Traditionally, most people have been unable to invest in the private placement market because alternative investments have generally been reserved for those considered by regulators to be wealthy enough to bear the risks. Such qualified entities and individuals, known as accredited investors, feed much-needed capital into the private placement market by participating in publicly solicited offerings such as Rule 506(c). Now, after 35 years of largely unchanged rules that qualify the investors in many private placement offerings, the U.S. Securities and Exchange Commission (SEC) has expanded the definitions of “accredited investor” and “qualified institutional buyer.” Adopted on August 26, 2020 and taking effect December 8th, 2020, the final rules add new investor categories that reflect the "financial sophistication" level of various individuals and institutions. We will now discuss more about these new amendments and how they may affect you, either as an issuer or an investor.
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Raising small business capital has never been a simple process, and smaller issuers have relied largely on their networks to make it happen. That’s why the Securities and Exchange Commission (SEC) recently proposed rules that would allow natural persons called “finders” to accept compensation from issuers of SEC registration-exempt offerings as they seek to raise funds from accredited investors. Typically, such finders need to register as brokers under Section 15(a) of the Exchange Act, but the newly proposed rules would exempt them from this requirement under certain limited circumstances.
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The cost of trading stock has dropped drastically with the rise of digital platforms. Large trading firms have started providing no-fee stock trading options to retail investors, and in doing so, they’ve transformed the stock market. These firms have included TD Ameritrade, Charles Schwab, ETrade, and, of particular note, Robinhood, which reported more than 4.3 million daily average trades in March of 2020, as cited by Quartz.
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Late on October 29, 2020, the Chinese fintech firm Ant Group told The Wall Street Journal that mainland China’s investors had already ordered more than $2.8 trillion USD worth of shares in the company’s initial public offering. Simultaneously listed in Shanghai and Hong Kong, the IPO will likely be worth closer to $34.4 billion USD, or $39.5 billion USD if underwriters in both locations utilize their option to increase the offering by 15%.
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Let’s face it: financing options for small businesses have been minimal, especially during the COVID-19 crisis. According to a recent SEC announcement regarding Regulation Crowdfunding, limiting factors include labor and supply chain disruption, investor behavior changes, and declining revenues in many industries. Also, according to data between May 16, 2016, and July 31, 2020, issuers with no revenues initiated 49% of the offerings, and only 11% of offerings were by issuers who reported a profitable fiscal year just before the offering.
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Adopted in June of 2019, Regulation Best Interest (Reg BI) and Form CRS are part of a broader framework of Securities and Exchange Commission (SEC) rules intended to foster straightforward, quality communication between broker-dealers or investment advisers and their retail investor clients, while still preserving both investor choice and service costs. Although firms have been working on compliance for much longer, June 30, 2020 was the official compliance date for both Regulation Best Interest and Form CRS. Whereas FINRA and the SEC don’t necessarily expect full compliance yet, they will be carefully reviewing certain key documents and internal processes of investment advisers and broker-dealer firms.
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We are glad to report that the Staff Standards of Conduct Implementation Committee of the Securities and Exchange Commission (SEC) has announced a virtual roundtable to discuss how compliance with Form CRS and Regulation Best Interest is proceeding across the industry. Personnel from FINRA, the Office of Compliance Inspections and Examinations, the Division of Trading and Markets, and the Division of Investment Management will participate in this virtual roundtable on October 26, 2020, from 1 PM to 3 PM eastern time. The event will be open to the public through both a live webcast and an archived replay.
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Since the pandemic began, the stock market has gone up and down so often, like a yoyo. Even the experts aren’t quite sure what will happen in the future. Just ask nationally syndicated financial columnist and author Terry Savage. “I think we’re in more uncertain times than any I’ve seen since back in the early seventies.”, cited by PBS’s Next Avenue.
So how should we invest our hard-earned money amid such uncertainty? Amid all the panic, it’s worth noting that in August, the S&P 500 stood at a record high since March. As reported by The New York Times in August, the market had rebounded after a collapse of almost 34 percent in February and March – an economic collapse not seen since the Great Depression. According to the article, this improvement reflects “a remarkable rally of more than 50 percent that has underscored the dissonance that sometimes exists between the markets and the economy.”
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Crowdfunding trends suggest that cryptocurrency and other forms of tokenized assets are becoming increasingly important to everyday investors in 2020, especially in the COVID-19 pandemic age. In the U.S., cryptocurrency is increasingly in the mainstream, with the federal government and big banks seriously weighing some exciting new initiatives.
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The U.S. economy has suffered greatly due to the pandemic and associated shutdowns. The second quarter of 2020 broke records as the U.S. GDP shrunk by 32.9%, which is the seasonally adjusted annual rate from the Bureau of Economic Analysis. Compared with the record of 10% annualized GDP shrinkage in 1958, this latest report is staggering. According to NPR, it’s also almost four times that of the worst quarter of the Great Recession. Furthermore, compared to the same period last year, the overall economy has shrunk by 9.5%.
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