Every week I speak with issuers and their advisers about their plans for Reg A offerings. The conversation often drifts to “should we list on an exchange?” and “how do we create liquidity for investors?”
This, in my opinion, is the wrong conversation.
Reg A is awesome. But it’s not really about creating secondary market liquidity for investors.
· It’s for raising capital; and,
· It’s for galvanizing your base of customers, vendors, partners, & users and turning them into owners and fanatical brand evangelists!
Sure, it can also be an intermediate step towards becoming a fully reporting, exchange listed company, but that’s later in a company’s lifecycle. That’s not the “now”.
Reg A securities have significantly lighter filing and ongoing reporting requirements than “fully reporting” entities, are sold on a best-efforts, min/max basis, and are “unrestricted” (meaning any investor can sell them to anyone they want, at any time, with no restrictions…unlike 506-D or 4(a)(6) securities). There is no requirement that you list them on an exchange.
Listing your securities requires stringent annual reporting requirements and allocating resources to court research, broker & institutional support, which can be problematic as Reg A stocks are, for a number of reasons, unlikely to obtain traction with analysts or institutional investors in the secondary market. And that’s okay, because it’s not why you’re doing this.
Investors, by and large, are NOT investing in your company for a quick market-based pop in the stock price. They are investing because they are passionate about your business and want to be part of the journey. This is why most investors want to hold your stock directly, in their name, and not in a brokerage account.
So, to repeat a section from my last blog, what should an issuer do? I think there are three choices;
- Don’t worry about secondary liquidity. Your company is raising money to build and grow, not to provide immediate market-driven upside to investors (that may come later). If an investor does need to liquidate/sell, let them go to one of the alternative auction/listing websites that are coming online such as ASMX, CTTauctions, CFX, and FNEX and see if they can find a buyer;
- List on OTCQX, don’t spend time and resources encouraging brokers to solicit investors or write research, and let investors buy securities on an unsolicited basis; or,
- List on OTCQX and go through the process & expense of getting Blue Sky registered in all states and have the CEO hit the road to court research and market makers.
But, no matter what, enjoy the fact that you’ve raised capital for your company and now have a large base of passionate owners!