Demystifying Tokenized Equities: An In-Depth Look at SOMA.finance's Issuing Process

SOMA.finance has partnered with a licensed broker-dealer, Tritaurian Capital, Incorporated for all issuances that take place on the Starter platform. This means that we strictly adhere to all regulations and requirements under the various securities laws of the United States. One of these requirements is the submission of certain documents that need to be filed with the SEC for the issuance of stocks and securities to the public. Let’s look at these filings in more detail to understand what they entail and what criteria need to be met for them to be filed successfully. 

SEC regulatory filings are documents that companies are required to file with the Securities and Exchange Commission (SEC) when they want to sell stocks or other securities to the public. These filings provide important information to investors so they can make informed decisions about whether to invest in the company.

The first and most important classification for regulatory filings comes from whether the offering will be “registered” with the SEC, such as an initial public offering, or IPO, or whether the issuer will claim an “exemption” from registration and sell its securities as a private placement.

The different types of SEC regulatory filings for exempt offerings reflect the differing requirements based on the exemption claimed by the issuer.  The choice of exemption is determined by the type of offering they're making, how much money is being raised, and who they're selling to. 

The main types of exempt offerings are Regulation A, Regulation D, Regulation S, and Regulation CF.  “Regulation” is most often shortened to “Reg” in common parlance.

For example, Reg A+ allows companies to sell securities to both accredited and non-accredited investors, while Reg D mostly only allows sales to accredited investors. Reg CF allows companies to raise up to a certain amount of money from non-accredited investors, while Reg S is used when companies want to sell securities to investors outside of the United States.

Each type of regulatory filing has its own specific disclosure requirements – such as financial statements, business plans, and risk factors – that companies must include in their filings. These disclosures help investors evaluate the risks and potential returns of investing in a particular company.

Reg A+ Filing

Regulation A, also known as Reg A, is a securities law regulation that allows companies to offer and sell securities to the public without having to register with the Securities and Exchange Commission (SEC) under certain circumstances. In 2015, the SEC amended Reg A to create a new exemption for offerings, called Reg A+.

Reg A+ offerings can be used by private companies to raise up to $50 million in a 12-month period from both accredited and non-accredited investors. The offering must be qualified by the SEC, which involves submitting a disclosure document known as an offering circular. The offering circular includes information about the company, its management team, the terms of the offering, and the risks involved in investing.

There are two tiers of Reg A+ offerings: Tier 1 and Tier 2. 

Tier 1 offerings allow companies to raise up to $20 million in a 12-month period, while Tier 2 offerings allow companies to raise up to $50 million in a 12-month period. Tier 2 offerings have additional disclosure requirements, including audited financial statements and ongoing reporting obligations.

One of the main benefits of Reg A+ offerings is that they allow companies to raise capital from a broad range of investors, including retail investors who may not meet the accredited investor requirements for other types of private offerings. 

The main downside for companies that conduct a Reg A+ offering is they are required to comply with specific ongoing reporting requirements, which can be costly and time-consuming.

Reg CF

Regulation Crowdfunding (Reg CF) is another securities law regulation that allows small businesses and startups to raise capital from both accredited and non-accredited investors through crowdfunding platforms. Reg CF was created by the Securities and Exchange Commission (SEC) in 2015 as part of the JOBS Act.

Under Reg CF, companies can raise up to $5 million in a 12-month period from both accredited and non-accredited investors. The offering must be conducted through a registered crowdfunding platform, which acts as an intermediary between the company and the investors.

Like Reg A+, Reg CF offerings require the filing of a disclosure document with the SEC, known as Form C. Form C includes information about the company, its management team, the terms of the offering, and the risks involved in investing. 

One of the main benefits of Reg CF is that it allows companies to raise capital from a large number of investors, including friends, family, and members of the public who may be interested in supporting the company's goals. 

Reg CF offerings are also required to comply with certain ongoing reporting requirements, which can be costly and time-consuming.

