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. 

Who Does Due Diligence on Companies using RegA+?

Due diligence is an essential part of the investment process. Especially following the passage of the JOBS Act in 2012, which expanded Regulation A+ (RegA+), companies now have additional opportunities to seek capital from investors. This has created a need for due diligence on these companies that is both thorough and efficient. In this blog post, we will discuss who does due diligence on companies using RegA+ and who does due diligence on companies using RegA+.

 

What Is Due Diligence?

 

The Securities Act of 1933, a result of the stock market crash years earlier, introduced due diligence as a common practice. The purpose of the act was to create transparency into the financial statements of companies and protect investors from fraud. While the SEC requires the information provided to be accurate, it does not make any guarantees of its accuracy. However, the Securities Act of 1933 for the first time allowed investors to make informed decisions regarding their investments.  

 

In the context of raising capital through RegA+, due diligence means that the issuer has provided all of the necessary information to investors and securities regulators so that they comply with securities laws. This may include information like:

 

  • Funding: The issuer should provide a detailed plan of how the money raised through RegA+ will be used.
  • Products/Services: The issuer should provide a clear description of their products and services, as well as any potential advantages that they may have over the competition.
  • Business Plan: The issuer should provide a detailed and comprehensive business plan outlining their current and future projects, as well as realistic projections based on their financial reports.
  • Management Team: The issuer should disclose information about the company’s officers, founders, board members, and any previous experience in business that may be relevant to investors.

 

Issuers should also use a registered broker-dealer as an intermediary to comply with Regulation A+ (RegA+). By doing this, they will ensure that they are meeting their due diligence requirements.

 

Who Is Responsible for Doing Due Diligence on companies using RegA+?

 

When it comes to due diligence for companies using RegA+, typically, the issuer’s FINRA Broker-Dealer is responsible for conducting due diligence both on the potential investors and the company itself. The broker-dealer will be required to perform regulatory checks on investors such as KYC, AML, and investor suitability to ensure investors are appropriate for the company. Additionally, they will perform due diligence on the issuer so that they can be assured that the company is operating in a manner compliant with securities laws so that they do not present false information to investors. Failing to meet compliance standards can result in the issuer being left responsible for severe penalties, such as returning all money raised to investors. 

 

However, both investors and issuers have a responsibility for due diligence as well. Investors should research the company thoroughly and make sure they understand all details surrounding the offering before investing their money. This includes reviewing all relevant documents, such as the offering circular, stock subscription agreements, and other related materials that give them a good understanding of the investment opportunity and its potential risks.

 

Issuers also contribute to due diligence as they must work with their FINRA Broker-Dealer to ensure that their offering is compliant with all laws and regulations. This includes verifying all information provided in the offering materials and making sure it meets regulatory requirements. The issuer must also disclose all information that could influence an investor’s decision to purchase the securities. 

 

Due diligence is essential for both investors and issuers when it comes to investments under Regulation A+ (RegA+). Ensure that thorough due diligence is conducted ensures that the offering is conducted in a manner that aligns with the best interests of both investors and the issuer. Ultimately, due diligence is a key component when it comes to investments under Regulation A+ (RegA+) and should not be overlooked.

 

What You Need to Know About RegA+

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

 

What is Reg A+?

 

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

 

Who is Reg A+ for?

 

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

 

Advantages of Reg A+

 

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

 

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

 

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

Call Centers for RegA+

A call center can be extremely helpful for companies looking to raise capital through a Reg A+ offering. By having a dedicated call center, businesses can easily keep track of all the investors who are interested in their company and ensure that they are meeting all compliance requirements. Additionally, a call center can assist investors with forms. This can help to build trust with potential investors and increase the chances of a successful raise. 

For companies using RegA+, prioritizing compliance is essential for a successful offering; a non-compliant raises risks of SEC penalties. This can be a daunting task for companies, as there are many different regulations to keep track of, and some of these rules have implications for the call center. 

 

In this regard, the call center cannot act like a broker-dealer, which means they cannot sell securities. If the investor has questions about whether or not an offering would be a good investment decision, the call center cannot answer this. However, if the issuer noticed that a potential investor was filling out a form that was not completed, a call center could reach out and see if there was a technical or logistic issue that the investor was experiencing, such as where they could find a routing number or where to fill in other important information. 

 

Still, the call center can direct the investor to resources like the offering circular if they have questions about the investment and its risk. And if the issuer has placed a firm focus on compliance, the offering circular should be a significant source of information for investors to make their decision based on their risk tolerance.

 

A call center can also yield useful, practical information about the market, by noticing and reporting patterns about the sorts of questions clients are asking. Similarly, if there are trouble spots in an online application that are a source of confusion, the feedback from a call center can help to identify them and suggest improvements.

 

These are just a few of the ways a call center can be helpful in a company’s Reg A+ offering and beyond. We interviewed Sara Hanks for a KoreTalkX in which she mentioned the topic. Learn more here:

 

If you aren’t current in your Reg A reporting, you could still be violating securities laws even if qualified by the SEC

It’s 1-SA filing season again for Regulation A filers, and time to make some observations about the consequences of not filing.

We have encountered more than three companies in the last three months that have not filed all (or in one case, any) of their ongoing filings, and yet have requalified their offerings or qualified new offerings. This is a problem.

Let’s start with the ongoing reporting requirements. Assuming a Reg A filer has a December year-end, under Rule 257 it has to file its annual Form 1-K by April 30 and its semi-annual 1-SA by September 28 (subject to adjustments for leap years and weekends). It may also need to file “current” reports on Form 1-U. We’ve posted previously about what to do if you miss these deadlines.*

Rule 251 says the exemption for offers and sales under Regulation A is available for companies that have made all the filings required under Rule 257 for the last two years.

If an issuer makes offers and sales supposedly under Regulation A while it is not in compliance with Rule 257, those offers and sales are not made in compliance with Regulation A and unless the issuer can fit them into another exemption from registration (unlikely), the issuer has made unregistered sales of securities in violation of Section 5 of the Securities Act and those sales are subject to rescission (having to buy the securities back).

“Hold on a minute,” our non-compliant companies might say, “we might have missed making these filings, but we filed a new Regulation A offering on Form 1-A or a PQA and the SEC qualified us, so they must reckon our filings are in order, yes?”

Nope.

Older securities lawyers among us (maybe it’s just me these days) will remember the “Tandy” language that we used to have to put in effectiveness or qualification requests. That says, in effect, that just because the SEC says you are ok to proceed with your offering, it doesn’t mean it can’t come after you later for some issue with your filing. While we don’t have to put that language in qualification requests anymore, that is still the SEC’s position, and they remind us that the issuer is responsible for the adequacy of its filings “notwithstanding any review, comments, action or absence of action by the staff”. Moreover, on any Reg A filing, right there on the cover, we have the mandated statement:

THESE SECURITIES ARE OFFERED PURSUANT TO AN EXEMPTION FROM REGISTRATION WITH THE COMMISSION; HOWEVER THE COMMISSION HAS NOT MADE AN INDEPENDENT DETERMINATION THAT THE SECURITIES OFFERED ARE EXEMPT FROM REGISTRATION.

