RegCF is coming up on its 18-month anniversary. In a recent podcast with iTunes, CracktheCrowd CEO Dan Baird talks with crowdfunding giants CEO, Sara Hanks and VP of Product Management and Strategy, Andrew Stephenson at CrowdCheck to give you an insider look at how RegCF is going.  

The rules would evolve and adapt as questions come up

“We’re constantly addressing questions that we didn’t even know existed before,” says Sara Hanks, CrowdCheck founder, coming from 30 years of experience in the securities field. “Never mind not knowing what the answer is and applying very traditional securities, laws, and regulations to very new markets. It means that you’ve got a new challenge every day which is why it’s so great.”

Andrew Stephenson, CrowdCheck VP of Product Management and Strategy, agrees. “A lot of this is new. Even Regulation A and Regulation CF have these private transaction elements that you previously only saw with offerings, say, under Regulation D, but they’re being applied to public offerings.”

Stephenson also pointed out that these private-into-public transaction elements, applying established interpretations of securities law to crowdfunding, create a “little bit of friction” that the rules hadn’t accounted for. The SEC and their experts like Sara Hanks work through these issues and adopt rules to them as they (the issues and questions) come up.

Disclosures and communication rules

However, Atty. Hanks says the level of regulation for Reg CF is currently comfortable. Issues often come from interpretations of the rules.

“We run into issues when, on unexpectedly complicated regulation, people drill down into it and we get counter-intuitive interpretations.”

The SEC had taken a flexible view, and this very flexibility has led to complexities that early stage companies can find difficult to comprehend when it comes to disclosure and the communication rules. These are areas “where we could simplify,” Atty. Hanks observed. 

What to understand about communications, so far:

  • “You can’t jump the gun,” says Sara Hanks, but once you’ve filed, you can use social media to talk about your raise.
  • To avoid trouble: don’t go beyond the terms of the offering, the price and the size and the type of security and the closing date.

Hanks admits that this restriction of what you can say–i.e., “We’re a great company to invest in but we can’t tell you what we’re going to sell”– is bizarre, and unhelpful to the investor. This will be sorted out and focused on down the line.

The bad actor check: contract disputes  

According to CrowdCheck, there are a lot of underage drinking among issuers. Just a funny stat. What makes platforms sit up are not DUIs and not bankruptcies either, but contract disputes.

Do those prior disputes with vendors or contractors create a probability of potential future fraud? Or would it raise concerns regarding investor protection?

If CrowdCheck or other similar due diligence providers can “predict any deal that would have led to arguments and recriminations and yelling between a platform and a potential issuer,” this could get you labeled as a “bad actor.”

The Nigerian Princes are rare; the mistakes are more common

Atty. Hanks points out: “The thing I always say about the whole fraud thing is let’s not use the F-word fraud because the number of Nigerian princes out there is limited and easily found as far as we can tell.”

“The flakes” are more common, the ones who make statements about doing this or that, but down the road are not able to comply with or execute their own plans.

“We have seen a few of those… and it’s usually not fraud. It’s just younger entrepreneurs biting off more than they can chew.

“Some of the biggest, most successful crowdfunding offerings ended in tears when the guy’s like, “Oh, I forgot to include the export tax in working on how much my things cost.”

At this point, Dan mentions he hasn’t received his Coolest Cooler yet.

Reg A

Reg A has a steady success in qualifications, with a number of failures who qualified but didn’t raise enough money to stay in Reg A, or left early. You need a good crowd for both Reg A and Reg CF, although larger for the former. Companies move from CF to Reg A after a successful campaign, “a natural progression” after acquiring your investors.

The costs of filing a RegA

Dan talked about “a handful of cases where they were talking about how they basically spent the majority– 75%– of the entire race just on the legal fees to conduct it.”

Atty. Hanks says, “This is not an area where hourly fees work, at least when we’re talking about crowdfunding… you do not need to over-engineer this. You do not need to over-lawyer it and you certainly don’t need to overpay it. We have fixed fees for the entire process, which includes due diligence, and we’re talking $40,000 or $50,000, period and predictable.”

