SecProbe.io

CORRESP
1
filename1.htm

NETCAPITAL
INC.

1
Lincoln Street

Boston,
MA 02111

April
12, 2024

VIA
EDGAR

United
States Securities and Exchange Commission

100
F. Street, NE

Washington,
DC 20549

    Attention:

    Bonnie
    Baynes

    Rolf
                                            Sundwall

    Eric
    Envall

    Sandra
    Hunter Berkheimer

    Re:
    Netcapital
    Inc.

    Form
                                            10-K for the fiscal year ended April 30, 2023

    File
    No. 001-41443

Dear
Ladies and Gentlemen:

This
letter sets forth responses on behalf of Netcapital Inc., a Utah corporation (the “Company”), to the comments received from
the staff (the “Staff”) of the Securities and Exchange Commission (the “Commission”) set forth in your letter
dated March 29, 2024 (the “Comment Letter”) regarding the Company’s Form 10-K for the fiscal year ended April 30, 2023
(the “Form 10-K”).

For
the convenience of the Staff, each comment from the Comment Letter corresponds to the numbered paragraphs in this letter and is restated
prior to the response to such comment.

Form
10-K for the fiscal year ended April 30, 2023 filed July 26, 2023

General

1.
Please provide a detailed legal analysis as to whether you and any of your subsidiaries meet the definition of an “investment company”
under Sections 3(a)(1)(A) and 3(a)(1)(C) of the Investment Company Act of 1940. Your analysis should include all facts upon which your
determination is based. Please also advise as to the percentage of the Company’s consolidated assets that consist of investment
securities as of year-end April 30, 2023 and the most recent fiscal quarter-end. Please note that we may refer your response to the Division
of Investment Management for further review.

Response:
As described in the more detailed legal analysis set forth below, the Company respectfully submits that neither the Company nor its
subsidiaries meet the definition of an “investment company” under Section 3(a)(1)(A) or Section 3(a)(1)(C) of the Investment
Company Act of 1940, as amended (“1940 Act”).

    -1-

Section
3(a)(1)(A) of the 1940 Act defines an “investment company” as any issuer “which is or holds itself out as being
engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting, or trading in securities.” The Company
and its subsidiaries do not hold themselves out as being engaged (or proposing to engage) primarily in investing, reinvesting, or trading
in securities. The Company is primarily engaged in the business of operating a funding portal and consulting business and Company management
spends the vast majority of its time and attention on the core operating businesses of the Company; monitoring the investment securities
is only an ancillary activity.

The
Form 10-K and the Company’s Form S-1 filed on December 15, 2023 both include disclosures that the Company is not an investment
company under the 1940 Act and that, if the Company was required to register as an investment company, the Company could not practically
continue to operate its business. The Company’s disclosures indicate that the Company is a fintech company that has three operating
subsidiaries that operate a funding portal, provide marketing and strategic consulting services and provide corporate valuation services.

The
Company does hold securities of certain of its customers. Other than with respect to one investment into an affiliate, the Company has
not invested into any investment securities other than as a result of receipt of securities from customers as payment for consulting
and other services provided to such customers. Other than liquidating such securities for cash, the Company does not trade in securities
by buying securities for cash or by selling securities and reinvesting that capital into different investment securities. The Company
believes that being open to receiving in-kind securities as payment for services expands the market for its core services to additional
customers that may not otherwise be able to pay cash for such services.

While
for certain periods the majority of the Company’s revenue may come from unrealized changes in value of the investment securities,
the Company believes that such proportion of revenue is not indicative of the core focus of the Company on its operating businesses.
As the securities held by the Company are generally illiquid private securities, the value of a security can fluctuate within a wide
range of values which can, given the overall revenue level of the Company, cause large swings in the consolidated revenue of the Company
relative to the operating revenue of the Company.