So no, the SEC qualifying your offering does not mean that anyone has signed off on the adequacy of your filing history. (I wish they would, but that’s not what that “QUALIF” posted on EDGAR means).

Issuers, before filing PQAs or new 1-As, check that you are up to date with your ongoing reporting. Brokers and lawyers, you are gatekeepers, so I don’t know how you think you are meeting your professional responsibilities if you don’t check an issuer’s filing history before making those filings. That should be at the top of your due diligence list.

 

 

*If an offering is open for over a year, the issuer also has to file post-qualification amendments (“PQAs”) to its filing to add its ongoing disclosure to the offering circular, but that’s a topic for a future blog post.

 

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

Labor Day: Democratization and Opportunities to Create Jobs

The growth in Regulation A+ and Regulation CF offerings fuels entrepreneurship and job growth in the United States. Since 2016, there have been over 4,600 capital offerings utilizing Reg A+ or CF, with over $500 million raised in 2021 alone. This capital helps companies grow, create jobs, and positively impact their local communities. Crowdfunding is a robust tool for businesses to secure funding, with an average of 43.8% of pre-revenue startups successfully using this method.

 

Crowdfunded Capital and Democratization

 

When businesses utilize crowdfunding, they can access a much larger customer base, allowing them to have a more significant impact on their local communities. it is particularly well-suited for getting loyal customers, employees, suppliers, and other stakeholders to become investors in your company. Crowdfunding enables the democratization of the private capital market by giving these parties an opportunity to participate in the investment process, something that has not been practical before with traditional investing. For many companies, this unlocks a powerful opportunity and  42% of raises reach their goal in 3 days. 

 

Creating Job Opportunities

 

With over $1 billion in capital raised through Reg CF at an average of $1.3 million per raise, these businesses create innovation and bring economic change to local communities in the form of spending and jobs. An estimated $2.5 billion went into local communities from crowdfunded companies in 2021 alone, with money changing hands as much as six times before leaving the local economy. This demonstrates how crowdfunding directly impacts many communities across the country. It brings money to a community by creating jobs; companies that utilize regulated crowdfunding support over 250,000 American jobs across 466 industries. That number is expected to grow as the private market continues to expand. 

 

Crowdfunding allows all types of businesses to access the capital they need to grow and create jobs through Reg A+ and Reg CF. Between 2000 and 2019,  small businesses created 10.5 million US jobs, while large companies only created 5.6 million, according to 2020 data from the US Small Business Administration. This highlights the importance of small businesses within the economy. However, many small businesses have not traditionally had the same access to capital as large ones. This changed with the JOBS Act, increasing the availability of capital for these small businesses and leveling the playing field. As these companies continue to receive capital from the JOBS Act exemptions, the economy continues to benefit from the democratization of capital. 

 

It’s not only the number of jobs that are important but also the quality of those positions. Good jobs lead to a better living standard. When people have good jobs, they can afford to make purchases, give their children better access to education, access healthcare whenever needed, and many other positive benefits for these individuals. At the same time, they support businesses within their community, which helps those grow as well. A strong economy also attracts business investment from other parts of the country and the world. All of these factors lead to more jobs, and the cycle continues.

 

Investing in the Future

 

The expansion of crowdfunding presents opportunities for anyone interested in becoming an investor, with a chance to get in on the ground floor of the next big thing, while also supporting businesses and creating jobs. It’s a win-win for everyone involved, and it all starts with the democratization of capital. When you invest in a company through crowdfunding, you can invest in your community. The money that is raised through these offerings stays local, and as the businesses grow, they pump even more money back into the economy.

 

Crowdfunding is an excellent way to support businesses and create jobs, but it’s also a great way to invest in the future. With the industry expected to continue to grow, now is the time to get involved. With opportunities for everyone, from accredited to retail investors, there has never been a better time to get involved in the democratization of capital. So this Labor Day, remember that when you support businesses through crowdfunding, you also help create jobs and create a brighter economic future.

 

The SEC Can Stop Your Regulation A Offering At Any Time

The SEC has two powerful tools to stop your Regulation A offering anytime.

Rule 258

Rule 258 allows the SEC to immediately suspend an offering if

  • The exemption under Regulation A is not available; or
  • Any of the terms, conditions, or requirements of Regulation A have not been complied with; or
  • The offering statement, any sales or solicitation of interest material, or any report filed pursuant to Rule 257 contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements made, in light of the circumstances under which they are made, not misleading; or
  • The offering involves fraud or other violations of section 17 of the Securities Act of 1933; or
  • Something happened after filing an offering statement that would have made Regulation A unavailable had it occurred before filing; or
  • Anyone specified in Rule 262(a) (the list of potential bad actors) has been indicted for certain crimes; or
  • Proceedings have begun that could cause someone on that list to be a bad actor; or
  • The issuer has failed to cooperate with an investigation.

If the SEC suspends an offering under Rule 258, the issuer can appeal for a hearing – with the SEC – but the suspension remains in effect. In addition, at any time after the hearing, the SEC can make the suspension permanent.

Rule 258 gives the SEC enormous discretion. For example, the SEC may theoretically terminate a Regulation A offering if the issuer fails to file a single report or files late. And while there’s lots of room for good-faith disagreement as to whether an offering statement or advertisement failed to state a material fact, Rule 258 gives the SEC the power to decide.

Don’t worry, you might think, Rule 260 provides that an “insignificant” deviation will not result in the loss of the Regulation A exemption. Think again: Rule 260(c) states, “This provision provides no relief or protection from a proceeding under Rule 258.”

Rule 262(a)(7)

Rule 262(a)(7) is even more dangerous than Rule 258.

Rule 258 allows the SEC to suspend a Regulation A offering if the SEC concludes that something is wrong. Rule 262(a)(7), on the other hand, allows for suspension if the issuer or any of its principals is “the subject of an investigation or proceeding to determine whether a. . . . suspension order should be issued.”

That’s right: Rule 262(a)(7) allows the SEC to suspend an offering merely by investigating whether the offer should be suspended.

Effect on Regulation D

Suppose the SEC suspends a Regulation A offering under either Rule 258 or Rule 262(a)(7). In that case, the issuer is automatically a “bad actor” under Rule 506(d)(1)(vii), meaning it can’t use Regulation D to raise capital, either.

