The Pros and Cons of Regulation A+

By Nate Nead, Meritharborgroup.com,

REG A+ VS. S-1 VS. REVERSE MERGER: ASSESSING YOUR OPTIONS FOR A RETAIL PUBLIC OFFERIN

As many already know, we also operate reversemergers.com and crowdfund.co. As a result, we likely kiss more frogs than we would like to admit. In almost 90% of cases, potential issuers will likely see me as the Debbie Downer. That is, I talk most off the ledge for going public via reverse merger, S-1 or performing a Regulation A+ offering via Form 1A. Each public offering type has its place in the world, but very few companies fit within each of these well-defined buckets. Every VC andcrowdfunding consultant out there is on the prowl for the next unicorn investment, but that still means a relatively small proportion of companies fit the mold.

If I were asked to rank  between these various alternative public offering types, I would likely order them as follows:

Regulations-Concept-242x154

 

Regulation A+ > Traditional S-1 > Reverse Merger

Let’s discuss some of the differences, including pros and cons of each so we know what types of company might fit within the proverbial bucket.

REGULATION A+

Title IV of the JOBS Act, also known as Regulation A+ or Reg A+ represents a new (and very well-promoted) form of offering stock to non-accredited, retail investors. The price: filing a couple years’ audited financials and getting a knowledge and reputable attorney to file the Form 1-A. There are two options for Reg A+, which provides a bit more flexibility.

One of the big benefits of Reg A+ is the ability to “test the waters” prior to shelling out the coin for attorneys and accountants to prepare your offering. A product or product design that has broad-based appeal and an existing network of potential users could–within the confines of what is allowed by SEC law–test the efficacy of a Reg A+ campaign before actually collecting any money and signing-up any investors. This option alone significantly reduces the downside financial risk. In addition, Reg A+ also bypasses most individual state Blue Sky laws, allowing issuers to generally solicit without having to register securities individually in each respective state. Not even an S-1 filing has that feature. This is extremely important, especially as most Reg A+ offerings will likely involve some form of web portal which will expose the offering broadly. Companies are also able to sell their own stock in a Reg A+ offering directly on the company’s website.

While a Reg A+ offering can be sold to retail investors, the stock is completely illiquid. It lacks a ticker symbol and has no publicly-traded float. This means companies that perform a successful raise through Reg A+, who want more liquidity to their stock, will need to work with a knowledgeable attorneys and investment bankers to move from Reg A+ over to a non-reporting public company.

Note: There is a special transaction structure that provides a simple, less-expensive method for obtaining immediate liquidity, by giving you a Ticker Symbol and DTC clearance on the OTCQB (not the pink sheets) without the need for a typical S-1 or reverse merger. This special structure then allows for further capital requisition through the power of the public markets. It also gives your initial investors a greater incentive to invest. A great, very recent example of this is Elio Motors

TRADITIONAL S-1

Often referred to as a direct public offering (DPO), a direct offering or a direct shareholder offering, a traditional S-1 is just like the famous IPOs often promoted in the media. Like a typical IPO a form S-1 is filed with the SEC, registered the desired shares. As part of this process, the company files PCAOB-audited financials, obtains a CUSIP# and applies for a ticker symbol. Most often these companies are listed on the over-the-counter exchange.

We are not talking about NASDAQ or NYSE in terms of size, pomp and hype, but many of the same Sarbanes-Oxley reporting requirements still apply. In addition, the annual, on-going reporting requirements are much more onerous than a Reg A+ offering (annual reporting for Reg A+ is only twice per year). With an S-1, you are somewhat pigeonholed in that you cannot go back to Reg A+. Michael Williams rightly points-out that existing, trading public entities are precluded from participating in Regulation A+.

REVERSE MERGER

In a reverse merger, a private company, registered as a C-corp, acquires a clean, trading public shell and “reverses” its business into the public vehicle. While we do operate reversemergers.com and have experience in this field it has become tainted through the years with foreign deals, pump-and-dump schemes and other fraudulent activities.

When it comes right down to it, reverse mergers are typically a terrible route for most small businesses. Unless you are willing to shell-out between $300K to $400K for an existing, clean, DTC-eligible public shell, there is a likelihood that even your shell is hiding something (e.g. convertible debentures, litigation/regulator liabilities, etc.). Perhaps the greatest benefit to a reverse merger is speed. A company that wishes to be fully trading and reporting can do so in a matter of weeks. Of course, there is a premium paid for the increased speed.

