding of the investment risk to ensure it meets their level of risk tolerance.

 

Financial Reporting: Public companies are required to report quarterly earnings and provide other financial information to investors regularly. This is not always the case with privately-held businesses which may only provide periodic updates or no financial information at all.

 

Protecting Your Investment

 

As an investor in a privately-held business, you may be at the mercy of the majority shareholders and can be subject to financial losses if the company does not succeed. To protect yourself, it is important to conduct background checks on all potential investments and set terms for your investment up front. Be sure to understand what rights you have as an investor and any restrictions on transferring or liquidating your shares. Especially if investing in JOBS Act exemptions, like RegA+ or RegCF, if the company you are looking to invest in offers a third-party option where you can sell your shares, this is a great way to access liquidity options.

 

Diversify Your Portfolio

 

The key to success with private investments is diversification. Investing in various companies across different sectors can reduce the risk of investing in a single business or startup that may not succeed. This will help to spread out any potential losses should a particular business not perform as expected.

 

Investing in the private market can be an exciting and rewarding venture for non-accredited investors. Understanding the risks and potential rewards of each potential investment is essential for any investor looking to make a profit in this sector. Ensure that you are comfortable with the risk associated before investing in any venture. Doing so will help to minimize potential losses and maximize potential gains. With careful planning and research, investors can benefit from private investments and diversify their portfolios.

 

Additional knowledge sources
https://www.investopedia.com/articles/stocks/08/privately-held-company-investing.asp

https://guides.loc.gov/company-research/private

https://www.cnbc.com/2021/02/22/if-asked-to-invest-in-a-private-venture-heres-what-you-need-to-do.html

How Do I Build a Community for My Company?

What is a community? The word can be defined as “a body of persons of common and especially professional interests scattered through a larger society” or “a group of people with a common characteristic or interest living together within a larger society.” Putting this into a bit more context, picture a beaver in the forest, building a dam. This seemingly simple, instinctual event has a profound effect on the surrounding area. The dam forms a pond, which creates the perfect habitat for a diverse range of animals, insects, and other organisms, while also improving the water conditions. 

 

This beaver is much like an entrepreneur building a business. As the business grows, it provides employment opportunities, creates a network of suppliers and partners, develops relationships with customers, and is supported by shareholders. They all play a crucial role in the success of your business. 

 

By nurturing these relationships, especially in today’s highly competitive business environment, this community can help increase engagement, loyalty, and interest in your company, which can translate into more investment and business opportunities down the road.

 

Recognizing the Benefits of a Strong Community

 

From customers to employees and suppliers, building a community around your company can bring numerous benefits. A thriving and engaging community can create:

 

  • Increased customer or employee loyalty: When customers and employees feel a sense of belonging and loyalty to your brand, they are more likely to remain loyal for longer. This can result in higher rates of retention, as well as increased referrals and advocacy.
  • Improved engagement with stakeholders: A thriving community can help you engage with key stakeholders such as investors, partners, and suppliers. This can help to foster stronger relationships over time, leading to better deals and collaborations.
  • Increased brand reputation: A community of loyal customers or employees can promote your brand integrity and trustworthiness, which is essential for building a successful business.
  • More growth opportunities: With a strong network of loyal loyal customers and employees, you’ll have a larger pool of potential buyers or investors when you are looking to grow.
  • A foundation for investors: Ultimately, when you’re looking to raise capital or attract investors, having a strong community of engaged stakeholders around your company can be an invaluable asset by providing evidence of your brand’s trustworthiness and potential. These stakeholders can also become valuable investors that share in your vision for the future.

 

Ultimately, cultivating this community requires transparency and compliance to build trust and instill confidence. But how do you go about building a community for your company? 

 

6 Tips for Building a Community

 

1. Understand Your Audience

 

The first step in building a community is to understand your audience. Who are the people you want to attract and engage with? What are their needs, wants, and interests? What motivates them to invest in your company? By creating customer personas and conducting market research, you can get a better understanding of your target audience. This can help you tailor your messaging, content, and engagement strategies to better resonate with your community.

 

2. Focus on Transparency and Communication

 

Transparency and open communication are essential ingredients for building a strong community. Shareholders, employees, and customers all want to feel like they have a voice and that their concerns are being heard. This is especially important when it comes to managing shareholder relationships. To build trust and transparency, consider implementing regular communication channels like newsletters, social media updates, and webinars. Make a point of responding to customer and shareholder feedback promptly and thoroughly.

 

3. Leverage Technology

 

Technology can be a powerful tool in building and managing your community. Consider investing in a customer relationship management (CRM) system to track and manage your customer interactions. This can help you identify patterns and trends in customer behavior, enabling you to tailor your messaging and engagement strategies to better resonate with your community.

Social media platforms like LinkedIn, Facebook, and Twitter can also be powerful tools for building and engaging with your community. Regularly update your social media channels with relevant content, respond to customer feedback and comments, and use social media analytics to track engagement and identify opportunities to better connect with your community.

 

4. Create Meaningful Content

 

Creating high-quality, engaging content is another key element in building a community. Content can come in many different forms, including blog posts, videos, webinars, eBooks, and more. The key is to create content that is tailored specifically to your target audience and resonates with them on an emotional level. This will help you build relationships and foster loyalty among your customers, employees, and shareholders.