In some ways, it makes sense that the SEC can suspend a Regulation A offering easily because the SEC’s approval was needed in the first place. But not so with Regulation D, and especially not so with a suspension under Rule 262(a)(7). In that case, the issuer is prevented from using Regulation D – an exemption that does not require SEC approval – simply because the SEC is investigating whether it’s done something wrong. That seems. . . .wrong.

Conclusion

As all six readers of this blog know, I think the SEC has done a spectacular job with Crowdfunding. But what the SEC giveth the SEC can taketh away. I hope the SEC will use discretion exercising its substantial power under Rule 258 and Rule 262(a)(7).

 

This post was written by KorePartner Mark Roderick and the original post can be found here. Mr. Roderick is an attorney at Lex Nova Law, where he leads the firm’s Crowdfunding and Fintech practice. He writes a widely-read blog at CrowdfundingAttorney.com and is a featured speaker at Crowdfunding and Fintech events across the country, including New York, Texas, Chicago, and Silicon Valley. Mark is one of the most prominent Crowdfunding and Fintech lawyers in the United States. He represents portals, issuers, and others across the country and around the world.

Opportunities to Invest in the Private Capital Market

The private equity market is rapidly growing, fueled by expansions to the JOBS Act exemptions in 2021. By 2030, the private capital market is anticipated to grow to a total value of $30 billion. This is largely driven by more companies seeing the potential in regulated crowdfunding through RegA+ and RegCF, and the rising interest of retail investors looking to move into the private space. Plus, research has shown that there is nearly $5 trillion in uninvested funds held by private equity firms alone. In addition, retail investors now represent 25% of the security trading volume in the public markets, a significant increase from the previous decade. According to BNY Mellon, “a new generation of younger retail investors are purchasing equities with the intention of becoming long-term market participants.” These factors have coalesced to create a favorable environment for investments in the private capital market. 

 

With favorable conditions to invest in public companies, there are many emerging and attractive industries for investors. Some of these include:

 

  • Medtech: Every day, companies are creating lifesaving technologies to improve human health and revolutionize medical care. Medtech companies often require high amounts of capital to fund clinical trials, research and development, and the many other processes they must go through. Since offerings limits for RegA+ were expanded to $75M, Medtech companies are increasingly viewing the exemption as a viable choice for raising capital.

 

  • Cannabis: The cannabis industry is rapidly growing, especially as public perception grows more favorable and legalization at the state level spreads across the US. However, cannabis companies are often underserved by traditional financial institutions due to the illegality at the federal level. With RegCF and RegA+, cannabis companies can tap into a vast market of retail investors who are willing to invest in an evolving industry.

 

  • Real Estate: Traditional real estate investments are capital intensive, making them cost prohibitive for many investors who are not high net worth individuals, private equity, or institutional investors. However, with RegA+ and RegCF, retail investors can own fractions of properties. And in, 2020, insurance, finance, and real estate accounted for 53% of qualified RegA+ offerings and 79% of the funds raised through the exemption. This indicates that real estate is an attractive investment opportunity for many investors. 

 

  • Franchises: JOBS Act exemptions create new opportunities for franchisees and franchisors to raise capital. These companies often have existing customers, who can become investors and brand ambassadors.

 

Regardless of the industry, a key component of any offering is the broker-dealer. Many states require issuers to work with a broker-dealer when selling securities in those states. A broker-dealer ensures that the issuer follows all SEC and state securities laws. More importantly, working with a FINRA-registered broker-dealer gives investors confidence by verifying that the issuer has provided all required information for the investors to make a sound investment decision. FINRA protects American investors by ensuring that brokers operate fairly and honestly. Plus, the broker-dealer also completes compliance activities, such as KYC, AML, and investor suitability and due diligence on the issuer themselves. 

 

Working with a broker-dealer ensures that the issuer behaves compliantly and gives the investor peace of mind when investing in one of the many investment opportunities within the private capital market.

 

RegA+ Offers Stability for Issuers

When a company decides to go the RegA+ route, they are opting for a more stable and regulated way to raise capital. This is due in part to the stability of the price; once a company goes public, its stock price can change rapidly and unpredictably because of factors like news, earnings reports, analyst ratings, and supply and demand. By contrast, a RegA+ stock is only allowed to fluctuate within a certain percentage from the original offering price, which makes it a more stable and predictable investment. With a RegA+ offering, the price is set ahead of time and will not change unless there is a significant shift in the market. This makes RegA+ an attractive option for investors looking for a more stable investment.

 

For example, companies that do a RegA+ raise and set their company shares at $5.80 a piece will likely see their shares at a similar price 12 months later. Because shares are unlisted on a public exchange, the share price will stay the same for a while, giving investors some stability in their investment. This stability can be ideal for companies and their shareholders, as it gives them a chance to better plan and predict their finances. 

 

It also gives companies more control over the price of their shares, especially when there are selling shareholders. For example, ATLIS’s stock price went from $5.88 to $15.88 to $27.88 before being listed on the NASDAQ. When companies like this do a Reg A+ before other raises, they can halt and reprice their company before going public. 

 

The stability of RegA+ can be attractive to both companies and investors. It allows for better planning and forecasting of finances and peace of mind knowing that the share price will not rapidly change. This predictability is one of the main reasons why Reg A+ has become such a popular way to raise capital in recent years.

 

If you’re looking for a more stable investment, RegA+ may be the right option for you. With a set price and no sudden changes, you can know what to expect from your investment. This makes it an ideal choice for those looking for a regulated and predictable way to raise capital. Whether you’re a company or an investor, the stability of RegA+ may be just what you’re looking for.

 

Why RegA+ Offerings Fail

When it comes to RegA+ offerings, there are several reasons they may fail: a failure to comply with regulatory requirements, a failure to budget for the offering properly, or a failure to assemble sufficient expertise. Most of these can be attributed to a lack of commitment; if organizations do not take these necessary components of the process seriously, then RegA+ offerings are set up for failure from the start.

 

Compliance for RegA+ Raises

 

Complying with regulations is one of the most important aspects of a RegA+ offering. However, many companies try to cut corners regarding compliance, thinking they can save time and money. This is a huge mistake that can have disastrous consequences. Not only will failing to comply with regulations result in fines and penalties, but it can also jeopardize the entire offering. When experiencing an audit or investigation, companies that have not been compliant with regulatory requirements often face much harsher consequences than those who have made an effort to stay compliant. Even if the raise completes without fines or penalties from the regulator, sloppy or half-hearted compliance raises the risk of being sued by an investor for some real or imagined offense. By wholeheartedly committing to the spirit and letter of the regulations from day one, and with the assistance of professionals well-versed in the regulatory requirements (a FINRA broker-dealer, an escrow agent, or an SEC-registered transfer agent), you can increase your chances of a successful RegA+ offering while protecting your company from potential legal problems down the road.

