Raising Funds With Reg A
Many company leaders are beginning to recognize the funding opportunities created by the passage of the Jumpstart Our Business Startup (JOBS) Act in 2012. The Act expanded the terms of Regulation A to make private company investments much easier and flexible than before, becoming known as Regulation A+, aka Reg A+.
Prior to the new law, only the largest organizations could attract underwriters for a public equity offering, forcing others needing capital into the arms of voracious venture capital firms or wealthy individuals. Raising capital often requires founders to cede the equity to outsiders whose only interest is to control the deal at the economic and governance levels.
The ravages of Covid-19 will affect consumer and capital markets for years, especially small and mid-market companies who are likely to need funding to transition to the new economy. While interest rates are historically low, banks and financial institutions have tightened lending standards and closed their doors to all but the largest organizations.
Reg A+ Funding
The new law established a faster, less expensive way to raise capital—equity, warrants, debt, and convertible—from the public The Act created tiers of approved offerings:
Tier 1. A company can raise up to $20 million over a twelve-month offering period if the offering is qualified by the state where the securities are offered, i.e., compliance with “blue sky” laws.
Tier 2. A company can raise up to $75 million over a twelve-month offering period if the offering is qualified by the state where the securities are offered. Tier 2 offerings are exempt from state securities laws but must be qualified by the Securities Exchange Commission (SEC) before coming effective.
Capital Reported Raised Under Regulation A
SOURCE: U.S. Securities and Exchange Staff Report, March 4, 2020
Issuers raising $20 million or less can opt for either tier depending on their circumstances and other requirements of the regulation. Since 2015, Regulation A+ offerings have raised more than $2.2 billion for issuers in the two tiers.
Traditional initial public offering (IPOs) are typically expensive and time-consuming. Depending on the amount of funds sought, legal, accounting, printing of documents, and registration fees can cost hundreds of thousands of dollars before a single dollar is raised, making raising funds from the general public inaccessible for small and mid-market companies.
Pursuing a significant private offering before Reg A+ imposed severe restrictions on the number and characteristics of investors available to participate as well as compliance with federal and state laws regarding such offerings. For the first time, Reg A+ opened the market for those who had been frozen out of the market.
Advantages of Reg A+ Offering for Companies
The new Reg A+ funding vehicles have unique advantages over other methods including:
Monetizing Proprietary Data
Reg A+ offerings provide a unique opportunity for BioTech, MedTech, Pharma, and Life Sciences companies to realize tangible value from their existing databases of CMOS, CROS, clinicians, physicians, orthopedic surgeons and other medical specialties through A+ outreach. Several large healthcare organizations such as the American Medical Association and the Blue Cross Blue Shield Association have programs for the use of their data.
While any data offered to third-parties must be identity-free (CMS has already ruled that data linked to a specific patient is owned by that patient, not the healthcare organization.), de-identified datasets can be rented for extra revenue to a healthcare enterprise.
Most healthcare businesses and medical practices overlook the value of their data in accounting for the net worth of the organization. The commercial value of the data would be considered in a valuation of the business for a Reg A+ offering to establish the pro rata shares of ownership held by the existing and new shareholder groups.
Capital sources are likely to be more restrictive and discriminating in the post Covid-19 era. At the same time, companies will be required to transform their products and services, cultures, and operating models to be successful in an economy of limited travel, greater online activity, and new consumer requirements. Few small and mid-market companies have sufficient capital on hand to pay for necessary investments.
Reg A+ offerings are a tool that should be included in the toolbox of every owner, CFO, and Treasurer in the United States. Their use provides great upside potential with little downside risk. Have you considered a Reg A+ offering for your company yet?