Traditional IPOs Wane In Luster As Regulation A+ Brings Better Capital and Liquidity Options to Small and Medium Sized Growth Companies.

Rod Turner headshot

 

 

 

 

 

By Rod Turner  founder and CEO of Manhattan Street Capital, Crowdfundbeat Guest Editor,

For Growth Companies, Particularly in Tech, IPOs May No Longer Prevail

Here’s the position I took in my presentation at the Crowdfund Equity Conference this week: — While traditional Initial Public Offerings (IPOs) have long been considered the liquidity option of choice for emerging tech companies, other alternatives, such as the SEC’s new Regulation A+, may soon prove to be a better alternative.

 

I have monitored this area carefully since the launch of my company, Manhattan Street Capital, as the first mover in Reg A+,

 

Manhattan Street Capital (www.manhattanstreetcapital.com) has created a community-centric model to bring Main Street investors together with high-performing midmarket candidates for growth funding as the first mover (the FundAthena division launched in May 2105) in the creation of a program built upon Regulation A+.

Traditional IPOs are losing their luster. Here’s why:

The IPO market has been soft for the past several quarters, and the downturn in “Unicorns” (companies with $1B valuation) is another trend that highlights the need for a better solution than has been available before. Most IPOs have a lamentable record of delivering returns for investors whose only option was to buy in the open market after the hype and the rise of the initial launch.

This phenomenon results in drastic reductions in market value, often to as little as 50% of prices that are struck shortly after the opening.

A large component of the challenge of conventional IPOs lies in the high cost structure of brick and mortar underwriters who are languishing in an older and non-tech model. As long as underwriters carry these high cost burdens, the door to IPOs will remain an on/off game, dependent on wonderful market conditions to function, with an entry requirement too high for most to surmount—in fact, hot growth companies approaching $300 million in annual sales represent the starting point for conventional IPO prospects.

The second structural impediment to tech companies doing a conventional IPO is the sheer cost of the reporting burden—more than $2 million per year. We’ve needed a better way, and the SEC breathed a huge breath of fresh air towards hot tech companies in drawing up the new Regulation A+ rules.

Not only are the inherent costs of conducting a Reg A+ offering lower because broad marketing is allowed for the first time, but the post-offering reporting burden is dramatically lower as well. Add to that the versatility inherent in Reg A+ where a company can choose to do a Reg A+ IPO by listing their company on the OTCQB or QX, or opt to have their shares trade though smaller marketplaces in a less formal manner. In all, this illustrates clearly how Regulation A+ brings a better set of choices to the table.

As we introduce new cost-effective Web-based methods that blow away the old underwriter model, we bring real, positive change, for providing liquidity and growth capital to a whole swath of great companies that have been out in the cold for a very long time.

A Reg A+ offering provides considerable advantages over traditional IPOs. It allows private companies to efficiently promote their offerings for the first time in places you might not expect – social media, PR and advertising. With Reg A+ you can promote your business freely, so long as you stick to the facts and avoid hype and exaggeration.

The cost of making a Reg A+ IPO is much lower as well – just $300k for a sizable offering including marketing and SEC registration/legal costs). The costs of post offering reporting are lower, too–primarily the cost of an annual audit. In all, RegA+ enables us to provide an attractive alternative to the traditional IPO and the brick and mortar IPO underwriters.

In all, I firmly believe we are at the beginning of a strategic shift from the old, stodgy and expensive IPO, to the new tech, Reg A+ PO model for the next generation of the best tech companies.  Now is their time for a better fundraising future.

Rod Turner is the founder and CEO of Manhattan Street Capital, helping successful mid-stage and mature, low risk startups to raise the capital they need to scale faster under the newly-approved criteria of Regulation A+. Turner has played a key role in building six successful companies including Symantec/Norton, Ashton Tate, MicroPort, Knowledge Adventure, and ArtSlant, Inc. He is an accomplished investor who has built a Venture capital business (Irvine Ventures) and has made angel and mezzanine investments in companies such as Bloom, Amyris, Ask, and eASIC.

 

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