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.

Who Does Due Diligence on Companies Using RegCF?

When it comes to raising capital using Regulation Crowdfunding (RegCF), due diligence is an essential part of the process. Due diligence helps ensure that the company offering securities complies with all applicable laws and regulations and that investors are fully informed about the risks that come with investing. We are going through who does due diligence on companies using RegCF

 

Conducting Due Diligence for Reg CF

 

The responsibility for conducting due diligence on companies using RegCF lies with a variety of parties. To offer securities through a RegCF raise, companies must use an SEC and FINRA-registered Broker-Dealer or crowdfunding platform. The broker-dealer or crowdfunding platform needs to ensure that the issuer provides accurate company information and complies with securities regulations at both the federal and state levels. These parties also ensure that any investors pass KYC and AML checks to ensure they are not bad actors or other people unable to invest.

 

The issuers themselves also have responsibilities when it comes to due diligence. They must provide investors with accurate and complete information about the company, its securities offering, and the risks associated with investing. Investors also have an obligation to thoroughly review any information regarding the investment opportunity so that they can understand its potential risk and determine if it is an appropriate investment.

 

Types of Information Gathered During Due Diligence

 

When conducting due diligence on companies using RegCF, there is an information-gathering process, notably from your Form C, such as:

 

  • Business plans
  • Background checks on key officers
  • Financial statements and tax returns
  • Intellectual property registration filings
  • Proof of ownership in any subsidiaries of the company
  • Legal documents related to the business, such as contracts and bylaws

 

This information provided during the due diligence process allows investors to better understand the company and its business operations. 

 

Protecting Investors and Issuers 

 

Performing due diligence on companies using RegCF is an important part of protecting investors. It helps ensure that only qualified and legitimate businesses can raise capital. It also provides investors with the information they need to make informed decisions about their investments.

 

Due diligence is important for companies raising funds through RegCF because of the number of new-to-the-space investors. Issuers will demand their broker-dealer to complete all due dilligence. Raises can be successful and investors need to be sure of that, as well. Additionally, platforms should also have procedures in place to collect information from companies and investors before they are allowed to raise funds, such as background checks. By doing so, platforms ensure that investors are protected and companies meet all necessary criteria before raising funds.

 

Proper due diligence has clear roles: From broker-dealers and the platforms that facilitate the RegCF transactions to issuers and investors themselves. Accurate and complete information about companies using RegCF protects issuers and investors. For investors, it allows them to make better-informed decisions about their investments. For issuers, it provides an opportunity to demonstrate commitment to compliance and build credibility with investors for a successful raise.

What You Need to Know About RegCF

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

 

What is RegCF?

 

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

 

What do you need to know about RegCF?

 

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

 

Who can invest in a Regulation Crowdfunding offering?

 

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

 

What are the investment limits for non-accredited investors?

 

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

 

What Are the Benefits of RegCF?

 

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

 

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

How Much Can I Invest in a Company with RegCF?

As Regulation Crowdfunding offerings continue to grow in popularity, more and more investors are looking to get involved. RegCF gives investors the ability to invest smaller amounts of money into early-stage companies as non-accredited investors. This is why investors put $1.1 billion into RegCF offerings in 2021 and this is predicted to double in 2022. But what exactly is Regulation Crowdfunding? And how much can you invest in a RegCF offering?

 

Why Invest in RegCF?

Reg CF allows you to invest in some of the newest and most innovative companies. This is because early-stage startups often have a difficult time accessing traditional forms of funding, such as venture capital. Other offerings have fairly large minimum investment amounts, which non-accredited investors might have trouble affording (since this prime directive of investing is never to invest more than you can afford to lose). This traditional approach to capital raising meant that only wealthy investors could afford to participate.

 

Since RegCF is specifically set up around the crowdfunding paradigm, the minimum investment amount is more affordable to more people. This is why in 2021 over 540,000 investors put their money into over 1,500 Reg CF offerings, double the number of offerings in 2019 and 2020 combined. This showcases the clear and continued interest in this type of investment from the public.

 

Investing in a RegCF Raise

Regulation Crowdfunding is a process through which companies can offer and sell securities to the general public. This process was created by the JOBS Act, and it allows companies to raise up to $5 million per year from non-accredited investors. So what does this mean for investors? Well, basically, it means that you have the opportunity to invest in some of the newest and most exciting startups, even if you’re not an accredited investor. And while you can’t sell your shares for the first year, there are several other benefits of investing in a RegCF company, but you must be aware of how much you can invest before doing so. Because of the inherent risk of investing, the SEC has placed limits on how much nonaccredited investors can invest within any 12-month period.

 

In a 12-month period, nonaccredited investors are limited in the amount they can invest in a RegCF offering. This limit is based on the investor’s annual income or net worth, whichever is greater. If an investor’s annual income or net worth is less than $124,000, then the investor can invest up to the greater of $2,500 or 5% of the greater of their annual income or net worth. If both an investor’s annual income and net worth are more than $124,000, then the investor can invest up to 10% of their annual income or net worth, whichever is greater. However, the total amount invested in RegCF offerings during a 12-month period cannot exceed $124,000.

 

Accredited investors have no limit to how much they can invest in RegCF offerings and are defined as individuals that meet at least one of the following criteria:

  • Annual income greater than $200,000 (or $300,000 with a spouse or spousal equivalent);
  • Net worth of over $1 million (with or without a spouse and excluding the value of the individual’s primary residence);
  • OR holds certain professional certifications, designations, or credentials in good standing, including a Series 7, 65, or 82 license.

 

Calculating Net Worth

To determine how much an individual can invest in securities through crowdfunding, it is vital to understand how Regulation Crowdfunding defines net worth. There are a few ways to calculate net worth, but the most common is to add up all your assets and subtract all your liabilities, according to the SEC. The value of an individual’s primary residence is not included in the calculation of their net worth, and neither is any loan against the residence up to its fair market value. Any increase in the loan amount in the 60 days before the purchase of securities will also be disregarded, to prevent artificially inflated net worth.

