The importance of Know Your Customer (KYC) for securities offerings

What you need to know about KYC and how to keep your securities offering compliant and competitive in 2020

By Vanessa Malone

The exempt securities offering market is on the rise. In 2019, 69.2% of all new capital raised was through an exempt securities offering.

With the SEC’s newly proposed set of amendments to harmonize common securities exemptions such as Regulation A+ (Reg A+) and Regulation Crowdfunding (Reg CF), we anticipate that this positive trend will continue.

Capital raising is a large undertaking for any company, especially in times like these. This shouldn’t dissuade you. Many well-known, successful companies were founded or raised funding during an economic downturn.

That said, if you’re considering conducting an exempt securities offering you may fall under the spotlight of regulation, and with that comes certain compliance requirements. One of these expectations is Know Your Customer, or KYC.

Know Your Customer (KYC) refers to the process of verifying a person is who they say they are. For securities offerings using a broker-dealer or underwriter, the broker-dealer will be responsible for implementing a KYC compliance process to:

1. Verify an investor’s identity
2. Assess investment history, investor suitability, and where funds for the investment are coming from
3. Check an investor against Anti-Money Laundering (AML) sanctions lists
4. Routinely perform post-issuance AML monitoring and reporting on an issuers cap. table to ensure continued compliance

KYC compliance laws were introduced in 2001 as part of the Patriot Act to mitigate money laundering and other financial crimes. As with AML standards, regulators only provide minimum guidelines for KYC compliance in order to ensure firms and issuers adopt procedures that comply.

While robust procedures are great with your ‘compliance hat’ on, issuers need to be considerate of how this will impact onboarding and the investment experience as a whole.

In today’s digital world, users expect the same frictionless, high-touch experiences they go through when they shop on Amazon to be replicated when opening a bank account or investing in a company they believe in.

This means you have to consider investor experience, brand alignment, and integration, all while ensuring the offering meets compliance demands.

Here’s where Horizon steps in to streamline it all.

Horizon built KYCware, a white-label KYC/ AML onboarding solution to integrate seamlessly into your offering to verify investors, screen investors against Horizon’s proprietary AML database and meet ongoing regulatory compliance.

How it works for securities issuers using KYCware:

1. Customize: We customize a KYCware app branded to your company’s likeness to meet your offering needs and participating investor jurisdictions. We found that keeping the investment process under an issuer’s brand maintains trust, reliability, and keeps an on-brand experience for investors.
2. Integrate: The KYC onboarding app becomes available to investors on the Apple App Store or Google Play Store, with a turnkey KYCware hosted web portal for your designated compliance team to efficiently review, and compliantly manage, investor Personally Identifiable Information (PII).
3. Onboard Investors: Investors download the issuers app and are taken through advanced ID, document, and identity verification technology including anti-gaming features, a Machine Readable Zone ‘MRZ’ scanner and liveness detection. The app auto-adjusts depending on an investor’s jurisdiction and adhere’s to national regulatory requirements to maintain a comprehensive, yet user-friendly investment process.
4. Secure Upload: Once an investor completes the KYC onboarding process, data is securely uploaded into a compliant in-memory datastore where the bank (or other authorized regulated entity) securely downloads investor PII data for KYC+AML review. Investors are automatically screened against Horizon’s proprietary database of global sanctions, politically exposed persons (PEPs), and watchlists.
5. Streamlined Review: It typically takes 1.5 minutes to verify an investor’s KYC submission and AML screening. This is a key differentiator as issuers can assure users that their sensitive data is managed solely by the issuer’s company and not outsourced to third-parties. Offline records of PII data are secure & in accordance with SEC Rule 17a-4(f). Once cleared to invest, an email is sent to the investor with the issuers bank account details.

Horizon’s KYC compliance solution offers an important compliance piece to the securities offering puzzle. We believe that knowing who your investors are, ensuring their sensitive PII data is protected, and adopting a compliance-centric process will help you streamline your Reg CF and Reg A+ capital raising.

KYC is only one piece of the puzzle which is why integrating technology solutions such as Horizon’s one-stop shop can help firms maintain compliance throughout the entire lifecycle of their offering. To schedule a demo to see how KYCware can meet your offering needs, please visit www.kycware.com or email us at horizon@kycware.com.

About Horizon

Horizon offers a suite of integrated securities software applications for compliant issuance through secondary trading of electronic securities. Truly a compliance-first business, our solutions combine Wall Street and Silicon Valley to power the next generation of exchanges and securities offerings in the U.S. and globally. Visit us at https://www.horizonfintex.com/.