In this interview, Rod Turner, Founder, Chairman and CEO of Manhattan Street Capital, we discuss a variety of aspect of Regulation A+, including:
- Overview of Equity Crowdfunding and which type suits what types of companies
- Specifics of Reg A+ from an Insiders View – Lessons Learned
- Analysis and Update on the specifics of the successful Regulation A+ offerings to date
- How Reg A+ works best for Real Estate Companies, and why Real Estate is the leading sector
- Tips and Techniques on how to excel with your Reg A+
- What Types of Companies are Best Suited for a Reg A+ Offering
Reg A+ is a type of offering which allows private companies to raise up to $50 million in startup equity financing. Like an IPO, Reg A+ allows a company to offer shares to the general public and not just accredited investors. Companies looking to raise capital via Reg A+ will first need to file with the SEC and get approval. The fees associated with a Reg A+ offering are much lower than a traditional IPO, and the ongoing disclosure requirements are much less burdensome, and less expensive. Currently there is not a mainstream market for trading shares of stock issued in a Reg A+ offering. This is a major distinction from shares that are offered in an IPO on the NYSE, NASDAQ, or a secondary exchange.
Reg A+ opens up the market for “retail” non-accredited investors to invest in private companies even when they are raising large amounts of capital, without the company going through an IPO.
Rod Turner is the Founder of Manhattan Street Capital, the #1 Growth Capital marketplace for the best mid sized US and Canadian companies. He has been the Senior Executive for two IPOs to NASDAQ (Ashton-Tate, Symantec). Rod was an Angel Investor in Ask Jeeves, INFN, AMRS, eASIC, Bloom Energy. He is a high energy strategic thinker with an engineering background and skills in all areas of business. He is also an experienced M&A expert. Rod is a contributing writer for Forbes. You can find Rod on Twitter @IamRodTurner.
Patrick: This is Patrick Henry, the CEO of QuestFusion, with the Real Deal…What Matters. Today we’re going to talk about Regulation A+, or Reg A+, as we sometimes call it. It is a large-scale crowdfunding thing that you know everything about, Rod. I’m a novice. We do have an expert here. Let me give you Rod’s background.
This is Rod Turner. He is the Founder of Manhattan Street Capital, the number one growth capital marketplace for the best midsize US and Canadian companies. He has been a senior executive of two IPOs, Ashton-Tate and Symantec. Ashton-Tate, back in the early days, provided the database software for the original PCs.
This was back in the DB2 and DB3 days. I remember when I used to use Lotus 123 and Word Perfect. Those were the early applications of the personal computer. He also worked for Symantec in the early days before they bought Norton Antivirus. He is a very experienced guy.
He has also been an angel investor in many companies including Ask Jeeves, INFM, AMRS, eASIC, Bloom Energy. He is a high-energy strategic thinker with an engineering background and skills in the areas of business. He’s also an experience M&A expert. Rod is a contributing writer to Forbes. You can find him on Twitter at @IamRodTurner. Welcome, Rod.
Rod: Thank you very much.
Patrick: How big is the Reg A+ market likely to become over time?
Rod: I’ve done a lot of work on this, starting from different points and different assumption sets to build scenarios. When I do that, I look to see that the results are similar. If so, then I’m okay. If they’re very different, then I know I have a problem. Essentially, $50 billion to $60 billion of growth capital will be raised using Reg A+ based on my assumptions.
Patrick: Over what period of time?
Rod: Per annum, once it’s fully established.
Patrick: That’s huge.
Rod: Yes, it is. It makes sense if you look at the size of the angel and VC business, which is $75 billion a year in the US only. That’s an average year, not a good year. Initial public offerings and secondaries follow the same companies raising $140 billion a year in an average year.
Patrick: Is that global?
Rod: No, that’s only in the US. Because Reg A+ is US-centric in the sense that companies need to have their headquarters here. Using it as the basis, all of the startup companies are well supplied in general. The companies that are strong enough and far enough along that they can do a regular IPO raising an average of $300 million in that initial public offering, that’s $140 billion. It makes sense. It’s bigger sometimes, at $250 billion a couple of years ago.
For all of the mid-stage companies, and there are more than one million of them, setting aside startups, of the companies that are established and don’t have a good place to go to raise sizeable amounts of growth capital, $40 billion or $50 billion is right in the zone.
Patrick: Let’s take a step back for the entrepreneurs and investors out there that aren’t as experienced with Reg A+. Can you give the layman’s overview of what it is?
Rod: It replaces Regulation A, which has been around for a long time. It went out of fashion in the 80s because of its limitations. The plus sign in Regulation A+ really doesn’t let you know how big a shift there is. It’s huge. These are the fundamental differences. Private investors worldwide at any wealth level are allowed to invest. For all those people who have been really interested in these kinds of attractive public companies, it’s new for them.
