For those not yet aware, Regulation A+ is a revamped securities regulation that went into effect at the end of June 2015, allowing companies to raise up to $50 million from accredited and non-accredited investors worldwide. As of Jan 31st 2017, 25 companies have raised $250 mill so far, starting with the first in Fall of 2015. These offerings ranged from $1 million up to $20 million and averaged $10 million. Ten percent included insider selling benefiting investors or founders.
New sources of capital, such as Regulation A+, are vital for company growth. In many cases, Reg A+ is a far better choice than traditional Venture Capital , and my research indicates this is a sizable trend that will accelerate over the next four years, building this industry to more than $50 billion per year of capital raised.
I have personally raised funds from VCs, including John Doerr at Kleiner Perkins, David Strohm at Greylock, and Mike Levinthal at Mayfield for three companies – one of which we took public on the NASDAQ (Symantec) and two of which we merged public. Additionally, I was involved in one IPO to the NASDAQ for a startup that was bootstrapped with no outside capital (Ashton-Tate). I’ve invested in leading VC firms and also built a VC firm, Irvine Ventures. I’ve made some 40 angel and mezzanine investments in private companies (including INFN, AMRS, Bloom Energy, Ask Jeeves).
I have been immersed in Regulation A+ for almost two years through my Regulation A+ funding platform. Through these experiences, I am reasonably well positioned to observe how Reg A+ compares and contrasts with Venture Capital.
Forty percent of the companies I meet with that are viable candidates for VC are opting for Reg A+ instead. I see Regulation A+ emerging as the superior choice in the following circumstances:
- More Direct Control Over Your Company’s Destiny – One appealing facet of Regulation A+ relative to VC is that the CEO has control over so many aspects of their offering destiny. For example, take your pick of these; valuation, size of the capital raise, share price, when you start, which service providers and funding platform you will use, the type of security you offer and how long you choose to spend in live offering mode (3 months or a whole year?). You even get to select where you will list your stock post offering or if you will list it at all. Of course, all this freedom does come with a price; there are no guarantees your offering will succeed. With VC, the entrepreneur has much less control over their financing and how their business is run afterward.
- Early, Low-cost IPO – While Reg A+ can be used as a direct method of taking a company public to the NASDAQ, NYSE, or the OTCQB or OTCQX, venture capital cannot. The Reg A+ characteristic of being able to market your company freely instead of the traditional Quiet Period is very appealing. While the flexibility to use Reg A+ to raise capital when planning an IPO to the NASDAQ, with the confidence that if you don’t reach the NASDAQ minimum for listing, you can complete the Reg A+ raise anyway and avoid the expense of a failed offering that a conventional IPO’s would have caused.
- Location – Venture capital is local. If your company is far away from a VC hub like Silicon Valley, Boston, LA or New York, VC is largely unavailable. Reg A+ is genuinely agnostic about location (as long as the company is headquartered in the US or Canada). This democratic access to capital is a huge plus for many excellent businesses and talented entrepreneurs.
- Customer Traction and the Credibility it Brings – In the case of companies that appeal strongly to consumers, the inherent Reg A+ process of marketing to thousands of investors has additive effects on the company and its brand. Throngs of happy shareholders make for happy customers and vice versa. (We can ask public companies about that phenomenon.) VC is not usually a factor here.
- Funding for Linear Companies Producing Just 30X Return Over 6 Years – VC firms are interested in companies poised to deliver a 100X return in about 6 years. A 30X level of return is pretty compelling for many individual investors. In my view, this may be one of the biggest Regulation A+ wins, as it will support and grow a new class of companies targeting attractive markets that can deliver solid returns that don’t appeal to VC’s.
- Mid-stage Companies – For successful mid-stage or “Small-Cap” companies, VC money is rarely an option unless they were already VC funded in an earlier round. There is also the case of mid-stage companies whose VCs have no more capacity to invest but have a great deal of interest in getting liquidity. In these cases, Regulation A+ is a uniquely good option that offers a fresh and less costly approach than reverse mergers or waiting 4 years for a conventional IPO. Getting access to growth capital for a $50 million business growing 40% per year, at a favorable valuation and with investor liquidity is a true symphony.
- Investor Power – Along with the efficiency of dealing with VC partners comes the mixed bag of concentrated investor power. VCs are practiced at replacing errant CEOs. This can be a Godsend for a struggling company. On the other hand, some founders would rather not put their strategy and role at risk. With Reg A+, founders reduce the likelihood that they will lose control of their companies.
- Liquidity for Investors – Reg A+ is a more liquid investment than traditional funding, as the investor’s shares can be traded immediately after purchase in most cases through brokers (a small but fast growing number) when a company does not list, or on stock markets. If investors or employees need liquidity, Reg A+ can deliver it much earlier. In fact, Reg A+ is a viable solution for VC firms that have accumulated numerous portfolio companies that are waiting for liquidity.
It is important to note that while Reg A+ is advancing, it is still in its early years – to misquote Winston Churchill, “We are at the end of the beginning.” Large scale changes to the capital markets, such as those Regulation A+ brings, take time to settle in and for awareness to build. I see a steadily growing number of companies engaging with Reg A+ and a significant shift to more established companies joining the early adopters that have tended to be early stage.
Reg A+ presents entrepreneurs with a level playing field for access to capital, based on merit, through which they can raise up to $50 million per company per year–sizable growth capital–and it does so in a cost-efficient and flexible manner. Regulation A+ does not fit all companies though. Take a look here to see the types of companies most likely to succeed.
Venture capital as we know it will adapt and evolve. Some of the change I expect to see will come from Reg A+ filling gaps in the capital formation landscape that VC was not addressing effectively, as you can see above. Reg A+ is improving the efficiency of the growth capital markets. Scores of companies that couldn’t raise capital in the old context will now prosper, boosting US economic activity and employment.
The result: Venture capital is getting a little squeezed around the edges. And this is a good thing. (For more on this topic, you can also see my earlier column, 7 Ways That VC Falls Short of Regulation A+.
Rod Turner is an expert in entrepreneurship and funding, and as founder of Manhattan Street Capital is helping mid-stage companies and mature startups to raise capital via Regulation A+.