I’ve recently given speeches at several conferences on the new Reg A+ rules. Invariably there are a couple of people who come up afterwards to let me know that they are thinking about doing a Reg A raise. My first reaction is “great, I think the new rules are fantastic for capital formation.”
Then I ask “why are you doing that?” Typically, there are two responses…
“I want to raise $25 million.”
Okay, fine, but you don’t need Reg A to do that. You can raise $25M with 506b or c. Heck, you can raise $250M with 506b or c. And 506b/c is a LOT less cost and a LOT less hassle.
“I want my securities to be liquid and tradable.”
Yes, technically Reg A securities are freely tradable. But in practice, not that much more so than Reg D securities (aside from the obvious non-accredited investor participation). We are about to see a number of alternative exchanges hitting the industry where investors will be able to sell and buy both 506b/c and Reg A securities.
Oh, you mean you want to get your securities listed on OTC or even NASDAQ? Great! But realize that;
- You need to get a CUSIP number for your securities (difficulty/expense rating = 2)
- You need to get your securities DTC qualified (difficulty/expense rating = 5)
- You need to go through the steps to get your securities listed on the desired exchange (OTC, NASDAQ) (difficulty/expense rating = 4 – 7, depending upon where)
- You need to find market makers and research coverage for your securities (difficulty/expense rating = 10+)
- You will need to commit to additional reporting and costs in addition to those associated with your SEC and state obligations.
Most Reg A securities, I believe, will NOT be traded on traditional exchanges. They won’t have CUSIP numbers or be DTC eligible. They will, instead, be traded on alternative online exchanges. And that’s fine, as it’s where the world is heading.
Regardless, since both 506b/c and Reg A securities will have liquidity options, then this comes back to the question at hand; “why do a Reg A?”
So, who is a Reg A offering right for?
I think it comes down to one simple proposition: it’s best suited for those issuers who want (or need) non-accredited investors. It could be just a way to raise capital, or, more appropriately, it could be part of a larger branding and marketing plan.
A great example of this is Elio Motors. They are a new automotive company that’s run a successful Kickstarter campaign and have raised quite a bit of institutional capital. Reg A enables their potential customers and brand evangelists to participate in the start of the company and help drive its success (pun intended), and for the company to issue tradable securities without the expenses of a full registration. We are seeing a number of B2C companies looking to use Reg A+ for exactly these reasons.
For everyone else, it probably makes more sense to stick with Reg D – especially 506(c) (see my previous article for a discussion of b vs c).
What about costs?
Reg A offerings are expensive in terms of both money and time. Here’s a quick overview (all approx.) –
RE: Broker-Dealer Fees
Short answer: yes, you need to use a broker-dealer to sell the securities, even to investors who find you directly from your marketing and general solicitation efforts.
Discussion: Per regulation, securities issued via Reg A Tier 2 are exempt from state blue sky review (just like 506b/c securities). This, to issuers and investors, is one of the best features of the new rules. However many states are very unhappy about it. They have other tools in their arsenal to make life miserable for issuers and to levy fines and even force rescissions of completed offerings.
Keep in mind that there are 50 “mini-SEC’s” at work here. They are chartered with protecting their states residents. Their first rule is to subject securities to blue sky review; but federal laws for Reg A Tier 2 (like 506b/c) preempt that. Their second rule is to control who is permitted to sell those securities to their residents. Each state has different “issuer exemptions” for 506b/c, which might (or might not) permit an infrequent issuer of securities to sell to their residents without using a broker-dealer or, alternatively, itself registering as a dealer. I understand that some states (e.g. MD, TX, FL) consider any use of “general solicitation” to invalidate any issuer exemption and require that securities can only be sold to their residents by securities dealers who are properly registered in their state (even though the securities are exempt from blue sky review, the act of selling them is not an exempt activity).
How does this affect Reg A Tier 2 securities? NASAA has stated that “most states require the agents of issuers in Regulation A offerings to register” as brokers and have appropriate securities licenses (e.g. 7, 63). Regulators never envisioned a world where securities marketed via general solicitation weren’t underwritten. And where the secondary trading of securities wasn’t on regulated exchanges or done through broker-dealer channels. Yet here we are.
- Can you market Reg A (or 506b/c) securities using general solicitation without being registered? Yes, clearly.
- Can you sell those securities to a state’s residents without being registered? No, probably not.
- And if you sell securities and later find out they weren’t sold legally…ouch.
Reg A+ is a fantastic new (well, updated+) alternative for issuers to use in raising capital. And it’s exciting for investors. Though it is expensive and certainly not for everyone. But for the right kind of B2C company, or the business who wants non-accredited investors as owners, it’s definitely worth considering.