 

5. Foster and Incentivize Engagement

 

Engaging your community is an important part of building relationships and developing loyalty. Consider running contests, giveaways, or other promotional activities to incentivize engagement. You can also create loyalty programs or rewards systems to further reward customer engagement.

 

6. Gather Around a Cause

 

When building a strong community creates a sense of purpose around your company. Find something that your customers, employees, and shareholders can all rally behind. This should be something bigger than just making money – it could be related to sustainability, philanthropy, or another cause the community can get behind. By giving people something to believe in, you can create a sense of shared identity that will bring your community together. 

 

When it comes to raising capital, you should also focus on creating experiences that make investors feel appreciated and valued. For example, you could offer exclusive investor-only events or create a private investment platform where invited investors can access exclusive content about your company and its opportunities. 

 

Regardless of how you approach it, building a thriving community around your business is essential to growing and scaling effectively. This will lead to increased loyalty, greater investment opportunities, and higher long-term returns. By taking these key steps to develop a strong community around your business, you’ll be well on your way to achieving your capital-raising goals.

 

7 Golden Rules for the Secondary Market

Secondary markets provide investors a way to trade securities they have previously purchased or buy new ones offered by other investors. This blog will look at the seven golden rules of secondary markets as well as how these rules are enforced through JOBS Act regulations.

 

What is a Secondary Market?

 

A secondary market is an organized platform that provides investors with the opportunity to buy securities from other investors, rather than from the issuer itself. It allows investors to have more flexibility in trading their securities and opens up the potential for greater liquidity. Secondary markets can be used to buy or sell almost any type of security, including stocks, bonds, options, futures, derivatives, and commodities.

 

How an ATS Differ from an Exchange

 

When trading securities on a secondary market, it is vital to understand the different types of Alternative Trading Systems (ATSs) available. ATSs are electronic trading platforms that can be used to trade securities without going through a traditional exchange. These systems can provide investors with greater liquidity and flexibility in trading their securities than what is available on an exchange.

 

Like an exchange that brings together buyers and sellers of securities, an ATS does not take on regulatory responsibilities. This means that an ATS can trade both listed and unlisted securities, like those purchased under a JOBS Act exemption. ATSs are also regulated by the SEC but must be operated by a FINRA-registered broker-dealer. 

 

The 7 Golden Rules of Secondary Markets

 

To ensure that transactions are compliant with security regulations, both issuers and investors should consider the following rules when transacting on a secondary market. 

 

Rule 1: Know Your Client (KYC) – Before conducting transactions, there must be a KYC procedure carried out by the broker-dealer. This helps to identify potentially risky investors and ensure that steps are being taken to prevent fraud, money laundering, and other illicit activities.

 

Rule 2: Disclose Financial Data – Issuers must disclose all relevant financial data before engaging in a transaction on the secondary market. This includes any material changes that have occurred since the last disclosure was filed. From an investor’s perspective, it is important to understand the financial health of the issuer before investing in their securities. This can be achieved by viewing the issuer’s financial statements, annual reports, and/or audited financials. Transparency is crucial in building trust with investors, and failure to disclose pertinent information can result in legal repercussions that can affect the trading of your security on the secondary market.

 

Rule 3: Respect Minimum Price Fluctuations – When trading on the secondary market, investors must always respect price fluctuation limits set by the governing body. These limits are designed to protect both buyers and sellers from extreme volatility or manipulation of the market. With most investors not being able to trade JOBS Act securities on the secondary market for at least a year, these limits help protect investors from quick market movements while providing issuers with stability.

 

Rule 4: Execute Trades Quickly – All trades on the secondary market must be executed quickly to ensure that buyers and sellers are getting the best price attainable. This is especially important with JOBS Act securities, as they are subject to strict time frames for when trading can take place. By executing orders promptly, investors can maximize their profits and minimize losses.

 

Rule 5: Follow Market Regulations – All transactions on the secondary market must adhere to governing body regulations, such as those set forth by the SEC, FINRA, and other regulatory agencies. This ensures that trades are conducted fairly and within legal bounds. It also protects all parties involved in a transaction from fraud.

 

Rule 6: Adhere to Securities Laws and Regulations – Issuers must comply with all applicable securities laws and regulations when trading on the secondary market. This includes complying with JOBS Act regulations, such as Regulation A+ and Regulation Crowdfunding. Failure to comply with these regulations can result in fines, penalties, and legal action.

 

Rule 7: Maintain Good Communication with Investors – Issuers should maintain regular and open communication with investors, providing updates on the company’s performance and any important developments. This helps to build trust and confidence in the relationship between the issuer and the investor. Good communication can also help to mitigate potential issues or conflicts that may arise in the future.

 

Overall, secondary markets can offer a variety of benefits to both investors and issuers, including greater liquidity and flexibility in trading securities. However, both parties need to follow the rules and regulations governing these markets to ensure fair and secure transactions. By adhering to the seven golden rules of secondary markets, investors and issuers can mitigate risk and build trusting relationships that can lead to greater success in their investment endeavors.

5 Things You Need to Know About Transfer Agents

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

 

1. Protecting Issuers and Investors

 

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

 

2. Issuing and Canceling Certificates

 

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

 

3. Managing the Cap Table

 

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

 

4. Legal Compliance

 

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

 

5. Investor Relations

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

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

Small Businesses Need Capital

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

 

Raising Capital is Expensive

 

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

 

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

 

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

 

The Solution: Private Capital Markets

 

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

 

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

 

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