January 2025 Newsletter

The Financial Edge

Welcome to the January 2025 Financial Services newsletter

Hi there!

As we begin 2025, we are pleased to share the latest updates on key developments in financial services and regulatory compliance. This month’s newsletter explores critical updates and case studies to provide your business with actionable insights to stay ahead.

The SEC’s enforcement results for fiscal year 2024 marked a historic $8.2 billion in financial remedies, which demonstrates the SEC’s commitment to addressing high-impact violations and protecting investors.

This is despite a decrease in total actions. For example in cases such as the SEC vs. Terraform Labs PTE, Ltd., in which Terraform owes $4,473,828,306 in disgorgement, prejudgment interest, and civil penalties.

The SEC’s 2024 Small Business Capital Formation Report highlights challenges and opportunities
for startups and small businesses, particularly for underrepresented founders. Understanding these trends can help small businesses leverage evolving capital markets to access much-needed funding.

New data from the SEC’s 2024 Market Statistics Report reveals the continued evolution of capital- raising exemptions, including Regulation A, Regulation D, and Regulation Crowdfunding. These pathways provide vital tools for small- to midsize companies to navigate their fundraising journeys effectively.

Key SEC enforcement during 2024 addressed unethical cross-trading practices, inflated asset

valuations, misleading statements to crypto investors, and unregistered securities sales. These cases underscore the importance of transparency, ethical practices, and strict adherence to securities laws to avoid compliance risks.

Lastly, we discuss how strong governance begins with steady board leadership. This month, we explore the essential components of a robust succession plan, highlighting strategies to ensure organizations are prepared for leadership transitions while maintaining continuity and advancing their strategic goals.

We hope you find these updates insightful and valuable as you plan for the year ahead.

Empowering Small Businesses and Startups

A Deep Dive into the Sec 2024 Small Business Capital Formation Report

Small businesses are the backbone of the economy, driving innovation, creating jobs, and fueling economic growth. However, their path to securing the capital needed to thrive remains challenging.

The 2024 Annual Report from the SEC Office of the Advocate for Small Business Capital Formation shines a spotlight on the data, trends, and barriers affecting small businesses—including startups— and provides a roadmap for addressing these challenges.

In this blog post, we’ll explore the key findings from the United States Securities and Exchange Commission (SEC) 2024 Small Business Report, analyze the trends impacting small businesses, and discuss how FinTech Law can assist small businesses that need to raise capital.

Understanding the Role of the SEC Office for Small Businesses

Established under the bipartisan SEC Small Business Advocate Act of 2016, the Office of the Advocate for Small Business Capital Formation works to support small and emerging companies

It focuses on improving access to capital for early-stage startups, small public companies, and private businesses. Particularly those led by underrepresented founders, including women, minorities, and entrepreneurs in rural areas.

The 2024 report highlights critical trends in capital markets and provides recommendations to foster a more inclusive and equitable capital-raising environment.

Key Data and Trends from the 2024 Report

1. A Challenging Landscape for Small Businesses in Need of Capital

Despite their critical contributions to the economy, small businesses face significant hurdles in accessing funding. According to the 2024 OASB Annual Report:

• Women- and minority-owned businesses remain underrepresented in capital markets. Barriers include limited access to accredited investors and institutional funding.
• Rural entrepreneurs struggle with geographic disparities that limit their access to angel investors and venture capital networks. These challenges highlight the need for tailored legal and regulatory support to help small businesses navigate the complexities of fundraising.

2. Startup Early-Stage Funding Constraints

The report notes that many startups rely heavily on self-funding or funding from friends and family.

While angel investors play a critical role in early- stage financing, emerging fund managers—who could diversify the sources of seed capital—face difficulties in attracting investors themselves

• Startups in traditionally underserved sectors, such as manufacturing and clean energy, are particularly affected by the lack of accessible capital.
• Women and minority founders often face additional scrutiny when pitching to investors, compounding the challenge of raising early-stage capital.
  

3. The Initial Public Offering (IPO) Market: Limited Recovery

The IPO (Initial Public Offering) market remains vital to startups and small businesses to access public markets and achieve liquidity. However, the report reveals:

• IPO activity in 2024 has improved slightly from historic lows during 2022–2023 but remains well below that of 2021.
• Small companies accounted for 40% of IPOs but only 4% of the total deal value, underscoring their limited market impact.

The high cost of going public and maintaining compliance, discourages many small businesses from pursuing IPOs.

4. Underrepresentation in Public Markets

The decline in market capitalization of small public companies continues to be a worrying trend:

• The median age of IPO issuers is approximately 10 years, indicating that businesses are staying private longer.
• Emerging fund managers and small companies struggle to attract institutional investment in public markets, further exacerbating this issue.

5. Regulatory Compliance Burdens

Many small businesses cite the high costs of regulatory compliance as a major barrier to entering and succeeding in public markets.

