CLICK HERE to read this article written by Rod Turner for Forbes.
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 mainly been 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 to conduct an IPO to the NASDAQ or the NYSE. The upper limit in such IPOs is a raise of $75 million per company per year.
As the CEO of a funding platform specializing in Regulation A+, I work with companies actively raising equity capital 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 of investing and raising startup capital for numerous companies--has put me in an excellent position to compare the traditional IPO approach with the new method of using Regulation A+ to fund IPO's.
Regulation A+ IPO's can provide practical 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 the 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.
However, in a Regulation A+ IPO, companies can market themselves broadly to all investors worldwide while their offering is underway. Think of it as a "loud period." Being effectively loud is necessary 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 tiny 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 money to acquire 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 doing the whole exercise into a positive step. It can then move up to the entire exchange later—a much better outcome than the conventional IPO approach of simply canceling the whole transaction.
Perhaps as necessary, the company raising capital using Reg A+ can conduct an early first closing for a small amount of money. From that point, it can 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 significant underwriters simply stopped doing small-cap IPOs. Fifteen years ago.
Regulation A+ IPOs provide ample 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 prices 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 essential 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. 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. Broadening the investor base to all investors and markets in this cost-effective manner opens up the IPO window to far more small-cap businesses than in the past.
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. 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 most substantial companies that address significant, growing needs.
In an exciting 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. It is a significant step forward that will help accelerate the growth of many businesses in North America.
Related Content:
Cost of taking your company public using Regulation A+
IPO Consulting Service from Manhattan Street Capital
How to do an IPO to the NASDAQ or NYSE via Regulation A+?
Rod Turner
Rod Turner is the founder and CEO of Manhattan Street Capital, the #1 Growth Capital service for mature startups and mid-sized companies to raise capital using Regulation A+. Turner has played a vital 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.
www.ManhattanStreetCapital.com
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