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Form 1A Preparations

Speakers

Peter Daneyko 00:10

Well, panel are we live yet? Are we waiting for something to countdown?

 

Shari Noonan 00:17

I think we’re live.

 

Peter Daneyko 00:20

Well welcome everybody here. And this next session revolves around preparations for form 1A, an interesting topic, super important topic. We hear all about teams and the importance of qualified intermediaries and experts for capital raised in a Reg A offering. And our panel is made up of deep, what I believe are the most highly respected experts in legal preparation, and auditors compliance, and they are all interconnected allies to ensure a successful raises done right from the start. So I’d like to welcome the panel, and maybe we do a couple of quick introductions. On the broker-dealer front is co-founder and CEO of Rialto Markets, Shari Noonan, Shari, great to see you again.

 

Peter Daneyko 01:14

And we’ll get the sounds dialed in here as we go along here, from Reg D Resources we’ve got founder Doug Ruark, and corporate counsel, Nick Antaki. And they’re going to address all of our questions that those that respect the legal community know to not step over our legal skis, and it’s super important stuff. And certainly last but not least is Matt McNamara, a managing partner of Assurance Dimensions. Hey, Matt, good to see you. And Matt lives and breathes all things, financial audits, something that might be not near and dear to our heart, but absolutely critical. Gonna ask our audience. Feel free to to ask them questions, we’ve got a number of questions that this panel can certainly address. And I’d like to take it from a perspective from, and I’ve got Doug Ruark, the founder of Regulation D resources. Doug, welcome. It’s great to see you again. I want to come from a perspective from a first time issuer coming to each of you, how you would guide us through and best prepare for one eight from the start? And I guess maybe the beginning of all this is, what is a Form 1A.

 

Douglas Ruark 02:41

Absolutely. So you know, with a Regulation A program, the filing that goes into the SEC, is called a Form 1A, and it’s essentially akin to an S one, it’s a very sophisticated filing, it is a filing that is going to be reviewed and qualified by the SEC. So it does obviously need to be prepared properly. There’s obviously a lot of exhibits that are going to go into that filing. So the Form 1A is a big piece of the preparation process for the Reg A plus offering itself. And it’s part it’s a big part of the timing ramp as well that you know that with the Reg A’s, it’s not you’re not going to have a Reg A out in a couple of weeks raising money. You know, with that said, it is akin to a public offering as far as the investor acquisition capabilities and the sophistication. So for that, that lead-up time of putting the filing in place, you’re obviously going to be getting a very sophisticated offering. And it’s in fact the most sophisticated offering you can execute as a private company. So that filing is going to describe, you know, everything about the company, its operations management team, investment risks, you know, there’s obviously going to be exhibits, your governance stocks, any kind of material agreements, the audited financials, which is obviously why we’ve gotten Matt McNamara on this panel, expert, obviously auditor in auditing firm, but it’s a it is a sophisticated filing to put in place. So I think for the people watching this presentation, that is something to keep in mind. You do want a firm like Regulation D Resources that has expertise in putting these filings in place, coordinating with all of the other vendors. There’s obviously going to be broker-dealers involved transfer agents, investor acquisition, escrow, auditors. So there’s there’s a lot of coordination that happens in putting the filing in place to get it to the point where it’s ready to be submitted to the SEC, and then go through the qualification process.

 

Peter Daneyko 04:56

Hey, great overview Doug. I think, again, it’s all about the preparation. It’s all about the team that you have. And, and so where does it? Where does it begin? We understand, certainly a little bit more about our Reg A, or what that is all about. But where does it all begin? I mean, Matt, maybe you can jump in and give us a perspective of, you know, doing an audit, I understand that the filing requires an audit. So maybe you can give us some insight on that, and maybe give us some takeaways of what’s good, bad or indifferent or with some challenges that you’ve seen and best practices that you might recommend.

 

