By John Lowy
Everyone in the microcap community is talking about Regulation A+ (“Reg A+”): it was the featured topic at the Growth Capital Expo in Las Vegas, held on May 3-May 5, at which I was on the first panel to discuss this new method of public financing.
Then, at the Marcum Conference in New York on June 1-June 2, Reg A+ garnered a lot of attention (not as much attention as Newt Gingrich’s keynote address, but a lot).
So, what’s all the fuss about Reg A+, which became effective on June 15, 2015, and which allows companies to raise up to $50,000,000 in a public offering that can be made directly to the public? Assuming that it’s a viable way for microcap companies to get financed—and it definitely is—what insights have some of the recent Reg A+ deals given us?
As of the date that this article went to press, the only company to successfully complete a Reg A+ capital raise and begin to trade (besides a few community banks) has been Elio Motors, which raised nearly $17,000,000 (gross proceeds) in its Reg A+ offering, which closed in February, 2016, at a price of $12 per share. As of this writing, ELIO is listed on the OTCQX and trading comfortably above its offering price, although with limited trading volume.
What were the ingredients in ELIO’s success? According to Jason Paltrowitz, Executive Vice President of Corporate Services for OTC Markets Group, with whom I spoke on June 9, CEO Paul Elio himself was one of the three keys to ELIO’s success. Jason described him as a visionary, who was passionate about his automobile, and—the second key—invested good money to get a concerted marketing and crowdfunding campaign: remember the Wall Street axiom, “Deals are not bought, they are sold”. The third key ingredient--and in my opinion the key to a successful Reg A+ offering--is the ability to combine selling a company’s stock with selling its product to consumers, hopefully the company’s existing customer base.
In ELIO’s case, there were more than 50,000 pre-orders to purchase the automobile when it becomes commercially available. What better way to raise capital than to have those same enthusiasts also buy your company’s stock? Indeed, ELIO now has approximately 6,600 shareholders, so it’s a good assumption that many of them are among the 50,000 pre-order customers.
Moreover, ELIO’s public filings show that the company raised nearly $17,000,000 in gross proceeds at a cost of less than $900,000, i.e. about 5.3% of the gross proceeds, which was far less than the traditional costs of doing an S-1 through an investment banking firm.
However, as with any attempt to raise capital, there have been unsuccessful offerings or attempted offerings in the Reg A+ arena. As they say in life, you learn more from your failures than from your successes. So, here is a brief review of two offerings which were withdrawn after the offering commenced, without the shares having been sold:
RalliBox was a complete startup—no revenues and not even any assets—that wanted to raise $3,000,000 to enable it to start a cooperative network of online retail merchants. Candidly, the Offering Circular was not well-written, and I suspect that there wasn’t much of a marketing/promotion effort put into it. If your idea is to “go it alone,” i.e. post your offering only on your company’s website and hope for the best, you should expect the worst (again, deals are sold, not bought).
Sun Dental, another post-qualification deal that was withdrawn after not selling, was nowhere near a startup—more than $9,000,000 in revenues for the first six months of 2015 in its Offering Circular. However, its products are sold only to dentists and dental labs; so, in my opinion, even though Sun Dental is a real company, its stock would appeal only to the .001% of people who actually like going to their dentist!
As Jason Paltrowitz pointed out when I spoke with him on June 9, because Reg A+ offerings can be marketed directly to the public without having to go through investment bankers, millennials are an entirely new and different breed: they are evaluating companies less on their balance sheet and more on their like or dislike for the product. Hence, while traditional investment banks, institutions, etc. might think that ELIO’s post-money valuation of nearly $318,000,000 was far too high, the fact that it’s trading at a premium over the offering price shows that, ultimately, the market itself is the best judge of value.
So, after approximately one year of Reg A+, and one successful capital raise (not including a few community banks), some failures, and with several more in the works, what is the future of Reg A+? Jason Paltrowitz has publicly stated, “This is going to be transformative. It’s just going to take some time. The reality is that the market for small company capital raising is broken and this was a way to try to address it and fix it. . . . So our view here at OTC Markets is that this is three-to-five years out. This process, with tweaks, still is probably the best thing to happen in recent memory to help small businesses raise capital, and it does it in a way that allows it to be open and transparent. It’s open, it’s democratic, it’s social and it’s online, it’s all these great things.”
Like any financial undertaking, Reg A+ is not for the faint of heart. It takes patience and persistence to successfully raise capital, whether debt or equity, in a private or a public offering, or via S-1 or Reg A+. So, a year after it was promulgated, here are my thoughts about Reg A+:
It’s an excellent way for a company to raise up to $50,000,000, especially a company that sells its products to individual consumers. Put together a solid business plan, be sure to have audited financial statements, experienced legal counsel, a good funding portal, and be prepared to spend on marketing—this time, for marketing the stock along with the products your company sells.
Many thanks to Jason Paltrowitz, Andy Kyzyk, and the outstanding team at OTC Markets Group for their assistance.
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