SEC Audit feedback timeline

Your first round is not supposed to take more than 28 days. “Your second round should be your last round of substantive comments,” says Atty. Hanks, with possibly a third round of cleanup comments by phone.

It should be 90 days for an SEC audit, from start to finish, for a normal operating company with normal activities and normal securities.

The length of the audit can vary based on financial and accounting records, “and what [you’ve] done and how [you’ve] classified revenue and expenses,” says Andrew Stephenson.  

Success Story: Legion

What’s the most surprising use of regulation or the most creative application of the RegA or RegCF fundraising methodology? What was the niftiest thing that you saw in the last year?

“Legion, with the sheer number of investors they’re ending up with,” says Sara.

Legion is the first fan-owned media/entertainment company, and has moved up from Reg CF to Reg A. “One of the things that people were always worried about in crowdfunding is how are we gonna deal with so many investors? Well, if you want to talk about investor wrangling, talk to Legion because they’ve got thousands of them and they were cool with that. They’re looking for more. So that was a good example as the true crowd.”

– 1-2 description of the podcast

  1. Dan Baird talks with crowdfunding giants Sara Hanks and Andrew Stephenson about RegCF, how far it’s come, how it’s going, and the little things that need fixing. Tips on bad actor checks, and the filing costs and feedback timeline, and more juicy bits you can’t miss.
  1. Unmissable tips on filing costs and SEC feedback timelines, bad actor checks, and more here in this podcast: CracktheCrowd CEO Dan Baird talks RegCF, RegA and what’s going on now and down the line, with CrowdCheck’s Sara Hanks and Andrew Stephenson.

Check out the podcast to get more good tidbits from the interview.

How to Listen

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If you have any questions or feedback, email us at info at crackthecrowd dot com. If you’ve got suggestions on who Dan should interview next, please drop us a line in the comments.

See the Full Transcript Below

Dan: And let’s see. Everything’s still good. Okay, cool. And with that, welcome to “Crack the Crowd.” Now, Sara and Andrew, fun thing in the most complimentary terms, you are both dinosaurs in this space. Going back to 2013, I remember some of our first conversations were I think that was maybe 2014 or maybe early 2015. This was back in I think February. And you two have been in the space for about literally as long as anybody, especially the headquarters in DC. You have been there, done that, have been in on the meetings with SEC and other thought leaders in the space.

With Reg CF surpassing and coming up on its 18-month anniversary, what and how have you seen the evolution between Reg CF, Reg A, and Reg D, I guess in that reverse order. But what’s been your take on the evolution of how these launched, did we get the people we were looking for, and is it working?

Sara: Thank you. It’s a really interesting phenomenon because, I think, the space has been shaped by the order in which the various regulations were adapted. And I think if it had been the case that Regulation CF had been adapted before Regulation A. It might have picked up a bit more speed than is currently the case. What happened is with Reg A coming ahead of Reg CF, some people started looking at it and saying, “Hey, we can do crowdfunding with Reg A,” which people had not…when we’re looking at the Jobs Act, originally, I think people would not have imagined that Reg A would have been a vehicle for crowdfunding, and yet it is, and it’s a very effective one, too.

So that shapes the whole thing and it’s been fascinating to watch this environment evolve through the Jurassic period as it were to current day, because we’re constantly addressing questions that we didn’t even know the question existed before. Never mind not knowing what the answer is and applying very traditional securities, laws and regulations to very new markets. It means that you’ve got a new challenge every day which is why it’s so great. Right, Andrew?

Andrew: It is, yeah. It’s rather exciting. And because a lot of this is new, even Regulation A and Regulation CF have these private transaction elements that you previously only saw with offerings say under Regulation D, but they’re being applied to public offerings. And so it does create a little bit of friction on the tail…I’m sorry, on the back end for any particular offering and some of this friction was not accounted for in the rules. And so it’s trying to work through some of those issues that arise based on, as Sara mentioned, applying established interpretations of securities law to this new market is rather interesting.

Dan: This is gonna sound like I’m being overly complimentary, but whether you two know it or not, but often times when you two aren’t around and people are looking for the bright line standard of what you can and cannot say, or what you can and cannot do, especially associated with Reg CF, they often look to your guidance. And I’m kind of curious what is your take on this level of regulation?

