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How to raise cannabis capital using JOBS Act exemptions

Posted on January 26, 2019 at 11:15 PM Comments comments (0)

There are several ways to raise capital for your cannabis business using exemptions using JOBS Act exemptions Reg CF, Regulation A+, Regulation D, or Regulation S.

1. Regulation Crowdfunding (Reg CF)

Think Kickstarter with equity (or debt) being offered.

Reg CF or Regulation Crowdfunding is relatively new and makes it legal for private placements to be marketed to non-accredited investors. Securities purchased under the Reg CF exemption cannot be resold within a year. Only $1,070,000 can be raised each year.  You will need to file an annual report with financial statements. If you neglect to do so, you will be unable to fund-raise with Reg CF again until you file the missing annual report. You may concurrently raise funds from accredited investors using a Regulation D exemption.

2. Rule 506(b or Rule 506(c under Regulation D

Rule 506 is the easiest and most-used exemption. There is no limit to the amount you can raise under either 506 (b or 506 (c. Under the Rule 506(c exemption, general solicitation and advertising are permitted. Only accredited investors may invest. Under Rule 506(b, 35 investors may be non-accredited, but no general solicitation is permitted. This exemption is often used with the friends-and-family-round of capital raise or first capital stack.

3. Regulation S is a relatively new but popular option. You can sell securities offshore without regard to the sophistication or number of purchasers in the offering or the size of the offering. You can raise as much as you want from an unlimited number of people. The regulatory environment is far less burdensome than with Regulation D offerings. Regulation S selling efforts from the U.S. are permitted if the efforts are directed abroad. You can sell securities offshore without regard to the sophistication or number of purchasers in the offering or the size of the offering.

You can raise as much as you want from an unlimited number of people. Unlike Rules 506(b and 506(c of Regulation D, Regulation S does not have specific information requirements.

An issuer who makes a Regulation S offering online may do so without jeopardizing its exemption by including prominent statements on its website saying that the offer is directed only outside the U.S. A Private Placement Memorandum is not required for a Regulation S offering, but steps must be taken so that foreign investors understand the structure, principals, and risks associated with the offering. A Regulation S offering may be conducted concurrently with a Regulation D offering to U.S. accredited investors without the offerings being deemed integrated. S

Securities sold under Regulation S are subject to re-sale restrictions. The nature of the restrictions depends on whether the issuer is foreign or domestic; whether the issuer is a public company; the types of securities being sold; and whether there is a “substantial U.S. market interest.” The securities being sold must contain a legend stating that the securities may not be resold to US investors for a restricted period of time.

4. Regulation A+

Regulation A+ is designed for companies who want to raise more funds publicly, but don’t want to do a full-blown IPO. You can raise up to $50 million per year. Importantly, you can advertise your cannabis fundraising while you “test the waters” and solicit investors before filing with the SEC.

It can be expensive. Before you can start fundraising with a Reg A+ you need to pre-file an offering placement memorandum (OPM) with the SEC. An OPM is like a business plan wrapped with a whole bunch of legal disclaimers, and can cost serious legal fees. We (Private Placement Advisors LLC) advise issuers to schedule 30 days to compile the required documents; 21 days to complete and submit the forms; and then up to 45 days to get SEC approval. 5. Cannabis Funding Platforms Platforms friendly to cannabis are said to be around the corner. This will be easier than going it alone but you may end up paying the platform 7%-8% of what you raise.

Questions? Contact [email protected]

Crypto Fund using Regulation S

Posted on September 22, 2018 at 6:45 PM Comments comments (0)

A self-described “crypto-blockchain and ICO-focused investment research fund and media portal” has announced that its Regulation S securities token offering (STO) will begin shortly. The startup, XResearch, claims it is building a “community commons for crypto investors” offering institutional-quality research services and content. 

Token holders will be entitled to “institutional-quality research” and share in 5% of the equity of the company (all token holders in aggregate).

