Documents / Documentation
* EDGAR initial filing completed 01/22/2018 – Received new account information CIK and CCC
** SEC FORMD completed 01/23/2018, planned 506c upload on 01/24/2018
*** SAFT Uploaded and excepted by SEC/EDGAR on 2/6/2018
Frequently Asked Questions
Rule 506 is by far the most widely used Regulation D exemption for conducting private placements. According to the SEC, about 90-95% of all private placements are conducted pursuant to Rule 506. This Rule permits sales of an unlimited dollar amount of securities without Securities Act registration, provided certain requirements are satisfied. Traditionally, issuers relied on Rule 506(b) that allows unlimited amounts to be raised from accredited investors and up to 35 non-accredited investors, so long as there was no general solicitation and advertising and other conditions were met. In implementing Section 201(a) of the JOBS Act, the SEC added a new Rule 506(c) that allows general solicitation and advertising in Rule 506 offerings so long as all purchasers of the securities are accredited investors and the issuer takes reasonable steps to verity their accredited investor status.
As of September 23, 2014, the SEC added a new section (d) to Rule 506. Rule 506(d) applies to all Rule 506 offerings, i.e., Rule 506(b) and Rule 506(c) offerings. It is important that all companies raising capital by means of Rule 506 know and understand the new addition to Rule 506 because failing to comply with Rule 506(d) will disqualify the entire offering.
Rule 506(d) identifies certain persons that may potentially become “bad actors.” It also lists certain events (“disqualifying events” or “bad acts”). An offering cannot be made using Rule 506 if it includes a “bad actor” that is engaging or has engaged in a “bad act.” This blog post focuses on (1) who may be a potential “bad actor” and (2) what constitutes a “disqualifying event” or “bad act.” The follow up blog will discuss certain exceptions from disqualification and how to obtain waivers.
Who are the potential bad actors?
Rule 506(d)(1) casts a wide net in terms of who can potentially be a bad actor (and can destroy the Rule 506 exemption). Possible “covered persons” include:
• The issuer of the securities (as well as any predecessor of the issuer or any “affiliated issuer.” An affiliated issuer, as the name suggests, is an affiliate (a person who controls or is controlled by the issuer) who is also issuing securities in the same offering.
• Any director, executive officer, or other officer participating in the offering. (Participation can include such activities as preparing due diligence and/or disclosure documents or communicating with other participants in the offering, including potential investors. In general, when trying to determine whether a particular officer is “participating” when it comes to performing a “bad actor” check, err on the side of caution and assume that the SEC is likely to answer “yes”, particularly when it comes to smaller start-up companies which may not yet have well-entrenched and explicit divisions of labor and responsibility.)
• Any general partner or managing member of the issuer.
• Any beneficial owner of 20% or more of the issuer’s outstanding voting equity securities.
• Any “promoter” connected to the issuer in any capacity during the actual sale of securities. (The SEC defines “promoter” broadly: the term includes any natural person or legal entity that “directly or indirectly takes initiative” in founding the company, as well as any person who, in connection with the founding, receives (other than solely as underwriting compensation or in exchange for property) at least 10% of either the proceeds of any sale of securities by the issuer or at least 10% of any class of the securities themselves.)
• Any investment manager of the issuer (if the issuer is a pooled investment fund), as well as its directors, executive officers, other participating officers, general partners, and managing members.
• Any natural person or legal entity who has been or willed be paid to solicit purchasers of the offered securities (e.g. a placement agent), as well as their directors, executive officers, other participating officers, general partners, or managing members.
As you can see, the list of potential “bad actors” that an issuer will need to vet can potentially be a long one, especially, for example, if they will be working with several different placement agents. That being the case, a company seeking to raise money in a Rule 506 private placement should be proactive in determining if they are subject to bad action disqualification at time they are offering or selling securities in reliance of Rule 506. Some steps a company should take include adding bad actor disqualification representations and covenants in their placement agency agreements or securities distribution agreements and asking all participants covered by Rule 506(d) to complete a bad actor questionnaire and/or certification (and bring-downs of the same if the offering is long-lived). Also, the issuer may add a provision in its bylaws requiring each “covered person” to notify it of a potential or actual bad actor event. Further, the issuer should check and re-check public databases for any triggering events. We will talk more about the reasonable care exception in the next blog.
What constitutes a “disqualifying event” or a “bad act”?
