Meet the KorePartners: Andrew Corn, CEO of E5A Integrated Marketing

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

 

From the first project he worked on while still in college, Andrew Corn has been involved in financial marketing. After his first analyst’s presentation, “and then second, and then fifth, I decided to drop out of college and focus on that full time. Soon after, I wrote my first IPO roadshow, built a company around that, and a few years later, also started working for money managers,” Andrew said. After selling that company, Andrew went to work for a publishing company specializing in investingas the chief marketing officer.

 

Then, for 9 years, Andrew left the marketing industry and created a multi-factor model used to analyze the stocks available on US exchanges to select them for separately managed accounts, and he and his team designed the index behind six ETFs, eventually selling that company to a bank, where he served as the chief investment officer. “When E5A was born, it was born as an investment house, and then I got sucked back into marketing in 2012 and switched E5A over into a marketing firm in 2013,” Andrew recounted. At E5A, they acquire investors through systematic, data-driven marketing.

 

For companies that are looking to raise capital, marketing plays an incredibly important role. For RegA+ offerings, a company’s first target is typically its existing network of customers. However, a marketing firm such as E5A can help companies to understand the behavior and demographics of current customers. Knowing how customers behave will allow companies to targetpeople that are demographically and behaviorally just like their current customers.

 

With RegA+ offerings, the majority of the money will be raised through marketing. “The beauty of that is that it’s passive,” Andrew says, “we can look at entirely new groups of prospects who are the most likely people who would be interested in investing in a company like yours. Sometimes we can find them through behavior or demographics, hopefully, it’s a combination of both.” Once potential investors have been found, marketing agencies can come up with the messaging platform that will raise money through these investors. Companies are often surprised that their existing network raises little money, but the investors they can gain through marketing helps them reach their goals.

 

Through the use of marketing, Andrew is excited about how companies benefit from acquiring investors at scale. “If you’re a restaurant chain, you want as many people to know about it as possible. If you have a direct-to-consumer product, you want many people to know about it. So a byproduct of raising capital is promoting the brand or the business.” Both investors and the companies get more engaged as information is put out regularly.

 

With RegA+ allowing investors of all wealth, income and experience levels to participate, the restriction allowing only accredited investors is lifted. Additionally, Andrew believes that increasing the limit from $50 to $75 million will greatly improve the regulation since oftentimes companies require more funding. With IPOs on both the New York Stock Exchange or the NASDAQ often over $100 million, he believes increasing the cap to as much as $200 million in a few years would be better for companies looking to utilize RegA+.

 

For its clients, E5A is a “turnkey marketing company, so we do everything from messaging platforms to data-targeting to media buying and optimization, message testing, web development, etc.” Andrew expects that E5A will be held to a standard of success being measured by the amount of money raised. While looking to maintain as much control of the outcome, E5A also understands that many of the companies they work with have their own marketing or IT departments, and try to share as much work with them as possible and include them in the process.

 

E5A looks to work with companies that have a high probability of success, which requires an ecosystem of legal, accounting, technology, broker/dealer, consulting, and marketing services. Andrew says, “We feel that Oscar and the KoreConX team are putting together a world-class network of service providers who are experts in each of their individual tasks. We are glad to participate.

Warrant Issuers, Keep Your Offering Statement Evergreen

An increasing number of issuers have been using Regulation A to make continuous offerings of units, consisting of a combination of equity, often common stock, and warrants to purchase the same equity at a future date.  Under the Securities Act, the units, the shares of stock, the warrants and the shares of stock issuable upon exercise of the warrants are separate securities whose offer and sale must be registered on a registration statement or covered by an exemption from registration such as Regulation A.  That is why offering statements under Regulation A list each of these individually and why the SEC requires the validity opinion filed as an exhibit to the offering statement to cover all of them (See Staff Legal Bulletin No. 19, available at https://www.sec.gov/interps/legal/cfslb19.htm ).

