Via Ferli Achirulli
Regulation A+ launched in June of 2015. It’s a promising new way for private companies to raise up to $50 million of equity capital from investors of all wealth levels worldwide and provide investor and insider liquidity. So, 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?
As the CEO of Manhattan Street Capital, (a Regulation A+ fund raising platform), I am in a good position to observe the performance and specifics of the Reg A+ industry, which I do on a regular basis. This 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 completed successful Reg A+ transactions and raised a total of $396 mill through the end of February 2017.*
Tier 2 Successes Through February 2017
Twenty Tier 2 offerings have completed for a total of $316 million raised, averaging $16 million 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.
The 80/20 rule applies here in that 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.
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.
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.
The rate of success will improve 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 companies were successful and raised $60 million, 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 million in Dec 2016.
A key issue that hinders companies making Tier 1 offerings is that 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. 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 Do We Go 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 funding success rate 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.
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 trendsetting offerings!
* 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
Keep me posted on your progress so I can include your success in my Reg A+ Updates.
This article was originally published on Forbes.
Rod Turner is the founder and CEO of Manhattan Street Capital, the #1 Growth Capital marketplace for mature startups and mid sized companies to raise capital using Regulation A+. Turner has played a key role in building successful companies including Symantec/Norton (SYMC), Ashton Tate, MicroPort, Knowledge Adventure and more. He is an experienced investor who has built a Venture Capital business (Irvine Ventures) and has made angel and mezzanine investments in companies such as Bloom, Amyris (AMRS), Ask Jeeves and eASIC.