Using Regulation S, issuers can raise large amounts of capital with without the cost and delay of a Regulation D exemption, while purchasers benefit from the ability to resell in a secondary market.

Using either Rule 144 and Regulation S, issuers can use two separate exemptions for the same time period offering the same assets. Also, since a Regulation S issuer may make an offering within the U.S. to a “Qualified Institutional Buyer” (QIB) or to anyone outside the U.S., U.S. broker-dealers can purchase the securities and market them, whether or not any non-U.S. investors purchasing under them would qualify as QIBs, to large institutional buyers both inside and outside of the U.S.

Issuers using Regulation S can take advantage of the fact that the SEC and FINRA deem sales outside of the U.S to be regulated, whether or not those sales are in fact regulated. 

XResearch is led by Charles Wyman, who is working with Steven Wasserman, Barry Cohen, and Neil Benedict, among others.

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Rule 506(c & Regulation S

Posted on June 7, 2018 at 3:55 PM Comments comments (0)

The ideal exempt offering is offered globally with online general solicitation. In the U.S., it is illegal to sell securities that are not registered or exempt. The most popular exemption, Rule 506(c, covers accredited investors who are U.S. persons and whose accreditation status can be verified. Regulation S exempts offerings made to non-U.S. persons.

If an issuer only uses Regulation S, sales can only be made to non-U.S.persons. Launching two side-by-side offerings with one relying on Regulation S and the other on Rule 506(c, therefore, has compelling advantages to most issuers.

Note: If an issuer only uses Rule 506(c, it must verify every investor as accredited, even non-U.S. investors.

Take care to treat each offering as a separate offering.

• Insure best practices for a 506(c offering, including third-party verification of your investors’ accredited status.

• Insure best practices for a Regulation S offering, including qualification of its investors.

The dual offerings must clearly delineate between U.S. and foreign investors. Practice tip: Before launching a dual offering, set up two separate websites.

Resale Restrictions

Both Rule 506(c and Regulation S have important resale restrictions; they are different and they are state and fact distinct.

Douglas Slain https://www.linked com/in/douglasslain/

ISOs using Regulation S

Posted on May 31, 2018 at 8:40 PM Comments comments (0)

ISOs using Regulation S

What type of documentation is typically involved in a Regulation S offering of debt securities? What are the holding periods for the sale of Regulation S securities? How is the distribution compliance period measured for different types of securities? How are Regulation S transactions structured? What are the holding periods for the sale of Regulation S securities? What is the due diligence process for initial purchasers in a Regulation S offering? 

What type of documentation is typically involved in a Regulation S offering of debt securities?

A Regulation S offering is often combined with a Rule 144A and/or a Rule 506(c offering. The same disclosure package is used with debt and equity offerings, with or without Regulation S. Documents include: The PPM or private placement memorandum for a Regulation D [Rule 144A and/or Rule 506(c] must stress restrictions on re-sales. The SAFT (simple agreement for future tokens) documents the transaction and serves as a form of purchase agreement. The Operating Agreement contains representations, warranties, and covenants specific to each offering. The Subscription Agreement commits the investor to the investment. Practice Note: The Regulation S offering may be conducted using documents that are based on the country‐specific practices of the relevant non‐U.S. jurisdiction or jurisdictions. With equity securities offered by U.S. issuers, the legend must state that hedging transactions may not be conducted. The same legend must also be printed in any advertisement made or issued by the issuer, any distributor, and their respective affiliates or representatives. All investors must be given the same “disclosure package.” Only changes in the issuer’s business, financial condition, or other circumstances need to be reported to the SEC, following the initial Form D filing.

What are the holding periods for the sale of Regulation S securities?

Securities cannot be offered or sold to a U.S. person during the distribution compliance period. But there is no distribution compliance period in connection with securities sold in a Category 1 transaction, and the distribution compliance period for Category 2 transactions for both equity and debt, and for Category 3 transactions involving debt securities, is only 40 days. The distribution compliance period for Category 3 offerings of equity securities is six months if the issuer is a reporting company, and one year if not.