 

Most warrants that are part of these structures are exercisable for more than a year after their date of issuance, often up to 18 months.  Since the exercise of the warrant and payment of the exercise price for the underlying shares is a new investment decision by the warrant holder, the offering statement covering the underlying warrant shares must continue to be qualified under Regulation A in order for the new shares to be covered by the exemption from registration. That means that an issuer must keep the offering statement “evergreen,” or qualified for at least 2 to 3 years to cover those exercises, even if the offering of the units is completed before the first anniversary of qualification.   Most Regulation A offerings permit rolling closings.  The effective date of a warrant is typically the date on which a closing is held and a warrant is issued to an investor.  For example, if an issuer commences a Regulation A offering on the date its offering statement is qualified (let’s say February 1, 2021) and holds its first closing of units on March 1, the warrants issued in that closing are exercisable until September 1, 2022, well past the anniversary of qualification.  Assuming the offering stays open for at least 9 months and the final closing is held on November 1, 2021, the warrants issued in that final closing are exercisable until May 1, 2023.

 

Under the securities laws, registration statements for continuous offerings are kept updated, or “evergreen,” when an issuer complies with its reporting obligations under the Exchange Act by filing timely periodic reports such as their annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.  However, since the analogous periodic reports under Regulation A are filed under the Securities Act, their filing does not keep the offering statement evergreen.  If an offering is to extend more than one year from qualification, issuers conducting continuous offerings need to file post qualification amendments (“PQA”)  in accordance with Rule 252(f)(i) every 12 months after the qualification date to update the offering statement, which includes incorporating the financial statements from the periodic reports filed during the previous 12 months.  If the original offering statement was scheduled to terminate before the warrant exercise period ended, the PQA would also need to extend the termination date. A PQA in those circumstances renders the offering statement un-qualified and subject to a possible new SEC review, which means an issuer may continue to make offers (so long as the financials are not stale yet) but may not make sales, such as the issuance of warrant shares upon exercise of warrants, until the SEC re-qualifies the offering statement (See our blog post on updating continuous offerings: https://www.crowdcheck.com/blog/updating-continuous-offerings-under-regulation).  Using our example above, the issuer of units would need to at a minimum file a PQA in sufficient time before February 1, 2022 to allow for a possible Staff review and comment period to meet the annual requirement under Rule 252.  Moreover, if the unit offering lasts more than 6 months after the original qualification date, an issuer should anticipate having to file a second PQA in early 2023 to cover the exercise of warrants issued in the last closing of the offering.

 

Warrant issuers should also keep in mind some additional steps they will need to take.   The subscription agreement and the warrants themselves will need to include additional reps, warranties and covenants, such as a covenant to keep the offering statement evergreen.  Plus, even after qualifying the PQA with the SEC, the issuer will need to insure that it is current with state notice filings, which typically need to be renewed every 12 months as well.

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.

What is the Role of a Transfer Agent for a Private Company?

For companies issuing securities to investors, a transfer agent plays an important role in the process. If your company has yet to issue securities but will be doing so soon, a clear understanding of the purpose of a transfer agent is necessary when choosing the best one to fit your company’s needs.

 

Throughout a company’s rounds of funding, investors will purchase their share of the company to fund the company’s growth. These purchases come in the form of securities and a careful record of them must be kept. Knowing the number of shares each investor owns will be essential in future business deals. In the past, investors were issued paper certificates by a transfer agent, denoting their share of ownership. Now, it is more common for them to issue certificates electronically, which saves the issuer both time and money. 

 

Not only does the transfer agent issue certificates, but they keep a record of who owns what, pays distributions to shareholders, and serves as an intermediary for the company for all transactions related to securities. In this capacity, they provides support to both the issuer and the investor. They are tasked with the responsibility of maintaining accurate records regarding all securities issued by the company. 

 

For a private company, a transfer agent is incredibly important when dealing with investors. When utilized alongside a capitalization table (usually called a cap table), a transfer agent can help the company provide a precise record of who their investors are and how much equity they have remaining, which becomes essential in future rounds of investments. When both current and potential investors can view accurate and complete information on the companies they are investing in, the transparency and availability of information increases the investors’ confidence. 