 

Budgeting for a RegA+ Raise

 

Budgeting is essential for a successful offering. Companies must have the proper funding to hire professionals, comply with regulations, and market the offering effectively. Without adequate funding, a company is likely to run into problems along the way. A RegA+ raise is a complex and costly undertaking, and companies should be prepared to commit the necessary funding before beginning the process. Including a well-thought-out budget in your business plan is one of the keys to success when raising capital through a RegA+ offering.

 

Affinity Marketing

 

Many companies turning to RegA+ aren’t just looking to raise capital; there’s something they want to do with the capital. Whether this is a product they want to make or a service they want to provide that they’re passionate about, they’re committed to that mission. Affinity marketing is a great way to connect with like-minded investors, show them that commitment, and bring them on board. This is much harder to do if the company isn’t actually committed to that mission in the first place.

 

Technology and Expertise

 

For issuers learning new technologies and working with experts in a field that they don’t know much about, it can be a daunting process. It takes commitment to learn these new technologies or do what the broker-dealer is advising, understanding that this is the path toward a successful offering. If you’re not sufficiently committed, you might just shrug this off as not worth the cost or effort.

 

Companies should take away from this that a successful RegA+ raise requires a commitment to the process from start to finish. Commitment is a willingness to put in whatever it takes to succeed: to invest the time and resources necessary, comply with regulations, budget appropriately for the offering, and assemble a team of experienced professionals. With a commitment to these essential components, a company can increase its chances of success and avoid the pitfalls that have led to the failure of other RegA+ offerings.

 

What is the Estimated Budget for RegA+ Issuance?

Navigating the fundraising process and understanding how much to budget from a financial standpoint is one of the most frequent questions we receive. In the process of conducting a RegA+ offering ourselves, KoreConX has researched the estimated budget for a RegA+ offering.

 

While the budget varies based on several factors, you need to keep in mind the size of your raise and sector. As a general rule of thumb, it is a good idea to be ready to spend at least $250,000 on a successful RegA+ offering, $50,000 of which should be dedicated to getting your investor acquisition started. Most of your budget will be spent on Investor Acquisition. Now, this will not apply to every company but should serve as a general guide as to what you should expect a RegA+ offering to cost depending on the amount raised. 

 

Estimated Costs for USA-Based Companies:

What Why/ Work to be done When How much
USA Lawyer To file your SEC Form 1A and state filings First step in moving forward $35-$75k 
Auditors Are required to be filed with your Form 1A   First step requirement $3,500 +
SEC/State Filings Required regulatory Filings    $5k 
FINRA Broker-Dealer 8 States require you to have a Broker-Dealer to sell securities to investors  Begin engagement when you start with lawyer  1-3% fees 
Investor Acquisition

  • PR Firm
  • IR Firm
  • Video
  • Social media
  • Media Firm
  • Advertising
  • Webinar
  • Newsletter
  • Publishers
These firms prefer to be engaged right after you file, as the clock begins and gives them only 45-60 days when you go live.  Depending on size of offering you will spend up to $200k-$400k. Before you file your Form 1A  $25-50k at the beginning to start
Investor Relations Director Hire an internal resource to manage incoming inquiries from potential investors.  Handle outbound calls from investor leads. $4,500/month
KoreConX All-In-One platform End-to-end solution $4,500/month
Investment Platform Requires 45-60 days to set up After you retain your lawyer  Included with your KoreConX All-in-one platform 
Live Offering During the live offering you will have to pay for ID, AML fees required   Ranges from $0.58/person, these fees are provided at cost
Live Offering During the live offering you will have to pay for your Payment processors ( Credit Card, ACH, EFT,  Crypto, WireTransfer, IRA)   These fees are provided at cost
SEC-Transfer Agent Required as part of your Form 1A filings  After you sign up with lawyer  Included with your KoreConX All-in-one platform 
Secondary Market Ability for Shareholders to trade private company shares. Included with your KoreConX All-in-one platform 
TradeCheck Report Ability to trade in all 50 states, include Blue Sky registration, and listing National Securities Manual Included with your KoreConX All-in-one platform 

 

 

Estimated Costs for Canada-Based Companies:

What Why/ Work to be done When How much
USA Lawyer To file your SEC Form 1A and state filings First step in moving forward $35-$75k 
Canada Lawyer $5k-$10k
Auditors Are required to be filed with your Form 1A   First step requirement $3,500 +
SEC/State Filings Required regulatory Filings    $5k 
FINRA Broker-Dealer 8 States require you to have a Broker-Dealer to sell securities to investors  Begin engagement when you start with lawyer  1-3% fees 
Investor Acquisition These firms prefer to be engaged right after you file, as the clock begins and gives them only 45-60 days when you go live.  Depending on size of offering you will spend up to $200k-$400k Before you file your Form 1A  $25-50k at the beginning to start
Investor Relations Director Hire an internal resource to manage incoming inquiries from potential investors.  Handle outbound calls from investor leads. $4,500/month 
KoreConX All-in-one platform $4,500/month 
Investment Platform Requires 45-60 days to set up After you retain your lawyer  Included with your KoreConX All-in-one platform  
Live Offering During the live offering you will have to pay for ID, AML fees required   Ranges from $0.58/person these fees are provided at cost
Live Offering During the live offering you will have to pay for your Payment processors ( Credit Card, ACH, EFT,  Crypto, WireTransfer, IRA)   These fees are provided at cost
Transfer Agent Required as part of your Form 1A filings  After you sign up with lawyer  Included with your KoreConX All-in-one platform 
Secondary Market Included with your KoreConX All-in-one platform 
KoreTrade Report Ability to trade in all 50 states, published in the Securities Manual Included with your KoreConX All-in-one platform 

Private Equity’s Primetime Has Arrived

Private equity’s primetime has arrived! This stems from a number of reasons, including favorable economic conditions for the private capital market. In fact, 42% of private equity limited partners report a 16% net return in this space. Here are three factors in particular that have caused private equity to outperform public equity in 2022.

 

1) Interest Rates:

A survey found that 71% of global private equity investors have indicated that their equity investments have outperformed their public equity portfolios since the global financial crisis. This is in part because private equity firms are less reliant on debt financing than public companies. Higher borrowing costs will hit public companies harder, putting them at a competitive disadvantage over private companies with rising interest rates.

 

2) Economic Uncertainty:

Some degree of uncertainty characterizes current economic environment. This can be attributed to the ongoing trade conflicts between the United States and China, Brexit, and the coronavirus pandemic. These factors have made it difficult for public companies to make long-term plans and invest for the future. Private equity firms, on the other hand, are better suited to deal with economic uncertainty. This is because they can take a longer-term view and are not as reliant on short-term results.