The U.S. Securities and Exchange Commission (SEC) has taken steps to mitigate these costs, including:

• Scaled disclosures and compliance accommodations for small issuers.
• Initiatives to clarify the obligations and rights of small business founders when interacting with sophisticated investors.

How Trends Impact Startups

The trends identified in the 2024 OASB Annual Report present unique challenges for startups.

As early-stage companies typically lack the financial history and collateral investors seek, they are particularly vulnerable to funding gaps.

Moreover, startups led by women and minority founders face additional biases that limit their access to capital and networks of accredited investors.

Demographic Disparities

The report highlights the ongoing underrepresentation of diverse founders in capital markets.

Women and minority entrepreneurs often lack access to critical networks and mentorship opportunities for securing funding.

Sectoral Concentrations

Startups in technology and healthcare continue to dominate the capital-raising landscape, leaving other sectors—such as clean energy and manufacturing—underserved. This imbalance limits the diversity of innovation across industries.

How We at FinTech Law Assist Small Businesses

At FinTech Law, we specialize in guiding small businesses and startups through the legal and regulatory hurdles of raising capital. Our expertise ensures that companies are well-prepared to access the funding they need to grow.

1. We Help Your Small Businesses Navigate Exempt Offerings

The SEC’s exempt offering framework provides valuable opportunities for small businesses to raise capital without the costs associated with public offerings. However, understanding and leveraging these exemptions requires a nuanced understanding of small business securities laws.

• Regulation Crowdfunding: We assist your company in structuring and managing crowdfunding campaigns, ensuring compliance with the SEC’s rules.
• Regulation D Offerings: FinTech Law helps small businesses with the preparation
  and filing of Form D to raise funds from accredited investors.
• Regulation A+ Offerings: We help businesses access this “mini-IPO” option, which allows them to raise up to $75 million annually with fewer compliance burdens.

2. We Help Your Startup / Small Business Comply with Public Market Requirements

Navigating the regulatory landscape is critical for small businesses and startups considering IPOs or direct listings. FinTech Law provides:

• Prospectus drafting: Ensuring the compliance of your startup or small business with the SEC’s disclosure requirements.
• Corporate governance advice: Helping you establish robust governance structures to attract institutional investors.
• Ongoing reporting: Assistance with quarterly and annual filings and compliance with insider trading laws.

3. Supporting Emerging Fund Managers

Emerging fund managers are vital to the capital ecosystem but often face regulatory hurdles in raising funds. FinTech Law provides:

• Fund formation services: Assisting with establishing venture capital and private equity funds.
• Accredited investor compliance: Guiding fund managers in meeting SEC requirements for investor verification.

4. Strategic Legal Guidance for Small Businesses & Startups

Startups often need to manage relationships
with investors, protect intellectual property, and structure deals to minimize risk. FinTech Law offers:

• Contract negotiation: Helping your small business and startup secure favorable funding terms with investors.
• IP protection: Ensuring that your company’s core innovations are safeguarded.
• Legal risk assessments: Identifying and mitigating potential liabilities in fundraising.

Building a More Inclusive Capital Ecosystem

The 2024 SEC report emphasizes creating a more inclusive and equitable capital-raising environment. Recommendations include:

• Expanding the accredited investor definition: To include individuals with relevant knowledge or experience, not just those meeting income thresholds.
• Promoting mentorship programs: Connect diverse founders with seasoned investors and advisors.
• Encouraging regulatory reforms: To reduce compliance burdens for small issuers while maintaining investor protections.

FinTech Law is committed to supporting these efforts by providing the legal expertise that small businesses and startups need to thrive.

Conclusion

The data and trends from the SEC’s 2024 Small Business Report reveal a complex landscape for small businesses and startups seeking to raise capital. From early-stage funding constraints to the challenges of public market compliance, these businesses face significant barriers that require tailored solutions.

At FinTech Law, we are dedicated to helping small businesses overcome these challenges by providing comprehensive legal support and guidance. Whether you’re a startup navigating your first fundraising round or a small public company seeking to expand, our team is here to help you succeed.

If your business is ready to take the next step in its growth journey, contact FinTech Law today for expert legal advice tailored to your needs. Together, we can empower your success in the fast-evolving world of capital markets.

Unlocking the Potential of Exempt Offerings

Insights From the Sec’s Market Statistics Report

The U.S. Securities and Exchange Commission (SEC) recently released its 2024 report on market statistics for exempt offerings under Regulation A, Regulation D, and Regulation Crowdfunding (CF).

These exemptions provide companies with pathways to raise capital without the complexity of traditional public offerings. Let’s explore this
report’s trends, data, and implications and how these markets continue to shape capital markets.