 

When choosing a transfer agent for your company, the one that eliminates unnecessary costs and time is the most logical option. Through its all-in-one platform, KoreConX offers just that. Completely integrated with the rest of the platform, the KoreConX Transfer Agent is SEC-registered and can be used with other features, such as cap table management and access to a secondary market. Since the KoreConX Transfer Agent manages paperwork and issues certificates electronically, the lengthy process of manual filing is eliminated, creating an experience that is both streamlined and faster. Through the KoreConX Transfer Agent, any change made is reflected in the cap table in real-time, reducing any errors that could be caused by the manual transfer of the data. 

 

Private companies can benefit immensely by employing the use of a transfer agent. Allowing them to manage their securities more efficiently, companies can keep a more detailed record of transactions. As it is the transfer agent’s responsibility to maintain the records of securities, it is essential that companies carefully consider when they’re making their choice. 

 

A good transfer agent must be able to handle many forms of securities instruments, such as equity, debt (bonds, debentures), convertibles, options, warrants, promissory notes, crowdfunding, etc. All of this should be done as efficiently as possible in a fully compliant way in multiple jurisdictions. Ideally, they should provide both the company and its shareholders information in real-time without additional expenses. Most importantly, transfer agent services that are easily integrated with other capabilities, such as portfolio management, shareholder management, minute book, investor relations, and so on, provide companies with a more inclusive and efficient way of maintaining their financials. 

Click “RESET”

In the future, 5 or 10 years from now, we will see an evolution in business and a paradigm shift occurring all due to the global COVID-19 pandemic. Many of us have been advocating that the business world has been operating ineffectively, but not until now has everyone been able to see it and experience it first hand. There are many examples where the chain is broken.

American Stimulus Checks (Banking)

Before the first round of stimulus checks issued to the American people, the US President told everyone that their checks would be deposited within 48 hours. However, a few hours later, the IRS issued a contradictory news release that only about 50% of Americans would receive the aid within 48 hours. For the rest of the population, without direct deposit set up, the process would take months and lacked the potential for setting up direct deposit only. Plus, since the pandemic began to close businesses and eliminate jobs, there has been no additional aid to the American people besides a smaller sum approved by Congress in December.

Opening Commercial Business Accounts (Banking)

Anyone with a business account has experienced the process of setting up a commercial bank account. Applicants need to bring their books, ID, etc., and set up an appointment with the bank to open a business account.  The banker collects all the information and begins the onboarding process. However, this process is often variable and inefficient depending on the financial institution. 

Broker-Dealer Transacting

Broker-dealers in the alternative investment sector, such as those who work with investors for private companies, are accustomed to meeting investors face-to-face to bring them opportunities and perform regulatory compliance. This often makes it more than just a service—it is a personal relationship built between investors and their broker-dealers. However, with face-to-face appointments becoming a way of the past in favor of virtual meetings, the process needs to be improved to support this fundamental change.

Post COVID-19 RESET

The last time we had a reset of any significant magnitude in business was at 11:59 PM on 31 December 1999.  For those who remember the 12 months before this date and time, everyone knew that the future was going to be different, and we saw the next phase of the computer and software introduction to business.

 

Despite this, since 11:59 PM on 31 December 1999, all we have seen is more development but no “reset” and small uptake to really make a difference.  These businesses on which we rely for our financial services have been noticing the signs that change is coming.  Most of them would say, nothing to worry about because my business is very personal with my clients.  Some have attributed that the only way you can offer a personal touch to your business is by not adopting technology to operate your business efficiently.

 

For those who understand and are already seeing this as an opportunity to lead the business world, this “RESET” will create new leaders in many areas as we move to end-to-end processes that have no broken links in these areas:

    • Banking
      • Banks that will be fully online, including onboarding customers and transacting. No more PDF’s but fully integrated with your corporate activities
      • End-to-End integrated with companies  
    • Broker-Dealers
      • The personal touch extended to all clients to pursue opportunities and able to invest by simply updating their profile and from the comfort of their home, office, vacation.
      • End-to-End integrated with investors, compliance, companies, banking
    • Companies
      • Managing all corporate records for C-level onward to be connected to their shareholders, access to capital, banking, insurance, and M&A, regardless of the size of a company
      • End-to-End integration with Broker-dealers, Banking, Secondary Market, and all stakeholders (management, board directors, shareholders, investors, legal, auditors)

 

Why Them?