How is the distribution compliance period measured for different types of securities?

Medium‐Term Notes. In the case of continuous offerings, the distribution compliance period is deemed to begin at the completion of the distribution. • Warrants. Securities underlying warrants are considered to be subject to a continuous distribution as long as the warrants remain outstanding. A sample Rule 903 legend reads, “These securities will be offered only outside of the United States to non‐U.S. persons, pursuant to the provisions of Regulation S of the U.S. Securities Act of 1933, as amended. These securities will not be registered under the Securities Act, and may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements.”

How are Regulation S transactions structured?

If there is no SUSMI in a foreign issuer’s debt securities, the issuer need only comply with the general Regulation S requirements (i.e., offshore transaction and no directed selling efforts). A SUSMI in debt securities exists if the issuer’s debt securities are held of record by 300 or more U.S. persons, and U.S. persons hold of record at least 20% and at least $1 billion or more of the principal amount of debt securities, plus the greater of 14 liquidation preference or par value of non‐participating preferred stock, and the principal amount or balance of asset‐backed securities. Foreign issuers of debt securities (and U.S. issuers of non‐convertible debt securities) may rely on the Category 1 safe harbor if the transaction qualifies as an overseas directed offering. An offering of non‐convertible debt securities of a U.S. issuer must be directed into a foreign country in accordance with that country’s local laws and customary practices, and the securities must be non‐U.S. dollar denominated or linked securities in order to qualify as an overseas directed offering. T

The provisions of the issuer safe harbor specific to offerings of equity securities are summarized below.

(A) Category 1 Safe Harbor The Category 1 safe harbor is available for equity offerings if a foreign issuer reasonably believes at the beginning of the offering that there is no SUSMI in the equity securities. A SUSMI in equity securities exists if, during the shorter of the issuer’s prior fiscal year or the period since incorporation, either: • The U.S. securities exchanges and inter‐dealer quotation systems in the aggregate, constituted the single largest market for a class of the issuer’s securities; or • At least 20% of all trading in a class of the issuer’s securities occurred on the facilities of U.S. securities exchanges and inter‐dealer quotation systems, and less than 55% of such trading occurred on the facilities of the securities markets of a single foreign country. If there is no SUSMI in a foreign issuer’s equity securities, the issuer need only comply with the general Regulation S requirements to make offers and sales.

(B) Category 2 Safe Harbor The Category 2 safe harbor is only available for equity offerings by a reporting foreign issuer. Even if there is a SUSMI in the securities, reporting foreign issuers who implement the Category 2 offering and transactional restrictions for the distribution compliance period may rely on the safe harbor. This is the issuer safe harbor available to foreign issuers (both reporting and non‐reporting) and reporting U.S. issuers of debt securities.

(C) Category 3 Safe Harbor The issuer safe harbor is available to non‐reporting U.S. issuers of debt securities, provided that the debt securities are not offered or sold to a U.S. person, other than a distributor, during the 40‐day distribution compliance period, except pursuant to the registration requirements of the Securities Act or an exemption from registration. Issuers must comply with the offering and transactional restrictions applicable to Category 2 offerings and Rule 903(b)(3)’s additional transactional restrictions during the distribution compliance period. Only changes in the issuer’s business, financial condition, or other circumstances need to be reported to the SEC, following the initial Form D filing.

What is the due diligence process for initial purchasers in a Regulation S offering?

Modest due diligence is more acceptable in standalone Regulation S offerings that do not involve financial intermediaries. Due diligence can be divided into financial, business and management due diligence, and into documentary or legal due diligence. Necessary due diligence varies by whether the issuer is a new entity, whether the business of the issuer is risky, and based on the nature of the tokens or securities offered. Practice tip: The PPM and other offering documents are not subject to SEC review. File the Form D, use it to “notice file” state regulators, and otherwise just follow rules. 

