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Regulation A+ launched in June of 2015. It's a promising new way for private companies to raise up to $50 mill of equity capital from investors of all wealth levels worldwide and provide investor and insider liquidity. In the 20 months since launch, how has Reg A+ performed? What are the results, the characteristics of successful offerings, the costs, and what approaches are companies taking? What lessons can we glean from their experiences?
The momentum is building for Regulation A+
Vitaliy VodolazskyyThis analysis focuses on the Reg A+ offerings that were successful at raising all or nearly all the capital they were seeking from June 2015 through February 2017.
First the punchline: Thirty-two companies have had successful Reg A+ transactions and raised a total of $396 mill through the end of February 2017.*
The early stages of the Regulation A+ capital raising process are pretty easy to track. Many companies file publicly with the SEC on EDGAR, and even confidential offerings have to open for public viewing a few weeks before going live to investors. But instrumenting the completed Reg A+ offerings is a far more difficult task.
Note that tracking the outcomes of Tier 1 offerings is relatively easy because the SEC requires companies to report on completion of their offerings. Tracking Tier 2 offerings is far more difficult because Tier 2 companies are not required to file a public statement upon completion. I have seen some analyses of Reg A+ offerings that erroneously report only on Tier 1 offering as if they were the entire Reg A+ market.
This is my first assessment of successful Reg A+ offerings. Overall I see good results for what is a rather sophisticated and highly regulated new capital market, and one that inverts many old maxims dating back to 1934. Changes of this magnitude take time before awareness reaches critical mass.
Tier 2 successes through February 2017: Twenty Tier 2 offerings have completed for a total of $316 mill raised, averaging $16 mill each with a success rate of 26% in raising all or nearly all the capital intended. This rate is actually higher than I expected, as I have seen many planned offerings that did not have a chance of engaging consumer investors (a necessity at this stage) in sufficient scale to succeed.
Overall, Tier 2 dominates at 80% of the capital raised to date. This is no surprise, because Tier 2 frees companies from the burden of filing for Blue Sky exemptions on a state-by-state basis, saving time and expense, and is suited to more mature companies with its $50 mill maximum.
*Researching and compiling the data in this article requires assumptions, estimation, and interpolation.
Tier 2 entrants tend to be more established than in Tier 1. Thirty-two percent are in revenue mode. Fifteen percent are cash flow positive and they average 30 employees. Sixty percent of Tier 2 offerings that are started persist through their journey and achieve SEC Qualification. This is a high proportion given the amount of learning inherent in Regulation A+ and reflects that Tier 2 holds fewer surprises during the filing process, compared to Tier 1.
Thirty-five percent of Tier 2 companies utilize testing the waters. Average SEC legal filing costs are $127k for Qualified offerings and SEC Qualification takes 78 days, on average, with the fastest completion occurring in just 55 days. The SEC has shown great responsiveness to Reg A+ offering companies and provides consistent and helpful responses. The process is far less intimidating in practice than many may assume.
Average audit costs of $29k indicate a mix of early stage and mid stage companies. Fees from selling agents averaged 7% of capital raised, excluding consumer marketing costs (which are not reported, but in my experience range from 2-5%, not charged as a percentage, of course). Broker-Dealer involvement was relatively low, at 23% for Qualified Tier 2 offerings, there is good upside here from engaging them for more transactions. 10% had selling insiders, selling 21% of the offering amount. More insider selling than I expected to see.
At least half of the Reg A+ offerings that have been started to date overall, were misfits in my view, meaning that the 26% success rate is more like a 50% success rate for offerings that had a chance from the get-go. The rate of success will improve rapidly over the next year as all parties apply what they have learned about the success model for Regulation A+ which is, let’s be clear, fairly complex and new to professionals and completely new to Issuing companies.
Tier 1 successes through Feb 2017: Twelve entrants were successful and raised $60 mill, averaging $5 mill each, which amounts to 20% of the capital raised in all of Reg A+. This is a 24% win rate, which is pretty good for a nascent industry. Of those, 80% are banks, which are the dominant entrants in Tier 1 so far. One is a Med-tech footwear and seat company that raised its intended $1 mill in Dec 2016.
Legal filing fees averaged $70k but ranged up to $150k and above because of the expense of satisfying State Blue Sky filing requirements. Only 4% used the testing the waters option in which companies can freely market themselves to assess how well they appeal to the investor community, confirming other indications that this marketing option is not yet being used much, or used effectively. Audit costs are $13k, on average, indicating early stage companies. Only 13% of SEC Qualified offerings worked with a Broker-Dealer, leaving upside for the value add that Broker-Dealers and Syndicates can bring.
Why so many banks, and why so few other types of businesses? Some banks are exempt from State Blue Sky requirements, and many banks are inherently local, which makes them able to raise capital from their local community in a handful of States. So they are a natural fit for Tier 1. A key issue that hinders non-bank companies in the Tier 1 route is that many states require audited financials, thereby removing one of the key advantages of Tier 1 being that in theory, there’s no audit required.
In addition, many states are very slow at processing Blue Sky filings. Some require a pass/fail “merit review” (California is one key example) where bureaucrats decide if they like the risk/return profile of the Issuing company, and they can easily decide that your startup should not be allowed to raise money in their state. This uncertainty, delay, and the resulting legal expense make Tier 1 unattractive to many companies. Tier 2 wins out. The current successful offerings raised capital in an average of six States.
Where to from here? As the market matures and the industry learns optimum methods, and as it becomes more selective as to which companies are suited to succeed using Reg A+, we will see the funded success rate gradually increase to the 40+% range overall, and higher on professional funding platforms and with Broker-Dealer Syndicate participation.
The biggest influence on near-term success will probably be the participation of the more mature companies that Reg A+ is ideally suited to, which I am seeing enter Reg A+ in increasing numbers. One company I know that is moving towards Reg A+ has revenues exceeding $100 mill per year. It won’t take many successful offerings for companies like this before accredited and institutional investors perk up and engage proactively in the Regulation A+ market.
The other major factor in the growth of Regulation A+ is that we are breaking through the awareness barrier built on 83 years of certainty that what Regulation A+ does has been simply not allowed. Conventional wisdom takes time to shift.
When we see the second and third big and exciting Reg A+ offerings succeed, perhaps one with an IPO to the NASDAQ, we will probably experience a large surge in awareness that will accelerate growth of this fledgling industry. At this stage, the pumps are nicely primed and ready for that development. My forecasts indicate that Reg A+ will be a $50 bill per year capital raising market in four-five years. So let’s bring on those two trendsetting offerings!
Click here for more details on successful Reg A+ transactions.
* Please note that researching and compiling the data in this article requires assumptions, estimation, and interpolation. I do my best to provide a balanced and reflective set of data herein.
See the SEC report through October 2016, which is one of the sources for this article.
