North Capital Resource Center

Companies often choose to raise capital through a private offering exemption because it can be  more cost effective and efficient than going to the public markets. There are several offering exemptions that a company may utilize, each type has different stipulations and requirements that can influence which exemption is most suitable for the specific offering. Deciding factors can include the nature of the business, the amount of capital needed, the type of investors the company plans to seek (i.e. institutional, retail, etc.), and the intended approach for raising the capital.

The SEC recently adopted new rule changes that went into effect on March 15, 2021 which allow issuers to “use generic solicitation of interest materials to “test-the-waters” for an exempt offer of securities prior to determining which exemption it will use for the sale of the securities.” The changes also impacted the maximum amounts allowed to be raised under Regulation A+, Regulation Crowdfunding, and Regulation D. 

Regulation D is the most commonly used issuer’s exemption.  It enables companies to raise capital without undergoing the time and expense involved in filing and reporting that would be required in a public offering. Regulation D private offerings can often be prepared quickly and for minimal cost, which makes them attractive to growing companies that need investor capital but are not ready for a full IPO. 

Except in limited circumstances, all shares offered under Regulation D are restricted securities that cannot be resold for a specified time, generally 6-12 months. The issuer must file a Form-D notice filing with the SEC after the first securities are sold. There are primarily two types of Regulation D offerings relied on by private companies: Rule 506(b) and Rule 506(c). 

For this exemption type, companies must establish a pre-existing and substantive relationship with an investor before disclosing information about an offering. General solicitation is not allowed for 506(b) offerings. There can be an unlimited number of accredited investors and up to 35 other purchasers. Any non-accredited investors must be sophisticated and have sufficient knowledge and experience that shows they are capable of understanding the risks associated with the investment. All of the information provided to investors must be free from any false or misleading statements. For non-accredited investors, companies must provide disclosure documents similar to a public offering such as a Regulation A or a registered offering, which includes financial statements. Companies must provide the same information to non-accredited investors as accredited investors. While this exemption can allow for non-accredited investors, many companies choose not to allow any non-accredited investors to minimize potential scrutiny. There is a requirement for companies to be available to answer questions from potential investors. 

For this exemption type, companies can generally solicit their offering to the public. However, they must take reasonable steps to confirm each investor’s accreditation status prior to accepting an investment. This includes reviewing documentation to confirm their income or net worth such as W-2’s, tax returns, banks and brokerage statements, and credit reports. Alternatively, the investor may provide a  professional letter from an attorney, CPA, or broker dealer that verifies their accreditation status. Requiring this sensitive information can be a barrier, as investors do not always want to share their financial information with multiple platforms. Many firms have chosen to rely on North Capital as a third party provider to perform accreditation verifications and issue professional letters for companies to rely on. North Capital’s registered personnel have committed issue letters within one business day of document receipt, assuming investors meet the accredited criteria. Despite the potential barriers to confirming investors’ accreditation status, the ability to generally solicit an offering can be advantageous for firms that want to increase their existing pool of investors and utilize broad marketing strategies.

There are times that firms raising capital on a consistent basis are required to affiliate with a broker dealer. North Capital partners with these “serial issuers” to license Registered Representatives and support the back-office compliance aspects of their businesses. North Capital has streamlined compliance procedures to help clients run their businesses smoothly.  For example,North Capital commits to reviewing advertising material within 1 business day where most broker-dealers in the space can take up to 1-2 weeks. 

The key difference between Reg A+ and Reg D is that Regulation A provides the issuer with a way to generally solicit and raise funds from the general public (as opposed to only accepting funds from accredited investors).  The Regulation A exemption has steadily gained traction since the JOBS Act was passed in 2012. 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 $75 million in a 12-month period. Due to the state Blue Sky approval 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 broker-dealer involvement in order for their residents to invest in the Reg A offering. 

Regulation A has been primarily utilized by companies that are looking to broadly solicit their investment and accept funds from accredited investors and non-accredited investors. This exemption type also allows for secondary trading, unlike Regulation D. This exemption has also been used to create unique offering structures to invest in assets such as collectibles, as well as more traditional structures such as private REITs.  

Intermediaries can go through an application process with the SEC and FINRA to become a Registered Funding Portal to raise capital through the exemption Regulation CrowdFunding. 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. Funding Portals are specifically prohibited from offering investment advice or recommendations. They cannot solicit purchases, sales or offers to buy the securities offered on their platform. Transaction based compensation for any employees, agents, or other affiliated persons based on performance of the sales of securities on the platform is strictly prohibited. Funding Portals are not allowed to hold, manage, possess, or handle investor funds or securities. In order to engage in any of these activities, a firm must register as a broker dealer rather than a funding portal. 

To become a Funding Portal, companies must go through an application process with the SEC and FINRA. 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. 

 The recent changes now allow each issuer to raise up to $5 million through Regulation Crowdfunding in a 12-month period. There are specific limitations on the investment amount for individuals, but all investors can invest up to $2,200 no matter their net worth or income. For investors who have an annual income or net worth that is less than $107,000, then their investment amount is limited to 5% of the greater of the investor’s annual income or net worth. If both net worth and income are equal to or greater than $107,000, then the investment limit is 10% of the greater value. Accredited investors are allowed to invest without an annual limit.

The Funding Portal is also responsible for properly vetting the issuers that raise funds through their portal. All information should be publicly available, without requiring an individual to subscribe to the platform. The information provided needs to be sufficient for an investor to understand and vet the opportunity before making the decision to invest. The information that the issuer is required to disclose must be available to the public on its platform throughout the offering period and for a minimum of 21 days before any security may be sold for that offering. A forum that allows investors and issuers to communicate on the portal must be available. The technology must also identify each user and their role with the issuer. These discussions must be publicly available to view on the platform. Funding Portals are not allowed to participate in the communication forum on the platform, except to establish guidelines for communication and remove any abusive or potentially fraudulent communications. 

There are also basic requirements that directly impact the internal processes of the Funding Portal. There must be written policies and procedures that are designed to keep the firm compliant with securities laws governing funding portal activities. They are also subject to certain privacy rules, similar to a broker dealer, such as Regulations S-P, S-ID, and S-AM. SEC examinations and inspections are to be permitted and unimpeded by the organization. Certain books and records must be maintained for no less than five years and be easily accessible for the first two years.

North Capital is a leading provider of technology solutions and compliance oversight for the alternative investment industry. North Capital has facilitated over 1,050 private deals, over 70,000 transactions and our partners have raised over $3.2 billion utilizing our services. Since starting the broker dealer in 2010, North Capital has been actively engaged with providing services to the evolving private securities market as a result of the JOBS Act that passed in 2012. The broker dealer provides due diligence services, advertising approval, and principal reviews to numerous platforms raising capital online. 

The TransactCloud technology solution has been implemented by the top funding portals, as well as by dozens of issuers and other intermediaries.  By utilizing our technology and escrow services, we are able to streamline and scale processes that are traditionally slow and fragmented.  The broker-dealer’s custodial capabilities allows North Capital to offer integrated escrow services and payment processing capabilities via ACH and credit card.  

TransactCloud offers 4 distinct solutions to meet the client’s needs: 

Contact us today to learn more and explore how partnering with North Capital can positively impact your business.

*We are not securities attorneys and recommend consulting securities counsel when choosing which exemption type to utilize.