Patrick: This gets away from the accredited investor requirements that were required prior to this for individuals investing in private companies?
Rod: Yes. A very practical part of the rule system is that the company does not have to prove that wealth level. We can accept accredited investors and institutional investors as well, of course. You don’t have to prove the wealth level. We trust the investor. That’s a nice situation. It makes it much more time efficient for the investor to make their investment and complete the process at retail on the internet.
Anyone can invest, anywhere in the world. Companies can raise up to $50 million per year. They can do another offering every year, a secondary. If they do what’s called a Tier 2 offering, the companies are not required to satisfy the state’s Blue Sky Filings, which means it’s practical to raise money by just registering with the SEC (U.S. Securities and Exchanges Commission). You can use a broker deal or not.
You can use a platform like my company, Manhattan Street Capital, or not. It’s up to the company doing the transaction. When you get down to some very important aspects, the shares that are purchased through Reg A+ are considered liquid by the SEC immediately upon purchase.
The company can restrict them, but if they don’t do so, the shares are liquid immediately. Then it’s a matter of what the company provides in the form of liquidity. Is it listed or not? It doesn’t have to be. Is it listed on another TC market? Is it on the NASDAQ or on the New York Stock Exchange? You have a wide berth of flexibility as to where you put the company when you’ve completed the transaction.
Patrick: We took Entropic public in late 2007. We went through the IPO process and all the different things you have to do in terms of S-1 filing with the SEC. They are very arduous requirements. In addition to all the requirements that are in place once you’re a public company, Reg A+ reduces a lot of that, but you’re still able to trade on the same exchanges?
Rod: Yes and no. Let me clarify. If you choose to use Reg A+ and then list on the NASDAQ or the New York Stock Exchange, then there is a process to convert the Form 1-A filing to the same level as S-1. It ends up costing you as much time and effort as it would have, but it’s spread out.
The advantage of doing the IPO that way is that, unlike a conventional IPO where you have to meet a minimum funding level to get listed on the NASDAQ, if you don’t meet that funding level in a traditional IPO, then it’s, “Sorry guys. What a waste of time this was. Egg on the face. Pack your bags and go home. You didn’t raise dollar one.”
With the Reg A+ method, let’s say your minimum was $15 million for the NASDAQ and you only raised $13 million. You complete the transaction and raise the money. You don’t list on the NASDAQ. You put the company on the OTCQX and stay there until you are ready to up-list at a later date.
Patrick: If you don’t get to upgrade to the minimum S-1 thresholds, and all of the other things that you have to do after you’re a public company, is there an after market for Reg A+ shares if you don’t do those things?
Rod: Yes. This is what’s happening in that regard. You can list the company on the OTCQB and it costs $2500 for a fresh, new ticker symbol, which is pretty amazing. If you go to the OTCQX, it’s $20,000. Then you’ll list it. Of course, you need market makers to provide liquidity, which is a function of engaging with them as well as having enough debt for your company that they’re interested.
They want to provide liquidity. The fact that we’re generally seeing a lot of consumer investors, shareholders, in Reg A transactions lends itself to be interesting to them. If you raise $50 million from five people, there is not inherent liquidity in that.
Patrick: Are you just seeing individuals, what we would call retail investors, come in at Reg A+ offerings, or are you also seeing institutions come in and take shares?
Rod: At the moment, almost exclusively, it’s consumer investors. Let me get back to the liquidity issue. This is an important thing. For a company that chooses not to list because they don’t want to worry about having to justify the fluctuations in their share price, they cannot list.
They can provide liquidity to their investors through a mechanism which they define up front as part of the offering. Now the investors know where they stand. Maybe it’s quarterly liquidity. The other thing is that there are a number of startup companies that are being built to provide digital training platforms for Reg A+ shares that are not listed. When they exist, they will be a good way to go. There are some broker dealers now, but it’s too difficult to find them in the main.
Patrick: We’re still very early.
Patrick: Can you distinguish Reg A+ from Title III Reg CF? All of this is primarily related to the JOBS Act, correct?
Rod: Yes. Reg CF, or Title III as it’s also called, has been effective since May of 2016. It allows companies to raise up to $1 million from any level of wealth, from any investor.
Patrick: It’s a much smaller scale equity crowdfunding.
Rod: It’s very similar, in concept, to Reg A+ but for seed rounds. You can raise $100K or $200K. The more you raise, the more the due diligence process becomes involved. I don’t think it’s an unreasonably involved process. No liquidity post transaction. It’s a bit like Reg D used to be for accredited investors. You’re liquid. When the company does great, then you have a chance to make a lot of money. If you don’t know when, that’s fair enough.
Patrick: It’s like traditional private investing but it lowers the threshold that you don’t have to be an accredited investor or early stage?