Rule 501(d)(1)(i)-(viii) lists the bad acts. A bad actor is any of the covered persons who:
• Has been convicted within ten years of the sale (five years for issuers and their predecessors or affiliates) of any felony or misdemeanor in connection with the purchase or sale of any security; involving making any false filing with the SEC; or arising out of the business conduct of certain financial intermediaries;
• Is subject to any final order, judgment or decree entered within five years of the sale that at the time of the sale restrains or enjoins such person from engaging or continuing to engage in any conduct or practice in connection with the purchase or sale of a security, involving the making of a false SEC filing, or arising out of the conduct of certain types of financial intermediaries;
• Is subject to a final order from state securities regulators, insurance, banking, savings association or credit union regulators, federal banking agencies, the CFTC or the National Credit Union Administration that either (1) at the time of the current sale, bars the person from association with any entity regulated by such a commission, agency, etc.; engaging in the securities, banking, or insurance business; or engaging in savings association or credit union activities, or (2) constitutes a final order based on a violation of any law or regulation prohibiting fraudulent, manipulative, or deceptive conduct.
• Is subject, at the time of the sale, to an SEC order entered under certain provisions relating to brokers, dealers, municipal securities dealers, investment companies and investment advisers and their associated persons;
• Is subject to an SEC order (entered within five years of the current sale) that, at the time of the sale, orders the person to “cease and desist from committing or causing a violation or future violation” of 1) any scienter-based [i.e. intentional] antifraud provision of the federal securities laws (e.g. Section 10(b) and Rule 10b-5 of the Securities Exchange Act, Section 17(a) of the Securities Act); or 2) Section 5 of the Securities Act (dealing with selling unregistered securities (which have not received an exemption) in interstate commerce) (Cease and desist orders regarding violations which do not include a scienter (intent) element would not be included, and thus would not be disqualifying “bad acts.”)
• Is suspended or expelled from membership in, or barred from associating with a member of, a registered national securities exchange (e.g. NYSE) or an affiliated securities association (e.g. FINRA) for actions found to be inconsistent with the just and equitable principles of trade;
• Has filed either as a registrant or issuer, or who acted or was named as an underwriter for, any registration statement or Regulation A offering which, within the five years prior to the current securities offering, was the subject of an SEC stop order, refusal order, or an order suspending the Regulation A exemption, or who is currently the subject of an investigation or proceeding to determine whether such an order should be issued.
• Is subject to a USPS false representation order entered within five years of the current sale of securities, or who has received a temporary restraining order or preliminary injunction regarding conduct alleged by the USPS to constitute a scheme to obtain money or property through the mail by means of false representations.
Only “bad acts” occurring on or after September 23, 2013 can destroy the exemption; those occurring prior to that date require disclosure, but do not themselves destroy the exemption. One important thing to note here is that this cut-off refers to the date of the conviction, order, etc. in question, not the underlying activities which eventually resulted in that action. For example, a broker who was suspended on October 1, 2014 for activity that occurred on June 3, 2014, would be a “bad actor” under the Rule, because the actual suspension occurred on or after September 23. Accordingly, the relevant look-back periods in the Rule are measured from the date of conviction or sanction, not from the date when the conduct occurred.
Final thing to note is that Rule 506(d) is not triggered by actions of foreign courts or regulations, such as convictions, court orders or injunctions.
Given the serious, even devastating potential consequences that can follow from failing to catch a “bad actor” disqualification, I strongly encourage companies considering raising capital through a Rule 506 private placement to devote the necessary time and resources to ensuring that the company and its covered persons are in full compliance with the “bad actor” disqualification provisions of Rule 506(d).
Accredited investors meet standards defined by the US Securities and Exchange Commission which allow them to invest in certain private securities offerings. Most startups raising money do so from accredited investors only.
The SEC web site contains the full definition. In general, any of the following would meet the standard:
- Individuals with annual income over $200K (individually) or $300K (with spouse) over the last 2 years and an expectation of the same this year
- Individuals with net assets over $1 million, excluding the primary residence (unless more is owed on the mortgage than the residence is worth)
- An institution with over $5 million in assets, such as a venture fund or a trust
- An entity made up entirely of accredited investors
Yes, non-US investors can participate in OTCE as long as they meet US accredited investor or qualified purchaser requirements. In general, non-US residents must also meet local laws regarding investment compliance.
In order to fulfill the accreditation requirements with your crypto-asset holdings, you can either
- Upload a screenshot from a credible cryptocurrency exchange or wallet showing holdings & valuations worth over $1MM USD. The screenshot should include the date and evidence tying the investor to the account (e.g. your name or the investing entity’s name), or
- Upload a message cryptographically signed using the private key of your wallet or wallets, proving that you own assets worth over $1MM USD.