Matthew McNamara 05:38

Okay, yeah. Great. Thank you, Peter. Yeah, and I think I think probably Doug can speak to this a little bit, a little bit more after I kind of answer your question there. But I think there are some, some critical paths here. And when does this thing start? Which was your original question. And I think there’s a lot of, I think we’ve seen in practice between Doug and Nick and I, we’ve seen that every piece of it, we’ve seen folks that are just kicking the tires, and they’re trying to understand what’s going on? And what do I need to do to get this thing accomplished and really trying to build out that spreadsheet? I’m assuming everyone watched the previous presentation with Stephen. But Stephen has an amazing spreadsheet, it really goes down all of these different costs, all these different pieces, and what does it really take to get this process completed? Doug, and I have worked with folks that that bring the auditor in, maybe before I’ve made introductions to Doug and groups that are looking to get the Form 1A completed and then we’ve gone all the way to the other side of it, where Doug gets involved, and we need to have an audit done very quickly. So I think best practice wise, and certainly getting in on the forefront, utilizing a quarterback that was referenced so many times in a previous presentation. And really having this process go through from start to finish, we can work in unison with Doug and his team, they can be prepping the form 1A, we can be completing the audit and really on separate timelines, our net goal is we just need to be done a week or two before Doug is ready to go final with his form 1A filing. So I think that is the key piece to the preparation side is that timeliness and having that spreadsheet, I think one of the key things and a lot of our presentations that we put through that is probably critical to note is, you know, as many of those costs as you can, as you can lock down and have solid fixed fee costs in place. So you know, the cost of the of the transaction and what needs to be, you know, what sort of funding you’re going to need upfront is obviously mission critical. And once again, I think, you know, having that quarterback in place to have those costs locked down have that, you know, what is his bridge, we’re going to need to get to the actual funding is really critical to kind of start process and where we go. I think I think that kind of answers your question, Peter.

 

Peter Daneyko 08:10

No, I think it’s great. I’m hearing, that one of the takeaways is that you’re doing a lot of things in tandem. And maybe you know, as far as Doug and then we’ll say we were to share it with as far as once the filing gets completed some timelines there, but maybe Nick and Doug, you can give some insight and say, you know, when the audits being done, and you guys are doing your paperwork, what are some? What are some things that can help you do your job when you’re having conversations with the issuers themselves? As far as Are they ready, for example, and maybe you can discuss some of the timelines that it takes to do to actually do the filing?

 

Nicholas Antak 08:50

Yeah, I can speak to that. So the vast majority of our offerings have three things being done in tandem. One is the audit. The other is the kind of refinement of those the cap table and the company corporate documents the either way, the LLC agreement, the shareholders agreement, the articles of incorporation, stuff like that is usually being done concurrently with us drafting the form 1A. So usually what we start off with is we just try to get as much information about your business as possible. Generally speaking, most of our, I’d say about 80% of our Form 1A’s don’t have sufficient articles of incorporation. They might not have enough authorized shares, for example, or there may be transfer restrictions with their articles and bylaws for the securities when in fact one of the biggest advantages to the Reg A would be to have some sort of liquidity for your shareholders. So you know, you have to really clean up those things. The audit will work concurrently. So usually what happens is we will go Go in there, we’ll learn as much about your business as possible. And we’ll just start drafting the form 1A. As the items get completed, we will then incorporate that into our drafting process. 

 

Douglas Ruark 10:13

I’ll add to that Peter to I think, you know, a big piece for us is obviously the narrative of the business. So when people come into this process, and obviously, you know, they’re coming in working with quarterbacks like Steven Brock and Scott Pantel, you know, getting them prepped properly, obviously come into our process, a big piece of it is obviously the narrative on the business. How does the business operate? What type of products does it have? Does it have patents? Well, you know, if it’s obviously if it’s med-tech, you potentially are looking at, you know, FDA processes for clearance and approvals. So, so I think for anyone out there that’s watching this, that’s thinking, hey, we’re contemplating doing a Reg A, and how can we really hit the ground running and come in well prepared, you know. Obviously, the quarterbacks will work with you on getting cap tables refined and everything like that. But I think to come into even the quarterbacks piece of it, effectively, what you’re going to want to do is come in with coming in with some narrative on the business, and it needs to be granular, it needs to be factual, that’ll also help my company and my team, be able to put that form on a in place more efficiently. The other thing I mentioned, too, and this kind of dovetails with what Matt said, is that I don’t need the audited financials out of the gate to start drafting work on the Form 1A. I’ll need it in the last say, 20%, of the of the filing preparation process. So that’s another thing that I tell people analyzing coming into this process is, you know, don’t, don’t start with Matt. And then you know, wait 60 days, and then get us started, because we can work in tandem. And as Matt’s working on the audit, we’ll be working on the filing. And ultimately, you know, it times it well. And Matt’s fantastic at getting these audits done quickly. Matt’ll have that audit done right at the time, where we’re going to kind of start needing to incorporate it into the filing.

 

Peter Daneyko 12:02

Oh, that’s terrific. I’m hearing also, that a lot of thought needs to go into being more forward-thinking, and perhaps, Doug, what I’m hearing is, don’t just think about this raise because this raise can affect your other raise and in the future and how you’re structuring things. Because most companies, they’re not just doing one raise, they’re doing multiple raises, especially in the med-tech space. I mean, it’s a journey. I mean, there’s a lot that goes into this. So what kind of advice or what kind of structuring, I guess, maybe on your discovery calls? Do you guys go through when it comes to those discussions with that company? Do you dive deep and say, Okay, we want to do the raise today, you know, for $75 million over the next 12 months. But are you looking forward-thinking to say not just this raise, but the future when we talk about existing shareholders? You mentioned cap tables? Can you maybe get into that a little bit on what goes into that, or at least give some insights into the issuers have some questions that they should at least be thinking about?

