Earlier this year, Amit Singh, an attorney and shareholder in the west coast law firm of Stradling, compiled data for Reg CF and Reg A+ issuers for 2017. These two securities exemptions represent two of the three rules that enable crowdfunding in the US and the two rules that allow non-accredited investors to participate in an investment offer. Reg CF, created by Title III of the JOBSAct allows for issuers to raise up to $1.07 million in a highly prescriptive offering environment. Reg A+, created by Title IV of the JOBSAct, is akin to a mini IPO that must be qualified by the Securities and Exchange Commisssion (SEC). Under Reg A+, issuers may sell securities of up to $50 million.
Crowdfund Insider asked Singh why he decided to publish the report and he explained he really wants to support the Regulation A+/Equity crowdfunding market;
“… letting potential issuers know that there are real alternatives to traditional public offerings and private offerings from accredited investors [is important]. Really good companies should get funded and individual investors should have the opportunity to participate in legitimate offerings.”
Singh said his findings were not quite what he expected;
“Frankly, I’m still surprised that the numbers are so small. However, this is all still very new and attorneys and investment bankers are still learning, so I see these as real alternatives to traditional IPOs and, more importantly, reverse-merger IPOs. As seen in the Wall Street Journal’s article today, only a handful of companies have used Regulation A+ (which I view as the most exciting opportunity, since up to $50M can be raised from regular folks) to become listed on a national exchange and those offerings have so far disappointed. However, once we have real market makers and other key persons involved in the market, I hope there will be greater liquidity and opportunity.”
Both exemptions are still evolving and growing. Most industry participants and some public officials recognize the fact that Reg CF must be improved as the cost to complete an offering is high and the amount of money does not match up with today’s reality of early stage investing and the amount of money required seed a young, promising firm;
“I think the maximum amount that can be raised needs to be increased significantly from $1 million as the costs involved are still too high to justify utilizing that exemption,” explained Singh. “However, I think it still makes sense for companies that are consumer facing and are looking to make their users “brand ambassadors” by giving them a piece of the action. I’d look at the legal/accounting/market costs involved as part of the overall marketing budget in that case. But, purely from a capital raising perspective, the costs are too high for such a small raise. