Regulation A+ is an updated securities regulation that allows companies to raise up to $75 million from accredited and non-accredited investors worldwide and enables liquidity for insiders and investors, including Reg A+ NASDAQ and NYSE IPOs.
Now that Regulation A+ has become a viable option for raising scale-up capital for startups and mid-stage companies, entrepreneurs can choose between it and Venture Capital. Reg A+ is winning out in a number of situations - see below.
Reg A+ can be a far better fit than Venture Capital
I have raised capital from blue-chip Silicon Valley VCs, and I was a senior executive for two successful NASDAQ IPOs - Ashton-Tate (TATE) and Symantec (SYMC). I also built a VC firm. I've made over 40 angel and mezzanine investments in private companies (including INFN, AMRS, Bloom Energy (Ticker BE on the NYSE), and Ask Jeeves (ASK on NASDAQ).
I have focused on assisting companies to succeed with their Regulation A+ capital raises and liquidity for the eight years since I founded Manhattan Street Capital, the Regulation A+ funding platform. As a result, I am reasonably well positioned to observe how Reg A+ compares and contrasts with Venture Capital.
Many of the companies I meet with that favor Reg A+ are viable candidates for VC. Reg A+ is emerging as the superior choice in the following circumstances:
1) You want to control your company's strategy and future directly. With Regulation A+, the CEO controls many aspects of their offering destiny. You select where you will list your stock after the offering or if you will list it. Moreover, you don't have to give up control of your Board of Directors. Of course, all this freedom comes at a price; there can be no guarantee that your offering will succeed. With VC, the entrepreneur typically gets more diluted and has much less control over managing their business.
2) Early, low-cost IPO. While Reg A+ can directly take a company public to the NASDAQ, venture capital cannot. In Reg A+, the ability to market your company freely instead of the traditional S-1 IPO Quiet Period is very appealing. In Reg A+, you can raise capital for an IPO to the NASDAQ. You also retain flexibility - if you don't reach the NASDAQ or NYSE minimum capital raise, you can still complete your Reg A+ capital raise and put money in the bank. A distinct advantage over an S-1 IPO.
3) You are not located near a VC Hub. VC is pretty much unavailable if you are far from a Venture Capital hub. Reg A+ is genuinely agnostic about company location (as long as the company is in Canada or the U.S.) This merit-based access to capital is a massive plus for many excellent businesses and talented entrepreneurs.
4) Customer traction and credibility. For companies that appeal strongly to consumers, the Reg A+ marketing process to thousands of investors adds to the company's reputation and brand. Throngs of happy shareholders make for satisfied customers and vice versa. (We can ask public companies about that phenomenon.) VC is not usually a factor here.
5) Adjustable (and higher) valuation. Typical Reg A+ offerings are far less dilutive for the founders than VC rounds. The ability to increase your company's share price and valuation (yes, you can) during the Reg A+ offering adds the flexibility to handle a more substantial capital raise than you initially planned. It does this while enabling you to manage dilution in a balanced way. Ask your VC-funded friends how they would like that!
6) Mid-stage companies. Most mid-stage companies are too far along to be appealing to VCs. In many cases, they are too small to be attractive to Private Equity firms. Regulation A+ is a uniquely good option for mid-stage companies that offers a fresh and less costly approach. Access to growth capital and liquidity for a $75 million business growing 40% annually at a favorable valuation can be like a breath of fresh air.
7) Excess VC Investor Clout. VCs can be a little trigger-happy at replacing CEOs. Some founders prefer not to put their strategy and role at risk. With Reg A+, founders stay in charge of their company.
8) Liquidity for investors. The SEC allows investors in Reg A+ offerings to sell their shares immediately after purchase, even when a company does not IPO. It is much more appealing to own tradable stock than shares that are locked up. Some companies (mostly those making real estate offerings via Reg A+) provide direct redemptions to their investors on a limited basis. If investors or founders want liquidity, Reg A+ can deliver it earlier. (Incidentally, Reg A+ is a viable solution for VC firms with numerous portfolio companies waiting for a liquidity event).
Summary
Reg A+ provides entrepreneurs with a level playing field for merit-based access to capital, and it does so in a relatively low-cost and flexible way. Regulation A+ works better for some companies than others. Types of companies for which Reg A+ is likely to work well.
Reg A+ is filling gaps in the capital formation landscape that VC was not addressing effectively and improving the efficiency of raising growth capital for small and mid-stage businesses. How to make Reg A+ work for your business.
Scores of companies that couldn't raise capital in the old context will now prosper, boosting U.S. economic activity and employment.
The result: Venture capital is getting squeezed around the edges, and entrepreneurs have better options than ever before.
