Reg A Success Stories

At Dealflow’s Crowdfunding Conference in NYC last week one of the speakers (a good friend of mine) said that only 2 Reg A+ offerings thus far have closed (been successful), one in real estate (Fundrise) and one in automotive (Elio Motors, a FundAmerica/StartEngine/Hambrecht/Jumpstart customer).

That’s incorrect.

FundAmerica has, thus far, been a technology and compliance service provider to 11 Reg A+ offerings. Of those, 3 have “failed”, meaning they did not reach their minimums and investors were refunded from escrow. Of the other 8, 6 have met their minimums (and started receiving disbursements from escrow even as they continue to raise capital) and 2 are just launching this week which I am extremely confident that they too will hit their minimums and, thus, be successful.

So, 8 out of 11 are “successful” offerings. Of those, only 1 is now listed (Elio, on OTC). The others are not going the route of DTC qualification and trading. They are doing the job intended by the issuers: raising capital and creating an engaged base of customers-as-owners.

This brings up a discussion that I started awhile ago…
How should we, as an industry, define “success” in Reg A+, and what is the best use of the exemption?

I continue to believe, and the market has thus far proven, that dreams of generating enough momentum for an out-of-the-gate listing on OTC or NASDAQ are, for the most part, foolish and premature. There will be some exceptions to this, of course, as Elio has shown and as another soon-to-launch offering will likely show. Those offerings have either a ridiculously huge and passionate base of investors or solid institutional support that is coupled with decent retail (crowd) interest. But that isn’t most offerings; very few, in fact.

Reg A is, to me, a stepping stone in a company’s capital-markets life cycle. It’s best suited for businesses that have previously raised some capital, who have a real product and are generating revenue, and who want to either raise some pre-IPO capital and/or start engaging a retail/crowd base of investors in their company. “Success” won’t be defined by if or how it’s trading on OTC or NASDAQ but, instead, by the fact that it successfully raised some amount of capital and/or created terrific marketing traction. Some will be common equity, some will be pref’d (such as real estate Reg A offerings where they declare minimum investor returns), and some will be debt. They will remain, as intended by rule, “unrestricted private securities” and not IPO securities as most crowd-investors don’t really care if you plan on publicly trading your stock or not, as that’s not why they are buying it. At some point we will see traditional institutional investors become interested in Reg A offerings, but until then it’s a tough road to build enough of a base and market enthusiasm for a listing.

Then, as the company grows, it can ultimately decide if it wants to take the next step in the capital markets by filing an S-1, doing an IPO and listing on OTC or NASDAQ. This, in my opinion, is the most responsible path for the majority of potential Reg A issuers...use Reg A to raise capital and engage your base, and work towards maturing to the point where you can attract the interest of institutional investors and responsibly afford to be a “fully reporting” company.

So, has Reg A been successful thus far? Yes, absolutely! Numerous businesses in automotive, medicine, aeronautics, brewing, gaming, and real estate have raised money and engaged their customers, suppliers, employees and business partners using Reg A. Are any of them trading on an exchange? Other than Elio, none of them are, and that’s a good thing as they aren’t ready for it.

Industry professionals need to set expectations on this. The lesson has already been learned that without a strong (VERY STRONG) marketing commitment from and by the issuer directly, regardless of which brokers or platforms are involved, the offering will (“will“, not “might“) fail. Even with that, the realities of how much will actually be raised or how long it will take to raise it have categorically shown that the answers to those will be “less than overly-enthusiastic people had hoped” and “longer than anyone expected“. But, in the end, if structured correctly for the intended audience and if marketed correctly to that audience, then the company will get some capital and the crowd will become part of the ownership. The offering will have been a success

Oh, and I would **LOVE** to name all the successful issuers using FundAmerica’s services, but my General Counsel is locking me down on that for fear that some regulator will misconstrue that as “soliciting” or “recommending” them as investments. {sigh} So we at FundAmerica and FASTransfer will just keep doing what we do: quietly & efficiently helping hundreds of issuers, broker-dealers, platforms, portals, and investment advisers frictionlessly, and in compliance, raise and manage billions of dollars in capital from tens of thousands of investors via our technology and back-office services.

 

 Scott Purcell
CEO
FundAmerica, LLC

 

About the Author: Scott Purcell is the CEO of FundAmerica, a fintech services provider to the emerging equity and debt crowdfunding industry. His firm provides escrow, payment processing, and compliance technology for numerous broker-dealers, investment advisers, portals and others who make a business of online capital formation pursuant to rules now in effect thanks to the  JOBS Act. FASTransfer is the only tech-driven SEC registered transfer agent focused on the crowd-industry. He is an active Board member of the Crowdfunding Intermediary Regulatory Association (CFIRA) and the author of the book “The Definitive Guide to Equity and Debt Crowdfunding” as well as the “Industry Best Practices for Funding Portals”.

Legal Disclaimer:
These materials are my personal opinions and for informational purposes only and not for the purpose of providing legal or tax advice. I am not advocating, advising or recommending anyone purchase any specific or general investment of any type, ever. The issues discussed include complicated areas of law and legal advice should only be obtained and relied upon from a securities attorney about your specific circumstances.

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