Commutee

New Regulation A+ Offerings

May 12, 2017 by  
Filed under Articles

Regulation A+ can be thought of as an alternative to a small registered IPO and as either an alternative or a complement to other securities offering methods that are exempt from registration under the Securities Act.

Recently, the Accelerated Growth Venture Group (founder Ramy El Batrawi) is in the process of offering new Regulation A+ offerings for YayYo and ATG.

Regulation A was adopted by the Commission under Section 3(b) of the Securities Act in 1936 as an exemption from registration for small issues. The annual offering limit permitted under this exemption had been raised several times and was changed to $5 million by 1992 Nevertheless, the exemption has been used infrequently over the past two decades.

The Jumpstart Our Business Startups Act (the “JOBS Act”) of 2012 amended Section 3(b) of the Securities Act of 1933, directing the Commission to adopt rules exempting from the registration requirements of the Securities Act offerings of up to $50 million per year. The Regulation A amendments (“Regulation A+”) were proposed by the Commission on December 18, 2013 and adopted on March 25, 2015. The amendments became effective on June 19, 2015.

In the approximately 16 months since the amendments became effective, Regulation A+ securities offerings have outpaced the past rate of Regulation A activity. As of October 31, 2016, prospective issuers have publicly filed offering statements for 147 Regulation A+ offerings, seeking up to approximately $2.6 billion in financing. Of those, approximately 81 offerings seeking up to approximately $1.5 billion have been qualified by the Commission. (Offerings must be qualified by the Commission before issuers may sell securities). Approximately $190 million has been reported raised during that period, although this likely understates the true amount raised due to reporting timeframes.

Issuers are availing themselves of both Tier 1 and Tier 2, but Tier 2 offerings were on the margin more common among qualified offerings, accounting for 60% of qualified offerings. The offer amount varied with issuer size, with the average issuer was seeking up to approximately $18 million. Companies mainly offered equity, which accounted for over 85% of all offerings. The majority of offerings were conducted on a best-efforts, self-underwritten basis, consistent with the small offering size and the small size of a typical issuer. Most of the issuers have previously engaged in private offerings, consistent with the use of amended Regulation A as a capital raising on-ramp.  – SEC https://www.sec.gov/dera/staff-papers/white-papers/Knyazeva_RegulationA-.pdf

  • 147 offering statements filed, of which 81 were qualified (as of the date of the stats)
  • Of the 81 qualified, 49 were Tier 2, 32 were Tier 1
  • 121 days avg time from filing to qualification (Tier 2)
  • 17% used broker-dealers (Tier 2)
  • $18M avg max-raise
  • 20% used “test the waters”
  • 87% equity/13% debt or other offerings
  • $50,000 avg legal costs to file & get qualified
  • $15,000 avg accounting audit costs
  • 50%+ of all issuers are incorporated in either Delaware or Nevada and located in California, Texas, Florida or DC-area
  • Typical issuer had no assets, no revenue, no net income (in other words, they are start-ups)
  • Real estate was dominant, accompanied by financial services

Time to qualification, 121 days (Tier 2 avg): This puts an exclamation mark on the fact that this isn’t a Reg D, which can be launched overnight. If you want to allow non-accredited investors to participate in a large or continuous private offering, and if you want the securities to be free of various restrictions (e.g. Rule 144 on Reg D), then you are going to need to allow for the time it takes to get audited, prepare the offering statement, and go through a 121 day avg SEC qualification process (though I know of several that have been much shorter, it seems to depends upon the experience of the lead attorney).

Broker-Dealer Activity, 17%: This is the most disturbing metric to me. You’d think that every broker-dealer in the country with “private placements” as an approved business line would be jumping on the bandwagon as Reg A is a fantastic Reg D alternative. But they’re not. The reasons, from my experience, are…

  1. Brokers think Reg A’s are IPO’s. As such they expect the issuers to be mature companies that are ready to trade on OTC or NASDAQ. This is completely misguided, of course, as Reg A is simply an “unrestricted (private) security” and should not be confused with an S-1 filing IPO. The fact that it “can” trade on OTC or NASDAQ doesn’t mean it should. Brokers need to view this as a private placement, not an IPO.
  2. FINRA treats Reg A’s like IPO’s. As such they are limiting broker compensation to the same caps as an S-1 of a less risky mature company backed by far more detailed disclosures and easy settlement mechanisms. We hear from many brokers that FINRA’s comp-caps make it impossible for them to justify the risk or work involved in handling a Reg A, so they pass on these; which leaves issuers (and investors) to fend for themselves.
  3. Compliance Education. The internal compliance depts at broker-dealers are not yet up to speed on this type of offering and so are quick to say “no” to deals their investment bankers bring to the table.
  4. Technology. Conducting an online offering is easy in concept, and challenging in execution. The transaction engine, the compliance requirements, the supervisory issues, and the fact that escrow has to manage potentially tens of thousands of individual investors are daunting issues.

Unintended Consequence: this is a situation where issuers could really use the guidance of a regulated broker-dealer, and the market and investors would be better for it. But regulators and compliance issues have caused issuers to say “no thanks, too much hassle, I’ll do this on my own.” In an age of General Solicitation, brokers are an optional expense/luxury as far as many companies are concerned, and with unclear or oppressive regulations they often (83% of the time) just skip it altogether.

Tier 1 Offerings, 40%. Stunning really, considering people filing under Tier 1 almost always have to get audited financials (as some states require them, e.g. CA), they have to pay filing fees that they could avoid with Tier 2, and they subject themselves to what can be extraordinarily painful “merit review” by some states.

Equity/Debt, 97% to 13%. This is a misleading metric and doesn’t really explain what’s happening or what investors are buying (in successful offerings). For instance, the equity sold in the Reg A’s for Realty Mogul* and American Homeowners Preservation* pay investors a defined income stream and have articulated exit mechanisms; Brewdog* investors feel they are buying into a culture; Elio Motor’s* fans (oh, I mean “investors”) were passionate about the concept and the mission; Fig* investors are excited about the games and projects. So the vast majority of successful Reg A’s have some sort of defined returns and/or benefits for investors that make them more than just equity securities being bought based upon technical merits and potential market gains. It’s critical that issuers, brokers and others in this market grasp this essential point, as we’ve seen several Reg A’s fail that did not do a good job with this.

Test The Waters, 20%. This isn’t surprising, as the current method of testing the waters is clearly broken. This will be fixed with technology and the number will increase.

In summary, it’s apparent that 2016 was a fantastic first year for Reg A+. With continued education, with more issuers successfully raising funds, and with the new Reg CF now taking care of the smallest, least-prepared issuers, it seems clear that the use of Reg A will grow exponentially in the coming years.

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