While there are similarities between Reg A+ and Reg CF offerings, It's worth noting that there are some key differences between the two: 

• Reg A+ offerings have higher maximum fundraising limits and can be conducted by larger companies, while Reg CF offerings are limited to smaller businesses and startups. 
• Reg CF offerings must be conducted through a registered crowdfunding platform, while Reg A+ offerings can be conducted directly by the company or through a broker-dealer.  
• The ongoing reporting requirements for Reg A+ are more robust than for Reg CF.

Reg S

Regulation S filings (Reg S) is a securities law regulation that provides an exemption from registration requirements for companies that offer and sell securities outside of the United States. 

The purpose of Reg S is to facilitate the global offering and sale of securities by U.S. and foreign issuers. Under Reg S, companies can offer and sell securities to non-U.S. persons without having to register the offering with the Securities and Exchange Commission (SEC). 

A primary type of Reg S issuance is for offerings from U.S.-based companies that want to sell securities to non-U.S. persons who are physically located outside of the United States and who are not U.S. citizens or residents, even if there are directed selling efforts in the United States. This type of offering is known as a Category 3 offering, as opposed to Category 1 and 2 which mainly deal with non-U.S. companies.

Companies that conduct a Reg S offering are generally required to include a legend on the securities that states that they have not been registered under the Securities Act of 1933 and may not be offered or sold in the United States unless they are registered or exempt from registration.

It's worth noting that companies that conduct a Reg S offering may still be subject to securities laws and regulations in the countries where the offering is made. Additionally, companies that offer and sell securities under Reg S may still be subject to SEC reporting requirements if they have a certain number of U.S. shareholders or meet other criteria.

Reg D 

Regulation D (Reg D) is a securities law regulation that provides exemptions from registration requirements for companies that offer and sell securities in private placements.

Private placements are offerings of securities that are not registered with the Securities and Exchange Commission (SEC) and are sold primarily to a limited number of accredited investors.

Under Reg D, there are three separate exemptions that companies can use to conduct private placements:

• Rule 504: This exemption allows companies to raise up to $10 million in a 12-month period from both accredited and non-accredited investors. However, companies that use this exemption are subject to state securities laws, which can vary widely.
• Rule 506: This exemption is divided into two parts, Rule 506(b) and Rule 506(c), both of which allow companies to raise an unlimited amount of capital from certain investors. The main difference between the two rules have to do with the use of advertising – called general solicitation in the rule – and whether any non-accredited investors may be included in the raise.
  • Rule 506(b) allows for up to 35 non-accredited investors but does not allow general solicitation.
  • Rule 506(c) only allows for accredited investors but does allow for general solicitation.

Companies that use Rule 506 must file a Form D with the SEC within 15 days of the first sale of securities.

One of the main benefits of Reg D offerings is that they allow companies to raise capital from a limited number of sophisticated investors without having to comply with the extensive disclosure and reporting requirements that apply to registered offerings. 

While they are exempt from many of the more intensive reporting requirements, companies that conduct a Reg D offering must still comply with anti-fraud provisions of federal and state securities laws.

Complying with SEC regulations is important for companies that want to offer and sell securities to the public, for several reasons. 

First and foremost, complying with SEC regulations helps to protect investors. By requiring companies to disclose information about their business, management team, and risks associated with investing, the SEC helps investors make informed decisions about whether to invest in a particular offering.

In addition, complying with SEC regulations can help to promote transparency in the markets. By requiring companies to file disclosure documents and comply with ongoing reporting requirements, the SEC helps to ensure that investors have access to accurate and up-to-date information about the companies in which they invest.

Finally, complying with SEC regulations can help companies access the capital they need to grow and succeed. By offering and selling securities in compliance with SEC regulations, SOMA.finance can attract a broad range of investors and demonstrate our commitment to transparency and accountability.

The forgoing discussions of regulatory law and compliance are summary in nature and should not, in any way, be relied upon as legal or financial advice.