I mean, you guys are familiar with how the European markets work and how the Oceanic and I don’t know how much or if you’re familiar with the recent phenomenon of ICOs, but between those, what’s your take? I won’t hold you to this. No one take this as legal advice, but are we overly regulated for each of these phases? Are we just about right? Is there not enough? What is your take in terms of how comfortable are we with the level of disclosures and requirements that come from each of these regulations?

Sara: I think we would say we’re comfortable with the level of disclosure and the level of regulation overall. Where we do run into some issues is some of the unexpected complexities of regulation, when people drill down into what did this regulation actually mean? And then you get some very, sort of, counter-intuitive interpretations. And the one I’m particularly thinking about is one that we didn’t really understand how the communications rules were supposed to work in Regulation CF until Andrew started doing some digging, and then we took it a stage further and then we spent a lot of time talking to the staff.

And we got to the point where we realized that because of the way the statute had been drafted and the very flexible view that the SEC had taken, bless them, that very flexibility has led to the level of complexity that is really difficult for early stage companies to comprehend. And so even though everybody has done their best to try and make this work, there are a few areas where we could just simplify. As opposed to change the level of regulation, simplify the way it’s applied. And I think the communications rules will definitely be an example of that.

Dan: Are you specifically referring to Reg CF where we can’t speak about the offering publicly until the forms have been filed?

Sara: Well, that’s kind of set in the statute, because the statute didn’t change anything in that area specifically. Yeah, you can’t say anything. You can’t jump the gun as it were with respect to Reg CF. But the real area of complexity is the fact that once you filed, you can use social media and all of the things that are completely intuitive to people who are doing capital raising these days using the internet. But if you go beyond the terms of the of the offering, the price and the size and the type of security and the closing date, to go beyond those, you’re in some very troublesome waters.

You can either just mention the terms or you can not mention the terms at all, and that becomes truly bizarre where you say, “We’re a fantastic company and we’re doing crowdfunding. You could go to this website and learn more about it. But, no, we can’t tell you what we’re selling,” which is, A, weird, and, B, not really helpful to the investor. And so it’s those little things that I’m sure in the end we will sort those out. But those are the things that I think we need to focus on as opposed to throwing out the baby with the bath water. This baby is doing okay in this bath water right now.

Dan: Sure. Question.

Andrew: And I’ll just to add one thing to that. So you’re calling about, so being able to do communications prior to filing the Form C. In practice that could be something useful for, sort of, building momentum as you see in a donation rewards crowdfunding offering. It’s probably not a good idea for any particular company or any particular issuer for regular crowdfunding offering. And the reason I say that is these are all typically smaller companies who have not previously engaged in public solicitation of securities offerings, who may not have established for proper governance mechanisms for bringing on outside investors which is a big requirement for any company.

So by jumping into it earlier without going through the process of putting together the Form C could lead potentially just some bad outcomes if we’re understanding what it’s selling to investors, enticing investors with information that’s not accurate, especially if they haven’t gone through the financial statement review process. And so those are important things. It’s helpful for issuers to do it right, that they aren’t able to solicit ahead of a Form C filing.

Maybe there’s some middle ground. Maybe there’s some ability to test the waters without being involved, say, too much, and that’s something that could be taken up later if there is a need for it. But there is a bit of discipline that goes into the process of filing the Form C that is important for early stage companies.

Dan: And just out of curiosity, now I’m gonna ask you this, see if I can get this answer. What do you expect the capacity for, I don’t know if punitive is the right word, but the follow-up from the SEC and the government side or the regulator’s side in terms…I don’t know about you, but I stopped keeping track of all of the campaigns that were violating, forward-looking statements, mixing terms and non-terms-based offering. And in the simplest form, the one that is done almost on a daily basis is people actually telling you what type of a security they’re offering in non-terms-based ads, right? Saying, “Come and own a piece,” right? Basically disclosing that this is an equity instrument.

It’s so prolific. Do you expect there to be substantial fall? It’s one of these where we talk to our clients all the time and often times go, “Well, you don’t necessarily have to do this. You can absolutely do it yourself. We speed it up. We make it easier. We have teams that are trained on what they can and cannot say.” And, unfortunately, this is one of those things where if you do it wrong, you find out the hard way five years from now. You won’t feel it this week, next week, 10 weeks, but you’re gonna find out later that you created a pretty big and easy to spot weakness in your offering and the viability that comes with it.