 

For joint calculations, you can also determine your combined net worth or annual income by adding your spouse’s income and assets to the calculation, even if the assets are not owned jointly. In these cases, the maximum investment cannot exceed that of an individual with the same net worth. 

 

Once you understand how much you can invest, the only thing left is to do your due diligence! You’ll want to review the provided disclosures so that you can get the full picture of the investment’s risk to ensure it aligns with your level of risk tolerance. 

Examining RegCF Trends

The internet has put financial literacy resources at the tip of our fingers and has done the same for investment opportunities. Whether it’s an app that allows you to buy and sell stock or cryptocurrencies, or a website that allows you to invest in a company that could be the next Uber, Tesla, or SpaceX, the average person now has access to new and exciting ways to invest that never existed before. 

 

The private capital market has been transformed by the JOBS Act and its exemptions, like Regulation CF, that allow companies to raise growth-fueling sums of money from accredited and nonaccredited investors alike. And, with companies now able to raise larger amounts than ever before, Reg CF investments are enjoying increasing popularity. This type of crowdfunding allows entrepreneurs to tap into the wallets of thousands of potential investors, providing not only the capital they need but also new networks, brand ambassadors, and more.

 

While the number of companies raising capital online decreased between 2018 and 2019, this number rebounded substantially since according to data shared by KingsCrowd. Between 2019 and 2020, the number of deals nearly doubled from 541 to 1024. The 2019 decrease could be attributed to multiple factors. One possible reason is that online crowdfunding was still considered a new space at the time, so investors and founders still had their reservations. The increased number of deals in 2020, 2021, and so far throughout 2022, suggests that this hesitation is starting to dissipate. This is supported by the tremendous milestone RegCF reached last year; over $1 billion has been raised through this exemption This could be due to a better understanding of how crowdfunding works or increased confidence in the industry as a whole. Whatever the reason, it’s clear that RegCF is becoming more popular among startups and investors alike.

 

When the COVID-19 pandemic began spreading across the US in the spring of 2020, it crippled and even bankrupted thousands of businesses. However, startups that raised capital with Reg CF didn’t appear to be affected the same way, possibly because of exploding demand in industries like telehealth, med-tech and delivery services, creating urgent new investment opportunities, coupled with large numbers of potential investors suddenly working from home and becoming more exposed to and accepting of online transactions and crowdfunding campaigns. 

 

This trend can also be seen in VC funding, which decreased during 2020 by 9% and 23% for the first quarter and second quarter of the year. The negative effect of the pandemic on VC funding largely impacted female founders more heavily than male founders, with female founders receiving only 2.3% of VC funding in 2020. That drove many founders to seek alternatives, which may explain some of the uptick in crowdfunding deals.

 

2022 is seeing a good flow of new crowdfunding deals as well. We’ve seen 429 new deals in the first quarter, according to KingsCrowd, and this number is only expected to increase as the number of founders and investors who recognize the power of crowdfunding continues to grow. With as little as $100, non-accredited investors can now own a part of a company and support a cause they believe in. This democratizes startup investing like never before.

 

Other trends we’re seeing are an increase in the mean amount raised per deal and a decrease in the median amount raised per deal, suggesting that while the biggest deals are getting bigger, the number of smaller deals is also growing, reflecting more participation by small businesses and small investors This has increased the amount of capital raised through RegCF from $239 million in 2020 to $1.1 billion in 2021, and this number is expected to double by the end of 2022. This means that more money is being funneled into startups and small businesses than ever before.

 

Will we see more startups turn to crowdfunding to compensate for the lack of VC funding? Only time will tell, but we’re excited to see how the rest of the year unfolds for the Reg CF community.

How to Read a Startup’s Financial Statements

This article was originally written by our KorePartners at StartEngine. View the original post here.

 

When considering which startups to invest in, there is some key information prospective investors would want to review and understand before making any investment decision. A lot of the information is presented to you on campaign pages, but if you want to review more detailed information about a company, you need to look at their:

  • Form C and “offering details” (for Regulation Crowdfunding offerings) or
  • Offering circular (for Regulation A+ offerings)

There are links to these documents on all of the campaign pages on StartEngine, so that you can review them, but they can contain a good deal of complex terminology that can be hard to understand.

One area that can be complicated to grasp is the company’s financial statement and the related analysis. It is one of the primary types of information prospective investors review to gain a glimpse into a company’s overall financial health.

Financial information can also help you identify trends of the business over time, so you get a better idea of the company’s potential future performance based on historical results. It can also provide you with a means of comparing a company’s performance to other companies in the same industry and stage of growth.

To make it easier for you to accomplish this, we have outlined some key terms and financial concepts to make it easier for you to review and understand a startup’s financial statements.

Note: a typical set of financial statements will include a balance sheet, income statement, statement of cash flow, statement of shareholder equity, and supplement notes. 

Income and Expenses

At some point in its lifecycle, a company must generate a sufficient amount of income to survive and grow (otherwise, it will continue to need outside sources of funding). So, how can you tell how much money a company is making, and how much it is spending? To determine this, you’ll need to take a look at the company’s Income Statement (for Regulation Crowdfunding’s offering details) or their “Statement of Operations” (for Regulation A+’s offering circular).

Gross Revenue

The first item presented on a company’s income statement is Gross Revenue. This is the amount of money the company has received by selling its goods and/or services. It is reported on the first line of the income statement, which is why you may come across people refer to gross revenue as “top line revenue” or simply “revenue.”

Cost of Goods Sold

After revenue, a company will deduct Cost of Goods Sold. This can also be called “Cost of Revenue” or “Cost of Services” and refers to all expenses that are directly related to the production of whatever products a company is selling or services it is performing. Sometimes a company may not have these costs on its income statement if it is an early stage pre-revenue startup that has not introduced its product/services to the market. These are also referred to as “variable costs” because they typically rise and fall in line with sales—simply put, producing more costs more.

