Much of the attention surrounding the JOBS Act has been focused on the new so-called IPO onramp, the removal of the ban on general solicitation by private companies, and the potential for equity crowdfunding to become a reality. However, it’s entirely possible that the piece of the bill that will ultimately carry the biggest consequences could be the expansion of Reg A. Now, the maximum amount of capital a private company can under Reg A has increased tenfold, from $5 million to $50 million, providing a potential loophole for many companies to avoid the lengthy and expensive process of going public.
The bubbling enthusiasm over Reg A is why Dara Albright; founder of NowStreet, co-founder of the LendIt Conference, and a recognized expert on crowdfunding; has organized Reviving the small cap IPO of yesteryear with Reg A Crowdfinanced Offerings, an exclusive cocktail event for some of the biggest experts in the field to discuss Reg A and what it means for the future of deal marketing and the small-cap IPO. Among the speakers will by David Weild IV, considered by many to be the father of the JOBS Act, and Rep. Patrick McHenry (R-NC), a member of the House Finance Committee.
Equities.com talked with Dara about Reg A, what the changes might really mean, and what to expect from her upcoming event.
EQ: So early on, there was a lot of initial enthusiasm about the potential of equity crowdfunding and the like, but it’s starting to appear as though the regulations are going to be a bit too onerous to make this a realistic possibility.
Dara Albright: Sadly, Title III is far from its initial intention. When the SEC came out with its proposal last October, at almost 600 pages, they just made it so burdensome and so expensive. It doesn’t even make sense for companies to use - especially for companies raising between $500,000 and a $1 million. The disclosure requirements can feasibly cost upwards of $100,000 for audits alone. Not only will it be really expensive, it will be incredibly time consuming for issuers. CEOs can likely spend more time raising capital and meeting regulatory demands than running their business! There are so many other, more practical, alternative structures for small companies to employ.
Title II is a viable alternative. It lets issuers solicit, but, of course, they could only take money from accredited investors. We’ve also seen, in this past year, a number of states adopting their own intrastate crowdfunding laws. Today nearly half of the states have either enacted or are in the process of enacting statewide crowdfunding legislation. I believe we will start to see the proliferation of Intrastate Crowd Finance Offerings (ICOs) for regional growth companies. However, SEC Rule 147 (which allows for the intrastate exemption) strictly prohibits ICO issuers from offering securities to residents outside of their domiciled State. This could severely curtail an issuer’s ability to advertise its offering. Because of these pitfalls, the new Reg A structure is looking more and more like the most pragmatic solution.
EQ: Your upcoming event is focused on the changes to Reg A, which a lot of people are now saying are going to ultimately have the biggest impact on how capital is raised in the future.
Dara Albright: Title IV did not really get much attention when the JOBS Act was initially passed. Title IV basically raises the threshold for Reg A offerings from $5 million to $50 million. But last December, when the SEC came out with their rule proposal for Title IV, they surprised the marketplace by proposing to exempt Reg A from state blue sky laws.
If implemented, it will be a complete game changer. I think we'll see the resurgence of small cap underwriters employing Reg A, in a big way, to structure small cap offerings.
Although a lot is being done legislatively to inspire creative offering structures for smaller companies, much more still needs to be done – especially with respect to the aftermarket. We still need to address the crux of the problem: flawed public stock exchanges. As I have said in the past, “The JOBS Act helped create a new onramp for companies to raise capital, but it won’t repair the highway. We need to bring back the ecosystem of support for young companies, especially in the aftermarket.”
In the past year, I think the industry has really woken up to the fact that that Title III is broken. Representative McHenry (R, North Carolina) voiced his concerns with the SEC’s rule proposal. And, recently, he introduced new legislation that would essential redo Title III crowdfunding.
At the same time, David Weild, former Vice Chairman of NASDAQ and expert on market structure, put forth new legislation that would essentially increase tick sizes for small caps. It will be interesting to see if this initiative helps create a more stable and flourishing aftermarket for small caps. I believe that David’s new tick size program has the potential to motivate the sell side and get them to once again embrace what he calls, “story stocks”. Unlike the larger, more recognized, stocks that are always actively traded, “story stocks” are relatively unknown companies that require sales and marketing to get their story out to the public.
EQ: Could you talk a little bit more about the retail investor? Because I do think it's interesting that so much of the discussion is focused on this from the side of companies getting new ways to raise capital. How do you think the basic investing landscape is going to change for your retail investor out there? Are we going to be facing a future where people need to diversify their portfolios into Reg A offerings off of the public markets to some degree?