ISOs using Regulation S

Posted on May 25, 2018 at 10:45 PM Comments comments (0)

What type of documentation is typically involved in a Regulation S offering of debt securities?

What are the holding periods for the sale of Regulation S securities?

How is the distribution compliance period measured for different types of securities?

How are Regulation S transactions structured?

What are the holding periods for the sale of Regulation S securities?

What is the due diligence process for initial purchasers in a Regulation S offering?

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What type of documentation is typically involved in a Regulation S offering of debt securities? A Regulation S offering is often combined with a Rule 144A and/or a Rule 506(c offering. The same disclosure package is used with debt and equity offerings, with or without Regulation S. Documents include:

The PPM or private placement memorandum for a Regulation D [Rule 144A and/or Rule 506(c] must stress restrictions on re-sales.

The SAFT (simple agreement for future tokens) documents the transaction and serves as a form of purchase agreement.

The Operating Agreement contains representations, warranties, and covenants specific to each offering.

The Subscription Agreement commits the investor to the investment.

Practice Note: The Regulation S offering may be conducted using documents that are based on the country‐specific practices of the relevant non‐U.S. jurisdiction or jurisdictions.

All investors must be given the same “disclosure package.”

Only changes in the issuer’s business, financial condition, or other circumstances need to be reported to the SEC, following the initial Form D filing.

What are the holding periods for the sale of Regulation S securities?

Securities cannot be offered or sold to a U.S. person during the distribution compliance period. But there is no distribution compliance period in connection with securities sold in a Category 1 transaction, and the distribution compliance period for Category 2 transactions for both equity and debt, and for Category 3 transactions involving debt securities, is only 40 days.

The distribution compliance period for Category 3 offerings of equity securities is six months if the issuer is a reporting company, and one year if not.

How is the distribution compliance period measured for different types of securities?

Medium‐Term Notes. In the case of continuous offerings, the distribution compliance period is deemed to begin at the completion of the distribution. 

Warrants. Securities underlying warrants are considered to be subject to a continuous distribution as long as the warrants remain outstanding.

A sample Rule 903 legend reads, “These securities will be offered only outside of the United States to non‐U.S. persons, pursuant to the provisions of Regulation S of the U.S. Securities Act of 1933, as amended. These securities will not be registered under the Securities Act, and may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements.”

How are Regulation S transactions structured?

If there is no SUSMI in a foreign issuer’s debt securities, the issuer need only comply with the general Regulation S requirements (i.e., offshore transaction and no directed selling efforts). A SUSMI in debt securities exists if the issuer’s debt securities are held of record by 300 or more U.S. persons, and U.S. persons hold of record at least 20% and at least $1 billion or more of the principal amount of debt securities, plus the greater of 14 liquidation preference or par value of non‐participating preferred stock, and the principal amount or balance of asset‐backed securities.

Foreign issuers of debt securities (and U.S. issuers of non‐convertible debt securities) may rely on the Category 1 safe harbor if the transaction qualifies as an overseas directed offering.

An offering of non‐convertible debt securities of a U.S. issuer must be directed into a foreign country in accordance with that country’s local laws and customary practices, and the securities must be non‐U.S. dollar denominated or linked securities in order to qualify as an overseas directed offering.

The provisions of the issuer safe harbor specific to offerings of equity securities are summarized below.

(A) Category 1 Safe Harbor The Category 1 safe harbor is available for equity offerings if a foreign issuer reasonably believes at the beginning of the offering that there is no SUSMI in the equity securities. A SUSMI in equity securities exists if, during the shorter of the issuer’s prior fiscal year or the period since incorporation, either: • The U.S. securities exchanges and inter‐dealer quotation systems in the aggregate, constituted the single largest market for a class of the issuer’s securities; or • At least 20% of all trading in a class of the issuer’s securities occurred on the facilities of U.S. securities exchanges and inter‐dealer quotation systems, and less than 55% of such trading occurred on the facilities of the securities markets of a single foreign country.