CONCLUSION

Both Traditional S-1 and reverse merger offerings often lack quality market makers and the support of institutional investors willing to create a public float that is commensurate with a highly-successful underlying business. Reg A+, traditional S-1 and reverse mergers have their place in the world and there is no one-size-fits-all scenario for capital financing.

While Reg A+ may offer benefits above other alternative public offering methods, the best route is to first focus on building a quality business that can act as a good platform for scalable growth. This includes the right people, systems and processes to create a real company. Most investment banks will only work with companies above a very specific size threshold. We could waste a great deal of time working with startups that have nothing more than an idea and a prayer. Like investors (both retail and institutional), we too prefer companies that have existing, profitable operations.  If the idea, team, intellectual property or potential backers are compelling enough for a startup, then Reg A+ can be a good option for issuers.

Note: As always, this is not legal, investing or accounting advice. Please consult with knowledgeable professionals when making business and investment decisions. 

Source:

http://investmentbank.com/alternative-public-offering-options/

Tags: , , , , , , , ,

nov2017-fintech confernce-dc

HEADLINE NEWS

KMOV.comCraft breweries start lofty crowdfunding campaign to take over Anheuser-Busch InBevKMOV.comNo money is actually being collected. On the website where you can pledge between $10 and $1000, it says "we'll be in touch if somehow, miraculously, against every odd, the $21 [...]

LeaflyCrowdfunding Site Cancels Aid to California Wildfire Victims ... - LeaflyLeaflyWith the most devastating wildfire in California history laying waste to its members' homes and livelihoods, the California Growers Association responded in the ...and more » [...]

Phoenix Business JournalCrowdfunding comes to Arizona real estatePhoenix Business Journal“The new crowdfunding legislation has empowered all Arizonans with the opportunity to invest locally in business startups, which had been for decades, reserved for only qualified investors. Neighb [...]

ForbesThe Recipes For Crowdfunding Success On Kickstarter -- And What To AvoidForbesConversely, how should we analyze the crowdfunding flops like the Cuppress, a coffee capsule sealing machine which is both economical and user-friendly? Too little is known about the recipes for a succ [...]

RecodeCrowdfunding site Indiegogo will now let you sell products as it shifts ...RecodeIn the past, entrepreneurs on the crowdfunding site Indiegogo could offer contributors a gift in exchange for cash. Then a year ago, they could begin offering ...and more » [...]

Food & Wine (blog)Crowdfunding Campaign Seeks $213 Billion to Buy Anheuser-Busch InBevFood & Wine (blog)With a goal that is impossible to reach, "Take Back Craft" (as the crowdfunding campaign is called) is admittedly a marketing campaign first. Jokingly, this " [...]

EW.comAdam Goldberg launches crowdfunding effort for Hebrew Hammer sequelEW.comFourteen years after Adam Goldberg first donned the Jewish crimefighter's overcoat and yarmulke, the actor is ready for another round. Goldberg, director Jonathan Kesselman, and producer Harrison Huffm [...]

Medical XpressBrain activity predicts crowdfunding outcomes better than self-reportsMedical XpressYoon and colleagues measured people's neural activity with fMRI scans while they performed a task selecting which documentary films to support on the popular crowdfunding site Kickst [...]

City A.M.Brewdog launches fifth equity crowdfunding round to fund new breweries and global growthCity A.M.I report on vice, leisure, the creative industries, luxury and white collar crim [..] Show more. Follow Alys. Alys Key. Brewdog's latest round of equity crowdfunding has now [...]

Researchers turn to crowdfunding to save endangered parrotEconomic TimesHe said as it was hard to get conservation funding, the researchers were turning to crowdfunding to help bankroll a device which helps protect the parrots in their man-made nesting boxes - also funded by the publi [...]

CFB Finance

Marketwired

  • Crowdfunding
  • Crowdfund
  • Peer to Peer Lending
  • FinTech
  • Reg A+
  • Reg CF
  • Crowdfunding USA

Press Release

Live Crowdfunding .tv

What's Next Step in Regulation A+ JOBS ACTS Title IIII :L Interview : Steve Cinelli with Brian Korn Securities and Crowdfunding/Peer-to-Peer Lending Lawyer, Watch more video library | Conference | Interview | Campaign Showcase | Research | Education |