Understanding Exempt Offerings

Exempt offerings allow businesses to raise funds without complete registration under federal securities laws. Each exemption serves different business needs:

• Regulation A: Enables companies to raise up to $75 million annually through two tiers:
  • Tier 1: Up to $20 million.
  • Tier 2: Up to $75 million.
• Regulation D: This includes rules such as Rule 504, Rule 506(b), and Rule 506(c), which allow offerings ranging from $10 million to unlimited amounts, with varying restrictions.
• Regulation CF: Focused on crowdfunding, allowing companies to raise up to $5 million annually via SEC-registered intermediaries.

Each exemption has specific investor protections, reporting obligations, and eligibility criteria, making them flexible tools for small to midsize companies.

Key Market Trends from the Report

1. Number of Offerings

The report highlights substantial growth in exempt offerings over the years:

• Regulation D remains the dominant exemption, with 56,721 filings in 2023, down from a peak of 65,372 in 2021. This reflects broader market trends, including fluctuating investor sentiment.
• Regulation A offerings have remained relatively stable, with 212 offerings in 2023 compared to 307 in 2022. This slight decline reflects increased competition from other financing methods.
• Regulation CF has shown consistent growth, with 737 offerings in 2023, a significant increase from 146 in 2017. Crowdfunding continues to gain traction among startups and small businesses.

2. Capital Raised

The total capital raised through exempt offerings showcases their growing importance:

• Regulation D led the way, raising $2.75 trillion in 2023, up from $2.36 trillion in 2022. This surge reflects the exemption’s flexibility and suitability for more extensive private placements.
• Regulation A offerings raised $1.13 billion in 2023, down from $1.85 billion in 2022. Despite the dip, Regulation A remains a viable option for mid-sized issuers.
• Regulation CF offerings raised $293 million in 2023, up from $329 million in 2022, reflecting increased adoption of crowdfunding as a mainstream financing method.

Implications for Businesses

Flexibility Across Industries

The exemptions cater to various industries, from technology to manufacturing. Regulation D, in particular, has been instrumental for mature private companies raising large sums, while Regulation CF supports early-stage startups.

Accessibility for Small Issuers

Regulation CF has democratized capital raising, enabling small businesses to reach a broad base of investors. Its low barrier to entry and use of online platforms have made it a popular choice for new companies.

Investor Protections

The SEC’s rules emphasize transparency and investor protection:

• Regulation A requires disclosure through Form 1-A, periodic updates, and audited financials for Tier 2 offerings.
• Regulations D and CF have strict “bad actor” provisions to ensure investor trust.

Navigating the Complexities of Exempt Offerings

For businesses considering these pathways, it’s crucial to understand the regulatory requirements and tailor offerings to their unique needs. Here’s how:

Regulation A

Ideal for companies looking to raise moderate amounts while maintaining access to public-like markets. Filing an offering statement (Form 1-A) and meeting ongoing reporting obligations can be resource-intensive but worthwhile for visibility.

Regulation D

A go-to choice for private placements among accredited investors. Companies must file Form D within 15 days of their first sale to ensure compliance with state and federal regulations.

Regulation CF

It is best for startups and small businesses aiming to engage their community. It requires using a registered intermediary (broker-dealer or funding portal) and detailed disclosures on Form C.

Challenges and Opportunities

While exempt offerings are powerful tools, they come with challenges:

• Regulatory Complexity: Navigating disclosure requirements and compliance can be daunting, particularly for small businesses.
• Investor Outreach: Strategic planning is required to attract accredited
  investors under Regulation D or manage crowdfunding campaigns under Regulation CF.
• Ongoing Obligations: Regulation A, in particular, demands periodic reporting akin to public companies.

Despite these challenges, the opportunities are immense. Exempt offerings allow companies to tailor their fundraising strategies, control dilution, and maintain operational flexibility.

The Role of FinTech Law

At FinTech Law, we specialize in guiding businesses through the complexities of exempt offerings. Here’s how we can help:

Strategic Planning

We work with companies to identify the most suitable exemption based on their financial goals and growth stage.

Compliance Management

From filing Form D for Regulation D offerings to drafting offering statements for Regulation A, we ensure full compliance with SEC rules.

Crowdfunding Campaigns

We provide legal and strategic support for businesses using Regulation CF, including drafting disclosures, managing intermediary relationships, and ensuring compliance with reporting obligations.

Ongoing Support

For companies navigating the ongoing reporting requirements of Regulation A or preparing for subsequent funding rounds, we provide continued guidance to keep them compliant and competitive.

Conclusion

The SEC’s 2024 Market Statistics Report underscores the critical role of exempt offerings in today’s capital markets. From Regulation D’s dominance to Regulation CF’s rapid growth, these exemptions provide businesses with versatile tools to meet their financing needs.