If there is no SUSMI in a foreign issuer’s equity securities, the issuer need only comply with the general Regulation S requirements to make offers and sales.

(B) Category 2 Safe Harbor The Category 2 safe harbor is only available for equity offerings by a reporting foreign issuer. Even if there is a SUSMI in the securities, reporting foreign issuers who implement the Category 2 offering and transactional restrictions for the distribution compliance period may rely on the safe harbor. This is the issuer safe harbor available to foreign issuers (both reporting and non‐reporting) and reporting U.S. issuers of debt securities.

(C) Category 3 Safe Harbor The issuer safe harbor is available to non‐reporting U.S. issuers of debt securities, provided that the debt securities are not offered or sold to a U.S. person, other than a distributor, during the 40‐day distribution compliance period, except pursuant to the registration requirements of the Securities Act or an exemption from registration.

Issuers must comply with the offering and transactional restrictions applicable to Category 2 offerings and Rule 903(b)(3)’s additional transactional restrictions during the distribution compliance period. Only changes in the issuer’s business, financial condition, or other circumstances need to be reported to the SEC, following the initial Form D filing.

What is the due diligence process for initial purchasers in a Regulation S offering? Modest due diligence is more acceptable in standalone Regulation S offerings that do not involve financial intermediaries. Due diligence can be divided into financial, business and management due diligence, and into documentary or legal due diligence. Necessary due diligence varies by whether the issuer is a new entity, whether the business of the issuer is risky, and based on the nature of the tokens or securities offered.

Practice Note: The PPM and other offering documents are not subject to SEC review. File the Form D, use it to “notice file” state regulators, and otherwise just follow rules.

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More questions? Contact [email protected]


With equity securities offered by U.S. issuers, the legend must state that hedging transactions may not be conducted. The same legend must also be printed in any advertisement made or issued by the issuer, any distributor, and their respective affiliates or representatives. All investors must be given the same “disclosure package.”

ICOs & Regulation S

Posted on May 5, 2018 at 3:55 PM Comments comments (0)

Outside the United State, ICO issuers can offer securities in reliance on Regulation S.

When a U.S. company relies on Regulation S, there is a period during which the securities cannot be transferred to “U.S. persons” which is a year for equity securities and 40 days for debt securities. This means that it is important to establish whether the securities are equity or debt. As with Regulation D, issuers must reflect these requirements in the smart contracts that govern trading.

Regulation S securities cannot be “offered” to U.S. persons. There cannot be an open-to-everyone website that describes Regulation S securities, even if the site says, “We must not and cannot sell these to U.S. persons.” That is still an offer (hard to believe but true).

It is best to put the website that describes Regulation S securities behind a firewall that requires investors to certify their non-US status before allowing them to view the offering. Some use Geofencing technology to block all US IP addresses.

Investors should certify that they are not “U.S. persons” and that they promise not to resell to U.S. persons. Those certifications should be made in the investor’s real name, not as a “check the box” entry. Additionally, while initial sales under Regulation D and Regulation A+ are “pre-empted” from state regulation, that is not the case for Regulation S. There are some states that regulate offerings made from those states.Check on those requirements before undertaking a Regulation S offering.

Regulation S only instructs on how to deal with U.S. Federal and state regulations. Issuers need to make sure that they comply with the regulations of the countries where the investors are located. They should block IP addresses from any jurisdictions where the securities cannot be sold.

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Join the State Securities Regulation LinkedIn discussion group and go down the crypto rabbit hole with us to learn 1) what will constitute securities in the eyes of state regulators and the SEC, and 2) what will constitute best practices for exempt offerings of ICO offerings. Members of the discussion group are entitled to any of 21 audio handbooks on exempt [email protected] https://www.audible.com/search/ref=a_hp_tseft?advsearchKeywords=Douglas%20Slain&filterby=field-keywords