Rod: Yes. It’s doing quite well as a space for companies. You need to have the same kind of appeal in a Reg CF company as you do in a Reg A+ company. These are both new forms or raising capital. The cynics, the institutions and accredited investors who have so many other choices for where to put their money, tend to be slow to adopt new funding methods. They’re looking and monitoring the situation.
When there are enough newsworthy great success companies, gradually, we will get past the section that feels this is a new and risky thing. The bigger issue is that, since 1934, we’ve known that you can’t do this stuff. You have a quiet period.
Now we’re actually allowed to market our company instead of having to be silent and not do anything unusual. You had a hard minimum. You couldn’t do an IPO without that. Now suddenly, you can. Now ordinary people can invest $300 in your company, which has some issues with how many investors you have, but that can be a benefit for listing and getting liquidity.
The main issue there is that, the bigger companies that I think are ideally suited to Reg A+, think $20 million to $60 million in revenue, are the ones that have the more seasoned conservative board members and executive teams. They are either happy where they are an unaware because they’re not looking, or they’re aware of Reg A+ and they’re waiting for it to prove itself.
Patrick: From a product life cycle standpoint, we’re in the early adopter stage of this new funding mechanism. To cross the chasm, there has to be more stuff that comes in to get into that early majority stage.
Rod: Yes. It reminds me of the early days of the PC industry. I was at Ashton-Tate and I would meet people in all walks of life, especially mainframe hardware and software companies. They would blow off microcomputers. They would say, “Maybe my assistant could use it,” but it would just be for entertainment. Of course, what we’ve seen is that the microcomputer took over the whole industry, and then the internet even more.
Patrick: What are some of the recent metrics in the Reg A+ market?
Rod: Reg A+ went live at the end of June in 2015. There’s a lead time in getting transactions done. The first offerings went live at the end of October 2015. I did an update in Forbes recently assembling all the metrics on the status so far. We’ve had 32 companies complete successful offerings since then.
That means to me, from November 1st of 2015 through the period I looked at, which was the end of February. We’ve had 32 companies complete successful transactions in that time. That’s pretty good. That’s about 25% of the companies that went to bat, that were qualified by the SEC, meaning they persisted through the process, which many companies did.
Patrick: It’s still smaller in terms of the number of companies in the IPO market, and then the traditional private equity market.
Rod: Yes, because it’s the early days.
Patrick: That’s still pretty good. Thirty-two over a few months is nothing to sneeze at.
Rod: It’s about two companies a month raising an average of $32 million per month.
Patrick: That’s pretty good for private equity. When Entropic made the decision to go public, part of it was giving investors liquidity. The public markets have so much more capital than the private equity markets. It’s hard to raise that kind of money in private equity. Thirty-two million is a big number.
Rod: Yes. As you said, private equity companies look at this size range of businesses and say, “You’re too small.” Banks say, “We’ll lend you money, but only $1 million.” Venture capitalists say, “You’re too late.” You may be a portfolio company, and still, it’s too late.
Patrick: You have a very limited, narrow group of investors and these crossover funds that might do something. But that’s a pretty narrow sliver of investors. There is not that much capital in those guys. It’s a supply and demand thing. They’re only going to invest in a few companies anyway.
Rod: Yes, it’s very narrow. I was surprised to find that whole private placement area. There is $1 billion a year of capital raised. It’s not private equity, but private placements where you have a broker that goes out and solicits the deal. It’s hard to get those guys on board. That’s only $1 billion a year. That’s really scratching the surface. Reverse merges are a place that these companies can go to. They’re raising, on average, $10 billion a year there, except the expense and risk is significant.
Patrick: You have to find a very clean public shell. If it’s not clean and you carry forward a bunch of liability…
Rod: …you may never earn your way out.
Patrick: Yes. There can be big challenges.
Rod: There’s one other snippet on liquidity that people are not generally aware of. Up to 30% of an offering in Reg A+ can go to insiders and a significant number of transactions. Twenty-one percent is the average to date for Tier II transactions. The part that no one really knows is that, because the shares of the company are now public, even though they’re still preferred and unchanged by the fact that you did a new issuance of Reg A+ shares.
Patrick: There isn’t a forced conversion like there is in an IPO?
Patrick: That’s interesting.
Rod: You can go on raising money from preferred if you choose to, on whatever terms. Also, those shareholders, once they’ve passed their Rule 144 holding period, they can be liquid too, as long as their trading volume doesn’t exceed the maximum, which are already there in place by the SEC.
This is as long as they do it after the company has made an announcement of its result. That is an issue that I didn’t explain. Once a year audits and once every six months profit, loss and revenue reporting is required for Tier II companies, which are the primary focus.
Patrick: When I was running a public company, there were all the requirements around Reg FD, Fair Disclosure. Do the same Reg FD requirements apply when you do a Reg A+ offering or is there more latitude there?