Dara Albright: I do think that we’re going to see new crowdfinance allocation models being introduced for the retail investor. I’m writing a book that will be released in the next few months that underscores this very topic. In it I discuss how Wall Street always has and always will “follow the money” a.k.a. the investor. I believe we are about to witness a fundamental investor shift in the markets - back to the retail investor.
For a long time, since the burst of the .com bubble especially, Wall Street became much more institutionally driven. It was a lot easier to land a larger institutional investor than it was to reach thousands of smaller investors. Additionally, the regulators made it very challenging for issuers and brokerages to even want to do business with the retail investor. There was simply too much compliance risk.
The JOBS Act is creating a new regulatory environment that allows brokerage firms to embrace the retail community again. This is crucial, particularly in an economy where the nation’s wealth gap continues to widen.
I also believe we're seeing the rise of the retail investor because average investors are getting frustrated with paying excessive fees for underperformance.
Look at the P2P space on the fixed income side of the market, for instance. We already saw a mass exodus out of conventional bond funds last year, and now, especially with Lending Club filing for their IPO, P2P and online lending is gaining more mainstream awareness. With conventional fixed income asset classes underperforming and investors and wealth managers becoming more knowledgeable about P2P investing, more capital is likely to find its way into a diversified portfolio of P2P loans. I think we’ll start to see more fixed income dollars headed in that direction. Then, once the legislation and the regulatory umbrella catches up on the equity side, we're going to see some really innovative financing structures that will allow “the crowd” to retake control of their investments again.
We’re also seeing the rise of the millennials. This generation has a completely different way of looking at, and, more importantly, connecting with their investments. This great wealth transfer from the baby boomers down to the millennials is approaching. Millennials are the investors of the future and these are crowd-investors at heart.
It’ll be really interesting to see how it all evolves. The rise of the retail investor and the democratization of finance is just beginning to take shape. I think Wall Street will be unrecognizable within 10 years.
Until Title III is perfected, I think Reg A offers one of the best solutions out there. Title II is great in that it gives issuers the opportunity to solicit to the general public, but, unfortunately, unaccredited investors are prohibited from investing. And the market demand for retail-centric investment products will intensify.
EQ: Can you talk to us some about the upcoming event you’re holding in New York on October 21? You’ve got some really interesting speakers scheduled.
Dara Albright: I’m really excited about this event. The agenda is truly ground-breaking. We’ll be talking about structures and concepts that the industry has yet to identify.
Representative McHenry is going to be there. He's going to talk about his newly introduced legislation to revamp Title III crowdfunding, how he envisions accredited crowdfunding ultimately working, and how Reg A+ could be a solution for unaccredited crowdfunding. We’re going to have David Weild there to talk about steps being taken to create a thriving aftermarket for Reg A and other smaller-cap offerings. We have the brightest legal minds, on the forefront of the crowdfinance movement, there to talk about the regulatory environment and show underwriters how to structure Reg A Crowdfinanced Offerings. Our legal panel includes: Brian Korn, Of Counsel at Pepper Hamilton LLC, Samuel Guzik, Partner of Guzik & Associates, Louis Taubman, Partner of Hunter Taubman Weiss LLP, Doug Ellenoff, Partner at Ellenoff Grossman & Schole and Sara Hanks, Founder of Crowdcheck and former Chief at the SEC’s Office of International Corporate Finance.
As transformative as the regulatory changes are, what most people don’t realize, is that, with the resurrection of the retail investor, we're about to experience a sea-change in deal marketing.
Wall Street knows how to market deals to the institutional community. It’s a no brainer. Sell side firms know what fund managers and analysts are covering what, following what; but when it comes to targeting and reaching the masses, they're completely in the dark. Through technological advancements we're witnessing the emergence of very sophisticated deal marketing systems that match issuers with investors. Steven Dresner, CEO of Dealflow, a company on the forefront of what is known as algorithmic deal matchmaking, will also be joining us on the 21st to illustrate how issuers and underwriters can successfully reach today’s breed of investor.
To summarize, the event will give attendees in-depth legislative insight and knowledge on how to structure, sell and market Reg A Crowdfinanced Offerings in the primary as well as in the secondary markets. Most significantly, our guests will learn how to implement what we call “crowdfinance principles” to create a truly stable and flourishing aftermarket for today’s small cap companies. I have no doubt that our attending small cap analysts, underwriters, fund managers and accredited investors will all depart with new tools and ideas for capitalizing on these significant industry changes.
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