Against the backdrop of a surging stock market which set a number of all-time highs during the year, we have clearly seen the ability of the market to fulfil its primary purpose – the generation of capital – as evidenced by a number of capital transactions and notable IPOs.
But underneath all the IPO and market headlines in 2017, we also witnessed a consistent uptick in interest for alternative funding mechanisms that provided the individual investor with increased access to a wide array of new opportunities previously unavailable to them – in particular, an alternative channel of public finance through Regulation A offerings.
Expanding the Individual Investor’s Tool Kit Opens New Investment Opportunities
I believe providing investors with greater investment choice is vital to efficient capital formation and the healthy function of the markets. One example where improved access is creating new choices and opportunities is offering investors direct access to companies earlier in their respective growth cycles, a domain once solely reserved for professionals or the well-qualified investor. This access is being provided by Regulation A.
Regulation A presents investors with the opportunity to invest in growth companies with the potential to generate significant capital appreciation and returns resulting from subsequent NYSE/NASDAQ listings traditionally available only to institutional capital like private equity firms.
An important distinction here, and one that clearly sets Regulation A apart from other forms of alternative direct funding mechanisms typically reserved for less mature organizations such as crowdfunding, is that all Regulation A deals are qualified by the Securities and Exchange Commission (SEC), which means that it has reviewed the offering for adequate disclosure and reporting.
This process, as well as the amounts generally being raised by these issuers, means typically more mature companies with disciplined business models are utilizing it. Therefore, I believe Regulation A opens a new investment frontier for the retail investor and will achieve greater prominence in 2018.
So, What is Regulation A?
Regulation A (“Reg A”) has existed in one form or another for over 80 years, but it wasn’t until Title IV of the Jumpstart Our Business Startups (“JOBS”) Act that it would have viability in today’s market.
The JOBS Act, signed into law by President Obama in 2012, was created to ease regulatory restrictions to encourage startups and small businesses to create jobs and stimulate the economy.
In June 2015, Reg A+ emerged, introducing a two-tiered system (Tier 1 for deals up to $20 million and Tier 2, the most common Reg A+ offering type, up to $50 million) and providing an alternative path to the traditional initial public offering, which makes it easier for smaller, growth companies to tap into the capital markets and raise additional funds to expedite their growth plans directly from retail investors.
According to FactRight’s Reg A+ research, since June 2015, 203 Reg A+ offering statements have been filed and 143 have been qualified by the SEC, with more than 40 through the first half of 2017 alone (source: http://blog.factright.com/interact-with-factrights-reg-a-database). The appeal of Regulation A+ has been embraced by issuers across a wide spectrum of industries – such as manufacturing, real estate, pharma, and retail – all seeking to tap into the capital markets by raising funds directly from individual investors under the watchful eye of the SEC.
Looking Into 2018 and Beyond
Based on the increasing number of Regulation A+ filings currently pending SEC review and the brisk pace of SEC-qualified offerings coming to market from issuers across multiple industry segments, it’s clear that interest in Regulation A+ is growing. So, what will 2018 look like? Will this positive trend continue, and will issuers utilize Reg A+ to attract the attention and investable funds of individual investors?
I think the answer is “yes” for a variety of reasons including:
- The U.S. economy has been steadily improving as we continue to see positive job data and stable to slightly increasing median household income levels, bolstering issuer and investor confidence and outlook;
- To support additional economic growth, the House Financial Services Committee recently passed 23 bills aimed at further spurring growth in the economy which in turn, can fuel the need for growth capital by companies of all sizes;
- As the current administration continues its commitment to de-regulate the U.S. markets as outlined in the U.S. Treasury’s Second Report on The Administration’s Core Principles of Financial Regulation, Regulation A is one focus area. The report outlines the administration’s desire to further ease restrictions on capital formation activities of early stage and small businesses by reducing the burdens of the capital markets, in particular, promoting greater usage of tools such as Regulation A by issuers by increasing amounts that can be raised under Reg A in a 12-month period, extending its use to already public companies and increasing liquidity for Tier 2 Regulation A offerings by exempting them from the onerous state-by-state “blue sky” registration process; and,
- Congress does appear to be listening to some degree to these recommendations as two bills to increase caps and open Reg A to already public companies appear to be making their way through the review process.
At the same time, the current climate in Washington will have a major impact on much of this as Congress works to bridge the gap across the aisles and reach a consensus on many reform proposals.
That said, I am cautiously optimistic and excited about what 2018 has in store for Regulation A and the companies that will utilize it as a powerful, flexible tool to gain access to the capital they need to grow and expand their businesses – thanks to a more clearly defined and less burdensome set of restrictions. For investors, they too are benefitting from Regulation A and the access it grants to a myriad of new investment opportunities previously not open to them.
As we enter 2018, there are sure to be both positive and negative market and economic developments, but I firmly believe that Regulation A (Reg A+) investments will greatly complement a well-diversified investment portfolio.
With that said, remember, not all Reg A+ deals will be right for every investor. There are risks with any investment, whether public or private, and it is up to the individual (and perhaps their respective financial advisors) to glean information from company materials, SEC filings, industry and financial research, and governance practices, etc. to make informed investment decisions.
Although Reg A+ removes a number of costlier requirements imposed by the SEC, each offering still must have its disclosure reviewed and each issuer is subject (under Tier 2 of Reg A) to ongoing reporting requirements.
Through the combination of diligent investing practices and the increased access to opportunities created by Regulation A+, investors can now potentially fund the next great start-up that perhaps, one day, will be the next headline-grabbing IPO.