We rely on them (Banking, Broker-Dealers) to transact to keep our businesses operational. If they are no longer changing the way a service is delivered or integrated or a company or stakeholders are onboarded, companies will pivot to make rapid, fundamental changes to keep their business operational. 

 

There will be holdouts as we saw on 31 December 1999. In the end, they will be the ones complaining that it was Covid-19 that destroyed their businesses, but in reality, their businesses were adversely affected by not pivoting when all indicators pointed to the need for change.  

Real-Time Success

We are seeing clear indicators already that we must pivot our way of doing business.  Companies are raising capital online from registered funding portals or via their website, and the data is showing strong growth in online investing. This is one clear sign that those who have pivoted are getting rewarded versus those waiting and hoping for the good old days to come back.

 

11:59 PM 31 December 2020

RESET

 

How to be Ready for Raising Capital

Whether you’ve raised capital in the past or are preparing for your first round, being properly prepared will help your company secure the funding it needs. Proper preparation will make investors confident that you are ready for their investments and have a foundation in place for the growth and development of your company. So if you’re looking to raise money, what must you do to be ready for raising capital?

 

From the start, any company should keep track of shareholders in its capitalization table (commonly referred to as the cap table). Even if you have not yet raised any funds, equity distributed amongst founders and key team members should be accurately recorded. With this information kept up-to-date and readily available, negotiations with investors will be smoother, as it will be clear how much equity can be given to potential shareholders. If this information is unclear, deals will likely come with frustrations and delays. 

 

Researching and having knowledge of each investor type will also help prepare your company to raise money. Will an angel investor, venture capital firm, crowdfunding, or other investment method be suited best for the money that is being raised? Having a clear answer to this question will help you better understand the investors you’re trying to reach and will help you prepare a backup option if needed. 

 

Once your target investors have been decided and you have a firm grasp on the equity you’re able to offer, preparing to pitch your company to them will be a key step. Having a pitch deck containing information relevant to your company and its industry will allow you to convince investors why your business is worth investing in. Additionally, preparing for any questions that they may ask will ensure investors that you are knowledgeable and have done the research to tackle difficult problems. 

 

Before committing to raising capital, you should make sure that your company has an established business model. Investors want to see that you have a market for your product and are progressing. If investors are not confident that the product you’re marketing has a demand, it will be less likely they will invest. Investors will also want proof that the company is heading in the right direction and the money they invest will help it get there faster. 

 

Once you have determined that your company is ready for investors, managing the investments and issuing securities will be essential. To streamline the process and keep all necessary documents in one location, KoreConX’s all-in-one platform allows companies to manage the investment process and give investors access to their securities and a secondary market after the funding is completed. With cap table management, the all-in-one platform will help companies keep track of shareholders and is updated in real-time, ensuring accuracy as securities are sold. 

 

Ensuring that your company has prepared before raising capital will help the process go smoothly, with fewer headaches and frustrations than if you went into it unprepared. Investors want to know that their money is going to the right place, so allowing them to be confident in their investments will ensure your company gets the funding that it needs to be a success. 

Can I Use My IRA for Private Company Investments?

Individual retirement accounts (commonly shortened to IRAs) allow flexibility and diversity when making investments. Whether investing in stocks, bonds, real estate, private companies, or other types of investments, IRAs can be useful tools when saving for retirement. While traditional IRAs limit investments to more standard options, such as stocks and bonds, a self-directed IRA allows for investments in things less standard, such as private companies and real estate. 

 

Like a traditional IRA, to open a self-directed IRA you must find a custodian to hold the account. Banks and brokerage firms can often act as custodians, but careful research must be done to ensure that they will handle the types of investments you’re planning on making. Since custodians simply hold the account for you, and often cannot advise you on investments, finding a financial advisor that specializes in IRA investments can help ensure due diligence. 

