Navarrete Hospitality Group Reg CF raise is live!

Navarrete Hospitality Group run by restaurant entrepreneur Jonathan Navarrete is conducting a Reg CF raise for its first franchise Hamdan BBQ.

This new Texas-based Korean BBQ concept is one of the fastest-growing resturaunt concepts in the U.S.

Check out NHG’s raise on the Silicon Prairie portal to learn how you can share in the profits of this franchise! 

Jossey PLLC performed paid legal work for this raise.

Reg CF Success Should Spur Further Deregulation

Reg CF Success Should Spur Further Deregulation

Reg CF, the innovative tool that allows ordinary people to invest in early-stage companies has now topped $1.1 billion in investment. Growth has been exponential with 50% of all investment occurring in 2021, according to data analytics company Crowdfund Capital Advisors (CCA). Total investment may double in 2022, equaling all previous years combined.

The numbers give hope for capital-starved startups and retail investors alike, as it upends traditional vectors for who receives and invests startup capital. As previously reported, in the past two years Black founders received 1.2% of venture capital funding and women just 2.3%. But those same cohorts were 40% of Reg CF startups that raised over $1 million. 

Similarly, CCA found 92.4% of all Reg CF offerings took place outside known venture-capital meccas.

Reg CF success multiplied after SEC deregulation

The numbers validate last March’s loosening of Reg CF rules by the Securities and Exchange Commission (SEC). In the past ten months, issuers have enjoyed a higher offer limit ($1.07M to $5M), the ability to consolidate retail investors into one legal bucket through a Special Purpose Vehicle, and greater freedom to gauge interest before hiring legal and accounting professionals with the ‘Testing the Waters’ provision.

Similarly, on the investor side, the SEC removed accredited investors limits removed and raised limits for retail investors.

Reg CF success came only after SEC hostility

Reg CF’s widespread success starkly contrasts the SEC’s initial hostile approach. This included then Chair Mary Schapiro and Commissioner Luis Aguilar predicting widespread fraud and scams. In fact, Edward Knight, Executive Vice President and General Counsel of NASDAQ, testified in a congressional hearing: “From the outset the SEC’s view of [equity crowdfunding] was they were not for this they and made it, shall I say, needlessly complicated and did not approach it except as this this was something where the public is going to get harmed and we need to narrow it as much as possible.”

Whilst the SEC’s newfound Reg CF love is welcome, it should not stop. Further deregulatory moves would spur more opportunities for those with business ideas and investors looking for new opportunities.

Ways to make Reg CF more successful

In a 2021 law review article, I suggested several ways the SEC could make Reg CF more attractive to both entrepreneurs and retail investors:

Exempt Secondary Trading: Lack of state preemption for secondary trading stifles Reg CF issuers and investors. Shares in Reg CF companies become fully tradable federally after one year, but practically remain illiquid through state rules. These restrictions serve no public policy purpose but depress value. If Congress or the Commission preempted state secondary trading laws Alternative Trading Systems would instantly emerge to serve this waiting and vibrant market. Secondary trading also has massive future implications. Blockchain-based endeavors and tokenized systems are incompatible with state-by-state secondary-trading regimes. As tokens express multiple, it is imperative states with their stifling and dissonant rules cannot interfere.

Preempt state filing requirements and notice fees: State filing and notice fees serve as an unnecessary tax on entrepreneurs. Fees and filings eat time and raises capital costs. State regulators have no jurisdiction over Reg CF issuers other than to prosecute fraud. All Reg CF filings are publicly available on the SEC database EDGAR, making these requirements superfluous.

Exempt Reg CF from the 12(g) Rule: The 12(g) Rule states issuers that meet certain requirements for number of investors and assets must register with the SEC, in essence, ‘Go Public.’ The SEC conditionally exempts Reg CF issuers from the 12(g) Rule, but it should make this exemption permanent. Most Reg CF issuers are nowhere near ready to face the rigors of registration and need many more funding rounds, making 12(g) a constant and unnecessary worry.

Raise the Reg CF Offer Limit to $20 million: Whilst raising the offer limit to $5 million was a good start, the SEC should go further. This would fill the gap that currently exists between Reg CF and Reg A+ Tier II.

Eliminate investment limits for retail investors: The SEC smartly removed limits for Reg CF accredited investors. It should follow suit for all investors. The SEC should allow people to assess opportunities and risk tolerance without limits. Bureaucrats have no special acumen to assess opportunities. Whilst some people may act foolishly, they should be able to do so with their own money. Conversely, the Commission is precluding wealth opportunities for savvy investors that do not meet Accredited Investor criteria.

Reg CF has succeed beyond what the SEC ever imagined. After years of hostility, the Commission warmth has benefited entrepreneurs and investors alike. But more must be done. The SEC can show true vision by continuing their deregulatory posture with the suggestions above.

By Jossey PLLC A version of this post originally appeared on the blog of the Competitive Enterprise Institute on January 12, 2022.

Watch Equity Crowdfunding Webinar

Check out this webinar on equity crowdfunding (Reg CF) featuring founder Paul H. Jossey, Shulman Rogers partner Larry Bard, Wefunder entrepreneur-in-residence Ben Maitland-Lewis, and CEO of successful Reg CF company Gary Skulnik.