Gross Profit

Once these costs are deducted, the resulting number is the company’s Gross Profit—the amount of money earned from the product or service sold. It is called a “Gross Loss,” if the sale of product or service loses money. In financial documents, losses are indicated by numbers in parenthesis, so for example ($200,000) would represent a loss of $200,000.

Operating Expenses

Operating Expenses, such as research and development expenses (money spent on innovation and technological advancement), “General and Administrative” expenses (day-to-day costs such as accounting, legal, utilities and rent) and many others are  deducted from gross profit or added to gross loss. These consist of all costs that are not directly attributable to the production of a product and/or service and are generally considered “fixed” costs because they do not rise or fall directly in line with sales.

Operating Profit/Loss

After considering these expenses, the resulting figure (gross profit minus operating expenses) is known as Operating Profit, or Earnings Before Interest and Taxes (EBIT). It is considered an “Operating Loss” or “Loss from Operations” when gross profit minus operating expenses results in a negative value.

Net Income

Once interest expense on outstanding debt and income taxes are deducted from Operating Profit/Loss, you arrive at Net Income. Conversely, if after deducting taxes and interest paid on the company’s debt results in a negative amount, it’s called a “Net Loss.”

This figure is referred to as a company’s “bottom line” due to the fact that it is typically the last item presented on the company’s income statement—much in the same way gross revenue is referred to as a company’s top line. Also, people will many times address a company’s net income or net loss as a percent of revenue, known as its “net profit margin,” which is used to measure a company’s overall profitability.

In the context of investing in startups, it’s worth noting that most companies will record gross losses, operating losses and net losses. Nearly all early-stage businesses are not profitable as funds are reinvested into growth and R&D. It’s why startups raise funding: to build the product that they can sell, to scale their operations to reach an economy of scale, to hire new employees, and a host of other reasons that help them grow towards that point of generating profit.

Net Worth: Understanding Balance Sheets

A company’s Balance Sheet presents their assets (anything the company owns that has value such as cash, inventory, accounts receivable, and real estate) and liabilities (what the company owes, such as unpaid invoices, taxes and debt). When you subtract all of the funds owed by the company from all of the assets it owns, you get the overall net worth (the book value of total assets minus total liabilities) of the company. Let’s start by looking at the asset side of the balance sheet.

Current Assets

The first category you will see is called, “Current Assets.” These are all assets that are considered cash or assets that the company expects will be converted into cash within a year. This includes cash and cash equivalents (any asset that can be immediately turned into cash, such as foreign currencies, short term government debt securities called Treasury Bills, and certificates of deposit), accounts receivable (the amount of money you are owed for products and services delivered that have not been paid for), inventory, prepaid expenses and other items.

Current assets are a major element of a company’s working capital (current assets minus current liabilities) that presents the amount of funds available to pay off short-term or current liabilities, which we will define later. The more working capital a company has, the greater its liquidity, which implies a more healthy financial position.

Long Term Assets

Next up on the balance sheet are Long Term Assets that consist of non-current assets that have a useful life of longer than 1 year. They include: property and equipment; long term investments; intangible assets such as patents, copyrights, trade names and goodwill; and software.

Long term assets are typically presented on the balance sheet at their cost value minus accumulated depreciation, which equals their net book value. Significant growth in this category can indicate that a company is focusing on or moving into or expanding lines of business that require a greater investment in fixed assets.

Current Liabilities

Current Liabilities consist of all expenses that are payable within 1 year, or sometimes within one operating cycle (the time period required to receive inventory, sell it and collect cash from the sale).

These short term liabilities include accounts payable (for example, unpaid invoices to suppliers), lines of credit, short term loans, accrued expenses (owed money for which no invoice has been submitted), taxes payable and payroll liabilities.

Current liabilities are also used in the calculation of working capital in order to ascertain a company’s level of liquidity as described above. This can provide important insight into the company and give you a sense of whether the company is generating enough revenue and cash in the short term to cover its bills.

Long Term Liabilities

Long Term Liabilities are made up of all obligations that are not due within 1 year of the date the balance sheet was prepared or during the company’s operating cycle. Examples of these liabilities are bonds payable, long term debt, deferred taxes, mortgage payable and capital leases.

A company is over burdened by excessive long term liabilities can equate to high monthly payments and lower cash flow, but some amount of long term obligations can be positive. This is due to the advantages that a company can gain through access to long term financing at low interest rates that can help it expand over a longer time period.

Net Worth

Finally, we come to Net Worth, which is most often referred to as “shareholders equity.” It is calculated by subtracting total liabilities from total assets and represents the amount of money a company would have if it ceased operations and paid off all of its debt. It is calculated the same way you would calculate your personal net worth—you would add the total value of everything you own then subtract all the money you owe.

Banks use this number as a metric for lending decisions because if a company’s assets far exceed its liabilities, it indicates a healthy financial position. On the flip side of the coin, if a company’s net worth is negative, it just means that the amount of money it owes exceeds the value of its assets. It should be noted that this is a common financial situation for an early stage startup that is trying to establish a foothold in its target market and continue to grow until its net worth is positive.

Cash Flow

The Statement of Cash Flows presents the net cash flow for a company over a given time period. It shows how cash enters and leaves a company from three main activities:

  • Operations (sales, inventory, accounts receivable, accounts payable)
  • Investing (buying and selling of assets and equipment)
  • Financing (selling of bonds, stock and paying off debt)

If an activity results in cash flowing into the company, it is shown as a positive number. If an activity causes cash to flow out of the company, it is shown as a negative number and placed in parentheses. E.g. $100,000 indicates a positive value, and ($100,000) indicates a negative value.

Cash Flows From Operating Activities

Cash flows from operating activities equates to how much cash has been spent or received from the company’s operations. One item is net income, which supplies cash to a company, or net loss, which indicates a flow of cash out of the company.

Depreciation expense (a yearly decrease in the value of a fixed asset over time resulting from normal wear and tear) and amortization expense (the yearly write-off of the value of an intangible asset over its useful life—e.g., a patent that is granted for 20 years has a 20 year useful life) are non-cash expenses subtracted from gross profit on the income statement. As such, they are added back since they are tax deductable expenses that do not deplete cash on hand.

