A leading financial adviser to middle market and Fortune 1000 companies believes the recently released Regulation A+ rules and a shift in IPO activity is turning 2015 into an interesting year for companies in search of financing and growth.
Alex Castelli is a partner with CohnReznick LLP in New York and is a leader of their Technology/Life Sciences Industry practice. Mr. Castelli assists clients with SEC reporting, Sarbanes-Oxley compliance, financial and advisory services.
Mr. Castelli spent some time discussing a few of these issues with Bankless Times.
Mr. Castelli is encouraged by the provisions included in the Regulation A+ package, saying it provides other options to private companies. The higher limits and two tiers may make it more cost effective and timely, he said, while adding it is a plus to broaden the investor base to include non accredited investors.
The $20 million cap on Tier I will be helpful, but the lack of a state preemption could limit its effectiveness, even though the coordinated review at the state level should help, Mr. Castelli suggested.
For Tier II he said the challenge is the required SEC review.
While Mr. Castelli conceded the impact of Regulation A+ has yet to be seen, it would not take much effort to eclipse the contribution from Regulation A. Regulation A was rarely used because of the high ratio between the amount of time and effort it took to, among other things, comply with state reporting requirements and the low dollar amounts allowed under the regulation.
Mr. Castelli expects Regulation A+ to begin having a tangible effect by mid-summer.
In terms of potential revisions that could come when it is reviewed in two years, Mr. Castelli suggests taking a wait and see approach. He suggests watching outcomes from Regulation A+ for up to a year to see how it is handled in practice and to determine its effectiveness in loosening of some of the disclosure requirements.
Middle-market activity as a barometer of economic health
Middle-market activity is an accurate indicator of overall market health because the middle market cap range of $10 million to $2 billion encompasses a significant portion of economy, Mr. Castelli said.
“The middle market has always been a good indicator of growth,” he added “Companies who are adding jobs and expanding are coming out of the middle market. We have always believed in the middle market.”
IPO activity down substantially this year
The 32 IPOs so far in 2015 is a 57 percent decline from the 71 which took place in the same period last year, Mr. Castelli said.
“(Last year) was a good year. The pipeline was full heading into (it).”
Mr. Castelli explained that before going public, companies have to look closely at their valuations and consider alternatives to going public such as private equity and venture capital.
Can Regulation A+ fill the gap between startup funding and an IPO?
“I think you have to go by each industry,” Mr. Castelli advised. “Smaller IPOs are different for a number of reasons. They are expensive and time consuming. In order to have a effective offering you have to have effective aftermarket support which is hard on small IPOs.”
Mr. Castelli added there is a high amount of consolidation in technology and other industries. Big companies are buying startups to get their technology and taking them off the market in the process.
“That’s part of the option companies have now,” Mr. Castelli explained. “Do they get acquired by a strategic buyer? What’s their plan going forward? It’s no longer just the traditional IPO process to look for capital or to look for an exit.”
What are some best practices for companies considering an IPO?
Start with the fundamentals, Mr. Castelli advises. Build a strong company by focusing on customer acquisition, revenue growth and a good management team who focuses on solid governance. Your options increase as your company grows stronger, he said.
Your decision on whether or not to go public depends on how it plays into your plans for your company he said.
“Why would you raise capital?” he asked. “It has to fit into your plan.”
A company considering an IPO should carefully assess where they currently are and where they plan to go, Mr. Castelli said. Look for gaps and quickly address any you find.
From a financial reporting point of view, make sure you have the finances to get through the expensive IPO process, he said.
“There’s a lot involved in going public,” Mr. Castelli said. “Make sure you have the right advisers and make sure you have a strong team inside your company and out.”