There is no statute of limitations for security violations. Do you expect that big of a weakness? Or do you think potentially just because it’s so common or maybe just because there’s so many people doing it and it’s relatively benign in the grand scheme of theme of things from the scale of fraud, which they’re actually trying to prevent, that they’ll be following up on them?

Sara: It’s a really good question. I mean, yes, everybody is doing this wrong, in many cases doing it wrong because they don’t’ know any better. But the SEC’s general approach in a resource-constrained environment is first thought is always going to be to pick up the phone and call the company and say, “You did this. You might want to talk to security. We’re about not doing that again.” I mean, they are not playing [inaudible 00:11:54]. They understand small companies may not be advised as to what they can and cannot do. And they are focusing here on capital formation and they’re not focusing on enforcement of things that are just mistakes as opposed to going further than non-compliance and doing things deliberately.

I think really that the danger here from all of these…these are Section 5 violations. This is making an offer without being registered by the SEC or fitting within a proper exemption. The remedy for that is rescission, giving the money back. And I think the danger here is not from the SEC and not from other regulators, it is from aggrieved investors a couple of years down the road, who are going to say, “Well, I invested $1000.” “Well, we all collectively invested $100,000. And I note that you did this, you made this communication which was a violation of Section 5 of the Securities Act, and therefore that whole offering is subject to rescission. So give me my money back.” And that’s going to happen when companies are not doing so well and people see an opportunistic basis. Or, there’s an opportunity to grab some money back and why wouldn’t I take it since the company’s not doing well?

That’s your real danger is in a future plaintiff. Each plaintiff will use…looking for historical violations in order to grab money back from the companies. The other thing I want to say in this area is the SEC, so it’s taking a robust interpretation as to terms in sort of a good way. And so they have said things like, “Well, if you’re not saying we are selling equity securities but you’re saying something a bit more subtle like ownership, that might be okay.” So that’s a very interesting position coming from the SEC.

Andrew: And just to expand on the process for rescission and how it would work and what the danger is to a company is that. Yeah, so with Regulation CF, there is no back stop. So if somebody has violated the terms of Reg CF, unless it fits into the insignificant deviation, then there’s no exemption available. The company has violated Section 5 of the Securities Act that Sara said which is a rescission. There are analogous provisions in every state securities law as well, typically, with a statutory interest rate of 8%.

So an investor who’s invested $1,000, three years later decides that they’re not really happy with a performance, they can actually demand rescission with 8% interest, which is probably a pretty good return. So they would want to go ahead and take it. But most investors also understand that if the company is failing, maybe there’s not money there to claim but potentially as a bankruptcy action, they could get to the head of the line by being a judgment creditor rather than an investor.

Another situation in which investors may decide to demand their money back, if they’re not happy with the performance of the company, then somebody that’s just recently raised a bridge route. So they see the opportunity to grab some money while it’s available, which could set off a cascading effect of early investors demanding return of their money, which then leads to a company ending event.

Dan: If you’re listening, that mezzanine financing is usually extremely expensive, like it makes [inaudible 00:16:12] look fantastic. It is absolutely just that very special moment where you have no other option but to often double their money in 90 days levels of interest. Excellent, okay.

Now, you guys have kind of a cool, nifty little niche inside this market. And if people aren’t familiar, specifically the bad actor check product that you do basically means that I don’t know…I mean, I’m sure other people do it. I don’t know of them. Pretty much literally everyone that comes in, which you have to call CrowdCheck and go get a bad actor check. When they come to you and you do that kind of background or checking, basically all the managers, the officers of the company, were looking for anyone that has any sort of securities violations in their past, that process has to be manual to some extent, right? It’s a combination of kind of digital checks. What’s the biggest hurdle to issuers getting through that process smoothly?