 

With IRA investments, investors need to be extremely careful that it follows regulations enforced by the SEC. If regulations are not adhered to, the IRA owner can face severe tax penalties. For example, you cannot use your IRA to invest in companies that either pay you a salary or that you’ve lent money to, as it is viewed by the SEC as a prohibited transaction. Additionally, you cannot use your IRA to invest in a company belonging to either yourself or a direct family member. If the IRA’s funds are used in these ways, there could be an early withdrawal penalty of 10% plus regular income tax on the funds if the owner is younger than 59.5 years old. 

 

Since the IRA’s custodian cannot validate the legitimacy of a potential investment, investors need to be responsible for proper due diligence. However, since some investors are not aware of this, it is a common tactic for those looking to commit fraud to say that the investment opportunity has been approved by the custodian. The SEC warns that high-reward investments are typically high-risk, so the investor should be sure they fully understand the investment and are in the position to take a potential loss. The SEC also recommends that investors ask questions to see if the issuer or investment has been registered. Either the SEC itself or state securities regulators should be considered trusted, unbiased sources for investors.

 

If all requirements are met, the investor can freely invest in private companies using their IRAs. However, once investments have been made, the investor will need to keep track of them, since it is not up to their custodian. To keep all records of investments in a central location, investors can use KoreConX’s Portfolio Management, as part of its all-in-one platform. The portfolio management tool allows investors to utilize a single dashboard for all of their investments, easily accessing all resources provided by their companies. Information including key reports, news, and other documents are readily available to help investors make smarter, more informed investments. 

 

Once investors have done their due diligence and have been careful to avoid instances that could result in penalties and taxes, investments with IRAs can be beneficial. Since it allows for a diverse investment portfolio, those who choose to invest in multiple different ways are, in general, safer. Additionally, IRAs are tax-deferred, and contributions can be deducted from the owner’s taxable income. 

Reg CF Investment Vehicles: What Are They Good For?

In its recent rulemaking, the SEC added new Rule 3a-9 under the Investment Company Act to allow for the use of “crowdfunding vehicles” for Reg CF investments. It is important to recognize that crowdfunding vehicles are quite limited, and not at all similar to the special purpose vehicles (“SPVs”) used to aggregate accredited investors in angel or venture capital funding rounds.

In that type of SPV, there is often a lead investor or manager who may act on behalf of the investors in the SPV. Those persons could be exempt reporting advisers under the Investment Advisers Act, or even fully registered investment advisers. In this way, SPVs create real separation between the investors and the underlying issuer, with some person or entity acting as an intermediary when making decisions or providing information to investors.

For crowdfunding vehicles, on the other hand, the SEC requires that investors receive the same economic exposure, voting power, ability to assert claims under law, and receive the same disclosures as if they invested directly in the issuer itself. In particular, a crowdfunding vehicle:

  1. Is organized and operated for the sole purpose of directly acquiring, holding, and disposing of securities issued by a single Reg CF issuer;
  2. Does not borrow money and uses the proceeds from the sale of its securities solely to purchase a single class of securities of a single Reg CF issuer;
  3. Issues only one class of securities in one or more offerings under Reg CF in which the crowdfunding vehicle and the Reg CF issuer are deemed to be co-issuers;
  4. Receives a written undertaking from the Reg CF issuer to fund or reimburse the expenses associated with its formation, operation, or winding up, receives no other compensation, and any compensation paid to any person operating the vehicle is paid solely by the Reg CF issuer;
  5. Maintains the same fiscal year-end as the crowdfunding issuer;
  6. Maintains a one-to-one relationship between the number, denomination, type and rights of Reg CF issuer securities it owns and the number, denomination, type and rights of its securities outstanding;
  7. Seeks instructions from the holders of its securities with regard to:
    1. The voting of the Reg CF issuer securities it holds and votes the crowdfunding issuer securities only in accordance with such instructions; and
    2. Participating in tender or exchange offers or similar transactions conducted by the Reg CF issuer and participates in such transactions only in accordance with such instructions;
  8. Receives, from the Reg CF issuer, all disclosures and other information required under Reg CF and the crowdfunding vehicle promptly provides such disclosures and other information to the investors and potential investors in the crowdfunding vehicle’s securities and to the relevant intermediary; and
  9. Provides to each investor the right to direct the crowdfunding vehicle to assert the rights under State and Federal law that the investor would have if he or she had invested directly in the Reg CF issuer and provides to each investor any information that it receives from the Reg CF issuer as a shareholder of record of the crowdfunding issuer.

