By Louis A. Bevilacqua, Esq.
On June 19, 2015 amendments to Regulation A commonly known as Regulation A+ became effective. Since the adoption of the rules, there has been much fanfare. The poster child for Regulation A+ is Elio Motors, a designer and manufacturer of a three-wheeled, low-cost, efficient and environmentally friendly vehicle. Elio Motors launched its Regulation A+ campaign last year around the time that Regulation A+ became effective. After unrivaled marketing efforts Elio Motors was able to raise $17 million in February of 2016 at a pre-money valuation of about $325 million. This successful deal has not had many followers, however, Regulation A+ deal activity is on the rise. According to Rod Turner, the CEO of Manhattan Street Capital, SEC qualified Regulation A+ filings accelerated to 2.5 per week during May 2016.
Several articles have addressed the benefits of Regulation A+, which include the ability of an issuer to “test the waters” before filing an offering statement with the SEC, the ability to sell securities to both accredited and non-accredited investors and raise up to $50 million, state blue sky preemption, a more streamlined offering statement and SEC review process, lesser ongoing reporting requirements, the ability to sell unrestricted securities and, most importantly, the ability to leverage all different types of deal marketing avenues like social media, direct mail, internet, radio and television. So, what is wrong with Reg A+? I have polled the Reg A+ brain trust, including Steve Dresner, the CEO of Dealflow.com, Lou Taubman of Hunter Taubman Fischer LLC, and Rod Turner, the CEO of Manhattan Street Capital. This article discusses some of the challenges that were identified.
The biggest challenge for issuers raising capital in a Regulation A+ offering is the cost to conduct the offering. From start to finish a Regulation A+ offering will cost between $250,000 and $500,000 mostly depending on how big the marketing budget is. This range does not include fees payable to an underwriter. Although the cost is much less than a traditional IPO, which can easily exceed $1.5 million in fees, it is still a sizable sum for an emerging company trying to raise capital. The solution, of course, is bridge financing. It seems that issuers are willing to provide generous terms for the bridge money, yet hedge and VC funds are slow to move into the space.
Another serious challenge faced by Regulation A+ issuers is the lack of institutional investor acceptance. Given the relative novelty of Regulation A+, it is difficult to attract institutional money. Ideally, the “crowd” would be used to round out institutional investments that have already been secured and piggyback off of institutional level due diligence. It may take some time and several successful offerings before institutions begin regularly investing in Regulation A+ offerings.
Lack of liquidity is also at the top of the list of Regulation A+ challenges. Issuers will need to conduct aggressive investor relations campaigns, seek research coverage and provide heightened levels of transparency in order to increase volume following their Regulation A+ offering.
Other challenges like the requirement for placement agents to submit to a FINRA Rule 5110 compensation review, the lack of preemption for secondary transactions in securities, the inability of public companies to use Regulation A+, and the sometimes disjointed process of depositing Regulation A+ securities in a brokerage account are also worth mentioning.
Overall Regulation A+ will provide issuers with greater access to capital and allow for online capital formation. Challenges exist, but they are not insurmountable and will be overcome as the number of successful Regulation A+ offerings increase.
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