Change in SEC Regulation Should Make It Easier for Small Companies to Raise Money

By Steven Dresner

Last March, the Securities and Exchange Commission finalized its new Regulation A rules to address so-called mini IPOs that allow retail investors to invest up to $50 million in these small public offerings.

Broker-dealers who have traditionally used an underwritten IPO process to take companies public believe that this new version of Regulation A, commonly referred to as Reg A+, will help smaller companies connect with the investment capital they need to operate and grow their businesses.

The recent announcement comes two years after the SEC proposed ways to modernize Regulation A, which was designed to minimize the costs and burden of full SEC oversight on small companies as they seek to raise money.

Below is an overview of what’s most important to know, should you consider investing in companies conducting Regulation A transactions. This may help you evaluate companies and potential deals. Consider:

Regulation A is a new path to becoming a public company.

Companies using Regulation A to raise capital can list on a major market or exchange after their offering.

Private companies (and public company subsidiaries) can do a Regulation A offering.

Regulation A is geared for privately-held companies. Although a public company can’t use Regulation A directly, its privately-held subsidiaries can.

Regulation A can help companies turn customers into investors.

Many companies will advertise their Regulation A offering to their own customers, making the offering process a unique merchandising opportunity as well.

Only companies headquartered in the United States or Canada can use Regulation A.

Regulation A is intended for use only by U.S. and Canadian companies. Companies with a base of operations overseas may conduct an offering but their principal place of business must be in the U.S. or Canada.

A company can conduct a “rolling” Regulation A offering.

If a company is current in its SEC reporting, they can continuously offer securities under the same Regulation A offering for up to three years.

A company can conduct a private placement prior to its Regulation A offering.

At the same time a company is planning its Regulation A offering, it may raise capital under a separate private placement transaction. This provides an additional opportunity for investors.

Most companies using Regulation A will likely conduct public company audits.

Unless a company wants its shares to trade only on the OTC market, they will obtain a public company audit. In this way, the company can list its shares on the Nasdaq orNew York Stock Exchange.

Companies conducting a Regulation A offering will undergo professional due diligence.

Regulation A offerings will involve a cast of professional services firms, much like a traditional IPO. This includes lawyers, accountants, broker-dealers, investor relations, and a transfer agent.

In subsequent articles I’ll be writing about these mini IPOs as they come to market, discussing the deal-makers involved in the offerings, and providing links to relevant information should you choose to learn more about these investment opportunities.

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