 

3) Regulation:

The increased regulation of public companies has made it more difficult and expensive for them to operate. Private companies are not subject to the same level of regulation, giving them a competitive advantage. Additionally, private companies can benefit from registration exemptions, like RegA+ and RegCF, which allow them to raise capital from everyday investors without the need to go public. This provides private companies a significant tool they can use to their advantage and fuel their growth.

 

These combined factors show that private equity has arrived and is here to stay. This will likely continue in the future, making private equity an attractive investment for investors. More individuals are involved in the private markets with the rise in forms of private investment for regulated and non-regulated investors, such as the JOBS Act regulations. This means more capital is flowing into private markets, which drives up valuations. With the current market conditions, investors would be wise to allocate a portion of their portfolio to private equity to protect and grow their wealth and prepare their portfolios for the future.

Quarterbacks: Their Role and Why They’re Essential for Your RegA+ Raise

In the world of Reg A+, quarterbacks are essential to a successful offering. They play a critical role in the overall success of an offering, and their importance should not be underestimated. This article will explore the role of the quarterback and explain why they are so crucial for Reg A+. 

 

What is a Reg A+ Quarterback?

 

A quarterback works with issuers to advise and bring the necessary players to the table in a RegA+ offering. They are essential to ensure everything goes smoothly, lending their capital raising expertise to aid issuers on their capital raising journey. Without a quarterback, a company can easily overlook the nuances and complexities of securities regulations. A quarterback’s role is to manage and monitor the entire process. Doug Ruark, founder and president of Regulation D Resources Enterprises, Inc., defines the role of the quarterback as someone who has got to “work with clients that are looking to execute a securities offering, and need to get everything structured. Companies need to get all of their offering documents drafted, they need to go through the filing process with the SEC. And then, typically, a quarterback provides compliance support as they, company and quarterback, move forward and execute their offering”.

 

For a company to file with the SEC under RegA+, it must go through qualified testing. This is where a company’s financials, management team, and other factors are analyzed. A quarterback is essential in this process as they can provide valuable insight and knowledge about the company. Without a quarterback, a company may be at risk of not being fully prepared for this vital step.

 

The Importance of a Quarterback

 

A quarterback is a crucial part of any capital raising activity. They will be a valuable asset in the process and can help you avoid any costly mistakes. Some key QB responsibilities include:

  • Provide non-legal advisory services to management teams
  • Coordinate fundraising efforts with online platforms or crowdfunding portals
  • Facilitate communication between issuers and financial professionals like broker-dealers
  • Assist with due diligence
  • Work with marketing teams to establish marketing strategies
  • Other services to streamline the offering

 

Reg A+ Raises and QBs

 

By preparing well for a Reg A+ offering with a quarterback, companies can put their best foot forward and make a strong impression on potential investors. Having a well-coordinated team in place is critical, as is having all the necessary documentation and financials. Quarterbacks play an essential role in ensuring all the pieces are in place and working together smoothly so that when it comes time to present to investors, companies can do so with confidence. Quarterbacks can help their companies make a successful Reg A+ offering and attract the funding they need to grow by taking the time to do things right from the start.

 

Credit Cards, Escrow, and Broker-Dealers for RegA+ = $75 Million for Cannabis Companies

 

“It’s About Time”

 

Up until now, it was a real challenge for Cannabis companies to take advantage of Reg A+ exemptions that allow private companies to raise up to $75 million from the crowd; accredited and non-accredited investors alike.  So you have the investor community’s appetite, the table is set and they are ready, willing, and able; but what else do you need?

 

FINRA Broker-dealer

 

The regulation is meant to create jobs, allow private companies another way to raise capital, and allow for the investor community at large to participate. Before RegA+ exemptions, many potential investors were left looking into the candy store without any way to invest.  So with the democratization of capital and the ability of an untapped investor community to now have a seat at the table, the broker-dealer becomes an all-important intermediary.  In a highly regulated environment, the Broker-dealer takes the onerous task of KYC, ID verification, and AML ( anti-money laundering) off the issuer’s shoulder;  so you, the Issuer, can run your business without worrying about this important compliance requirement. As a result, you not only have the opportunity to gain large groups of investors but also develop brand advocates who share in your story.

 

Escrow Agent 

After the broker-dealer, you need an escrow agent that can hold funds from investors in all 50 states and territories and only charge you one flat fee. 

 

This key intermediary holds the investors’ funds on behalf of the Issuer until the broker-dealer completes the ID, KYC, and AML verification. Once these checks are complete, the escrow agent can release the funds. Until recently, a couple of historical challenges for industry sectors such as cannabis included the inability to get Escrow for their capital raises. Not only is Escrow now available but also at a cost-effective price point and with normalized fees, which is really the way it should have always been.  

 

Credit Cards 

 

Now below 2.9%  allowing both cannabis companies and their shareholders to be fairly treated when investing in the growth of their companies;  bringing jobs to communities and opportunities to those that believe in the company. Being responsible with your credit cards is common sense. Still, the ease of use and points as an added bonus is certainly one of the nice perks and perhaps a big reason for their high usage via crowd participation in private capital raises.

 

If you’re part of the Cannabis ecosystem looking to learn more about how KoreConX can help you on your capital raising journey, please fill out the form here.

KorePartner Spotlight: Nate Dodson, Managing Member at Crowdfunding Lawyers

Nate Dodson has over 15 years of experience helping clients with securities, financing, real estate, asset protection, and mergers and acquisitions. Not only has he served as an advisor in real estate transactions, financing, and investments, but he has also successfully developed ground-up commercial properties and participated on the GP side of approximately 4,000 multifamily units over the years.

Before his legal career, Nate worked as a stockbroker, giving him unique experience in investment sales, structures, and asset protection. By leveraging his industry expertise and the help from his long list of trusted connections, he has personally represented over $2 billion in real estate and business funding transactions over the years. While Nate’s full-time efforts are focused on the securities practice with and management of Crowdfunding Lawyers, he remains a partner at his diversified namesake law firm Dodson Legal Group, founded in 2007 and focusing on transactional, litigation, and family law work. Between both firms, their experienced legal teams have represented more than $5 billion in transactions.

Crowdfunding Lawyers is a boutique law firm focusing exclusively on representing securities transactions across the United States. As a specialty-focus law firm, the firm works with investment sponsors/operators and their advisors to develop capital funding strategies, investment offerings, and securities platforms. By taking a unique team-based approach to the firm’s client services, their clients work with a multitude of experienced, dedicated securities attorneys in the representation of Regulation D, Regulation A, Regulation CF, and S1/S3 public (IPO) offerings. The firm has provided services to 1,000+ clients, and its attorneys have, with CFL or through prior engagements, many billions in capital transactions over their respective careers. Because Crowdfunding Lawyers’ focus is limited to federal securities laws, they regularly coordinate with local attorneys and tax counsel to ensure well-rounded representation for clients. However, the firm’s attorneys have considerable experience in real estate, business, regulatory, and finance transactions and activities.