Sara: Good question. I should say bad actor’s just one of the many services that we provide in this area, of course. We do believe there are other service providers out there, but I think, in essence, accumulating other sources. The way the bad actor stuff came about was when it was adopted by the SEC. We went to the SEC and said, “Okay, is there a central database where we can check this?” And they said, “Nope.” We went to Zimmer [SP] and said, “Is there a central database that you’re aware of?” And they said, “No. Maybe you’ll build it.” So we did. And it includes everything like state stuff and obscure things like the Chicago Options Exchange and things like that.

We’re not the only game in town, but what we do provide is a complete service with respect to the bad actor process. Most importantly, establishing who are the covered persons because one thing that we do see again and again is someone comes to us and says, oh, we’re doing a Reg D, we’re an LLC. Here is the people who needs to be checked and then we push back and say, “Well, who is the managing member of the LLC?” “Oh, that’s another LLC.” We’re like, “Okay, you gotta check those, too.”

Because if you didn’t do this, if there wasn’t an obligation, and there is an obligation to go all the way up until you hit a human being or an incorporated corporation, you could just disguise bad actors by putting LLCs on top of LLCs until people give up. So that’s an essential part of our services, is establishing who the covered persons are, and then going through their backgrounds and doing the checks and then evaluating the results that we get back.

But a lot of the times when we get something back from state or federal court, and we have to apply it against the rules to make sure that we know exactly how that cease and desist order or lifetime ban or whatever applies to the actual rules. Andrew, we get a fair number of hits. The one that I notice most often is, my goodness, a lot of you are underaged drinkers. We get that one a lot. And, by the way, that is not a bad act. All right. It is understandable. You’re not likely disqualified for that.

A lot of bankruptcy we deal with and entrepreneurs. That happens, again, a lot of bad act, but I think we’ve had maybe one bank robbery, which are the weirdest ones that you’ve come across.

Andrew: Yeah, to your point, it does say a lot about who is raising money in this space. So you have young CEOs of newly formed companies that are recently out of college and got a drunk in public or a minor possession charge while in college. Or you have more established entrepreneurs who have also run into some tough times and have bankruptcies in their past. So there’s a little bit of variety there. Yeah, what are some interesting ones?

Yeah, there’s a lot of driving issues. We also see a fair number of contract disputes with prior vendors, especially for previous entities of their management of the company has been involved with. And, again, those are not bad acts, but they may be items that are of interest or need to be known by the platform, especially Reg CF as part of the platforms obligation to conduct a background check. A platform may have to make a determination of whether that…so those prior disputes with vendors or contractors creates some sort of probability of potential future fraud or otherwise would raise concerns regarding investor protection, which is a very broad and catch all term that platforms have to make determinations regarding.

And so some of that prior performance, especially of previous entities that have been run by the management, if it’s led to lawsuits, there may be something there that a platform would have to say, “No, we can’t move forward, even though it is not a disqualifying event.”

Dan: Sure.

Sara: One thing I…

Dan: Go ahead.

Sara: One thing I could add there is we have had situations where we we’ve run the bad actor checks and nothing disqualifying has come up but we go, “Oh, this is a large number of lawsuits that seem to be instigated by this guy.” And we did have one case where we’re doing a Reg CF offering. We had alerted the platform that the entity or person in question seems to be rather litigious and that deal did not go through.

And if we had to predict any deal that would have led to arguments and recriminations and yelling between a platform and a potential issuer, that one would have been it. So you can get some useful information there, even outside of the hold, and are you a disqualified bad actor person.

Dan: I’m trying to think in the, what, four or five years, whatever that we’ve been doing this, I think I’ve come across I’d say maybe two instances of what I…let’s say 95% sure it was a literal attempt at fraud. And for those listening, that’s out of several hundred, maybe thousands of conversations. I’ve come across two where one was a guy with some serious bad actor violations was trying to basically do some 506(c) raise under his daughter’s name and another one that was out of the Caribbean that was a pretty clear pump and dump scheme.

Have you guys, in the last five, have you come across that many that you would say…I don’t think they got as far as to you. I mean, we basically took a look and went if we found it this quickly, you’re bad news. We’re not interested. How many do you think you’ve come across in the last few years?

