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September 25, 2017
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:
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:
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:
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+.
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