As
reported in the Company’s 10-K for the fiscal year ended April 30, 2023, and the Form 10-Q for the fiscal quarter ended January
31, 2024, the percentage of the Company’s consolidated assets (including cash, cash equivalents and government securities) that
consisted of investment securities as of year-end (April 30, 2023) and the most recent fiscal quarter end (January 31, 2024) based on
the consolidated balance sheet were 55.5% and 50.0%, respectively. The Company believes that the percentage of assets calculated on a
consolidated basis is not a representative measure of the true proportion of the total value of the Company held in investment securities
because a significant portion of the value of the Company is in its operating subsidiaries and is built into assets (such as number of
portal users and value per user) that are not reflected on a consolidated balance sheet. As the Company is primarily engaged in operating
a funding portal and consulting activities, the Company respectfully submits that it is not primarily engaged in investing, reinvesting
or trading in securities and is not an “investment company” under Section 3(a)(1)(A).

    -2-

Section
3(a)(1)(C) of the Investment Company Act of 1940 defines an “investment company” as any issuer that “is engaged or
proposes to engage in the business of investing, reinvesting, owning, holding, or trading in securities, and owns or proposes to acquire
investment securities having a value exceeding 40% of the value of the issuer’s total assets (exclusive of Government securities
and cash items) on an unconsolidated basis.”

Section
3(a)(1)(C) is calculated at each entity level on an unconsolidated basis. Each of NetCapital Systems LLC, NetCapital Funding Portal Inc.,
and MSG Development Corp. did not hold any investment securities on their respective non-consolidated balance sheets as of April 30,
2023 and as of January 31, 2024 so each had 0% of its total assets (exclusive of Government securities and cash items) in investment
securities. NetCapital Advisors, Inc. held only 1 investment security on its balance sheet as of April 30, 2023 and as of January 31,
2024 and the value of its investment security was 32.7% and 26.5%, respectively, of its total assets (exclusive of Government securities
and cash items) as of such dates. While certain of the subsidiaries are contractually entitled to receive securities from customers as
payment for services, the subsidiaries direct those securities to the Company and such securities are held on the non-consolidated balance
sheet of the Company. Therefore, the Company respectfully submits that none of the Company’s subsidiaries are investment companies
under Section 3(a)(1)(C).

With
respect to the Company itself on an unconsolidated basis, (i) its equity interests in its wholly-owned subsidiaries do not qualify as
investment securities because the subsidiaries are wholly-owned and the subsidiaries are not themselves investment companies or relying
on Section 3(c)(1) or 3(c)(7) of the 1940 Act and (ii) the value of such equity interests in its subsidiaries is included in the calculation
of the total assets of the Company for purposes of Section 3(a)(1)(C). The value of the Company’s equity interests in NetCapital
Funding Portal Inc., MSG Development Corp. and NetCapital Advisors, Inc. was approved by the board of directors to be $76,784,978, $10,554,412
and $11,562,036, respectively as of April 30, 2023 and $82,432,788, $12,625,218 and $9,120,000, respectively as of January 31, 2024.
The valuation methodology for the Company’s interests in its subsidiaries was approved by the board of directors and the methodology
uses the same valuation tool that the Company uses to determine the valuation of its issuer customers that plan to conduct an offering
using the Company’s services. Using the foregoing valuations for its subsidiaries, the value of the Company’s investment
securities as of April 30, 2023 and as of January 31, 2024 was 18.7% and 16.9% of its total assets (exclusive of Government securities
and cash items), respectively. Therefore, the Company respectfully submits that it is not an investment company under Section 3(a)(1)(C).

    -3-

Item
1. Business

Development of Business, page 6

2.
We note your disclosure on page 6 of your three operating subsidiaries and each entity through which you provide these services. We also
note your disclosure of significant revenues for two of these subsidiaries. Please tell us, and revise future filings to disclose as
necessary, the following:

    ●
     Tell
    us whether each of the entities/operating subsidiaries you identify represent an operating segment pursuant to ASC 280-10-50-1 through
    50-9.

    ●
    Revise
    to disclose your operating segments and your reportable segments as well as the general information required by ASC 280-10-50-21.

    ●
    To
    the extent you aggregate operating segments into one or more reportable segments, please explain how the operating segments meet
    the aggregation criteria in ASC 280-10-50-11.