Rod: There is much more latitude. I’ve been told by experts in S-1 public company reporting that it’s one tenth as onerous. You need an audit. You don’t need to have a whole bunch of dedicated employees. The actual expense is primarily the audit and some bandwidth from your inside team. If you go to the OTCQX, then quarterly reporting is required for the market and once a year audits. It’s pretty reasonable.
Patrick: What types of companies are most likely to succeed with Reg A+ financing?
Rod: We mentioned earlier that the accredited investors in the main are not participating very much yet. It is the same for institutions. We need to focus on companies that can raise money from consumer investors, people who are not accredited. The ones that are accredited are currently risk averse.
They’re regular people who have to love the company enough that they want it to prosper, or need it to prosper, and they’re hoping it will open a branch around the corner. I have a company that we’ve been working with in the background for a while, more than a year. They have an incredible pain treatment system.
Everyone has a relative or friend that is in agony and taking painkillers, which are gradually killing them. This is a tested system. It is FDA approved and patented. When they get the other things that they’re working on prepared, I think that will be very appealing to consumers.
Patrick: Things that have that consumer base understanding and appeal, like the things that have done best with pre-sales and crowdfunding. You have Kickstarter and Indiegogo. Those are things that, if it’s technical or something that consumers can’t relate to, it’s tough unless you bring your own network to play on it.
Rod: Yes, that’s right. There are some companies that are already funded, that have enough happy customers, that they already have the money lined up. But that’s the exception. Another example is a stem cell company that we’ve been working with for some time. It’s such an appealing treatment.
I believe that will be remarkably engaging, even though that is a business-to-business company, which makes it a little more difficult. On the other hand, everyone wants their doctor to have this stem cell treatment to fix the vertebrae in your disc or shoulder. That’s another example. As you said, the gadget companies are relatively easier to raise money for.
The best example so far was VidAngel. In October last year, their full raise was $10 million in the space of two weeks live on the market. It was two weeks of raising money. They did a little bit of social media. They emailed their most active customers. They had 30,000 active customers.
Patrick: We have a question. Paula says, “I’ve seen REITs gain traction. Do you agree?”
Rod: Yes. This is eREITs. That’s the new term that’s being used. Real estate is the most successful group.
Patrick: That is Real Estate Investment Trust, for those of you that don’t know the term.
Rod: The appeal of being paid a dividend as well as you can see that the building is tied in gives a degree of security. The concept isn’t rocket science to understand. We’re seeing a lot of success in that area. The eREIT term is being used because some of the more successful ones have been structured like REITs. One of the ones that I like the most is Fundrise. I’m not talking about their investments. I don’t have any idea how great their investments are. They are structured where they lock the shares, but they provide stated terms of liquidity, and quarterly liquidity with reasonable notice.
Patrick: They’ve gone through Reg A+ offers?
Rod: Yes. They have three. One of the great advantages of real estate is that, so far, it’s the only place where, because you can geographically divide the US and other parts of the world, you can do three or four offerings simultaneously. Normally, it’s just one per company per year. They’ve done three simultaneously up to 50 million transactions. They’re marketing themselves incredibly well. That package with liquidity is very good. That being said, if you are considering investing in real estate then doing as much research into the rental market as possible on websites like Roofstock is strongly recommended. The rental market, in particular, can seem overwhelming at first and therefore it is crucial that you stay on top of the latest developments in the property sector.
Patrick: We have another question. “Does your platform allow for non-Reg A offerings such as 506C, understanding that we can only then look at accredited investors for a 506C and perhaps even Title III CF deals?”
Rod: We’re not doing Title III Reg CF deals for two reasons. One is that you’re required to accept all comers. When you do that, you establish yourself as a platform. You cannot be selective about the companies that you take on. That, to me, is really bad news. I wanted to be selective and have a carefully picked group of companies. There are a lot of regulatory requirements to go through, which is fair enough, but I don’t want to divide and de-focus the business. We are doing Title II or Reg D transactions and 506C for select companies, where they’re subsequently doing a Reg A+.
Patrick: It’s like a pipeline.
Rod: Yes, a sequential process.
Patrick: We have some other questions. “At what stage should a company consider growth capital using Reg A?”
Rod: What’s happened so far is more early stage companies that I think are ideal are using Reg A+, in which case they need to have the emotional appeal to consumers and enough credibility and progress that they’re real so that they make it through the SEC process.
If there is a broker dealer involved, they’re credible enough to pass their test as well as our test. You can do it for a very few mature startups. These are startups that took four years to get here. They could get a VC if they wanted. It’s not someone that just has a concept. The sweet spot is for the companies that are established and are too mature or far along for VC, but still too small for private equity or a regular IPO.
Patrick: Of the 32 companies that have gone out using Reg A+, I think about metrics. Do they have revenue? Are they of a particular size? Is there a particular minimum amount of money that they’re trying to raise?
