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Securities Alert

September 25, 2017

Regulation A+ Offerings Offer a Path to Stock Exchange Listing

By Charles D. Vaughn, John M. Jennings, Andrew C. Nielsen, Benjamin M. Russell, N. Vincent Pulignano III

More than two years ago, the Securities and Exchange Commission (“SEC”) adopted new rules that expanded Regulation A to allow companies to offer and sell up to $50 million of securities in a 12-month period, commonly referred to as Regulation A+.  In June 2017, shares offered in a Regulation A+ offering were listed on a U.S. stock exchange for the first time.  Subsequently, four other Regulation A+ companies have listed their shares on a stock exchange.  These offerings serve as a reminder to smaller companies that Regulation A+ can give them access to a broad range of investors and a significant amount of capital faster and at a lower cost than a traditional IPO.  For a Regulation A+ company that elects to list its shares on an exchange, however, the costs of meeting the listing standards are considerable.  The most costly requirement for a company that lists its shares is that it must become a reporting company under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and will therefore incur the substantial ongoing costs that accompany that status.

Shares of the following five companies that conducted Regulation A+ offerings are currently listed on U.S. stock exchanges:

  • ADOMANI, Inc. (Nasdaq Capital Market: ADOM)  ADOMANI, a provider of advanced solutions for zero-emission electric and hybrid vehicles, filed the first Regulation A+ offering of shares that became listed on the NasdaqCM and began trading on June 15.  In its initial Regulation A+ offering, the company sold over 2.5 million shares at $5 per share, raising approximately $9.2 million in net proceeds.
  • ShiftPixy (Nasdaq Capital Market: PIXY)  ShiftPixy’s shares began trading on the NasdaqCM on June 30, raising $12 million in its initial Regulation A+ offering.  ShiftPixy manages employment compliance for part-time employees.
  • Myomo, Inc. (NYSE American (f/k/a NYSE MKT until July 27, 2017): MYO)  Medical-robotics maker Myomo, Inc. listed on June 12 and became the first company to go public on the NYSE MKT under Regulation A+.  Myomo raised $5 million in its initial Regulation A+ offering.
  • Chicken Soup for the Soul Entertainment (Nasdaq Global Market: CSSE)  On August 18, Chicken Soup for the Soul Entertainment, a self-proclaimed next-generation media company, was the first to list its shares on the Nasdaq Global Market.  The company raised $30 million in its initial Regulation A+ offering.
  • Arcimoto, Inc. (Nasdaq Capital Market: FUV)  Arcimoto is the most recent company to list its Regulation A+ offering, as it began trading on the NasdaqCM September 21.  Arcimoto, which designs and manufactures utility vehicles, raised $19.5 million in its initial Regulation A+ offering.

Consistent with the disclosures in their offering circulars, each of these companies voluntarily elected to begin reporting under the Exchange Act by filing a Form 8-A, thereby satisfying one of the conditions for listing shares on the Nasdaq Capital Market or the NYSE American.  The management of each of these companies apparently believes that the benefits of listing its shares on an exchange outweighs the increased burdens of being a fully reporting company under the Exchange Act compared to the lesser ongoing reporting requirements under Regulation A+.  (Note also that an Exchange Act reporting company is not eligible to do another offering under Regulation A+.)

These recent offerings demonstrate the benefits, and some of the drawbacks, that Regulation A+ can provide companies in raising capital.  Regulation A+ capital raises typically fall between traditional IPOs and private offerings under Regulation D.  Regulation A+ is divided into:

  • Tier 1 offerings, which may be up to $20 million per year and are subject to state “Blue Sky” review but lesser continuing reporting requirements than Tier 2 offerings, and
  • Tier 2 offerings, which may be up to $50 million per year and are exempt from Blue Sky review with greater reporting requirements than Tier 1 offerings.  

Like a traditional IPO, Regulation A+ enables companies to offer and sell securities to the general public (with a few restrictions) rather than having to sell only to accredited investors or a limited number of non-accredited investors, as required by Rule 506 of Regulation D.  Upfront and ongoing fees and disclosure requirements for a Regulation A+ company are much less burdensome than the upfront and ongoing fees and disclosure requirements for a company that engages in a traditional IPO.  If a company that conducts an offering under Regulation A+ elects to become a reporting company under the Exchange Act, however, (a) its ongoing costs as a public company will be the same as those for a company that has taken the typical IPO route, and (b) the smaller size of its public float and the corresponding lack of depth in its trading market may lead to greater volatility, as most of the five companies referenced above have experienced in the brief period in which their shares have traded.  The lack of liquidity may also preclude institutional investors from investing in the stock. 

Nevertheless, other key benefits of a “Regulation A+ IPO” include:

  • Maintenance of Control.  The broad investment base structure of Regulation A+ allows controlling shareholders to retain significant control over a company, compared to selling shares to institutional owners such as venture capital firms in a private offering.  Because a Regulation A+ offering typically raises smaller amounts of capital from a larger number of individual investors than in a private offering to institutional investors, which generally require some level of control along with their investment, ownership is spread out broadly and a company will not need to cede certain control rights as is typical in private offerings.
  • More Efficient Offering Process than a Traditional IPO.  Because legal and accounting costs are lower for a Regulation A+ offering than a typical IPO and companies usually move through the SEC review process in a Regulation A+ qualification more quickly than companies in a typical IPO registration, companies that conduct offerings under Regulation A+ can expect to incur materially lower overall expenses in the qualification process than in the registration process for a typical IPO.  In addition, a company’s ongoing reporting expenses will continue to be materially lower as well, unless the company (a) voluntarily elects to register a class of shares under the Exchange Act, as the companies referenced above have done, or (b) is required to register a class of shares under the Exchange Act because its public float exceeds $75 million (or, in the absence of a public float, it has annual revenues above $50 million). 

In conclusion, Regulation A+ provides an “IPO lite” option for small-cap companies that desire to list their shares on an exchange.  Companies that wish to raise less than $50 million should consider the benefits of Regulation A+, particularly if they have an engaged customer base that might be receptive to an opportunity to buy its shares.  A company should carefully consider the substantial ongoing reporting costs of electing to become an Exchange Act reporting company to enable it to list its shares on an exchange.  To date, the vast majority of companies that have raised capital under Regulation A+ have elected not to register the class of shares under the Exchange Act, have not listed their shares on an exchange and, as a result, have remained subject to the lesser ongoing reporting requirements under Regulation A+.

If you have questions regarding this publication, please call any of the lawyers listed below or your regular Nelson Mullins contact:

Jeff Allred: 404.322.6101 or at jeff.allred@nelsonmullins.com
Neil Grayson: 864.250.2235 or at neil.grayson@nelsonmullins.com
John Jennings: 864.250.2207 or at john.jennings@nelsonmullins.com
Janis Kerns: 202.712.2813 or janis.kerns@nelsonmullins.com
Daniel Nunn: 904.665.3601 or at daniel.nunn@nelsonmullins.com
Jim Rollins: 617.573.4722 or at james.rollins@nelsonmullins.com
Brennan Ryan: 404.322.6218 or at brennan.ryan@nelsonmullins.com
Douglas Spear: 404.322.6266 or at doug.spear@nelsonmullins.com
Jon Talcott: 202.712.2806 or at jon.talcott@nelsonmullins.com
Charles Vaughn: 404.322.6189 or at charles.vaughn@nelsonmullins.com