4 Years In, Is Reg A+ Working?

The SEC’s adoption of amendments to Regulation A, known as “Reg. A+”, in 2015 made it easier for small companies to raise money and access the secondary markets.

Born out of the 2012 JOBS Act, the revamped Regulation A was meant to provide a streamlined path for companies to raise up to $50 Million while benefiting from regulatory changes like general solicitation, ‘testing the waters’, and state Blue Sky preemption. The goal was twofold: to benefit issuers with a less burdensome approach to raising capital and to provide non-accredited investors the ability to invest in early stage companies.

SEC-reporting companies were originally excluded from using Reg. A+. But in January, the SEC adopted new rules to expand Reg. A+ that enabled public companies to raise capital in a similar manner to a traditional IPO via an S-1 registration or an S-3 shelf registration.

So, what’s the verdict four years in? That depends on whom you ask.

For small companies in need of capital, Reg. A+ has been critical. According to Manhattan Street Capital, 157 companies used Reg. A+ to raise about $1.5 billion between 2015-2018. That comes out to about $9.5 million per deal, a relatively small amount by Wall Street standards, but not an insignificant sum for small-and-micro-cap companies.

However, not all of those companies have fared well on the public markets.

As the Wall Street Journal noted in June, of the 11 companies that have listed on Nasdaq or NYSE American following a Reg. A+ offering, 10 were trading below their IPO price. To prevent poor performance from future Reg. A+ listings, both exchanges have moved to increase the requirements needed to gain approval.

According to Jason Paltrowitz, Executive Vice President, Corporate Services at OTC Markets Group, the true success of Reg. A+ lies in the offerings that haven’t been publicized.

“In the way it was intended to work, it’s actually worked quite well,” he said. “It’s community banks that have used Reg. A+ to raise money from their depositors. It’s REITs that have used Reg. A+. It’s small, early stage developing companies that have used Reg. A+ to raise some money and grow their business.”

The biggest problem, so far, has been the way some in the industry have manipulated the regulation in a way it wasn’t meant to be used, he said.

“Reg. A+ was not intended to be a fast track for companies to list on national exchanges and circumvent the IPO process, and that is where it has not worked well,” said Paltrowitz. “Unfortunately, a lot of the companies that have chosen to use Reg A+ to trade on national exchanges had complicated capital structures, and didn’t have the liquidity necessary for a healthy secondary market. They went to exchanges so brokers could sell expensive shares. These companies create the impression that Reg. A+ was a bust.”

As more and more companies utilize Reg. A+, some are naturally going to try and take advantage. Huixinjia Capital Group raised eyebrows in early July by claiming, among other inaccuracies, it intended to raise $700 million via a Nasdaq Reg. A+ offering. The maximum allowed is $50 million.

Investors also caught wind of another big Reg. A+ development—this one in the world of cryptocurrencies.

The SEC recently approved two companies, Blockstack and Props, to hold regulated token offerings using Reg. A+. While still early, the decisions could be monumental in paving the way for blockchain-based companies to raise money in the public markets.

Paltrowitz’s advice for investors looking to invest in these offerings is to remember that these are smaller offerings and can be early stage companies that come with a higher degree of risk.

“As with all investing it’s important to conduct your due diligence. Like any investment, Reg A+ deals come with risk and there are a wide variety of companies. Anybody that’s thinking of investing in this space should go in with eyes wide open. These companies aren’t as well known and don’t get as much coverage as the Facebook Inc FB and IBM IBM of the world. That is an opportunity if you do your research.”

For companies looking to potentially go the Reg. A+ route, he cautioned executives that if it sounds too good to be true, chances are it is.

“You’re not going to wake up one day and be traded like an S&P 500 company because you did a Reg. A+ deal and listed on an exchange,” he said. “That’s just not going to happen. And if somebody tells you that’s going to happen, you’re being sold a bill of goods.

“It is important that companies carefully vet their financial advisors and make sure they are aligned with their long-term success. If you are raising $9.5 million and a banker is saying you need to list on an exchange that adds over a million dollars in operating costs each year, the math does not add up.”

OTC Markets is a content partner of Benzinga