 

Douglas Ruark 13:07

Sure. Well, and actually, you know, and Nick can kind of add some color to this. You know, Todd apparently has a question about if you’re currently an LLC, do you need to convert to a C Corp to do a Reg A through a Form 1A? The answer that is no. We’ve certainly done Reg A work for LLCs. Before but this actually is a kind of a perfect segue to the question that you just asked Peter, which is when you start looking ahead, and if you’re looking to raise $30, $40, $50 million, even ten or $15 million, the forward plan of the company, managing your cap table, what’s the ultimate exit, all that starts to come into play? And I think then that does start driving the conversation of do you convert to a corp? We’ve run into clients before where they were going to do rounds of funding, and obviously have a lot of shareholders coming on board. And when they looked at what the fees were related to, say, issuing a K-1, there are certain states out there. For example, that have fees for each K-1 that gets issued in a member in LLC, and that it can all of a sudden quickly become unworkable, in that manner. So I think that is also part of the conversation when you start looking at the entity formation. What’s the for plans for the company? How many rounds do they want to have? What’s their projected exit? I would say that for most companies coming through to do a Reg A, they’re probably going to look to convert to a corp because that’s probably going to be the better format considering the growth potential of a company coming in to do a $30 or $40 million raise.

 

Peter Daneyko 14:43

I think you summarized a lot of that, again, is forward planning and thinking. I want to ask Shari a question, you know, as the broker dealer. I mean, obviously you’re accountable for all the KYC, the ID, the AML associated with the Reg A and looking after those shareholders and more importantly, you know, like the insurance policy for the company themselves. As we, as it were, as a form 1A gets completed and you get into the qualifications to the side of side of things. Where do you jump in? And how does that affect? You know, everybody? Because, again, it’s all interconnected at some point.

 

Shari Noonan 15:24

Absolutely. So, you know, from the beginning, we’re working with Doug and team, so RDR, and really happy to be working with them, because while we’re diligent, saying and reviewing the form and making sure that everything is complete from a reasonableness standpoint, certainly the legal filings that RDR team is really managing and the securities lawyers are really managing. From our perspective, it’s we’re becoming involved when the filing hits the SEC, because at that point, then we’re filing with FINRA, certain filings that we need to make. And then when there is a no-objection letter from FINRA, the SEC will await that when we’re involved with the process. Before they will file, they will issue their final no objection letter to actually move forward the process. So that’s sort of how that is all interconnected, we need to actually have the filing to the actual form 1A to file with FINRA. So so that’s sort of the timing on that.

 

Peter Daneyko 16:38

So this, this really says a lot about the timing, where you have to be working unison, where the auditor, the broker deal, or the filing the legal preparations form if you’re not working together. And from a tech perspective, that’s something we see that kind of can go off the rails sometimes. And you have, you have a good team working in unison, it works out great, because at the end of the day, the technology when that issuer wants to flick that switch and go live. There’s sometimes the occasional hiccup where gee, we’re waiting on a document where somebody’s waiting on this, is it in the broker-dealers hands. Is it in the lawyers hands, or are they audited financials get a delay and nobody was communicating that so so you know. A cautionary tale to all the issuers, really, really respect the teams that you’re going to put together on your raise, because they have to be interconnected. They have to be communicating to each other, with each other. And, you know, you keep hearing about this team and your quarterbacking and everything that’s going on with all of this. It is so so important and so pertinent to think that way, because if they’re working together, they’re working together for you. And I can’t help overemphasize that. There’s some questions that come up and say, Hey, how long does this take? There’s two, two questions here. So when is how long does it take? And what’s this thing about comments? And what are comments and, and why? Why the comments occur? And why can’t my brother who’s a lawyer, just file these documents and all of a sudden, his document comes back? And with lots and lots of comments, maybe maybe we can share some horror stories there. Maybe Nick or somebody? 