Changes in working capital (current assets minus current liabilities) are also considered on the statement of cash flows. For example, if the company collects more cash from its receivables, cash increases. If it pays down its accounts payable, then that would reduce the amount of cash the company has on hand.

Investing Activities

Cash used for investing activities include cash spent on long term assets such as real estate, equipment (also called “capital expenditures”), patents, stocks and bonds. Conversely, gains on the sale of long term assets are recorded as cash received by the company. For example, if a company sold a warehouse, that would indicate a positive cash flow, whereas the purchase of stock in another company would constitute a negative cash flow.

Financing Activities

Finally, if a company raises money from investors by issuing securities such as convertible notes or stock, this would result in a positive cash flow to the company. When the company makes payments on its debts or buys back shares, it results in a negative cash flow.

Conclusion

And when all cash inflows and outflows are considered, the resulting amount of cash left over is a company’s net cash position. If a company shows an overall negative cash flow over time, the rate at which it is spending its cash reserves is known as its burn rate. The burn rate is usually quoted in terms of cash spent per month. 82% of startups fail due to the lack of cash flow necessary to survive and grow.

Based on the burn rate, you can figure out the company’s runway, which tells you how long a startup can survive before it will need to earn positive cash flow or raise additional capital (if the company’s finances remain unchanged). A startup’s runway is equal to its total cash reserves divided by its burn rate.

Understanding a company’s financials can help you make a more educated and informed decision when choosing the right startup to invest in. Once you have a good idea of what all of the terms mean, financial information will become easier to understand and faster to review, and in turn, investing will become a more enjoyable experience.

How Regulation Crowdfunding Will Reach $5 Billion

“We are adopting amendments to facilitate capital formation and increase opportunities for investors by expanding access to capital for small and medium-sized businesses and entrepreneurs across the United States.” – SEC, 2021

 

The continuous maturation of the crowdfunding industry has resulted in growth in the development of businesses and innovation. Since 2016, there have been 4,683 capital offerings, a third of which happened in 2021. This increase in crowdfunding spurs entrepreneurship while allowing startups to bring new technologies to market that will have a lasting impact. With over $775 million raised in crowdfunded investments in 2021 alone, this brings the total value of investments to $1.7B. This capital raised fuels companies to grow, create jobs, and positively impact their communities.

 

Growing with Crowdfunding

Before Regulation CF (RegCF), it was challenging for early-stage companies to access the capital they needed since it was often cost-prohibitive. However, this capital is essential for companies to succeed. Regulated crowdfunding is a robust tool for businesses to secure funding, with an average of 43.8% of pre-revenue startups being successful using this method of fundraising. Crowdfunding utilization has been steadily increasing since 2016, but in 2020 the success of startup companies declined to 39% due to COVID. This rebounded in 2021, with overall company success improving and 37% of all capital raised to new-revenue corporations.

 

Crowdfunded Capital

Out of 4,131 companies that have received crowdfunded capital, 2,700 were able to fund enough to innovate in their industry. Ninety-six of these organizations obtained three or more rounds of VC attention utilizing crowdfunding to improve their reach and innovation. With over 1 billion in capital deployed at an average of 1.3 million, these businesses create innovation and bring economic change to local communities.

 

An estimated $2.5 billion was pumped into local communities from crowdfunding companies in 2021, with money flowing as many as six times before leaving the local economy. Another way investment crowdfunding brings money to a community is by creating jobs; companies that utilize regulated crowdfunding support over 250,000 American jobs across 466 various industries. Crowdfunding helps industries grow and prosper, with 28% of funding going to manufacturing industries in the USA to rebuild the American manufacturing industry. Innovation grows with successful crowdfunding, with over 24% of capital being spent on IT services that make our future.

 

The Future of Innovation

 

With substantial growth in hundreds of industries, crowdfunding supplies businesses with the tools to simplify their success. With sizable exits leading to media and returns coverage, over $1 billion has been funded in over 2,500 offerings. This has led to other changes in the market, like a rise in technical innovations and digital assets like NFTs, which has also increased the growth of a secondary market.

 

Crowdfunding is an essential resource for startups, allowing companies to raise capital and turn dreams into reality. Crowdfunding efforts are an investment opportunity that helps organizations reach their goal by gaining the means to build an innovative business. We have seen the growth to $1 billion in record time, following the increase in investment limits earlier this year. Continual innovation and crowdfunding support will only help drive successful raises forward towards $5B.

Is Email Still King for Reg A, Reg CF, and Reg D Marketing?

This article was originally written by KorePartner Dawson Russell of Capital Raise Agency. View the original post here.

 

Email marketing has been around for a while. You might even be surprised to read that email has been around since the ’70s — over 50 years ago!

 

You’d think that as fast as the digital world moves, such a dinosaur of a marketing strategy would be nothing more than a relic or extinct.

But it’s not.

In fact, email marketing is somewhere in the ballpark of 40 times more of an effective marketing strategy than social media marketing, according to a study conducted by McKinsey & Company.

So why is that?

How is email marketing still king when we now have search engine optimization (SEO), social media marketing, mobile marketing, pay-per-click, content marketing, and influencer marketing all at our fingertips?

Here’s are 3 of the main reasons:

1. It’s Highly Customizable

The most crucial and effective way to have success with your email marketing strategy is to implement what’s known as “customer segmentation.” This means you can use customers’ recent and relevant searches & interests to your advantage and generate custom-made emails for them in a way that is MUCH more effective than other approaches. Customer segmentation also allows you to be much more tactful with your email timing, so you can avoid spamming their inboxes.

Even better, you can pivot your customer segmentation strategy quickly by reviewing click rates, bounce rates, and subscribe & unsubscribe rates.

2. It Provides Better Conversion Rates

It doesn’t matter if your focus is on Reg A email marketing, Reg CF email marketing, or Reg D email marketing, it will still have a better conversion rate than any other method.

