This is another installment in 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.
Investing is almost always a risk/reward proposition. Most start-ups fail. But many don’t. The ones that are successful can lead to significant rewards for their early investors. Who wouldn’t want to have been an early investor in Apple or Google (two companies who we helped take public)? But how do you get to invest?
Until recently, the federal securities laws have largely prevented most ordinary investors from funding early-stage companies. Experienced angel and venture investors that were plugged into the groups, law firms, and brokers-dealers were able to see the deals. But ordinary investors were generally shut out of these opportunities.
Private placements couldn’t be advertised in public, and sales could only be to so-called “accredited investors.” So, if you knew somebody, and you have a lot of money, then you could participate. But if not, then you pretty much had to wait until after an IPO, if one ever came.
Regulation A+ Creates New Options for Investors
On June 19, 2015, revisions to Regulation A (often called Reg A+) became effective, and the world changed. Reg A+ allows companies to raise up to $50 million (including up to $15 million from selling shareholders) from the public markets.
Investors should know that there are two tiers of Reg A offerings. “Tier 1” offerings allow companies to raise up to $20 million, while “Tier 2” offerings allow companies to raise up to $50 million a year. The rules are very different for these two tiers, and investors should be cognizant of the differences.
For companies raising only smaller amounts of capital, but who don’t necessarily have audited financials or the ability to provide much in the line of ongoing reporting requirements, Tier 1 is an option. Investors should be keenly aware of the risks these companies present. These may be offered over the internet, likely with the help of a smaller law firm. Investors should be very careful to conduct their own due diligence of these offerings, particularly if there isn’t an investment bank involved. That’s because investment banks helping with offerings have to conduct basic levels of due diligence to ensure that the companies, the management, and the offerings are all legitimate. States’ regulations of these securities may provide additional protections, but may also limit how tradable and valuable the securities are for investors.
Tier 2 offerings provide significant additional protections for investors, but also additional costs for companies. Most importantly, companies who sell securities using Tier 2 have audited financials and have committed to providing ongoing reporting that should keep investors informed about key issues for the company.
As far as liquidity goes, there should be plenty of places for Tier 2 offerings to trade. For example, OTC Markets Group recently proposed revising its Standards for its OTCQB platform to accept the Tier 2 ongoing reporting as adequate to allow for quoting and trading on its platform. Of course, a company could list on NYSE or Nasdaq, and thus become a full Exchange Act reporting company (with full quarterly SEC filings). And we expect other trading venues to pop up as well. Thus, under Tier 2, no matter what, investors should be able to stay well-informed about their companies and have venues where they can trade their securities.
We expect that ordinary investors seeking to get in on great growth-stage companies may soon be able to access them. Finally. This is the democratization of capital.
If you are an investor looking to access great growth-stage companies, please contact us.