Reg A+ builds on promise but showing slow adoption

In 2017, 122 companies filed Regulation A+ (Reg A+) offerings and raised over $236.5 million collectively, building upon the early promise shown when the rules went into effect two years ago. Reg A+ is a less complicated and shorter process for a company going public than the traditional initial public offering (IPO) process. The 2017 Reg A+ offerings averaged $18.2 million each, according to a recent report by Amit Singh from the Stradling law firm, and include both Reg A+ Tier 1 and Tier 2 offerings. However, as the SSTI Digest recently reported about  equity crowdfunding, startups and other small businesses have been slow to adopt this new source of capital. Touted as a “game changer” by its proponents because it allowed companies to more easily raise money from non-accredited investors and market their mini-IPO over the internet, Singh contends he was surprised that there have been so few offerings.

At its core, Reg A+ allows U.S.-based companies to gauge their offerings’ appeal in the marketplace and raise up to $50 million over a 12-month period in growth capital from both accredited and non-accredited investors with significantly less regulatory red tape than the traditional IPO allows. This Security Exchange Commission (SEC) rule change was made possible under the JOBS Act of 2012 and made the previously underutilized Regulation A rule much more accessible to companies looking for new sources of capital.

While he was surprised about the slow adoption, Singh writes that the slow adoption was mostly because the rules were very new. He believes that attorneys, investors and companies are still learning about the process. However, he believes that as more institutional investors become familiar with the process, they will help drive the market for Reg A+ offerings.

In a recent blog post at FactRight, a website focused on third-party due diligence reporting and risk management, Brandon Raatikka highlights the continued growth that Reg A+ has had in Q1 of 2018 with 26 Tier 2 offerings. In comparison, between 2011 and 2015 the total number of qualified offerings was just 27 under the old Regulation A rules. Raatikka also reports that nearly 160 Tier 2 offerings were made between Q4 of 2015 and Q1 of 2018, with the majority of offerings focused in three industry sectors: manufacturing, real estate, and services.

Costs of filing Reg A+ offerings

Based upon his review of the Reg A+ offerings during the 2017 calendar year, Singh also found that the average company that reported costs associated with a Reg A+ offerings spent just over $93,000 in legal fees with an average reported audit cost of approximately $33,735. Other costs associated with Reg A+ offerings include sales commissions (an average of $1.8 million); finders’ fees (an average of $800,000); underwriters’ fees (an average of $1.3 million); promoters’ fees (an average of $529,630); and Blue Sky compliance fees (an average of $19,819).  These findings highlight the contention that Reg A+ is exhibiting a faster, easier way for companies to go public than the traditional IPO process.

Industries benefiting from Reg A+ offerings

A Forbes article notes that Reg A+ offerings were more concentrated in areas that investors perceived as having high consumer appeal versus all other types of industries. Angel investors, the article contends, are most likely to invest in a Reg A+ offering when the product appeals to consumers. This focus on investing in consumer-targeted products is mostly due to the concern angel investors have with the lack of research on these newer types of investments. The article lists specific areas that are poised to benefit from the continued growth of Reg A+, including: real estate offerings, medical/biotech products, IoT technologies, VR/AR products, wearable technologies, drones, alternative transportation, and gaming/eSports.

For more information about the impact of the regulatory changes included in the JOBS Act, please refer to our earlier Digest article on regulation crowdfunding that highlight its slow adoption, but potential growth moving forward.