Email has been traditionally regarded as the most transactional part of a company or business.

Think about it.

You can generate traffic to your business and/or convert a visitor to an investor with just a single click of a link. They can reply directly, sign-up for other newsletters, forward the email to other potential investors, and more.

According to a study done by Statista, over 93% of Americans between the ages of 22-44 used email regularly, and over 90% of Americans between the ages 45-64. Even 84% of people 65+ were regular email users.

3. It’s a Cinch to Automate

Once you get everything written out and running properly, you can launch a highly effective Reg A, Reg CF, or Reg D marketing campaign, with minimal effort compared to other methods.

With the right automation tools to go along with your campaign strategy, you can create and deliver automated emails that are not only relevant to your subscriber list but generate leads and new investors at the same time.

In Conclusion…

Email marketing really is still the best way to reach out to potential investors and remains the king of the digital marketing world. When utilized and implemented properly, it can build leads to potential investors, and strengthen brand trust and loyalty in a way that enables your fund to grow more than you would’ve thought possible.

PS: did you know that adding PS to your email marketing campaigns could increase click-through rates by an extra 2%?

End to End for RegCF

When the JOBS Act was signed into law in 2012, it brought about many changes in the private capital markets, namely, the dramatic increase in the availability of capital from more expansive pools of investors. Later on, 2016 saw Regulation Crowdfunding, also known as Title III or RegCF, go live. At that point, US-based issuers could raise up to $1.07 million from both accredited and nonaccredited investors. Additionally, companies in the startup stage through to full operating companies across all industries can take advantage of this exemption to raise capital. 

 

However, due to the comparatively low limit of RegCF in the early days when the regulation was introduced RegCF was largely overlooked by many companies seeking to raise capital. Now, it continues to gain momentum due to the limit of RegCF increasing to $5 million in March of 2021. Since then, RegCF has reached a significant milestone. In October 2021, companies surpassed a cumulative total of $1 billion raised under the regulation. Now that the limit has increased nearly five times from where it started, we expect the adoption of Reg CF to continue to grow much faster than the half-decade it took to reach $1B.

 

Getting Started with RegCF

 

For issuers looking to use Regulation CF for their offering, it is relatively straightforward for those looking to raise up to $1.07 million. For raises of this size, the issuer is not required to submit audited financial statements to the SEC. They must retain a securities lawyer to complete their Form C and obtain a CrowdCheck Due Diligence report. Next, the issuer must find an SEC-registered transfer agent to manage corporate books and cap tables, a requirement under the regulation. Additionally, the issuer must also select a FINRA-registered broker-dealer to raise capital directly from the issuer’s website. 

 

The process for raising up to $5 million is pretty similar. However, the main difference is that issuers require an audit. With this being the only difference, there is not much in terms of the change to the regulatory and compliance requirements.

 

What do RegCF Broker-Dealers Need?

 

For broker-dealers working on RegCF raises, it is something different than anything else they’ve done; they need to be prepared to handle things they may not have needed to consider in other types of capital raising activities. These things include:

  • Investment Landing Page: Once the landing page is created and ready to go live (a step sometimes done by investor acquisition firms), the broker-dealer must manage it. This includes taking over or registering the domain name. This ensures the broker-dealer is in total control, with the ability to shut it down or change/amend things as needed. 
  • Back Office: After an issuer signs up with a broker-dealer, the broker-dealer provides them with the escrow and payment rails. For the escrow account, the broker-dealer is on title as a broker-dealer so that they handle all payment components like credit cards, ACH, wire, cryptocurrency, and IRA. Typically, the bank or trust providing the escrow account will also offer wire and ACH. Since broker-dealers currently cannot hold any crypto, crypto payment options allow issuers to submit crypto that gets exchanged into fiat USD. 
  • Due Diligence: The broker-dealer will be able to rely on the CrowdCheck report, an industry standard. 
  • Registration: The broker-dealer must be registered in all 50 states to be able to provide the best help to an issuer.

 

What Compliance is Needed?

 

The compliance officer also has responsibilities they need to meet for a successful RegCF raise. This included performing ID, AML, KYC, and suitability on each investor who is investing in the offering. Plus, while accredited investors aren’t restricted to the amount of money they can invest through RegCF, the compliance officer can request an individual to go through verification, but it is not necessary. The compliance officer must also manage the KYC process through the entire offering until the money is released to the issuer. Another new change to RegCF is that companies can have rolling closes, which means that they can start closing each time they hit their minimum. When it comes to closing, the broker-dealer must ensure that the company has filed its Form C amendment.

 

What Does an Issuer Do to Prepare?

 

While the broker-dealer fills their component of the RegCF raise, an issuer will typically work closely with an investor acquisition firm to bring the eyeballs to the website. The issuer is responsible for meeting their regulatory requirements, like preparing their audit if raising over $1.07 million. Even if an issuer does not have their audit ready, they can still start their raise up to the $1.07 million amount. Once the audit is done, the offering can be amended to go to $5 million instead. Since securities are being sold directly on the issuer’s website, the traffic they’re driving there is only for them. Previously, when RegCF offerings could only be done on a registered funding portal, traffic would be directed to a site with many other offerings as well. 

 

This is not to say that funding portals don’t serve a purpose; instead, some issuers (especially those who have grown out of the startup phase) prefer more direct traffic. Currently, there are over 70 funding portals (and more on the way). Each option has pros and cons depending on the issuer and the raise that must be considered when launching RegCF. Additionally, some investor acquisition firms prefer an individualized landing page because it directs traffic and attention solely to the issuer.

 

Investment Process for RegCF

 

When the investor (or potential investor) goes to the landing page and begins the investment process, the first thing collected is their email address. This allows the investor acquisition firm to remarket to the individual if they left the page before completing an investment. Every day, a report of drop-offs will be provided that details which stage of the investment process the investor left. Plus, data is provided as to where each investor is coming from.