The result is that no lead investor or manager can be used, and investors will have the same rights and responsibilities as if they invested in the issuer directly.

The biggest practical effect is that Reg CF investors will appear on one line on the issuer’s cap table (addressing the “messy cap table” issue), and that line will represent the full number of beneficial owners, who each must still be notified by the issuer in the event of any decisions requiring investor action. The issuer could hire an administrator to handle communications with the investors in the crowdfunding vehicle, but there was nothing preventing an issuer from doing that previously.

However, by only existing as one line on the issuer’s cap table, and confirmed in its rulemaking, crowdfunding vehicles will count as one “holder of record” for the purposes of Section 12(g) of the Securities Exchange Act. This is the provision that says that a company has to register with the SEC and become fully-reporting when it reaches a specified asset and number-of-shareholder threshold. Up to now, crowdfunding companies have relied on a conditional exemption from Section 12(g) but some companies have worried about what will happen when they no longer comply with those conditions.

The SEC further opined that with these changes, it is possible that issuers will provide greater voting rights than has been common in Reg CF offerings. I am not sure that will be the case, as use of crowdfunding vehicles will not simplify obtaining votes for any necessary corporate consents unless the rights of investors are curtailed by the use of drag-alongs or similar provisions.

Setting up a crowdfunding vehicle will require documentation tailored to follow the terms of the securities being sold in the crowdfunding offering, and arranging for administrative tasks such as issuance of K-1s to the investors.  CrowdCheck is available to talk through the implications of using crowdfunding vehicles and whether it makes sense for your Reg CF offering.

The SEC proposes expanding the “accredited investor” definition

The SEC has proposed amending the definition of “accredited investors.” Accredited investors are currently defined as (huge generalization here) people who have net worth of $1 million (excluding principal residence) or income of $200,000 ($300,000 with spouse) or entities that have assets of $5 million. Here’s the full definition.

The whole point of the accreditation definition was that it was it was supposed to be a way to determine whether someone was able to “fend for themself” in making investment decisions, such that they didn’t need the protection that SEC registration provides. Those people may invest in private placements. The thinking at the time the definition was adopted was that a financial standard served as a proxy for determining whether an investor could hire a professional adviser. Financial standards have never been a particularly good proxy for investment sophistication, though, and some people who are clearly sophisticated but not rich yet have been excluded from being able to invest in the private markets.

The proposal would:

  • Extend the definition of accredited investor to natural persons (humans) who hold certain certifications or licenses, such as the FINRA Series 7 or 65 or who are “knowledgeable employees” of hedge funds;
  • Extend the definition of accredited investors to entities that are registered investment advisers, rural business investment companies, LLCs (who honestly we all assumed were already included), family offices, and other entities meeting an investments-owned test;
  • Do some “housekeeping” to allow “spousal equivalents” to be treated as spouses and tweak some other definitions; and
  • Create a process whereby other people or entities could be added to the definition by means of a clear process without additional rulemaking.

We are generally in favor of these proposals. However, we worry that the more attractive the SEC makes the private markets, the more that people of modest means will be excluded from the wealth engine that is the American economy. We also believe that the concerns raised about the integrity of the private markets by the two dissenting Commissioners, here and here, should be taken seriously. The real solution to all of this is to make the SEC registration process more attractive, and better-scaled to early-stage companies.

In the meantime, read the proposals and the comments, and make up your own minds. The comment period ends 60 days after publication in the Federal Register, which hasn’t happened yet.