Nate’s experience with crowdfunding makes him a valuable addition to the KoreConX ecosystem. He is passionate about providing regulatory clarity across jurisdictions to ensure raises are compliant and efficient. His ultimate goal is to help investors and businesses succeed in the digital age.

We took some time to speak with Nate and learn more about himself, his organization, and his thoughts on the future of crowdfunding.

What services do Crowdfunding Lawyers provide for Regulation A offerings?

We handle the legal process from beginning structuring throughout the qualification process for Regulation A offerings. We never expect our clients to come to the table with anything other than their plans and ideas. After structuring, we draft all the documents and form any needed entities. Our goal is to file Form 1-A with the SEC within 45 days of engagement.

Because our services are comprehensive, we’ll start with consulting on our client’s business plans and advise the best strategies and structure for funding through a Reg A offering. We also introduce our clients to great vendor partners and team members, like KoreConx.

To meet our self-imposed 45-day timeline, we ensure that we have complete information, including broker-dealers, if involved, or financial audits and introductions are made when appropriate.

How is a partnership with KoreConX the right fit for your company?

We love working with KoreConX and refer to them regularly to serve as the transfer agent for our Reg A offerings. It is essential to have a good transfer agent system involved, as they manage your investors and investment opportunity administration.

KoreConX is not an attorney. Crowdfunding Lawyers is not a transfer agent. Both are necessary for your success with your Regulation A offering.

What excites you about this industry?

Our entire team has a passion for the investment industry, but we’re not a diversified firm. We have a team of very qualified attorneys that solely focus on securities transactions. All of our attorneys come from prestigious law schools and have worked in the legal field for years. If they are newer in the securities realm, it’s only because they have so much experience in startups, entrepreneurship, real estate, investing, and corporate law. Our attorneys have similar impressive pasts and a drive for our client’s success. 

As an example, I worked as a stockbroker until the internet stock bubble burst around 2000, selling investments on the phones before crowdfunding became available after the JOBS Act of 2012.

What services do Crowdfunding Lawyers provide that are different?

We always spend substantial time in the initial stages of representation, where we get to know our clients and their business. We strive to structure your opportunity so that you can meet both market expectations as well as investor expectations, and our client’s primary goal is to get funded faster.

While we focus heavily on real estate funds and syndications, approximately one-third of our clients are focused on business and investment funds. With our real estate fund representations, we often represent Regulation A offerings for REITs (Real Estate Investment Trusts) and series LLC offerings. Our clients can replicate their traditional syndication model with Reg A series offerings by breaking down the Regulation A offerings into unique project-specific classes. This is where our clients can continue to offer a real estate syndication model with all the benefits of placing offerings through Regulation A, which is a different twist on setting up a $75 million blind-pool fund.

 

KoreClient Spotlight: Brent Fawson, COO of Facible

Working at Facible, Brent Fawson believes that the company is poised to leave a lasting impact on lives around the world by making medical diagnostic testing more accessible. We sat down with Brent and talked to him about the medical industry, his company, and capital raising in the medical field.

 

Q: Tell me a little more about your company. How do you impact the Medtech space and the customers you serve?

A: Facible Diagnostics is a diagnostics company that uses our revolutionary Q-LAAD technology to take hospital-grade diagnostics out of the lab and to the point of care. Legacy diagnostic technologies often require a tradeoff between speed, accuracy, and ease of use. Q-LAAD technology enables the development of faster and more accurate diagnostic tests that are easier to run, and don’t require complex machinery so they can be run outside of a hospital laboratory making hospital-grade diagnostic testing available anywhere. It’s ideal for underserved and rural areas, urgent cares, physician’s offices or even the home.

 

Q: What excites you most about your industry?

A: I think with the SARS-CoV-2 pandemic, we have all seen the limitations with some of the legacy technology platforms. To have a revolutionary technology at the forefront of the industry is very exciting. I feel we are just scratching the surface of understanding and using medical data to improve our lives. There are companies out there, like Apple, that are beginning to use this data for research purposes. We can create richer data sets to understand and address big challenges we all face. With the COVID crisis, we have all seen not only current deficiencies in diagnostics, but also an unprecedented investment at the same time which will work to improve our lives. 

 

Q: How do you see the LSI MedTech event having an impact on your company?

A: We are really excited to meet with like-minded people who understand the value a company like Facible can bring to the world through their partnership. We have a unique vision to offer investors and partners and love to collaborate and explore the endless possibilities of where our technology can go.   

 

Q: Now that your company will be using Regulation A+ for your next offering, how do you see this helping your company?

A: A startup like Facible is always at risk of choosing the wrong funding pathway. Biotechnology development is expensive and it’s easy to start chasing money to keep the company going. You then run the risk of partnering with investors with different goals, objectives, and understanding of how best to use the funds provided.  We feel that because our technology is so revolutionary, we want to see our vision realized and Regulation A+ is the best path toward making that happen. This also is a great way to allow people that have supported us all along to finally be able to invest in our future.

 

Q: Why do you think education on RegA+ places such a vital role in expanding access to capital for medical companies?

A: Right now, there are very traditional ways to raise money. It’s such a well-worn path, it’s great to have these other alternate options out there and understand them. As we started looking at Reg A+ a couple of months ago, we knew nothing about it. It’s vital that entrepreneurs understand all of their options for capital to allow their company to be as successful as possible. Along with that, Reg A+ is so new that there are not many people that really understand how it works. It’s only through talking to people like Oscar (CEO, President, KoreConX) and Doug (Senior Principle, Regulation D Resources) that we have been able to understand it.

 

Q: What effect do you think Reg A can have on Medtech companies in general?

A: Medtech development is expensive. For a small company who has great ambition, amazing science, but few institutional connections it can be nearly impossible to fund a company. To have access to a broader capital market allows us to sell our vision directly to investors that understand and appreciate the impact that these emerging technologies can provide.  

 

Q: What advice would you give a young Medtech entrepreneur as they begin their journey through capital raising and building their company?

A: You must have a good plan. You need to be willing to test your ideas with the right people so that you understand what value to bring. Make sure you are surrounding yourself with people who are willing to be critical. I have seen many companies try to move without fully vetting their vision. And beyond that, really try to understand what it’s going to take to bring your product to market. It’s an expensive and challenging process so make sure you go in with your eyes wide open.  