 

 After the initial stage of the process, the investor will proceed to enter their information, like how much they want to invest, their income, how they want to invest, and other data necessary to complete the investment. Once all of the information is entered, the investor will review and sign the subscription agreement before submitting their investment. 

 

Once the subscription agreement has been submitted, the investor receives an email allowing them to register their account with the issuer’s private label page to manage the investment they’ve made. Even though the broker-dealer manages the website, the investors’ experience end-to-end is with the issuer. Once the investment is completed, the investor will be able to find it in their portfolio. Through the portfolio, the SEC-registered transfer agent and the company manage the cap table and provide individual investors access to their investments.  For each investment, the investor can view all of its details rather than keeping that information in paper documents. They can see what rights they have for each security, how much they invested, how they paid, etc. 

 

Through the entire investment process, not only is the investor involved but there are many other parties involved. Beyond helping the company set up the investment, the broker-dealer also helps to ensure that the issuer has everything ready in their platform. The broker-dealer is then responsible for ensuring that the offering and investors are vetted into the platform as well. Additionally, the compliance officer will also have to verify the investors through the platform’s compliance management system. Once the investor is approved, their funds are sent to escrow, which the broker-dealer monitors to make sure they’ve all arrived. When the minimum is met, the broker-dealer closes, allowing the company to receive their funds and the cap table to be updated. 

 

For 2022, we anticipate that RegCF will be a game-changer. The amount of capital raised under the regulation makes it a perfect fit for seed and Series A companies that may have otherwise used RegD. Like RegD, issuers can target accredited investors, but they can also target nonaccredited as well. This significantly increases the potential pool of investors and opportunities available to raise capital. While there are an estimated 8.5 million accredited investors, only 110,000 have been verified. When considering nonaccredited as well, this number grows substantially to 233 million individuals. 

$1 Billion Raised Through RegCF

It seems 2021 is the year where we continue to break new ground for the JOBS Act, and today marks a momentous milestone in its history. Fundamentally, the act was designed to empower businesses and democratize capital. Not only has it succeeded in this goal, but it has also allowed companies to create jobs and return ownership to company founders. Recently, the amount of capital raised under Regulation CF offerings has reached an amazing milestone: $1 Billion USD over the lifetime of the exemption. 

 

This tremendous achievement would not have been achieved without the great work done by those in this sector. As of June 2020, there were 51 active RegCF funding platforms, a number that continues to grow as we see continued expansion on offering limits from regulators to make this funding method even more powerful. Now, over a year later, and after RegCF offering limits increased to $5M USD, we see nearly 70 regulated crowdfunding portals registered with FINRA.

 

We would not be arriving at this milestone today without the great work our of KorePartners in the industry, many of which have the same mission of creating equal access to the private capital markets for the everyday investor and include:

 

 

And perhaps most importantly, we would like to thank you: the investors who have poured capital into causes and businesses you are passionate about. Without your investments, we would be a long road away from the milestone we celebrate today. You have made the JOBS Act a reality and a phenomenal success that we could not have achieved without you. The everyday investors have been the lifeblood of this industry, fueling innovation, company growth, and job creations with your investments.

 

With more capital poured into private companies through these regulations, there is more opportunity than ever before for companies to succeed and investors to get involved with innovative, industry-changing companies. Such opportunities were previously unavailable to Main Street investors, but the JOBS Act has radically changed this landscape. After the incredible growth over the last nine years since the JOBS Act’s initial passage, it will be exciting to see how the space progresses over the next decade. 

 

Hooray to $1 Billion USD and counting!

 

As we move into the future, this is the group that will advance RegCF to raise $5 Billion USD for private companies:

Using RegCF to Raise Money for a Non-US Business

To use Reg CF (aka Title III Crowdfunding), an issuer must be “organized under, and subject to, the laws of a State or territory of the United States or the District of Columbia.” That means a Spanish entity cannot issue securities using Reg CF. But it doesn’t mean a Spanish business can’t use Reg CF.

First, here’s how not to do it.

A Spanish entity wants to raise money using Reg CF. Reading the regulation, the Spanish entity forms a shell Delaware corporation. All other things being equal, as an entity “organized under, and subject to, the laws of a State or territory of the United States,” the Delaware corporation is allowed to raise capital using Reg CF. But all other things are not equal. If the Delaware corporation is a shell, with no assets or business, then (i) no funding portal should allow the securities of the Delaware corporation to be listed, and (ii) even if a funding portal did allow the securities to be listed, nobody in her right mind would buy them.

Here are two structures that work:

  • The Spanish business could move its entire business and all its assets into a Delaware corporation. Even with no assets, employees, or business in the U.S., the Delaware corporation could raise capital using Reg CF, giving investors an interest in the entire business.
  • Suppose the Spanish company is in the business of developing, owning, and operating health clubs. Today all its locations are in Spain but it sees an opportunity in the U.S. The Spanish entity creates a Delaware corporation to develop, own, and operate health clubs in the U.S. The Delaware corporation could raise capital using Reg CF, giving investors an interest in the U.S. business only.

NOTE:  Those familiar with Regulation A may be excused for feeling confused. An issuer may raise capital using Regulation A only if the issuer is managed in the U.S. or Canada. For reasons that are above my pay grade, the rules for Reg CF and the rules for Regulation A are just different.

 

This blog was written by Mark Roderick of Lex Nova Law, a KorePartner. The article was originally published on Mark’s blog, The Crowdfunding Attorney.

How a Member of the Crowd Made Crowdfunding Easier

A while back, one of our favorite start-up clients called me and asked me to speak to a potential investor. Paul Efron, a resident of Arizona, wanted to invest in the company’s Regulation A offering. However, when he went onto the company’s website to invest, his subscription was rejected. The company was accepting subscriptions from investors in every state but Arizona and Nebraska.

Why Arizona and Nebraska, asked Paul?

