Regulation A+ is an updated securities regulation that allows companies to raise up to $50 million from accredited and non-accredited investors worldwide. 157 companies have raised $1.5 Billion via Reg A+, ranging from $1 mill up to $50 mill, averaging in the low teens.
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 (TATE and SYMC). I also built a VC firm. I've made over 40 angel and mezzanine investments in private companies (including INFN, AMRS, Bloom Energy and Ask Jeeves).
I have focused on Regulation A+ for four 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 are opting in favor of Reg A+ are viable candidates for VC. Regulation A+ is emerging as the superior choice in the following circumstances:
1) You want to maintain direct control over your company's strategy and future. With Regulation A+, the CEO has control over many aspects of their offering destiny. You select where you will list your stock after the offering or if you will list it at all. 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 how their business gets managed in the future.
2) Early, low-cost IPO. While Reg A+ can be a direct method of taking a company public to the NASDAQ, venture capital cannot do so directly. 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 can also retain flexibility - if you don't reach the NASDAQ minimum, 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. If you are far away from a Venture Capital hub, VC is pretty much unavailable. 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+ process of marketing to thousands of investors adds to the reputation of the company and its 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 the price of your company (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 local VC friends how they will take to that!
6) Mid-stage companies. Most mid-stage companies are too far along to be appealing to VCs. In many cases, they are also too small to be attractive for Private Equity firms. Regulation A+ is a uniquely good option for mid-stage companies that offers a fresh and less costly approach. Getting access to growth capital and liquidity for a $50 million business growing 40% per year at a favorable valuation can be a breath of fresh air.
7) 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. Of course post offering liquidity is limited when a company does not list on a major exchange. Some companies (mostly those making real estate offerings via Reg A+) provide direct redemptions to their investors on a limited basis. If investors or employees need liquidity, Reg A+ can deliver it much earlier. Reg A+ is a viable solution for VC firms that have accumulated numerous portfolio companies that are waiting for a liquidity event.
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 business. 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 a little squeezed around the edges, and entrepreneurs have better options than ever before.