Sara: I would say we’ve had about three or four at the Nigerian Prince level where they were clearly, “I’ve got these fantastic ideas and please go to my honorable website and I am applying for whatever.” So a few of those, we had at least one where clearly there was something wrong and the issuer was insisting that the platform has an obligation to post them. And I think that’s got to be one of the biggest red flags ever is you have to list me. And then they’re trying to make some legal argument based on the Reg CF rules as opposed [inaudible 00:25:28]. That one, it was so clearly wrong from the start, and the company didn’t match up with the person who was communicating. Nothing made sense.

I use the Nigerian Prince example because those emails are always designed to be deliberately a bit hokey and have a lot of misspellings in order to draw in people who are more gullible. Something like that, which was so obviously wrong on so many levels, I think it may have been deliberately put together, or maybe I’m just being cynical about it in order to try and find the most dumb, the most gullible platforms. But the ones that we worked with did not accept them and eventually made them go away.

I mean, there’s also been a few allegations of misleading statements. The thing I always say about the whole fraud thing is let’s not use the F word, fraud, because the number of Nigerian princes out there is limited and easily found as far as we can tell. The flakes, though, the guys who are making statements about we are going to do this where it does not seem that they’re going to be able to comply with their own plan of operations and they’re not gonna be able to execute, those are far more common. And we have seen a few of those and sometimes that gets into allegations of fraud and it’s usually not fraud. It’s just younger entrepreneurs biting off more than they can chew and we see that all the time in the donation rewards as well, don’t we?

Andrew: Yeah, yeah, absolutely.

Sara: Some of the biggest, most successful crowdfunding offerings ended in tears when the guy’s like, “Oh, I forgot to include the export tax in working on how much my things cost.”

Dan: I’m still waiting on my Coolest Cooler.

Sara: I wasn’t gonna mention that.

Dan: I sit there and they continually send those, “Hey, give us an extra $100 and we’ll send it.” I’m like, “No, I need to learn my lesson.” I’m now like three years overdue but it’s an absolute risk. It’s one of those things. When you get the more sophisticated investors, you know they usually say, “I take whatever the entrepreneur says and I add at least a third.” It’s just the nature of them. What you think you can do in the one year period is usually actually much understated what you can complete. And five is usually actually more than you’d think, right? Yeah, to some extent to be expected is my experience as well.

Now, question, we both have a lot of work and I know you do a lot of Reg A work as well, but when you’re looking and kind of watching the space, I was looking through a blog that you wrote a little while ago and it talked about…it might have been from April but you were referring to the form filings of CFU. It’s basically the form that you file when you’ve completed and successfully closed Escrow and how I think there were 20 but the statistics don’t necessarily reflect that. Am I misreading that in terms of I’m looking at that and going, “Well, what that actually is is people failing to file the form, not people failing to complete the raise.” Are you seeing a bunch of mistakes, both in the aftermath and the updating stages of the campaign? What do you think the cause is there as well?

Sara: We’ve talked to SEC about some of this. And if the campaign fails, they are not generally expecting to see a Form CU. So that should put people’s minds at rest. Their view is that it’s sad enough that you failed to do anything and adding a requirement on top of that to say that you failed would seem unfair. So the CU should be filed by anyone who has closed their offering. There’s a bit of a disconnect here and, again, this is as a result of the SEC being very flexible and saying rolling closes, that is if you hit your target you can take that money and then you can have more closings until you reach your termination date.

When the wall was originally drafted, it was all anticipated that there would be one campaign and one closing and one CU. So less people as a market practice are not filing the CU until they have finished, finished, finished and done all of their filings. But the blog post that I did in April related to the fact that I’m looking at…knowing that there are a certain number of companies that have closed and taken money, and there’s a certain number although they may not have filed their CU, and there’s a certain number of companies that have filed a CU. Everybody who has sold securities up to that point, should have filed a Form CAR. And about half of them, by my calculation, didn’t.

Dan: And CAR, I’m recalling CAR is for revised CF offerings, right?

Sara: No. Revised is CA. CAR is the annual report. We were expecting to see annual reports sometime end of April, early May, and there’s a whole bunch of it that didn’t get filed it seemed. And we know there are lawyers out there saying, “Well, there’s no real recourse for SEC if you don’t file. And the only thing is if you’re not in compliance, you can’t do another Reg CF fundraising round. And if you want to do another Reg CF, then all you have to do is get up to date and file your missing CAR.” I had discussed that with the SEC and they said, “We can sue people for not filing. Don’t get cocky.”