Rod: The minimum raise amount is $3 million or $4 million. There are some exceptions. It doesn’t make sense below that. Thirty percent of them have revenue. Sixteen percent of them have profits. This is of the Tier II companies. The Tier I companies so far have been almost exclusively banks because they’re local. It makes sense to do it in one or two states.
Patrick: We have a question from Cal. “How will the new presidential administration effect the Reg A and crowdfunding industry?
Rod: I was going to write a column on that. I couldn’t find a way to write it and have it be just positive. It seems to me that it will see less regulation. It will be easier to do Reg A+ transactions. That’s the bottom line. The specifics of that, we are yet to see.
The guy that is going to be the new chair of the SEC seems like a very seasoned professional with a very pragmatic view and a lot of relevant experience. I’m hoping that FINRA (Financial Industry Regulatory Authority) and the SEC will not ban some of the hurdles that we face. This is a complicated business. That’s why we don’t have 30 competitors. It’s difficult to figure this all out and navigate the lines properly.
Patrick: How long does it take to complete a Reg A+ offering? I know that when Entropic went public, we had the initial thought process in December-January. We needed to complete an acquisition. Then we went really fast. It still took us five months to go public. Is Reg A+ similar?
Rod: It is similar. Once you have the audit done, if it’s an early stage company or newly formed entity, then the order can be quicker. Once the audit is complete, then it’s 60 days if you do a good job of execution. It is critically important to project manage this stuff well. Sixty days later, you can be raising money. Then the question is, how long does that take? That’s going to be at least a month, except for companies that already have their investors lined up. I have a couple of companies like that. That’s delightful. It can be done in a week. The norm will be two to four months.
Patrick: I did a Kickstarter for my new book. I never even thought about doing that. I talked to John Lee Dumas, who is a podcaster. He did one for his book. I thought if it was good enough for John Lee, it’s good enough for me. I always thought of Kickstarter as a platform primarily for gadgets.
I did it, but my experience was that, farming my own network as opposed to allowing the platform to drive the demand was essential. Do you see the same phenomenon in a Reg A+ offering, where you have to do the groundwork and get investors excited on your own?
Rod: Yes. The most critical component of success for these offerings is, once the company is identified as being a viable transaction because they have enough consumer appeal, then having a marvelous marketing agency that knows what to do, loves the company and proposes a reasonable budget to do it is important.
That’s usually 2% to 4% of the capital that’s raised. It’s not charged as a percentage, I’m just framing it. When it’s done right, it’s a very similar technique to what you see on Kickstarter. It’s amazing how much work has to be done. There is the project management that needs to be done and all the different marketing bases that have to be covered. We have so much better tools these days than ever before.
Patrick: Are there PR and IR, public relations and investor relations, agencies that are now specializing in this?
Rod: Not IR so much. That’s usually considered for later. Yes, there are agencies specializing in this. We’ve picked four that we work with. We have a rapport with them. We don’t control them. They want to see the continuing flow of companies from us. We’re involved in maximizing the likelihood of success, making sure there are no missed bits, that the pricing is reasonable and that the execution works well. That is absolutely critical. The great thing is, with digital marketing, you don’t have to spend long to figure it out. If you’re testing it, you can test it on a low budget and do that quickly. If it’s working, you know. If it’s not working, you know. It isn’t a mystery.
Patrick: Talk to me about testing the waters. What does that mean in terms of Reg A+?
Rod: Testing the waters is a neat aspect of Reg A+ that hasn’t been used properly yet, in my view. I suggested this to the SEC in 2012. The idea is that you don’t have to pay for the audit. You don’t have to get a legal firm to do your filing and start the big bucks spend just to test your company out and see if it engages enough interest. That’s the idea.
What’s happened to date is, the companies that have used it, they are already committed. They’re already doing everything. They put the offering up and test the waters for a while to generate a lot of enthusiasm, so that when they turn on funding, it will be more successful.
Patrick: It’s like pre-demand generation.
Rod: Yes. In my view, you should only do it for a couple of weeks. If you do it longer, then it makes it harder to reengage those people because they went stale. They’ve been waiting for two or three months and they do something else with their money.
That’s what’s been done. What needs to be done, and what we’re offering, is what I’m calling test the waters audition. Companies can inexpensively check it out and put together an offering. We can help them test messages to see what the appeal is and then run a low-budget advertising campaign to see how much enthusiasm we get.
Patrick: Is it like A/B testing?
Rod: Yes. There are a few messages that are right on. You get a surprise sometimes. You think it’s going to work but it bombs miserably. That’s the way to do it, in my view. Then you don’t have a lot of money in play. You didn’t take any big risks. We set the stage.
Patrick: Do you raise any money in that or are you just testing messages?