In either case, you will also need to provide documentation of your debts (e.g. via a credit report or letter from your accountant) in order to qualify.
Documents you upload as evidence of accreditation are kept private and are only used to assess your accreditation status. Our team of licensed attorneys and CPA’s review these documents to ensure that the relevant accredited investor thresholds are met.
Qualified purchasers as defined by the US Securities and Exchange Commission are individuals with at least $5M in investments or funds and other entities with at least $25M in investments.
You can invest with US dollars, Bitcoin, or Ether.
The Simple Agreement for Future Tokens (SAFT) is an instrument and open-source framework for token sales. The SAFT is the default agreement for investments on CoinList.
While the SAFT has been extensively reviewed by multiple legal teams, we strongly recommend you consult with your own legal, investment, tax, accounting, and other advisors, to determine the potential benefits, burdens, risks, and other consequences of such a transaction.
Absolutely. The SAFT is open-source and free for all to use on launch.
“Regulation D” is a government program created under the Securities Act of 1933, instituted in 1982, that allows companies the ability to raise capital though the sale of equity or debt securities. The programs were designed to provide two main things – the needed “exemption” to sell unregistered securities in a private transaction (something that happens in any transaction involving investors) and the appropriate framework and documentation for doing so properly.
There are several programs that are available under the Regulation D Exemption. Most of our clients typically choose the JOBS Act 506(c) program as it allows general advertising and solicitation of the offering and also benefits from some compliance efficiencies with State “Blue Sky” filings.
Regulation D Program Information
Raising capital from investors properly and effectively requires the development of a securities offering executed in compliance with State and Federal rules. Most small and medium size companies choose the SEC’s Regulation D exemption program to execute such offerings. With the advent of the JOBS Act 506(c) Program – companies can now execute a “public offering” of their investment opportunity and securities offering while still retaining the low execution cost and straightforward compliance benefits of a traditional Regulation D offering. What will a Regulation D offering provide your company? Two main advantages:
(a) The ability to solicit investors and sell them equity or debt securities in compliance with applicable regulations and;
(b) The fundamentals necessary to provide concise investment structure, proper and mandated SEC disclosure, and the capability to execute the subscription of investment funds into your company effectively
Who should use a Regulation D Offering
Any company or entrepreneur that is seeking to raise equity or debt capital from investors properly and legally. Even if you plan on only having one or two investors in your transaction you need to provide the transaction framework, related disclosure documentation and investment agreements necessary for raising capital. A Regulation D Offering provides the proper transaction structure and documentation for raising debt or equity capital from investors. Trying to raise private capital of any amount without these fundamentals in place is almost impossible.
Most companies use the programs to raise from $25,000 to $50,000,000 in capital. Regulation D Offerings have been used for a wide variety of transaction and industry types: corporate seed capital, corporate expansion capital, film production capital, real estate equity funding (acquisitions, development projects, golf courses, rehab), capitalization for early to pre-IPO stage Internet and technology companies, expansion funding for retail companies, and product development and distribution funding.
Use the menus at the top of this page to find specific information on the available Regulation D Programs, the advantages of a Regulation D Offering, and details on the offering preparation process.
A key aspect of a successful private placement offering is the structure employed in the offering. Often overlooked, this is a major part of a successful placement and proper structure is critical to the success of the offering. Your company may have a compelling opportunity, but if you do not employ the appropriate structure for the investment transaction the company could easily have an unsuccessful capital raise.
At any given time our firm has a substantial number of clients on the market raising private capital from investors. We are intrinsically involved in the execution of our clients’ offerings and are highly knowledgeable regarding the type and form of transaction structure investors find appealing.
Key aspects of transaction structure involve:
- Choosing a debt or equity structure
- Application of preferred equity securities or common equity
- Voting rights
- Liquidation rights
- The application of warrants or options
- Participation rights in excess of a preferred return
- The application of a conversion feature from preferred equity to common equity or from debt to equity
- Identifying the appropriate target ROI for investors to maximize interest in the company and the offering
- Identifying and disclosing potential exit strategies
- Implementing a securitization of the debt or equity securities with assets from the company
There are a substantial number of variables involved in the proper structuring of an investment transaction and private offering of securities. The expertise of our staff in the proper structure and execution of private placement offerings is a significant advantage for our clients.