Response:
In light of our ongoing efforts to align with the Financial Accounting Standards Board’s Accounting Standards Codification
(ASC) 280, Segment Reporting, and after thorough review of our company’s operational structure and management processes, we continue
to determine that our operations constitute a single operating segment. This determination is based on the integrated nature of our ecosystem
in the fintech space, and the centralized decision-making process led by our Chief Operating Decision Maker (“CODM”), who
is our Chief Executive Officer. The rationale behind considering our entire operation as one business segment for reporting purposes
under ASC 280 is as follows:

 1. Centralized
                                            Decision-Making: All strategic and resource allocation decisions are made by our CODM
                                            across all subsidiaries and entities within the company. This centralized approach to decision-making
                                            ensures that our operations are highly integrated and managed as a singular strategic unit.
                                            The performance of the business is managed and reviewed for the consolidated company as a
                                            whole.

 2. Integrated
                                            Operational Ecosystem: Our subsidiaries and entities operate within a unified fintech
                                            ecosystem, sharing resources, technology, and objectives. This integration goes beyond mere
                                            collaboration, representing a singular operational framework focused on delivering cohesive
                                            fintech solutions.

 3. Uniform
                                            Review Process: The performance of all entities and subsidiaries is reviewed as a whole
                                            by our CODM, without discrete financial segments being evaluated separately. This holistic
                                            review process is indicative of a unified operational strategy rather than segmented business
                                            units.

 4. Consistent
                                            with Industry Peers: Our operational structure and the rationale for considering it as
                                            a single segment are consistent with practices observed in peers within the fintech space,
                                            including major players such as Affirm Holdings, Inc and PayPal Holdings, Inc. These companies
                                            have integrated operations that are managed and reported as a single segment.

 5. ASC
                                            280 Compliance: According to ASC 280-10-50-1 through 50-9, an operating segment is a
                                            component of an enterprise for which separate financial information is available and is reviewed
                                            regularly by our CODM. Given our integrated operational model and centralized review process,
                                            our entire operation is aligned with the spirit of ASC 280’s definition of an operating
                                            segment.

    -4-

Considering
the above points, we respectfully submit that our company operates as a single business segment within the meaning of ASC 280. This approach
not only reflects our operational reality but also aligns with the standard’s requirements for segment reporting. We believe that
this reporting structure provides meaningful and transparent financial information to our stakeholders, accurately reflecting our operational
and financial performance.

Item
7. Management’s Discussion and Analysis of Financial Reporting and Results of Operations Results of Operations

Fiscal Year 2023 Compared to Fiscal Year 2022, page 31

3.
We note your revenue disaggregation disclosures by service line nature on pages 32 and F-10. Please tell us, and revise future filing
as necessary, the following:

 ● We
                                            note the disclosure on page 6 of your three operating subsidiaries includes funding portal,
                                            consulting business and valuation business. We also note your game website revenue disclosed
                                            on pages 35 and F-10. Revise to clarify whether valuation business revenue and game website
                                            revenue are included in online or consulting services revenue, and quantify such amounts
                                            if material. Refer to ASC 606-10-50-5 and ASC 606-10-55-91.

 ● We
                                            note your disclosure on page 35 that you recognize service revenue under ASC 606 from your
                                            consulting contracts and game website. Please reconcile this disclosure with the disclosure
                                            on page F-8 that also includes funding portal in the service revenue you recognize.

 ● We
                                            note your revenue disclosures on pages 32 and F-8 regarding your “4.9% portal fee”
                                            and “listing fees”. Please reconcile these disclosures with those on pages 6
                                            and 30 regarding your “4.9% success fees” and “engagement fees.”

 ● Please
                                            revise your results of operations on page 31 to describe the underlying reasons for any material
                                            changes in quantitative and qualitative terms. Refer to Item 303(b) of Regulation S-K.

Response:
With respect to the first bullet point above, our valuation business revenue is included in our consulting revenue and our
game website revenue is reported separately. Specifically, our game website revenue amounted to $1,192 in fiscal 2023 and $1,155 in fiscal
2022. It is not a material component of our operations, and we