This is the first of a series of blogs from W.R. Hambrecht + Co., LLC. In this series, we will explore the capital raising challenges facing small and emerging companies and recent regulatory changes that should greatly help executives, venture capitalists, and individual investors meet these challenges head-on.
It Begins with a Dream
Every successful entrepreneur has, at least once in her life, dreamed about her company’s IPO. Finally. Stock that is publicly traded. Stock that she or her employees can sell—to anyone, at any time. Stock that she can use to borrow against, or sell or buy things with. Stock that, put simply, can make her—and her dedicated investors, employees, and supporters—rich. The crowning achievement of years of hard work. Her early venture investors have probably had a similar dream.
But these folks aren’t the only dreamers. Investors dream too. They dream of having access to fantastic small companies. They want to research, identify, and invest in promising smaller companies, ranging from biotechnology firms to restaurants to everything in between. They’ve been locked out of these investments, which have been the exclusive terrain of venture and angel investors. They want to find the next company developing a break-through cancer treatment, killer app, or fantastic food concept.
Closing the Distance from Dream to Reality
The one thing these dreams have in common is that, until recently, they looked a lot more like fantasy than reality. Well, it’s time for these folks to wake up, because the dream may be becoming reality—and sooner than we all thought. The SEC dusted off and fixed an old exemption from the securities laws and has just made it a lot easier for small and emerging companies to raise capital by selling debt or equity securities to the public.
Regulation A was never used much before, but in its latest incarnation, and unless the lawyers manage to mess this up (a possibility), there’s a great chance for it to revolutionize capital raising for small and emerging companies, and investing for individual and professional investors. We at WRH+Co have been pushing for these changes for years—and are thrilled that Congress and the SEC seemed to finally listen. The SEC cited us over 40 times in its final rule.
You can read the entirety of the Reg A+ final rule here. The document can seem a little intimidating, but the “Introduction” section provides a good, accessible overview beginning on page 6.
Introducing the New Regulation A
By now, many in the venture community have heard about these reforms to Regulation A. They know that it allows for public offerings of securities (up to $50 million!) without having to register with the SEC. And they know that these securities can be sold to anyone, not just the elite. Regulation A now allows companies, their founders, and early investors a way to both raise money, and monetize their existing positions.
There are also a lot of advantages for investors. First off, before now, most investors couldn’t even access these companies. They had to wait until the IPO several years later at the expense of substantial returns on investment. Regulation A now welcomes investors of all shapes and sizes. For sophisticated investors who would probably have made another private investment in the company anyway, this gives them liquidity they wouldn’t otherwise have. For ordinary investors, this gives them access to these terrific companies earlier.
Larger Regulation A offerings, known as Tier 2 offerings, will also have a number of critical investor protections that aren’t usually found in private offerings. For example, companies would need to provide audited financial statements and submit regular updates to the SEC. But, these updates are not the full-blown Exchange Act reporting requirements and the oft-dreaded Sarbanes-Oxley requirements; rather they are just straightforward updates on key company information. So the burden on companies shouldn’t be onerous.
The Reg A+ Opportunity Begins this Summer
To be sure, the biggest risk with Regulation A right now is that it’s new. These changes come into effect June 19th of 2015, and there are many details that still need to be worked out including issues related to how and where these securities will trade after an offering is made, how the state involvement will work, and just how onerous the initial filing requirements might be. But those topics will be for another part of the series. In the meantime, we think it’s time for companies, founders, executives, and investors to take a long, hard look at Regulation A—it might just be the opportunity you’ve been dreaming about.