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The Small-Cap IPO Market Is Alive And Well, Thanks To Regulation A+
A new strategy has appeared for small-cap companies to compete in the IPO race once again.
Rod is a regular Contributor at Forbes. He wrote this column for Forbes where it was published on December 13th 2016.
Historically, the window for large and mid-cap company IPOs opens and closes like a heart valve, depending upon the volatility of the stock markets. But in sobering fact, it’s been largely sealed shut for small-cap offerings for the last 15 years.
So how can small-cap companies get access to public investors, liquidity and significant growth capital?
Regulation A+ offerings are now a legitimate way for them to conduct an IPO to the NASDAQ or to the NYSE. The upper limit in such IPOs is a raise of $50 million per company per year.
As the CEO of a funding platform specializing in Regulation A+, I work with companies actively raising equity capital that are considering using Regulation A+. I have had meetings with more than 300 companies at this stage. For 12 months I have published a monthly Regulation A+ status update, which requires me to stay up to date on offerings as they happen. This experience--combined with my background as a serial entrepreneur, my involvement as a C-level executive for two successful NASDAQ IPOs and my long history investing and raising startup capital for numerous companies--have put me in a good position to compare the traditional IPO approach with the new method of using Regulation A+ to fund IPO's.
In fact, Regulation A+ IPO's can provide worthwhile advantages over traditional IPO's and can be relatively immune to the swings of stock-market cycles. Be aware that we are dealing with a small sample here-these are early days for Regulation A+. Consider the following:
No quiet period. A traditional IPO requires companies to restrict their communications and marketing activity in the ramp-up to their IPO in the SEC-required quiet period. This restriction often limits the day to day business activity of a company when, for example, it feels the need to downplay or delay new product announcements until after the quiet period to reduce the risk of having its IPO shut down by the SEC. It also prevents companies from promoting themselves to potential investors, which, of course, was the reason for the quiet period in the first place.
In a Regulation A+ IPO, however, companies are allowed to market themselves broadly to all investors worldwide while their offering is underway . Think of it as a “loud period”. Being effectively loud is necessary in order to raise capital. The beneficial side effect of this marketing is that companies get to promote their brand, which accelerates customer traction and attracts strategic partnering opportunities earlier and with higher efficiency than if the companies were required to stay quiet.
No minimum capital raise. Many promising companies fail to complete their traditional IPO because they miss the minimum capital raise required to list on the NASDAQ or NYSE, sometimes by only a small amount. This is costly in many respects and the awareness of this risk turns many attractive companies away from the IPO route. In a Regulation A+ offering, there is usually no requirement to set a minimum for the capital to be raised. (There are some exceptions, such as when raising capital to conduct an acquisition of a company or a fixed asset such as Real Estate).
A company that misses its NASDAQ or NYSE minimum can complete its Regulation A+ capital raise and list on an OTC market instead , thereby raising the capital needed and making the whole exercise into a positive step. It can then move up to the full exchange later—a much better outcome than the conventional IPO approach of simply canceling the entire transaction.
Perhaps as important, the company raising capital using Reg A+ can conduct an early first closing for a small amount of capital, and from that point, use investment proceeds to fund its ongoing marketing to investors, thereby reducing upfront costs, and improving the cash flow of its capital raise.
A cost-effective route to public status. The 2001 adoption of decimal stock trading in the U.S. removed two-thirds of the trading profits from Wall Street firms, which made most small-cap IPOs unprofitable for underwriters. As a result, the big underwriters simply stopped doing small-cap IPOs. Fifteen years ago.
Regulation A+ IPOs provide comprehensive promotion opportunities courtesy of the Internet, and as a result, costs are coming down. Social media promotion is one key component, it is a relevant and more effective means of marketing. This trend towards lower costs will continue as Regulation A+ becomes more broadly established, and as Fintech tools and methods used in Reg A+ transactions improve efficiency further. Transaction efficiency is a very important factor in keeping the Regulation A+ IPO window open in less than stellar markets.
A broader investor base. For the very few traditional small-cap IPOs that have been completed since 2001, they have usually limited their marketing to U.S. investors because the cost of a conventional international roadshow is too high for the underwriters to pay, for what are relatively small offerings and fees from their perspective. In addition, traditional IPOs are only offered by underwriters to institutional and very select wealthy investors. Regulation A+ IPOs, on the other hand, can be cost effectively promoted to investors of all wealth levels, worldwide. Broadening the investor base to all investors and to all markets in this cost effective manner opens up the IPO window to far more small-cap businesses than in the past. This benefits CEOs in two significant ways, by reducing IPO timing uncertainty and putting more control in the hands of the CEO about when and how to conduct your IPO.
You will notice a theme emerging in the Regulation A+ IPO offering process- putting more control in the hands of the CEO, a very welcome development. The flip side is that Regulation A+ is still in its early years and as a result, it does not fit as many companies today as it will in a few years time. The principal limitation at present is that to be successful a company must appeal strongly to consumers. As took place in the peer to peer lending business, the early adopters in Regulation A+ are consumers. Institutions tend to move more slowly into new markets. As institutions increase their engagement, the Regulation A+ funding window will expand to include the majority of substantial companies that address large, growing markets.
In an interesting news update, in late November, Myomo – a medical device company, filed their Form 1-A with the SEC indicating their intent to use Reg A+ to raise growth capital and to list on the NYSE following their Regulation A+ offering – if they succeed with their offering, this will be a significant first.
In conclusion, Regulation A+ is re-opening the IPO option for small-cap companies and doing so in a manner that can stay viable in good times and rough times too . It is a significant step forward that will help accelerate the growth of many businesses in North America.
Rod Turner is the founder and CEO of Manhattan Street Capital, the #1 Growth Capital marketplace for mature startups and mid sized companies to raise capital using Regulation A+. Turner has played a key role in building successful companies including Symantec/Norton (SYMC), Ashton Tate, MicroPort, Knowledge Adventure and more. He is an experienced investor who has built a Venture Capital business (Irvine Ventures) and has made angel and mezzanine investments in companies such as Bloom, Amyris (AMRS), Ask Jeeves and eASIC.
Manhattan Street Capital, 5694 Mission Center Rd, Suite 602-468, San Diego, CA 92108.