There are two types of Regulation D offerings: 506(b) and 506(c). The 506(b) exemption requires that issuers only solicit interest from potential investors that they believe to be accredited investors with whom they have a substantive pre-existing relationship. The 506(c) exemption allows issuers to market the offering publicly through general solicitation, but investors must be verified as accredited investors before allowing an investment to be finalized. Companies utilizing Regulation D are not necessarily required to offer their securities through a broker-dealer if they are eligible to raise capital through the so-called “issuer’s exemption.” Whether a company and its principals are eligible for this exemption depends on a number of factors, including the number of offerings conducted during a one year period. Even though a broker-dealer may not be required, it is best practice (and in some cases, a requirement) for companies to run certain checks on investors to satisfy Know Your Customer (KYC) and Anti-Money Laundering (AML) obligations. In certain cases, it may also be appropriate to utilize a subscription escrow account to streamline investment flows and closing processes. North Capital offers KYC, AML, and escrow services to issuers who are in need of these services.
The Regulation A exemption is becoming more commonly used since the JOBs Act was passed. Regulation A has two offering tiers: Tier 1 for offerings of up to $20 million in a 12-month period; and Tier 2 for offerings of up to $50 million in a 12-month period. Due to the state Blue Sky approval filing requirements for a Tier 1 offering, the most commonly utilized exemption is Tier 2. An important decision for a company to make when electing to do a Reg A offering is whether or not to offer securities through a broker-dealer. There are 8 states (New York, Texas, Arizona, Florida, Nebraska, North Dakota, Washington, and New Jersey) that effectively require a broker-dealer involvement in order for their residents to invest in a Reg A offering.
Intermediaries can go through an application process with the SEC and FINRA to become a Registered Funding Portal for Regulation CrowdFunding offerings. Registered Funding Portals are classified as self-regulated entities and must follow specific guidelines on how the offerings are displayed and how an investor is on-boarded. When going through the application process, a prospective Portal must identify an escrow provider and answer certain questions about how the platform will service the platform’s investors. There are a handful of technology solutions that can be utilized to help funding portals fulfill these requirements and get to market more quickly. Some companies choose to license technology because it can reduce overhead and shorten a Portal’s time to launch. North Capital offers three technology solutions that can assist these platforms. The solutions are a white-label platform (Marketplace-as-a-Service), investor micro portal (DirectInvest Button), and an API solution (TransactAPI). North Capital currently works with multiple Funding Portals to help streamline their investor process through our technology and escrow services.
We pride ourselves on providing technology that securely stores investor information. Marketplace-as-a-Service is powered by a transaction engine called TransactAPI that has two components: a set of RESTful API methods and a secure web application for administration purposes. TransactAPI is hosted on AWS, with services restricted to specific locations and individuals. Data at rest is protected with unique encryption keys and data in transit is allowed only via an encrypted transport layer protocol. We employ continuous threat detection and regular vulnerability scanning using a number of third party tools and services. In some instances, clients conduct their own vulnerability or penetration testing for items including, but not limited to, SQL injection threats, session handling, cross-scripting, etc. All API function calls are logged and tracked in the TAPI audit trail.
To learn more about Regulation D:
https://www.sec.gov/fast-answers/answers-rule506htm.html
To learn more about Regulation A:
https://www.sec.gov/smallbusiness/exemptofferings/rega
https://www.investor.gov/additional-resources/general-resources/glossary/regulation
To learn more about Regulation CF:
https://www.sec.gov/divisions/marketreg/tmcompliance/fpregistrationguide.htm