By Jossey PLLC 

PWG report on stablecoins misses the mark

PWG report on stablecoins misses the mark  

Stablecoin market capitalization has risen 500% in past twelve months. The growth aligns with growing interest in transacting outside heavily regulated banking system. People are seeing myriad benefits from stablecoin use including yields from “staking,” more fluid trades, smaller fees, simple borrowing procedures, and smooth cross-border payments among many others.

The Biden administration looks on with alarm and suspicion. Last summer, the ‘President’s Working Group’ (PWG), composed of several financial regulators, announced it would evaluate stablecoins and recommend action. The president should scrap the gloomy report recently issued by the PWG and let the stablecoin market develop.

Because of their value in the crypto ecosystem, stablecoins demand more interest than their dollar-pegged book value, to the benefit of ordinary American savers. Virtual marketplaces like Nexo and Celsius offer 10% APY or higher to deposit stablecoins.

PWG report embodies bureaucratic quagmire

The PWG report ignores stablecoin benefits and instead reflects a myopic, risk-averse, regulator-centric view of crypto that permeates the executive. The dour report warns of every possible stablecoin risk. It suggests Congress create a “comprehensive” regulatory apparatus to oversee the supposed risks and warns it will pursue the matter solo if Congress fails to act.  The Financial Stability Oversight Council (FSOC), an administrative board created through Dodd-Frank, could designate stablecoins systematically important thereby subjecting them to onerous oversight, compliance, and enforcement.

Odd things arise from this approach. First it is ironic the administration insists the stablecoin phenomenon is so unwieldly it requires a new regulatory cloak whilst Gary Gensler, SEC Chair and PWG member, has insisted all year the larger crypto space needs no such overhaul as it fits within Howey-investment-contract analysis and many cryptocurrencies are already subject to the SEC’s jurisdiction.

It is curious why this relatively tiny $139 billion market would need a comprehensive solution but the greater the greater $3 trillion crypto market must conform with decades-old investment-contract analysis that Congress never defined in the original statute. The extent of Mr. Gensler’s guidance boils down to enforcement, period.  Unsurprisingly, the SEC has stablecoin issuers Tether and Circle in its crosshairs.

PWG report sees risks where they don’t exist

But as the Digital Chamber of Commerce argues, stablecoins, a tiny subset of the overall crypto market, already fit into regulatory apparatus: “applicable regulatory frameworks can involve money transmission laws and state-level trust company charters on the federal level, and FinCEN, CFPB, and CFTC regulations on the federal level.”

This system works as intended. When stablecoin Tether allegedly used shady accounting practices for stating its reserves, both New York state and CFTC levied fines. Now all major stablecoins voluntarily publish their reserves on varying schedules. In fact, Grant Thorton LLC a prestigious accounting firm attests to stablecoin Circle’s reserves.  

Second the bureaucratic worrywarts concern about risks, which the report classifies in several distinct ways, is unfounded. The market is not only miniscule compared with the crypto market but other financial sectors as well. As Cato Institute’s Norbert Michel relays, circulating dollars constitute $2 trillion, treasuries $5.4 trillion, money-market funds $4.5 trillion, and equities $40.7 trillion. An FSOC ‘systematically important’ designation would be well disproportionate to its size. In a letter to Treasury Secretary Janet Yellen, Senator Patrick Toomey (R-PA) explains, the Clearing House Payment Company, one of only eight designated systematically important financial market utilities, clears and settles $1.8 trillion payments per day

Stablecoins are less risky than other assets

Further, stablecoins because of their 1:1 pegs pose less systemic risk than other financial instruments. As the Digital Chamber of Commerce states:

[L]eading U.S.-headquartered stablecoin payments systems – unlike banks – are not leveraged. Instead, the reserves of these stablecoin payments systems are held almost entirely in cash or cash equivalents. And, notably, the only sizable U.S. dollar-pegged, cryptocurrency backed stablecoin is over collateralized. The reserves of these stablecoin payments systems arguably have a much lower risk profile than permissible investments of other state-regulated money services businesses.

Finally, PWG advocacy for “comprehensive” federal oversight, while unsurprising, should be examined by the results of other such federal efforts. Empirical evidence shows the Securities Act of 1933 did little to thwart fraudsters. Dodd-Frank has been worse, with its notable accomplishments being slowing the IPO market, killing off free bank accounts, and destroying money market mutual funds. These laws did no more for financial integrity than McCain-Feingold did to restore trust in campaign finance. The list goes on.

In fact, Congress’ only successful financial reforms have been deregulatory. The Small Business Investment Incentive Act of 1980 led to the wildly successful Reg D. The Jumpstart Our Business Startups Act of 2012, is slowly creating a business-capitalization revolution with Regulation Crowdfunding and Regulation A+.

The PWG should allow stablecoins to flourish and abandon the overbearing regulatory instinct to suffocate innovation it does not understand. If it does this, the stablecoin market will grow and allow ordinary people to prosper from its success.

By Jossey PLLC

A version of this post originally appeared on the blog of the Competitive Enterprise Institute on November 22, 2021.