 

Regulation A Disclaimer

This communication may be deemed to be a solicitation of interest under Regulation A under the Securities Act of 1933, in which case the following apply:

 

  • No money or other consideration is being solicited, and if sent in response, will not be accepted;

 

  • No offer to buy the securities can be accepted and no part of the purchase price can be received until the offering statement is qualified, and any such offer may be withdrawn or revoked, without obligation or commitment of any kind, at any time before notice of its acceptance given after the qualification date;

 

  • A person’s indication of interest involves no obligation or commitment of any kind; and 

 

  • An offering statement, which would include a preliminary offering circular, has not yet been filed with the SEC.

Attracting Impact Investors

Founders and executives of startup and early-stage healthcare companies seeking funding historically were limited to appeals to Venture Capital firms, Angels, and bootstrapping – struggling to survive by internal growth alone. In many cases, the founders resort to selling their businesses for values well below their potential. Fortunately, their options have increased due to

1. The Emergence of the Impact Investor

The economic devastation from the coronavirus and its evolving variants is a once-in-a-lifetime event that super-charged the nascent trend of individuals and institutions to invest in ventures intended to improve the quality of life. The dollar value of “impact investing” – experienced “remarkable growth over the past ten years, reaching $2.1 trillion in 2020, according to the International Finance Corporation (IFC).[i] Impact investments are investments made to generate positive, measurable social and environmental impact with a financial return. The bottom line is that impact investors look to help a business or organization complete a project, develop a new life-saving treatment, or do something positive to benefit society.

2. Exposure of Venture Capital Myths

For years, companies seeking funds avoided the tag of “social responsibility,” afraid that investors would avoid any company whose profit objective is compromised by non-financial returns. Nobel Prize-winning economist Milton Friedman ridiculed the idea that business has a “social conscience” and asserted that businessmen who believed such ideas were “unwitting puppets of the intellectual forces that have been undermining the basis of a free society these past decades.” [ii] Consequently, company leaders and investors unwittingly accepted

  • Myth #1 that impact investing produces lower financial returns that take years to materialize. A report by McKinsey & Company in 2018 found that investments in socially beneficial organizations produced returns comparable or exceeding those dedicated to profits only. Furthermore, the median holding period before exit (IPO or M&A) was about the same as conventional VC investments.
  • Myth #2 – An article in the 1998 Harvard Business Review[iii] challenged the belief that VC funding is the underlying force of invention and innovation in economic systems, finding that only a tiny percentage of VC capital (6%) invested in startups or research and development. A VC’s investment focus is on companies that have proven success and need funds for scaling.

Doing Well by Doing Good

Healthcare — where success is measured in improvements in disease progression and quality of life – is the focus of my firm. We promote Impact investing because the strategy provides an avenue in which people can do well by doing good, i.e., buying the securities of companies that positively affect the health of themselves, their families, and others. From the discovery of bacteria to the first artificial organs, significant medical discoveries have extended the quality and length of humans’ lives. Take a look at some of my clients and how they’re positively impacting the world of health and medicine.       

  • EyeMarker: developer of non-invasive assessment and tracking devices for traumatic brain injury (TBI) improving the speed, accuracy, and consistency of concussion detection and diagnosis.  
  • Facible: developer of revolutionary biodiagnostics technology for infectious disease which simplifies the diagnostic testing process while increasing the accuracy of results, empowering patients to better understand their personal health and the quality of products treating their wellness.
  • HealthySole: disrupting the infection prevention market with ultraviolet shoe sanitizer technology clinically proven to kill 99.99% of infections, contaminations, and pathogens in only 8 seconds. 
  • Kurve Therapeutics: provider of compact liquid drug delivery devices significantly enhancing the efficacy and safety of formulations treating Alzheimer’s, Parkinson’s LBD, and ALS. 
  • McGinley Orthopedics: manufacturer of orthopedic surgical devices employing cutting-edge sensing and navigation technology reducing surgical time and cost while improving patient outcomes. 
  • Medical 21: reshaping the future of cardiac bypass surgery with an artificial graft which eliminates the harvesting of blood vessels, significantly decreasing procedure time and cost as well as the risk of infection, scarring, and pain for patients.

The recently updated JOBS Act of 2017[iv] offers founders of healthcare companies an alternative channel for fundraising to running the gauntlet of impersonal VC managers focused solely on extraordinary growth as quickly as possible. Using a Regulation A+ offering in place of venture capital allows company management to target those investors who believe in the company’s objectives and want to support them. For healthcare companies, the potential investors include the

  • doctors who work in the company’s field and know first-hand the impact your solution could have,
  • patients who have been affected and their family members and friends, and
  • people who support the non-profit organizations around those you help diagnose/treat.

Founders of healthcare companies will find a wide variety of investors eager to help them reach their objectives, according to the Global Impact Investing Network 2020 Annual Impact Investor Survey.[v] Their research estimates the current market size at $715 billion, attracting a wide variety of individual and institutional investors:

  • Fund Managers
  • Development finance institutions
  • Diversified financial institutions/banks
  • Private foundations
  • Pension funds and insurance companies
  • Family Offices
  • Individual investors
  • NGOs
  • Religious institutions

Rather than having one or more VC shareholders anxious to make a profit and move on to the next deal, Regulation A+ offers access to thousands of potential advocates – a legitimate community of people with a shared sense of purpose — for your business.

A Reg A+ offering allows investors to contribute to life-saving research, clinical trials, or tools and technology to assist victims in returning to everyday life, possibly within their families. For example, small biotechs are more likely to invest in research, spending up to 60% of their revenue on R&D.[vi] They account for up to 80% of the total pharmaceutical development pipeline in 2018,[vii] making small companies the driving force behind innovative new therapies, and 64% of all new drugs approved by the FDA in 2018 originated from small pharma.

Final Thoughts

Founders seeking new funding should ask, “Do I want a group of shareholders that focus solely on my bottom lines or investors who care about our company’s objectives for the full community – patients as well as shareholders?” The question is especially pertinent since an alternative process is available with less hassle, cost, and time. We believe that Regulation A+ offerings should be in the toolbox of every founder, owner, CFO, and Treasurer in the United States. Their use provides excellent upside potential with little downside risk.

