Raising Capital: DIY vs. Broker Dealer Approach

Raising Capital

DIY (Do It Yourself) is a great approach for art projects and some simple home improvements, but when it comes to raising capital for your growing company -not so much. Prior to taking on a DIY capital raise, Issuers should fully research and understand what a capital raise journey. When capital is raised from outside investors, the exchange of funds and securities creates a rapport with precise expectations. A FINRA member broker dealer helps by strategically evaluating an Issuer’s options and compliantly structuring a viable capital raise that best fits the company’s needs and is ultimately fair, balanced and transparent to investors.

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The 10 Commandments of PIPR Solicitation

Erik Qualman

https://www.youtube.com/watch?v=jottDMuLesU by Erik Qualman

Erik Qualman

https://www.youtube.com/watch?v=jottDMuLesU by Erik Qualman

With the JOBS Act and the lifting of the 80-year-old ban on General Solicitation for Private Issues, a new securities rule exemption was created titled: Regulation D 506c. This exemption allows Issuers to inform prospective investors of their capital raise by using modern-day communication channels such as the internet. By leveraging these technologies, Issuers (emerging growth companies) can vastly increase the awareness of their company and product while reaching a wider spectrum of prospective investors. For high net worth investors it means greater exposure to investments opportunities which were previously controlled by their brokers and/or advisors. 

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What is a Broker Dealer?

Broker Dealer

A Broker Dealer (“BD”) is an entity that mostly buys and sells securities and participates in other securities transactions. BDs must be registered with the Securities and Exchange Commission (SEC) and must be a member of a Self-regulatory Organization (“SRO”).  There are several SROs that a broker dealer can join, depending on the type of securities products sold and where their business is transacted. FINRA, Financial Industry Regulatory Authority, is the SRO which oversees BDs assisting private issuers with raising capital. A BD that specializes in raising capital for issuers can also be referred to as an Investment Bank.

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What’s the difference between Crowdfunding and Crowdfinancing?

Listen to the Crowd

On October 30, 2015, The SEC approved equity crowdfunding by a 3-1 vote. Equity Crowdfunding was the last piece of the JOBS Act to be approved. Equity Crowdfunding, stipulated under Title III of the Jobs Act has been in regulatory limbo since April 2012. The JOBS Act has 7 separate titles which has made the most significant rules changes to the financial industry since the 1930s. Title III lifted the ban of general solicitation of Reg D 506 private placements, creating Reg D 506c Private Placements (AKA Crowdfinance) and been in effect since September 23, 2013. Title IV amended Regulation A which is now commonly referred to as Reg A+.

The term ‘Crowdfunding’ has been a general term of art for raising funds through the internet. The crowdfunding concept first became prevalent when popular sites like Kickstarter and Indiegogo offered project creators the opportunity to expose their ideas, hopes and aspirations while asking supporters for needed funds in the form of a donation to make their project come to fruition. Reward Crowdfunding project creators offered their supporters a reward like a T-Shirt, first delivery of product or special acknowledgement, in exchange for their donation. Reward Crowdfunding is not a financial security transaction and supporters (aka backers) not investors therefore not regulated by FINRA or the SEC.

See how the different types of crowdfunding and crowdfinance compare to each other.

Crowdfunding vs Crowdfinance Table

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UPDATE: FINRA’s Latest Proposed Funding Portal Rules and Fees

jobs-act-senate-passesFINRA

On October 9, 2015, 2 years after FINRA first published its proposed Funding Portals rules , FINRA published the amended proposed Funding Portal Rules to the Securities and Exchange Commission (SEC). The following are FINRA’s proposed rule submissions:

1. SR-FINRA-2015-040
a. Adopt Funding Portal Rules 100,110,200, 300, 800,900 and 1200 and related forms.
b. Adopt FINRA rule 4518: Notification to FINRA in Connection with the JOBS Act.

2. SR-FINRA-2015-041: Adopt Section 15 of Schedule A to the FINRA By-Laws governing fees for funding portals that are FINRA Members.

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