The reason was that while federal law and most states’ laws say that a company selling its own securities is exempt from broker-dealer registration, that’s not the case in a handful of states. These states say that if a company isn’t using a registered broker-dealer to sell in their state, the company has to register itself as an “issuer-dealer.” Depending on the state, that can involve letters to the regulators showing that the company and its officers are familiar with securities regulations, fingerprints, and, in the case of Arizona, a requirement that the company comply with “net capital” requirements as if they were an actual broker. Start-ups, of course, very rarely have any excess capital sitting around. So our client decided just not to sell in Arizona. (There were similar issues in Nebraska, which has since changed its rules.)

Paul could have done several things at this point. He could have pretended he lived somewhere else. He could have given up and invested in something else. But, being an entrepreneur himself, he decided the law needed to be changed, and set about changing it.

He reviewed the Arizona legislature website and saw that every legislator gets an email address on the website.  The way the website email system is setup, doing a mass email campaign with individual emails was possible.  Paul sent out an email to every one of the 30 Senators and 60 Representatives which took about an hour of click, click, cut and paste.  He found the autofill function very helpful.  Republican Senator Tyler Pace and Democratic Representative Aaron Lieberman replied to the email.  Having a member of both parties from both houses was perfect for this nonpartisan bill.  He brought me in to explain the issue to the legislators, their staff and the relevant committee staff. They listened, understood, and drafted. The first attempt at getting the legislation through was derailed because of COVID.  Paul contacted the legislators again.  The bill was reintroduced, passed this session, and the Governor signed it into law last week.

Start-ups (and Arizona investors) owe Paul. Not just for getting this roadblock removed, but for setting an example of what can happen when a citizen looks at a regulation and says “Well that doesn’t make any sense; how do I fix that?”

KoreConX CEO Oscar Jofre was Recently Interviewed on DNA Podcast

Recently, KoreConX President and CEO Oscar Jofre had the pleasure of joining Jason Fishman on the Digital Niche Agency podcast. Jason and DNA are valued KorePartners and their podcast Test. Optimize. Scale. feature actionable insight for industry leaders on how to grow and optimize brands. 

 

In this episode, Jason and Oscar discuss how he was able to test, optimize, and scale KoreConX. In addition, they discuss the growing potential of Regulation Crowdfunding (RegCF) and the impact it will have on the private capital markets. 

 

The full episode can be listened to on Spotify or YouTube

KorePartner Spotlight: Jonny Price, Vice President of Fundraising at Wefunder

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

 

Jonny Price has always had an interest in economic development and a passion for economic justice and equity. In his first role in the fundraising sector, he worked for a company called Kiva, which provided crowdfunded micro-loans to US entrepreneurs. With his experience as the head of Kiva US, it was a natural transition to Wefunder, where he serves as VP of Fundraising.

 

For too long, investments in private companies have been limited to only accredited investors. For the average person, their only chance to invest was once the company went public. Wefunder makes it so that private investments are not just limited to wealthy investors – through Wefunder, anyone can become an angel investor for as little as $100.

 

Jonny is excited about how this is changing the private investment space. When ordinary people can invest in brands they care about, more capital is available for founders and entrepreneurs to grow their businesses. Especially in minority and women-run businesses, there is a great disparity in access to capital. Only 1% of VC funding goes to black founders, and 3% goes to female-only founding teams. Crowdfunding helps to level the playing field tremendously.

 

Partnering with KoreConX was the right fit for Wefunder. Jonny said: “I have known Oscar for a while and am impressed with the services they offer. A number of Wefunder clients have used the platform, and had very positive things to say about the KoreConX team.”

Announcing the 2021 JOBS Act Program RegCF

KoreConX has long been dedicated to helping companies meet all regulatory compliance requirements in the most cost-effective way. This commitment continues with our complimentary 2021 JOBS Act Program for RegCF, which will enable eligible companies to use the KoreConX all-in-one platform for free. KoreConX pledges to make this available to companies who have completed, started, or are in the middle of their RegCF raise. 

 

The KoreConX platform meets the regulatory SEC transfer agent requirements in addition to a dedicated agent, Cap Table Management, Portfolio Management, Shareholder Management, and BoardRoom Management. Companies using the KoreConX platform can efficiently manage SAFEs, CrowdSafes, promissory notes, debenture, and digital securities.

 

The JOBS Act Program will begin accepting applications on March 01, 2021.  KoreConX has committed to supporting your RegCF raise up to $1.07M with our complimentary (100% FREE) JOBS Act Program solution, complete with an SEC-registered transfer agent. With this increased access to capital, private companies have the chance to grow and create jobs in an economy greatly affected by the ongoing COVID-19 pandemic. KoreConX is proud to continue to provide the solutions that companies are in need of, in order to compliantly raise capital cost-effectively and efficiently.

 

Eligible companies can apply on the JOBS Act Program website. Once a submission has been received, the KoreConX team will begin the review process and notify accepted applicants within 48 hours.

 

www.JOBSActProgram.com

Using a Transfer Agent Doesn’t Mean You Have a Single Entry on Your Cap Table

Many issuers are concerned that “Crowdfunding will screw up my cap table.” In response, several Title III funding portals offer a mechanism they promise will leave only a single entry on the issuer’s cap table, no matter how many investors sign up.

The claim is innocuous, i.e., it doesn’t really hurt anybody. But it’s also false.

The claim begins with section 12(g) of the Securities Exchange Act. Under section 12(g), an issuer must register its securities with the SEC and begin filing all the reports of a public company if the issuer has more than $10 million of total assets and any class of equity securities held of record by more than 500 non-accredited investors or more than 2,000 total investors.

17 CFR §240.12g5-1 defines what it means for securities to be held “of record.” For example, under 17 CFR §240.12g5-1(a)(2), securities held by a partnership are generally treated as held “of record” by one person, the partnership, even if the partnership has lots of partners. Similarly, under 17 CFR §240.12g5-1(a)(4), securities held by two or more persons as co-owners (e.g., as tenants in common) are treated as held “of record” by one person.

