Businesses are slowly catching on to the opportunities of Reg. A+. Last month, DSTLD became the first apparel company to offer Reg. A+ equity funding to the general public. Myomo, a medical robotics company that manufactures products which help users overcome upper extremity paralysis, announced it is also pursuing Reg. A+ funding.
Drinker Biddle’s Crowdfunding Report, an open data set which provides information on the first 50 offerings conducted under the new Regulation Crowdfunding exemption, also shows companies exploring equity crowdfunding options.
While interest is rising, questions remain. Drinker Biddle partner Marc Leaf, along with special guest Howard Marks, co-founder and executive chairman of StartEngine, discussed some of the ins and outs of Reg. A+ and other alternative public offering models during a roundtable discussion about the evolving online public offering landscape.
These are five takeaways from the discussion.
Reg. A+ helps smaller companies raise capital
Emerging companies with strong growth and an enthusiastic customer base often find Reg. A+ appealing. Reg. A+ also allows companies to tap into marketing lists and loyal customers to invest as unaccredited investors. This is a departure from previous regulations which only allowed companies to solicit accredited investors. Companies in an early stage that may not have a product to sell yet and don’t have a marketing list can try out marketing campaigns such as contests, sweepstakes or working with YouTube influencers to generate buzz and find investors.
It’s a more cost effective route to going public because the legal fees are less, accounting disclosures are more subtle, and ongoing reporting requirements are more limited. There’s also no limit on the amount an accredited investor can invest in Reg. A+.
Testing the waters for a public offering
Before Reg A+, a new business usually had to have a pre-existing relationship with an investor before they could provide funding. General solicitation under Reg. A+ allows businesses to reach out to both accredited and unaccredited investors to see whether they think it’s a good idea to pursue a public offering. It gives them an idea of whether they’ll be successful before hiring accountants and lawyers to help with raising money and regulatory issues.
Comments lighter in the IPO process
One trend that has emerged with the Reg. A+ offerings is that the SEC review process has generated less and more limited comments. This seems to be a result of the lighter disclosure requirements but doesn’t mean the SEC isn’t being upfront with companies that clearly aren’t ready to go public. Companies that are able to articulate a clear vision for what they want to do, present audited financial statements, and can describe their revenue drivers tend to get fewer comments than before.
Crowdfunding will become more popular
Crowdfunding will continue to be a popular way to raise capital. Many investors are willing to contribute small investments for things they are passionate about to improve their communities, even if they don’t get their money back. Raising money through lots of small investors over the Internet with little cost and fewer delays than a traditional IPO is a good option for many small companies.
Defining goals to determine a Reg. A+ or traditional IPO path
Companies are looking at a Reg. A+ or a traditional IPO path should consider the following questions:
- How much are you looking to raise realistically?
- How much trouble are you willing to go to raise it?
- Who do you think you're going to be raising this money from?
Based on those three questions, a company can probably figure out the right form of securities offering. If the goal is to raise a significant amount of money then either Reg. A+ or an IPO is probably the best bet because an IPO will attract more traditional institutional investors. A company looking to raise small amounts of money from a lot of different people should probably consider a crowd funding or Reg. A+.