Dan: That’d be a shame, too, on the issuers’ behalf. A lot of people don’t realize from the marketing perspective how much cheaper this stuff gets the second time you do it. When you go back to the existing investor pool or you go back to the people even that didn’t invest the first time. I’ve said it, [inaudible 00:32:18] the face, but the cost to send an email versus to drive the traffic to your campaign in the first place is nothing versus expensive.

And a lot of people don’t realize when they say how much it will cost, the trick is if you think about it over the five year term how much less expensive it is the second, third, fourth and fifth year, remarkable savings in terms of costs and capital by basically building an engine that kind of has momentum and continually kind of feeds itself, so that’d be a shame. If you’re an issuer listening, do not do that. That is a huge mistake. This is not expensive capital when it all comes down to it.

Well, question, shifting gears a little bit, Reg A, the CFs we saw in the first year, they’d done about 300 in the first 12 months. If my account is correct, at least in terms of filings, they’re near 600 now. The momentum is gaining. In the Reg A space, we saw a slower start, but to some extent it’s a, let’s say, a little bit more of a niche and a little bit harder to place the right company to do a Reg A. I know a lot of people, from our perspective, they’re going is a Reg A the right methodology. And in some cases, you can do a Reg CF and a Reg D simultaneously. And the people that are using Reg A, it seems like it’s building momentum as well. Are you seeing much more pick-up there from your business side?

Sara: Yeah, we’ve actually been very busy on Reg A since probably after the first quarter of Reg A, and I think I have to check on the numbers but we’ve qualified about 20 or some, we have another to come…no, two to come in the next few days, which qualified planning, it gives us more than 10% market share and it is an equal representation in the number of filings. So it has increased. It’s been steady. I think there has been a number of failures which have been sad. Some companies…we got one or two qualified and they just didn’t raise enough money to make it worth their while to stay in the Reg A with [inaudible 00:34:38] regime. I think one of them, at least, left too early. They didn’t give it a chance.

The thing is with Reg A as with Reg CF, you need a crowd and you need a slightly larger crowd than with Reg CF. The one thing that is interesting at the moment is if you remember companies moving from the CF world to the A, and I think that should be a natural progression. Whether you did a Reg D concurrently with the CF or not, if you did a successful CF, acquired a bunch of security holders, there’s your natural crowd for going back to them for the Reg A.

Dan: Sure.

Sara: And the thing with this…

Dan: When Reg A originally came out, I remember there were a handful of cases where they were talking about how they basically spent the majority, like, 75% of the entire race just on the legal fees to conduct it. They dropped precipitously. Well, actually I don’t. I have asked multiple lawyers this on the podcast before and I know it makes them nervous, but just in terms of the upfront filing fees, the timeline and the ongoing filing fees and other resources that issuers should be ready for, what do you usually kind of tell them to ballpark? I understand they’re totally different, kind of depending, but could you give me a ballpark to where we currently are in terms of filing a Reg A?

Sara: This is an area where there’s some lawyers, and I come from the traditional law firm area where my hourly fee was $1,500 an hour at least if the deal’s over a billion. And we’re in different worlds here. This is not an area where hourly fees work, at least when we’re talking about crowdfunding. If we’re talking about the companies who are using Reg A to just have an easier way to get listed on aspect, and there’s been a few great successes recently like Myomo went out of money and people like that. They’re not crowdfunding companies. They are just NASDAQ-listed companies who use this as a stepping stone.

The crowdfunding area, you do not need to over-engineer this. You do not need to over-lawyer it and you certainly don’t need to overpay it. And we have fixed fees for the entire process, which included due diligence, and we’re talking $40 or $50 thousand, period and predictable.

Dan: Predictable? Wonderful. Have you seen a big part of the headache that I’ve gotten from issuers? Because often times, when they’re doing fundraising, it’s often because…they basically explore options, but it’s more of a process of elimination which is the lowest hanging fruit in many ways. To some extent, they figure out one method doesn’t work, another method doesn’t work, another method doesn’t work, and then they come back to crowdfunding, based on the resources that I have turns out to be the right methodology.