Rod: You are not allowed to raise money in any of the “test the waters” incarnations. That’s the part that the SEC is most concerned with. They want it done cleanly without hype, and that you don’t do anything remotely like raising money.
Patrick: In the IPO process, even though it took five months, most of that time was in the back-and-forth with the SEC around getting the S-1 approved. Then we did the IPO roadshow. That lasted two and a half weeks and it included a trip to Europe. The actual time spent in raising money was two and a half weeks, even though there was PR. In Kickstarter, everything I read said not to do a Kickstarter longer than 30 days. Do you use similar rules of thumb in Reg A+ around the amount of time that you’re out there raising money?
Rod: Not yet. I have my perception on these different parts by observing offerings, seeing how they’re working and how quickly they work. I do believe that, by it’s far nature, this is a public funding method. You need to succeed, and you need to be seen to succeed rapidly. That’s where the 30 days thing comes in.
Patrick: Yes, early momentum is key.
Rod: Yes, because now everyone jumps on board. But when you’re raising money, there are other methods that you can use that are legitimate and create excitement. That’s something that we are innovating in. I think we’ll do well with that. That’s a latitude that you don’t have with a Kickstarter situation. The same thing applies. You have to show momentum quickly. The faster it is, the easier it is to do the rest of the raise. Then there are all of the obvious things about marketing.
Patrick: That’s been the case anytime I’ve raised capital in private or public situations. You have to find that anchor tenant to come in, lead and show that early momentum. Then everyone else comes in. I was looking at Kickstarter when I was running my campaign.
Rod: It’s about creating the perception of rarity value.
Patrick: Yes. They have a page that tells you the funding campaigns that are ending within the next week. I looked at the non-fiction publications, because that’s the category that I was in. I was fascinated that only 15% to 20% of them were getting funded. You have to reach your funding threshold or you don’t get it.
Rod: That’s another thing. You have to manage expectations. That’s another issue with Reg A+. So many companies say, “I can go to 50. Let’s have a 50 maximum.” Then, when you start raising the money, four weeks in, you’ve raised $4 million. Everyone is celebrating. That’s $4 million that you didn’t have. But $4 million compared to $50 million is boring. It’s not enough. You have a perception issue there, which is totally manageable.
Patrick: Do you have to set a funding threshold where, if you don’t raise that much, you don’t get it?
Patrick: Reg A+ is more open ended?
Rod: You can have a zero minimum as long as you’re not buying something. If you’re buying a building for $6 million, you need a minimum of $6 million.
Patrick: There is a question. Paula asks, “Can you address what can be done to make the broker dealer community comfortable with Reg A?”
Rod: There are a number of active broker dealers now in the Reg A+ space. I get regular calls from relatively bigger underwriters who are interested to see this and how we would work together. It’s the beginning of the change.
Patrick: Are they “Bulge Bracket” guys or more second tier?
Rod: Second tier. They’re calling me to find out about how we can work together. That’s a positive thing. The single biggest issue where there’s a misunderstanding about broker dealers and what they do, they add a lot of value, but only once you’ve already shown that you have a success at the retail investor level. If you’re dragging and it’s not working there, then broker dealers are not going to risk their relationships with their clients and go to bat for you. The likelihood is that it’s going to fail. The dialogue will fail.
Patrick: Do you need the broker dealers to make a market in the stock?
Rod: Yes, you do post offering. In the offering, it’s optional to have a broker dealer involved. They can add a lot of value. For example, we instrument when people go through the investment process but stop partway through. Then we flag that information and send it to the broker dealer.
They are allowed to call those investors up and help them understand the nuances of the business. They can take an investment that way if they choose and it makes sense for the investor. Doing that in the right method is important. That’s a natural thing for a broker dealer to do. They can do that day one when you’re live.
What people really want is their investor clientele, which are generally accredited investors and institutions. Then you’re back to the same point. Realistically, once we’ve already made it successful, and they raised $4 million on a $6 million goal or $12 million on a $20 million goal in four weeks flat, this is looking good. They raise the share price. Now we have reasons to call your client.
Patrick: It’s a hotter deal.
Rod: Until that happens, they will not add that value. They will not bring in their investor clientele.
Patrick: It’s similar to the fact that they will pick and choose what companies they want to take public.
Patrick: It’s a two-way courting process. You’re courting them and they’re courting you.
Rod: They don’t want a roadshow where no one shows.
Patrick: What are the various phases of a Reg A+ offering?
Rod: There is flirting with the idea and checking it out. You’re evaluating if you should do this. Then it’s an audit. That’s the critical path item. In parallel with the audit, get the Form 1-A filing done and the marketing agency on board. In the 60 days after the audit is completed, you can be done with the SEC part in as quick as 55 days, but 60 days is repeatable. The average is 78.
Patrick: Do you still get the same level of comments back and forth with the SEC?
