Reg A – Broker-Dealer Issues & Opportunitiese

By Scott Purcell,  Fund America Founder & CEO, CrowdFundBeat Guest post

Situation: Reg A presents issuers, broker-dealers and other industry professionals with a fantastic new tool for raising capital. Many others have already done an overview of the rules, so I’m just going to dive into a couple of specific items you need to be aware of. As FundAmerica is now servicing numerous live Reg A offerings, and our customers (broker-dealers and platforms) have another 65 offerings in process, we are in a unique position to be the first to get bloodied/educated as these deals start getting done.

Issue: Form 211
If the shares are to be tradeable on the OTC Marketplace or on a national exchange then the securities need to be both DTC and DWAC eligible, which only a broker-dealer DTC Participant or corresponded firm can apply for. Furthermore, a Form 211 needs to be filed with FINRA. As part of the Form 211 filing FINRA requires that considerable additional information be included with the application before providing a ticker symbol and approval for exchange trading, including;

  • all signed investor subscription agreements,
  • assurance that non-accredited investors have not exceeded the regulatory restrictions on the amount they can invest, and
  • proof of payment for each investor’s securities.

If the securities are not going to be traded on an exchange but, instead, privately traded or traded on any of the new auction/listing platforms now being created by FNEX, ASMX, MarketX and others then you don’t need to worry about either DTC or Form 211 filings.

Issue: Escrow & Settlement (& rep commissions)
IPO’s have historically been done on a “firm commitment” basis where the underwriter buys the shares from the issuer and immediately sells them to investors in one single closing. Reg A offerings are generally “best efforts”, not firm commitment and so this changes the dynamics of the process.

The bad is that since most Reg A offerings will be continuous, “min/max” deals and not “all or none” the normal settlement process does not work – the investors funds need to go directly into escrow. This means the escrow agent has to review many thousands of investor subscription agreements in order to ensure the funds received match the contracted amount, it means the escrow agent has to perform AML on each of those thousands of investors and handle the various exceptions that inevitably hit, it means the escrow agent has to deal with the hundreds, if not thousands of exceptions from ACH fails and wire errors. These are things that traditional securities escrow agents are not equipped to do as it’s just too much work for their low-tech, highly manual processes.

The good is that continuous offering, min/max Reg A’s can have minimum’s and thus break escrow prior to the offering being completed. In this way they behave very much like private offerings. So, although it may take months for the offering to hit the maximum raise (and then get DTC qualification, Form 211 approval and start trading), it may only take days for the offering to hit the minimum and thus the issuer is able to start receiving cash out of escrow…and for brokers to start getting their commissions!

The fact that this security will, at some future point, close and go up on OTC or NASDAQ has nothing to do witEdit Edit statush either the issuer starting to get money or the reps getting paid. This can happen right now, well before the close.

Solution: Invest Now Technology =>            
FundAmerica’s Invest Now technology enables people to conduct these offerings while maintaining and managing compliance. Here’s how…

Escrow – ouunnamed (15)r automated tools, integrated with our bank partners, enable FundAmerica Securities to handle thousands of individual investors in any offering pursuant to SEC Rule 15c2-4. Our compliance team is adept at quickly clearing AML exceptions and our operations team handles issues with ACH and other funds exceptions. You can use online tools to process investor rescissions as needed, as well as request escrow disbursements once the minimum is met. All balances are available online, along with funds clearing status reports.

5110 Support – our staff attorneys have boilerplate agreements and a lot of direct experience in filing 5110’s and will work with your attorney’s  to help get these done right and minimize both time and costs.

Compliance – our proprietary BD Dashboard enables underwriters and syndicate members to review all new transactions, including investor suitability information and signed agreements. Compliance personnel at your broker-dealer can approve or reject any transaction, as well as obtain all historical records to comply with FINRA 2111, SEC 17a3 & 4, and other regulations.

Non-Accredited Investors – get stopped automatically if they attempt to invest more than the amount they are permitted to subscribe as defined by regulations. Thus the transactions don’t even get into the system if they don’t qualify.

Online Tech – our “plug ‘n play” Invest Now button can simply be copy & pasted onto your offering page(s). This automatically enables you to securely get investor vesting, KYC, suitability, e-signed subscription agreement, and everything else the investor needs to make the investment. Easy.

Syndication – you can simply create multiple buttons, each with unique tracking code, for use by each dealer in your syndicate and each marketing venue you use.

Transfer Agent – for exchange traded securities, once the offering closes we will provide your registered transfer agent with all investor records. Investors can then DWAC them to their brokerage account as desired. For non-exchange securities FundAmerica Stock Transfer has been created to economically handle investor records on the issuers’ behalf.

Form 211 – we provide the broker-dealer who is handling the 211 with all records required, including pdf’s of signed subscription agreements and proof of payment for every single investor participating in the offering.

Conclusion: Solutions are now in place so issuers and broker-dealers can use the new Reg A rules to help get businesses funded, and make a living in the process.

Questions? Reach out to me or anyone on the FundAmerica team anytime

About the Author: Scott Purcell is the CEO of FundAmericaTechnologies, a fintech services provider to the emerging equity and debt crowdfunding industry. His firm  provides escrow, payment processing, broker-dealer execution, electronic document signing, registered transfer agent services and compliance technology for  numerous broker-dealers, investment advisers, portals and others who make a business of online capital formation pursuant to rules now in effect thanks to the  JOBS Act. He is an active Board member of the Crowdfunding Intermediary Regulatory Association (CFIRA) and the author of the book “The Definitive Guide to Equity and Debt Crowdfunding” as well as the “Industry Best Practices for Funding Portals”.

Legal Disclaimer:
These materials are my personal opinions and for informational purposes only and not for the purpose of providing legal or tax advice. The issues discussed include complicated areas of law and legal advice should only be obtained and relied upon from a securities attorney about your specific circumstances.



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