And a big headache originally on the Reg As was the substantial common period where you had to basically send in marketing materials, you’re offering materials and basically get feedback from regulators. And originally, I wanna say it was between, in some cases, I think it was Mark Roderick that would say, “Expect 90 plus days, sometimes as much as six months,” but in subsequent interactions, I’ve heard a lot of clients saying, came back in three weeks, have you seen the [inaudible 00:38:25] potentially there?

Sara: Yeah, the SEC’s rules for this are exactly the same in terms of timing and response as if you were doing a registered offering. They’re supposed to get back to me for a few days, varying for less than 28. We’ve seen 24-26 days [inaudible 00:38:46], they’re not supposed to take more than 28. They’re just not supposed to. And if you can turn around the offering, send it back to them within a couple of weeks after that, then they’ve got 10 days to respond. Your second round should be your last round of substantive comments and you probably end up with a third possibility of just telephone of cleanup comments.

And one filing we recently got three comments on the first round, another got two. They are not looking to foot faults here. [Inaudible 00:39:24] doing something straightforward and we’ve got a couple of filings that are super not straightforward and very experimental and they are currently still in self and they’ll come out of self and you’ll see how many comments we got. But if you’re a normal operating company doing normal things with normal securities, then you won’t get a whole bunch of comments and the SEC is pretty easy to get through. Right, Andrew?

Andrew: Yeah, it absolutely is. The SEC only comes back with a significant number of comments that may require multiple rounds to address that specific comment if it’s something new or unique in Reg Ards to the operating structure, fee arrangements for the type of security. But, yeah, if you’re a standard operating company with a standard [inaudible 00:40:18] of securities, yeah, 90 days is certainly possible to get through the entire from start to finish, including the drafting of disclosures and getting through the SEC. The only sort of wildcard is how long it takes to complete the audit, which will vary based on the companies prior, so financial and accounting records and what they’ve done in how they have classified revenue and expenses.

Dan: What’s the most interesting or surprising thing that you’ve seen in the last year? Meaning the most surprising use of regulation or the most creative application of the Reg A or Reg CF fundraising methodology? What was the niftiest thing that you saw in the last year?

Sara: Oh, boy. I don’t want to play favorites. So many cool companies. We certainly have to mention Legion and because of the sheer number of investors that they’re ending up with. And they’re an example of 3,000 plus in the Reg CF and then they’re accumulating more now in their Reg A. And that’s kind of cool because one of the things that people were always worried about in crowdfunding is how are we gonna deal with so many investors?

Well, if you want to talk about investor wrangling, talk to Legion then because they’ve got thousands of them and they were cool with that. They’re looking for more. So that was a good example as the true crowd. We’ve dealt with so many really cool companies. It’s hard to pull out any of them. Andrew, you got any thoughts there?

Andrew: Yeah, I think just building on that, what [inaudible 00:42:25] shows is how Reg CF and Reg A can be used most effectively when generating that large number of investors who are now first stakeholders in the company and invested in the company’s success and want to see it grow. It’s just a great use of the crowd to get them involved in the company. And while not every company can do that, not every company is that type of centered consumer-facing company, but it’s a great use of for these new mechanisms for raising capital.

Dan: Perfect. Cool on that, some good note to go out on. Where can people get in touch? Andrew and Sara Hanks. Andrew Stephenson and Sara Hanks from CrowdCheck, if people want to find you online, where should they go to connect?

Andrew: Pretty easy. It’s…yeah.

Sara: www.crowdcheck.com. I’m sara@crowdcheck.com. And Andrew is andrew stephenson, with a P-H, or one word, @crowdcheck.com. He couldn’t be Andrew because we already had an Andrew. We were [inaudible 00:43:45] a lot of first names.

Dan: Growing pains, right? The cool emails run out quickly. Excellent. Well, thank you both. I hugely appreciate your time and I’m looking forward to the next one.

Sara: All right. Thank you very much.

Dan: Thank you.

Andrew: Thanks much.

Sara: Bye-bye.

Andrew: Take care.