Rod: Not as much, no. The degrees of freedom are far fewer. It’s a simpler transaction. The SEC has been super with this. We were worried that they wouldn’t have enough resources. They’ve been great.
Patrick: Are the audit fees and legal fees typically lower in a Reg A+ offering versus a public offering?
Rod: The Form 1-A filing fee, you can pay as much as you want. It starts off at $50K, all in, including the offering circular, which is the red herring equivalent that’s online. Then the audit is whatever it costs. You don’t get a special deal. The amount of work that the auditor has to do is a part of the SEC filing.
That is a reduced cost. Then the marketing stuff is the marketing cost. One of the biggest issues tends to be the upfront cost. It’s a minimum of $80K if you’re really careful who you use. That’s marketing and legal service provider, not counting the audit. The audit depends on the complexity and on which auditor you choose.
It’s about $80K up to $200K or $300K for a large raise, in terms of preparing the ground properly. Then you can usually use proceeds to pay for the ongoing marketing if you choose to do that.
You asked about the schedule. There is the audit. There is the Form 1-A filing, which is two months, as well as marketing preparation. I would rather not go live and test the waters when you know you’re marketing it. I would go live to investors. It’s a better test. It’s real. Then there is one to four months or marketing to bring in the investment. The relatively good news is that you’re bringing in investment money right away. You can do the first closing when you’re ready.
Patrick: You can do a mini closing to get the cash.
Rod: You can do that every two weeks. It’s not an “all or nothing” thing.
Patrick: You have to get to the end zone before you bring the money in.
Rod: Right. It’s a definite transaction, as long as you’re not buying something.
Patrick: It is a big difference.
Rod: Yes, it is huge, from a cashflow point of you.
Patrick: We have another question from Rosaria. “What if a company is headquartered in Canada? Can it still avail of Reg A?”
Rod: Yes, it can. Companies in Canada have the same rights that US companies do to conduct a Reg A+ transaction. They are not able to sell shares to Canadian citizens. That is regulated by the Canadian government. Reg A+ allows them to raise money from all other countries and from the US. We’re seeing more established non-US, non-Canadian companies moving their headquarters here to raise money.
Patrick: They need to have a physical headquarters here?
Patrick: Most of these companies are Delaware corporations as well.
Rod: Usually, yes, or Nevada. Generally speaking, that’s its own selection criteria. A company that can afford to move their headquarters over here to do this transaction are much further along. We’re seeing more mature companies from outside the US.
Patrick: Are you required to take a company public after Reg A+?
Rod: It’s a double-barreled answer. Technically, you do because the shares are tradeable as far as the SEC is concerned. If you lock them, for example, you might lock them for five years or until the company lists, then they are not tradeable. You are not public. You choose to provide liquidity or not.
That’s a part of the offering. It’s all open and above board along with the risk factors. Then, you’re not actually taking the company public. You’re raising money through a convenient method. Or you can take it public, as discussed. It’s your choice. Some people do think that they’re forced to do an IPO to the NASDAQ, which is not true. I think the sweet spot for some time is going to be OTCQB and OTCQX. Along with the reduced reporting requirements, you can stay legitimate.
Patrick: Yes, the listing requirements are much less onerous on those exchanges.
Rod: As the number of companies there increases, we are going to build our own research analyst service. These companies need low-cost analyst following.
Patrick: Is there a big public market for these microcap stocks or more small cap stocks that are on a lower exchange?
Rod: There are microcap stocks. Some of the companies that I’m seeing are far further along. There are big small gaps. There aren’t going to be a lot of those right away. It’s going to be a few over the next 12 months.
Patrick: It’s that microcap. They want some liquidity. They want to raise a decent amount of money with fewer restrictions and lower costs.
Rod: More control. Venture capital is a superb way to go, as we know. You’ve worked with Mission Ventures, which is a great firm. I’ve worked with Kleiner Perkins and other great firms. They’re the crème de la crème, the exception that proves the rule. Sometimes it’s the fan that doesn’t want to risk being booted because the VC firms decide they have a different agenda and schedule for the growth of that company.
Patrick: There can be a lot of different agendas. Is a Reg A+ available for companies whose operations are outside the US or Canada?
Patrick: But they have to move their headquarters here?
Rod: Yes, their headquarters have to be here.
Patrick: What are the greatest risks associated with the Reg A+ offering?
Rod: That is doesn’t succeed. As in a Kickstarter environment, some people are afraid to list their company in a public forum because they’re worried that they’ll give away their strategy, which you almost certainly do. They’re worried that, by tipping their hand to their potential competitors, they’ll create a landslide of competition.
Then, if it doesn’t succeed, that’s the worst-case scenario. You have an idea that you can’t harvest without capital, and it doesn’t work. That’s the worst-case scenario. Not every company will choose to take this route. Some companies are concerned about that. The biggest thing that I do up front with companies is help them understand if Reg A+ is a fit for them at this stage in the game so that they don’t waste their time and money if it won’t work.