 

Shari Noonan 18:22

I have one about, you know, why do why can’t my, you know, brother, my cousin who just graduated from law school, this seems pretty easy. Why can’t they just fill out these documents? You know, I can’t stress enough, this is a really specific type of filing. And there are people on the other end that receive these filings all day, and they like to receive them in a specific way. They like to receive, you know, specific information that that looks a specific way that reads a specific way. And when they don’t receive it in a specific way. It can cause a lot of delays. And so, you know, as a broker-dealer, we work with RDR, and they’re fantastic. And the filings go really smoothly. We have worked with others who, where the filings do not go smoothly at all. And it can be months, it can be it can just go into a black hole, because there’s miscommunication. The filings aren’t done correctly. It’s so I just I think it’s really, really important to get the appropriate lawyer for this particular filing. And we’ve seen that firsthand. 

 

Matthew McNamara  19:45

Yeah, sure I agree with you. From my perspective, I see the same thing. We’ll have groups that get on the front end of the process and have the audit completed and we go through our efforts and so forth, and then the next year rolls around and they need to do But again, and and they still haven’t gotten the form 1A filed. So I think that is absolutely critical and bringing in the right players and the right in the right pieces to get the job done is critical. We do a number of med-tech presentations, Doug and team are always on there. And Doug, maybe you could speak to here in a little bit. But you know, the no comment, your percentage of no comments that go through. And it really just, it really goes back to having a team that’s experienced and able to get this done. And I think that goes hand in hand with what we’re doing as well, from an audit side. It is critical to folks like Doug and to Nick, for us, they circle back with us, hey, you know, we need the financial statements, we know exactly what to send over, we need they need to work, they need to be able to insert them into the document, we need a consent, we need this, this and that. So even dealing with that component of it. You know, it’s critical to have team members that have worked together have gone through the process, and can really can really cut that timeline down. So I think Doug’s probably the best one to speak to the overall timeline here. But I would say, you know, from my perspective, having these team members in place is critical. I think, Andre and had a question around Sox score of four lead requirements that is not required under Reg A. To get that question that was out there answer the underneath the Reg A requirements, you can actually file an AICPA audit opinion, or a PCAOB audit opinion 99.9% of the time, we actually have our clients file AICPA opinion, we can do that at a much better price point. And then at any point after that, if our clients want to go full public, then that obviously is something that can be done and can be converted to a PCAOB audit down the road. But yeah, that should answer that Sox score 404 B question that is not required under the Reg A requirements, which is a huge, huge piece of Reg A is it does give you, you know, some the public option for raising capital, but it doesn’t include those really stringent cost points, which obviously getting a 404 B. Certification is another cost that gets added when you’re a public entity. So maybe, Doug, you can talk about that, that timeline, because I think that’s that’s obviously critical. 

 

Douglas Ruark 22:37

Yeah, you know, just real quick, I want to backstop the fact I mean, the team, this team mentality is huge. I mean, we’re working with Rialto daily, we work with KoreConX daily. I’ve worked with Matt McNamara for a long time, right. So I think the thing is, is that there’s a real tangible benefit there. Because we all know what we each need when we need it. We know the format we need it in I mean, so there’s a there’s there’s some serious advantages to that team mentality. And having a group a team, kind of the groups that have all worked together before multiple times. There’s that that provides a lot of efficiencies into the equation. As far as the preparation work and the timing. So there’s a lot that goes into obviously preparing one of these filings. I think if people just, you know, download a form one and look at it, they almost might look at it as a loan application like well, you cheat, you just feel this filing out. It’s certainly far more complex in that part of actually, what we do too is is we work with what we would call foundational legal that we’re working with the clients. You know, their corporate counsel, their foundational legal, the team that’s there making sure that any prior security sales have been properly and the proper exemptions were claimed that the cap table has been set up properly. But as far as timing goes, you know it a lot of it is dependent on how clean is the client coming in, we get some people where there’s events happening, mergers, or they’re converting over to a C Corp and Delaware, and there’s, you know, obviously, you know, work that needs to be done there. I would say that if it’s a clean file, it’s possible to have that client ready to file within about 90 days. That’s assuming that the client is getting us information, responds in a responsive manner, that it’s good information, that there’s, you know, it’s a pretty clean deal. There’s no complexities in there that need to be worked out. But I think that the client needs to really budget in and the additional time of submittal the SEC working through any comments. You also have to factor in FINRA approving the 5110 filing the the four that we’ve submitted so far with our med-tech a team and this just credits Nick and the rest of the team here at my company, we’ve had five day turnaround from the SEC, we’ve had two day turnaround. And we’ve had I think two four day turnarounds all no comment, no review. So that’s like I said, that’s a credit to my team. And just that Nick, and the people working here know how to set these filings up. They know what the SEC examiners are going to be looking for. But at the end of the day, you know, there can be comments, they can come back. The comments tend to be the SEC looking for clarity on certain disclosures or aspects of the company’s business. And certainly, then what you’re doing is sitting down with the client and working through their responses to those comments. The ones we’ve done, where they came back, no comment, we’re actually waiting on FINRA, more than we are the SEC, I think Shari could probably speak to this a little bit more accurately. But I think FINRA is probably two to three weeks on those 5110 filings to get them approved. And then from there, once all that’s done, you then have a submit, you basically submit to get your qualification letter, you’re obviously also working on getting all the tech stuff done, you’re going to have a raise website, obviously developed. So again, you know, you’re looking at four months, maybe five months, sometimes on some of these to get through filing prep to get through SEC qualification to get you know, FINRA clearing the 5110. And then you know, reaching to the point where you’re ready to launch. So my thing that people plan ahead, you know, it’s not a two-week process, plan ahead, get started early, the more time, the better. Because sometimes things come up in the offering preparation process that require a rework, you know, there might be a rework of a cap table, there might be, you know, material agreements that need to be finalized, that are going to have to be included in the filing.