With their eyes on this regulation, the funding portals require each investor to designate a third party to act on the investor’s behalf. The third-party acts as transfer agent, custodian, paying agent, and proxy agent, and also has the right to vote the investor’s securities (if the securities have voting rights). The funding portal then takes the position that all the securities are held by one owner “of record” under 17 CFR §240.12g5-1.

Two points before going further:

  • Title III issuers don’t need 17 CFR §240.12g5-1 to avoid reporting under section 12(g). Under 17 CFR §240.12g6(a), securities issued under Title III don’t count toward the 500/2,000 thresholds, as long as the issuer uses a transfer agent and has no more than $25 million of assets.
  • 17 CFR §240.12g5-1(b)(3) includes an anti-abuse rule:  “If the issuer knows or has reason to know that the form of holding securities of record is used primarily to circumvent the provisions of section 12(g). . . . the beneficial owners of such securities shall be deemed to be the record owners thereof.”

But put both those things to the side and assume that, by using the mechanism offered by the funding portal, the issuer has 735 investors but only one holder “of record.”

Does having one holder “of record” mean the issuer has only a single entry on its cap table? Of course not. At tax time, the issuer is still going to produce 735 K-1s.

The fact is, how many holders an issuer has “of record” for purposes of section 12(g) of the Exchange Act has nothing to do with cap tables. The leap from section 12(g) to cap tables is a rhetorical sleight-of-hand.

As I said in the beginning, the sleight-of-hand is mostly harmless. Except for some additional fees, neither the issuer nor the investors are any worse off. And the motivation is understandable:  too many issuers think Crowdfunding will get in the way of future funding rounds, even though that’s not true.

Even so, as a boring corporate lawyer and true believer in Crowdfunding, I’m uncomfortable with the sleight-of-hand. When SPVs become legal on March 15th perhaps the market will change.

Foreign Issuers Using Regulation A and Regulation CF

For some reason, this issue has been coming up a lot lately. Our usual response to the question “Can non-US issuers make a Regulation A or Reg CF offering?” is to point to the rules:

  • Rule 251(b)(1) says Regulation A can only be used by “an entity organized under the laws of the United States or Canada, or any State, Province, Territory or possession thereof, or the District of Columbia, with its principal place of business in the United States or Canada.”
  • Reg CF Rule 100(b) says Reg CF may not be used by any issuer that “is not organized under, and subject to, the laws of a State or territory of the United States or the District of Columbia.”

Slightly different formulations, as you can see, and note that Reg CF doesn’t say that the company needs to have its primary place of business here. But both exclude non-US or Canadian companies.

But we are getting a lot of pushback and “what if?” questions, so here are responses to a few of the most common:

  • What if we redomicile to the US? Well ok, that might work for Reg CF. It might work for Reg A too, if your management changes their domicile too (you need a bona fide principal place of business here). However, have you considered the tax consequences in your original home jurisdiction? Also, note that you’ll still need two years audited or reviewed financial statements, in US GAAP and audited or reviewed in accordance with US auditing requirements (US GAAS).

 

  • What if we form a subsidiary and it makes the offering? Yes, you can form a subsidiary here (it’ll have to have its principal place of business here too, for Reg A) and it can raise money under Regulation CF. But the money it raises here has to be legit used for the sub’s own purposes. It can’t be upstreamed to the parent, because that would likely make the parent a “co-issuer” that needs to also file a Form C or 1-A and can’t. So the sub needs to be planning to undertake its genuine own business. Even then, if it’s not a new business but just taking over some part of the parent’s business, then the sub might need to produce financials (again, using US GAAP and US GAAS) from the parent’s business or the part of business it’s taking over, because that’s a “predecessor.”

 

  • What if we create a holding company in the US? Yes, although the same issues come up. If using Reg A, you need to move your principal place of business here. For either exemption, the foreign company that is now your subsidiary will be the “predecessor” company and so again we have the need for two years’ audited or reviewed financials using US GAAP and US GAAS.

 

  • What if we create a new company that licenses the foreign company’s product or service? This may be the most promising option, but it’s really going to depend on facts and circumstances. Proceeds of the offering have to be used for the new company’s operations, in the case of Regulation A the company’s primary place of business has to be here, and you’ll have to look carefully at whether there are any predecessor issues.

SEC changes to RegA+ and RegCF

On 04 March 2020, the US Securities Exchange Commission (SEC) has laid out the proposed changes that are going to have a major impact on the private capital markets.  This is very positive for the market. These changes have been in the works for a number of years and many in the industry have advocated for these changes that are now materializing.

The Commission proposed revisions to the current offering and investment limits for certain exemptions. 

Regulation Crowdfunding (RegCF): 

  • raise the offering limit in Regulation Crowdfunding from $1.07 million to $5 million;

This is going to benefit the 44+ online RegCF platforms such as;  Republic, Wefunder, StartEngine, Flashfunders, EquityFund, NextSeed.   These online platforms have paved the way and now more US-based companies will be able to capitalize on this expanded RegCF limit.  

Regulation A (RegA+) 

  • raise the maximum offering amount under Tier 2 of Regulation A from $50 million to $75 million; and
  • raise the maximum offering amount for secondary sales under Tier 2 of Regulation A from $15 million to $22.5 million.

As you saw in our recent announcement of our RegA+ all-in-one investment platform, we expect more companies to now start using RegA+ for their offerings and they need a partner that can deliver an end-to-end solution.   www.koreconx.io/RegA

These two changes are momentous and will have far-reaching consequences in democratizing capital and make it very efficient for companies to raise capital. This also increases the shareholder base, which makes it even more important for companies to have a cost-effective end-to-end solution that can manage the complete lifecycle of their securities.

If you want to learn more please visit:

www.KoreConX.io/RegA

Here is the complete news release by the SEC

https://www.sec.gov/news/press-release/2020-55?utm_source=CCA+Master+List&utm_campaign=40105b558a-EMAIL_CAMPAIGN_2020_01_02_09_01_COPY_01&utm_medium=email&utm_term=0_b3d336fbcf-40105b558a-357209445