Offering Types — Debt or Equity
Structure for an offering is fully dependent on the company’s business and planned operations – thus the following is just a general overview of basic investment structure options for an offering. There are two basic types of Regulation D Offerings that can be structured; an “equity” offering where the company is selling ownership in the company (via the sale of stock or an LLC membership unit for example) to raise capital – or a “debt” offering where the company raises debt financing by selling a note or bond instrument to investors with a set annual rate of return and a maturity date that dictates when the funds will be paid back to investors in full.
An equity offering is where the subject company sells an ownership stake in the company or project to investors. Equity is usually preferred by early stage companies that need flexibility regarding capitalization. We also execute about 80% of our real estate offerings as equity based investments.
In an equity situation investors profit as the company profits since they are partial owners. In some cases, for example an LLC raising capital for real estate acquisitions, there may be a Preferred Return distribution made first to investors prior to sharing proportionally in additional operating income with management and founders. Most operating companies sell 5%-30% of their company for a first round funding – obviously there are exceptions but this tends to be the average range. A real estate project or real estate fund, or oil and gas company typically deploy a different structure regarding investor share of operating income and providing participation in the accretive value of the asset(s).
Most of our clients are using either a “C” Corporation (where you would sell stock to investors) or a Limited Liability Corporation LLC (where you sell a membership unit to investors). Real estate and energy transactions tend to use a Limited Liability Company or Limited Partnership as the issuer entity type. Investors typically profit in two ways from an equity deal; via their proportionate “per share” percentage of company profit (called a dividend or profit distribution depending on entity type) and via the final sale or company redemption of the security through an exit strategy (example: the company buying the securities back from the investors, the company and its issued securities being bought out by another company, going public and selling on the open market, or a real estate asset being sold, etc.). There are significant differences between how an offering for an operating company (a software company for example) would be structured versus a real estate fund, real estate project, or energy company offering would be structured. There are also permutations from the base equity structure including convertible preferred shares, redeemable preferred shares, and for an LLC the utilization of various classes of Membership Units to provide specific investment terms and rights to investors and management control and management participation in net income to the manager(s). Assisting the client in structure is part of our core services and RDR clients benefit from our vast expertise and transactional experience in developing proper structure.
A debt offering functions much like a private business loan where the company sells a promissory note to investors. The note sets forth the terms and conditions of the loan arrangement between the company and the investor. Thus, a note would provide a certain interest rate typically paid annually to investors with a maturity date that dictates when the principal is paid back in full to investors. The downside to a debt offering is; (a) you have a balance sheet capitalized with debt which may limit options for leveraging external funding and; (b) you have default risk should you fail to make an interest payment or fail to repay funds at maturity. Notes can be convertible into equity within the company which provides investors the security of a Note but the capability to participate in equity ownership at a later date.
Developing proper structure is company and project specific – thus the prior overview is providing only a general understanding of the various forms of capitalization. For more specific guidance on potential structures for your company or project – please call us today to discuss (303) 984-4883.
Regulation D 506c “General Advertising” Program
Ready to engage in general advertising of your private placement offering to investors?
The JOBS Act, passed in April 2012, mandated the creation of a new exemption under the Regulation D 506 program that would allow for general advertising of an offering to accredited investors. This new exemption is termed “506c” and is widely known as the “general advertising” 506 program.
The 506c exemption was activated on September 23, 2013 and allows an issuer to engage in general advertising and solicitation of accredited investors for the securities offering. The Regulation D 506c program will retain many of the characteristics of the current 506b program with some notable changes:
- Advertising and general solicitation of investors is allowed
- Participating investors must be “accredited” investors per the Regulation D Rule 501 definitions
- Accredited investors must provide proof or an approved third party verification that they meet the accredited standard for income and/or net worth
- The SEC filing process will be adjusted to include a “pre-filing” of Form D with a 15 day waiting period prior to advertising being allowed for the offering.
There are some other small adjustments to execution aspects of the offering, but the above listed changes constitute the primary modifications inherent in the 506c program. It is important to note that the current 506b program will still be available for issuers that do not need the capability to engage in general solicitation.
The 506c program is a significant change in the solicitation rules and essentially allows a client to execute a public offering of securities while retaining the benefits of a Regulation D exempt private placement (lower preparation costs, less compliance interaction with the SEC, etc.)
We are professional public market and software developers with 20+ years of experience each. We worked in different organizations from United States public startups to large international corporations. All the projects we participated in are successful.
Now we are focused on a development of blockchain ecosystem. We consider OTC Exchange as a solution that can help other teams to bring their projects to life by helping them with raising funds and unifying them with global investment partners for their development