However, navigating these pathways requires expertise and strategic foresight. At FinTech Law, we are committed to empowering businesses with the knowledge and support they need to succeed. Whether you’re a startup exploring crowdfunding or a mature company leveraging private placements, we’re here to help.

Contact us today to learn how we can support your capital-raising journey. Visit FinTech Law to get started.

Building a Legacy Why Every Board Needs a Succession Strategy

Good corporate governance starts with strong, steady leadership at the board level. As the challenges and opportunities facing organizations evolve, it becomes crucial for boards to prepare for leadership transitions.

Succession planning isn’t just about filling future vacancies ‒ it’s about maintaining consistency, bringing in fresh perspectives, and making sure the board has the right skills to support the organization’s goals.

Key Elements of a Board Succession Plan

A comprehensive succession plan involves several key components:

1. Evaluating the Current Board Composition

Begin by assessing the board’s current composition, including each member’s skills, expertise, and term length. This can help identify any gaps that may need to be filled to ensure the board is well-equipped to support the organization’s future goals and strategy.

2. Defining Future Needs

Depending on the company’s evolving strategy, determine the types of skills and experience that will be critical for future board members.

• A board overseeing a tech-driven company may prioritize directors with expertise in:
  • Technology and Innovation: Individuals with experience in software development, digital transformation, artificial intelligence, or cybersecurity can help guide the company in leveraging cutting-edge technologies.
  • Product Development and Management: Someone with a background in product innovation and lifecycle management is valuable for ensuring the company stays competitive in tech markets.
  • Intellectual Property and Regulatory Compliance: Directors with experience in protecting proprietary technology and navigating tech-specific regulatory landscapes, such as data privacy laws, add significant value to risk management.
• For financial companies, boards may benefit from directors with backgrounds in:
  • Financial Services and Markets: Individuals with experience in banking, investment management, or capital markets bring
    a strong understanding of the financial landscape.
  • Regulatory Compliance and Risk Management: Directors knowledgeable in financial regulations (such as the SEC, FINRA, or Basel III) and risk assessment can ensure the company adheres to strict regulatory standards.
  • Fintech & Financial Reporting: Directors with fintech expertise can guide innovations such as online banking, blockchain, and digital payment solutions, enhancing both efficiency and customer experience. Paired with financial reporting expertise, they ensure accurate reporting, regulatory compliance, and transparency, especially as new technologies reshape financial operations.

3. Identifying Potential Candidates

Once future needs are defined, the next step is to identify potential candidates who align with the board’s strategic vision. This process can include:

• Internal Talent Development: Assessing whether current executives or senior employees could transition into board roles over time. Internal candidates often have institutional knowledge and a deep understanding of the organization’s culture and strategy.
• External Recruitment: Partnering with recruitment firms or leveraging industry networks to identify experienced professionals with the desired skill sets. External candidates can bring fresh perspectives and specialized expertise, particularly in emerging fields such as technology or fintech.
• Diversity Considerations: Prioritizing diversity in backgrounds, skills, and experiences to foster well-rounded decision-making. A diverse board is better equipped to address various challenges and opportunities.
• Succession Benchmarks: Establishing clear criteria and benchmarks for evaluating potential candidates, such as leadership experience, industry knowledge, or technical expertise.

4. Establishing a Succession Timeline

Effective succession planning involves setting a realistic timeline for onboarding new board members. Key steps include:

• Staggered Transitions: Gradually introducing new members to avoid significant disruptions to board operations.
• Onboarding Process: Developing a robust orientation program for new directors to ensure they quickly understand the company’s strategy, operations, and governance practices.
• Mentorship Programs: Pairing incoming board members with experienced directors to accelerate their integration and effectiveness.

5. Regular Review and Adjustment

Succession planning is not a one-time exercise; it requires ongoing evaluation to adapt to changes in the company’s goals, industry trends, or unforeseen events. Boards should:

• Conduct Annual Assessments: Regularly review the board’s composition and succession plan to ensure alignment with strategic priorities.
• Monitor Industry Trends: Stay informed about shifts in the business and regulatory environment that may influence future board needs.
• Update Policies as Needed: Ensure the succession plan remains flexible and responsive to opportunities and challenges.

6. Communicating the Plan

Transparency in the succession planning process helps build trust and confidence among stakeholders. Boards should:

• Inform Key Stakeholders: Share high-level details of the succession strategy with shareholders, senior management, and other relevant parties.
• Emphasize Stability: Highlight how the plan ensures continuity and positions the organization for long-term success.
• Leverage Shareholder Meetings: Use annual meetings or reports to outline the board’s approach to succession and governance.

Conclusion

A well-executed board succession plan is a cornerstone of effective governance. By thoughtfully evaluating the current composition, anticipating future needs, and preparing for transitions, boards can ensure they will be able to navigate the complexities of today’s business environment. Succession planning supports organizational stability and fosters innovation and resilience, positioning the company for sustainable growth.