Patrick: A lot of that is how you communicate. Companies that communicate effectively don’t necessarily give away all of their secrets.
Rod: That’s true. You can have this black box over here and talk about what it does, but no one knows how it does it. That’s true. There are a bunch like that.
Patrick: Do you have any parting comments or key points that we left out?
Rod: I see a lot of companies making mistakes. They will come to me and they’re partway through a journey. They’ve been given some daft advice or they’ve advised themselves. They’ve spent quite a bit of money to get nowhere because they’re partway through the SEC filing. What you have to do is restart this puppy.
It’s going to cost a significant amount of time and effort, because the way you’ve gone is the wrong journey. The fact that you have these things approved doesn’t help you because you’re not going to succeed with that transaction.
Seek experienced advice. I always say that I’m biased. I think they should all come to Manhattan Street Capital. It’s okay to go to one of our competitors. The point is to get professional advice. It’s not a big law firm or a big auditing firm that has experience with IPOs. This is different enough.
You want people that are in this space of Regulation A. Auditors, marketing agencies and law firms that are practiced in this space are the people that you want. They’ll spend less money and get a faster result, whereas you’re educated the giant firms. You pay through the nose for that. It costs so much time.
Patrick: That’s always great advice in raising capital in general. Get the best partners. Get the best bank. Get the best attorney. Get the best auditor. Get the best marketing firm. Pay a little bit more to get the best, if you can afford it, or get the best that you can afford. There are so many people out there who say they know what they’re talking about and they really don’t.
Rod: They probably have great intentions. They might come from a different set of variables. I’ve seen some horrific stories where one company was in test the waters for six months waiting for an updated audit. You can bet that they weren’t told it would be six months. They were in test the waters the whole time. The early adopters are the ones who jump on it first. They’re the ones that you lose first if you don’t have a relatively close time frame.
The other thing is to make sure that you do a thorough job. You have to like the people you’re working with. There is so much involved in this. Like when you did your IPO, this is simpler, but you have to like the other people.
Patrick: You’re working with them shoulder to shoulder, hand in hand for months.
Rod: There are a lot of meetings, phone calls and trust. You can’t predict every variable up front. You have to know that the other person is going to be reasonable to deal with when that surprise comes along. It’s a journey. It will get easier with time, practice and repetition.
Patrick: I think this does provide a very unique, new and valuable way to raise capital that previously didn’t exist. This is much different than what existed before.
Rod: Yes. From time to time, I’ll have conversations with people from the investment bank industry. Many of them are very skeptical about anything new. Reg A+ to them is, “I haven’t heard about it enough, therefore, it doesn’t matter.”
Then there are others who look at it more closely and they are changing their entire business model, focusing on this and partnering with us, bringing really solid companies, which is fantastic. This reminds me so much of the microcomputer revolution as it moved over from the perception of being a toy. Then look what that toy did.
Patrick: There are two things that I apply from a product company standpoint. One is that crossing the chasm concept where we’re in that early adopter phase. As that gets momentum and people get comfortable, broker dealers get comfortable, the ecosystem gets comfortable, this thing can skyrocket.
The other thing is the innovator’s dilemma. This is a much lower cost way of doing something that previously didn’t exist. In the beginning, everyone was skeptical. They think this is a toy, for novices, and not for professionals. As it gets refined, there are big opportunities.
Rod: I see this already. The fees that we charge have been going down. We’ve reduced our fees. I believe that’s part of the game. If we aren’t able to reduce the cost of these transactions with time, then why are we doing this?
Patrick: Yes. It should be more efficient. It should be faster and lower cost.
Rod: More and more automated with more and more state-of-the-art technology. We have an algorithm, which is a living breathing thing. They have to be if they’re going to continue to stay state of the art. It monitors a bunch of interesting activities on our platform. That’s an example right there. That is AI.
Patrick: Yes. It’s big data. It’s AI. It’s going to allow you to be more efficient in making offerings over time, as you use that data in a very intelligent way.
Rod: We use it primarily to identify risky investors because law suits are a scary phenomenon in this business.
Patrick: What’s the best way to get a hold of you?
Rod: Send me an email at email@example.com. Through the website, there are different touch points. You are welcome to reach out to us. It usually ends up in my lap when it’s a new company discussion.
Patrick: Rod can also be found on Twitter at @IamRodTurner. He is a contributing writer for Forbes. Check out his existing articles there. I have read a few of them and they are good. He is really insightful on Reg A+ and what’s going on there. Thank you so much for joining me today.
Rod: Thank you.
Patrick: It was great to see you again.
This is Patrick Henry, CEO of QuestFusion, with The Real Deal…What Matters.