 

Matthew McNamara  26:44

I would add on to that to just I think the I think the age of the the company itself really drives that process. Like for example for us, the SEC requires two years of audits. So obviously right now, it’d be a 2020 and a 2021. Financial statement on it, that would be a 2019 beginning balance sheet. So that’s three balance sheets, two p&l cells. Now obviously, if the entity is six months old, you have six months of effort to audit. So I think everybody’s timetable could be a little bit different. As far as you know, how much do you have to talk about how much stuff is out there? As far as the legal team and a next component? You know, how long is this entity been out there? How many transactions have taken place? How many rounds preferred? Are you already into? I think there’s a lot that goes into that. So some really good upfront planning is, is critical to that process.

 

Peter Daneyko 27:41

Well, this is this could go on for an hour, and I never thought paperwork and preparation was so detailed. And this is why I always tell people, I never step over my legals. I always talk to Matt and Nick and Doug. And Shari, when it comes to I go, Hey, help me out with something, I’ve got a question. We’re running a little bit close to the hour here or close to our 40 minute session. From a closing perspective, what I’m hearing as you’re generally looking at three months, pretty much three months or better to get your offering qualified. And that’s, that’s if you’ve got the right team. And if you have no comments, for example, would that be a fair, fair comment,

 

Douglas Ruark 28:23

I would. I would say three, three months clean file to get the filing prepared. And then obviously, it’s got to be converted submitted to the SEC. So I would not set a three-month expectation on getting qualified, I would set it as if it’s a clean file, we could ever be ready to submit in that timeframe. If it’s more complex file, more complex company, factor in maybe another 30 days.

 

Peter Daneyko 28:47

Okay, so you’re looking at that hopefully gives everybody who’s listening and looking at doing a Reg A that, hey, plan ahead, and it’s going to take some time and engage all the parties that you need to engage as, sooner than later. One closing comment from the tech guys, because unfortunately, sometimes when we get that phone call says How come my offering isn’t right isn’t live today, and they’re pointing fingers, it’s because these little missing pieces to the puzzle, and that’s why you have to do everything in unison. And I can’t help you know, overstate that do engage all the parties early on, because they all have to touch each other and they can help each other and they can help you with your rates. Anybody else have any closing comments on that? 

 

Douglas Ruark 29:30

I would say to just real quick the last 5% of filing drafting is it takes I mean, there’s a heavy lift, they’re all making sure all the data is congruent, as Nick knows because you know, he’s he’s the one that’s really you know, coordinating everything. There’s a lot of coordination between all the exhibits coming in, you know, cap tables, any selling shareholders Use of Proceeds data. So that last kind of 5% is getting everything cordinated. And like I said, it’s one of those things where you know, plan ahead, it is possible to have you ready to file in 90 days. But that’s got to be a clean file, you got to be really responsive and getting us info because there’s, it’s not just drafting the filing, it’s coordinating it and getting all the exhibits and getting everything final during approvals from everyone, then get it converted and submitted the SEC.

 

Peter Daneyko 30:23

And I guess my final closing is, you mentioned cap tables, this is just the first part of that journey, because once you go live there, all the information you captured early on, it has an impact going forward because you’re going to have your cap table management, you’re going to be existing shareholders, they’re going to be imported, you’re going to want to communicate with them. And that’s going to dovetail right into our next session here, which we’re going to get into, you know, prepping the live issuance and the raise and, and talking about things such as cap table management and investor acquisition, and the broker-dealer and making sure that everything is completely compliant. So thank you all and we’ll jump into our next session. And hopefully everybody here learns a little bit more about doing your filings in preparation for your Reg A. Plus, I learned every time I talk to these guys, so thank you all. Thank you

 

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