 

Resources:

[i] Gregory, N. and Volk, A. (2020) GROWING IMPACT New Insights into the Practice of Impact Investing. International Finance Corporation. (June 2020) Access through https://www.ifc.org/wps/wcm/connect/8b8a0e92-6a8d-4df5-9db4-c888888b464e/2020-Growing-Impact.pdf?MOD=AJPERES&CVID=naZESt9

[ii] Friedman, M. (1970) A Friedman doctrine‐- The Social Responsibility Of Business Is to Increase Its ProfitsNew York Times. (September 13, 1970) Accessed through https://www.nytimes.com/1970/09/13/archives/a-friedman-doctrine-the-social-responsibility-of-business-is-to.html

[iii] Zider, B.(1998) How Venture Capital Works. Harvard Business Review. (November-December, 1998) Access through https://hbr.org/1998/11/how-venture-capital-works

[iv] Littman, N. (2021) Healthcare-Focused Impact Investing: Another Way To Invest For Change. Forbes Magazine. (April 28, 2020) Access through https://www.forbes.com/sites/forbesfinancecouncil/2021/04/28/healthcare-focused-impact-investing-another-way-to-invest-for-change/?sh=3f4c7f501e5c

[v] Staff. (2021) WHAT YOU NEED TO KNOW ABOUT IMPACT INVESTING. Global Impact Investing Network. (August 25, 2021) Access through https://thegiin.org/impact-investing/need-to-know/

[vi] Coskun, M. (2020) How is R&D spending affecting Biotech company growth? Data-Driven Investor. (May 11, 2020) Access through https://www.datadriveninvestor.com/2020/05/11/how-is-rd-spending-affecting-biotech-company-growth/#

[vii] Kurji, N. (2019) The Future of Pharma: The Role Of Biotech Companies. Forbes Magazine. (May 29, 2019) Access through https://www.forbes.com/sites/forbestechcouncil/2019/05/29/the-future-of-pharma-the-role-of-biotech-companies/?sh=43d88c5f6bb3

KorePartner Spotlight: Scott Pantel, President & CEO of Life Science Intelligence

With the launch of the KoreConX all-in-one platform, KoreConX is happy to feature the partners contributing to its ecosystem. 

 

During the capital raising journey, many things must be in place to increase the potential for success. One of these critical factors is having the right team to assist with gaining information on your demographic is vital to a successful capital raise.

 

As the President and CEO of LSI, Scott Pantel knows the importance of this, which is why Life Science Intelligence was formed. Scott knows that the most important and strategic business decisions must be made based on data and insights from trusted advisors. LSI is proud to be the go-to-market research firm to support those making these big decisions because of their experience in the Medtech field. With a team of economists, analysts, and market researchers, LSI provides deep knowledge of the healthcare industry, guiding clients with actionable data to identify significant trends in medical devices, diagnostic, and digital health technologies that are rapidly evolving in the industry.

 

We took some time to speak with Scott to learn more about him, his company, and his thoughts on the future of market research, advisory, and raising capital.

 

Q: What does your company do, and how are you making a difference?

A: We’re a Medtech-focused market research and advisory company. We help early-stage companies all the way up to the largest healthcare companies in the world, and their investors, make the best strategic decisions possible. We do this through independent research, consulting, advisory and partnering events.

 

Q: What excites you about the Medtech, Life Sciences, and Biotech Industries?

A: The thing that excites me most about Medtech is that we get to have an impact on people’s lives. The innovators in our space save lives and reduce suffering. To borrow a quote from our 2020 Keynote Speaker and Co-Founder of Auris Health (acquired by J&J for $5.8B), “Medtech is the best and original impact investment sector.”  The innovators in our sector are literally changing and saving lives.  I also get excited to see that patients are increasingly becoming more involved in their healthcare decisions. The convergence of medical devices, data, and smart technologies improves patient outcomes and is slowly but surely making our healthcare system more efficient. We have a long way to go, but I believe we are on the right track, and we will see some quantum leaps in medical technology over the coming years.  

 

Q: How do you see the LSI Medtech event impacting your company and industry?

A: This event connects the innovators with the capital sources they need to commercialize life-changing and saving technologies.  Innovations need capital and strategic partners to scale and get to the market.  Our event connects all of the stakeholders in the Medtech ecosystem so that good things can happen and we can get technologies to market faster.

 

Q: Why do you think education on RegA+ plays such a vital role in expanding access to capital for Medtech companies?

A: Most of the companies we work with are totally unaware of what is available in terms of tapping the private markets and leveraging equity crowdfunding. The market is slowly but surely catching up, and we believe inside of the next 12-18 months, we’ll be seeing a huge uptick of healthcare companies taking advantage of the various Regulations that came from the JOBS Act. Specifically, we believe Reg A+ will see exponential growth within healthcare/Medtech companies.

 

Q: What impact do you think RegA+ can have on Medtech companies?

A: It is already having a huge impact. Companies are starting to jump in. In the last six months, I’ve personally gotten involved in supporting five Medtech companies that collectively raised over $200M. And it is just beginning – we are at a turning point, and the markets have a huge appetite for impact investment opportunities. This is a perfect setup for CEOs and founders that are running Medtech startups that are building solutions that can save a life or reduce suffering.

 

Q: What advice would you give a young Medtech entrepreneur as they begin their journey in capital raising and building their company?

A: Do your homework and see if a Regulation A+ capital raise path makes sense for you. Surround yourself with talented people that are committed to your vision. Stay positive and be willing to adjust as you go. 

 

The Recipe for a Successful RegA+ Offering

If your company is looking to raise funding, you’ve probably considered many options for doing so. Since the SEC introduced the outlines for Regulation A+ in the JOBS Act in 2012 and its subsequent amendments, companies are able to raise amounts up to $75 million during rounds of funding from both accredited and non-accredited investors alike. If you’ve chosen to proceed with a RegA+ offering, you might be familiar with the process, but what do you need for your offering to be a success?

When beginning your offering, your company’s valuation will play a key role in the offering’s success. While it may be tempting to complete your valuation in-house, as it can save your company money in its early stages, seeking a valuation from a third-party firm will ensure its accuracy. Having a proper valuation will allow you to commence your offering without overvaluing what your company is worth, which can be more attractive to investors.

Since the SEC allows RegA+ offerings to be freely advertised, your company will need a realistic marketing budget to spread the word about your fundraising efforts. If no one knows that you’re raising money, how can you actually raise money? Once you’ve established a budget, knowing your target will be the next important step. If your company’s brand already has loyal customers, they are likely the easiest target for your fundraising campaign. Customers that already love your brand will be excited to invest in something that they care about.

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

For a successful offering, companies should also keep in mind that they need to properly manage their offering. KoreConX makes it simple for companies to keep track of all aspects of their fundraising with its all-in-one platform. Companies can easily manage their capitalization table as securities are sold and equity is awarded to shareholders, and direct integration with a transfer agent allows certificates to be issued electronically. Even after the round, the platform provides both issuers and investors with support and offers a secondary market for securities purchased from private companies.

Knowing your audience, establishing a marketing budget, creating simple terms, and having an accurate valuation will give your RegA+ offering the power to succeed and can help you raise the desired funding for your company. Through the JOBS Act, the SEC gave private companies the incredible power to raise funds from both everyday people and accredited investors, but proper strategies can ensure that the offering meets its potential.