Here’s What’s Actually Going on With the SEC and Republic’s STO

Republic is trying to swap one SEC exemption for another to move its security token from the private to public markets.

On Aug. 5, Republic, a platform for investing in startups, announced that it had sold out commitments for coming fundraises for its security token, Republic Note, happening under two distinct exemptions. 

The firm is in total looking to raise $16 million — $11 million already committed under Reg. D, with another $5 million earmarked from public investors waiting for a Reg. A+ to clear. This follows earlier private funding rounds.

...but what does that mean?

U.S. securities law is a tangled mess, and the process of bringing tokenized securities to the main-street market has taken longer than anyone expected. Part of that is the intricacies of the various exemptions from full registration with the SEC.

What’s fascinating about Republic’s approach is that it is trying to convert one form of offering tokens to the public to another, with investors in the earlier Reg. D round will ultimately be part of the pending Reg. A+ application, if all goes well. Speaking with Cointelegraph, Republic CEO Kendrick Nguyen outlined the plan that “investors from the Reg. D will get rolled into the Reg. A+.”

SEC’s homemade alphabet soup

Reg. D is an easier filing, allowing a firm seeking investors to get an infinite amount of capital — as long as it comes from only accredited investors, which is SEC-speak for people with plenty of money. 

Aiming to bridge the gap between main-street investors and venture capital opportunities, Reg. A+ limits total possible investment to $50 million but doesn’t restrict the types of investor who can get involved. However, Reg. D is something you file before holding your sale, and then afterwards if the SEC finds evidence that you did not restrict investment to accredited investors the commission may crash the whole party. 

In contrast to the more punitive means of monitoring Reg. D, Reg. A+ requires more proactive filing. Republic’s plan of switching is highly unusual but “it’s actually possible,” said Anthony Tu-Sekine, a partner at Seward & Kissel and the head of that firm’s Blockchain and Cryptocurrency Group. He did note, however, “I don't think I've ever seen a Reg. D and Reg A+ together.”

According to Tu-Sekine, the challenge will be keeping those pools separate: 

"Republic will need to make sure that they keep those two separate, or they at least need to make sure that the Reg. D public notes are not somehow intermingled with freely tradeable public notes."

The plan, according to Nguyen, is that Republic will be able to move investments made under Reg. D into the pile of investments under Reg. A+, given that in neither case would the total amount approach the $50 million cut-off. It makes sense though, given that the stated mission of the Republic Note and the platform as a whole is to give the public access to private investment opportunities. That’s what Regs. A and A+ are for. 

The switch to extended funding and reasons for not pursuing $50 million

Nguyen said that the extended funding round was a response to more interest than predicted: “At the beginning we weren’t even looking to raise $8 million.” The change to $16 million was to meet community reaction, he said. “The way that our token economics are structured, we have a relatively limited number of our tokens available.”

It’s a fascinating plan, and likely the fact that Republic itself is an investment platform played into the firm’s comfort working with various SEC rules.  

“The regulatory framework in the United States is not going to change anytime soon, but it gives people enough tools to engage the community — accredited and non-accredited. It’s complicated and takes some time, but you can do it compliantly.”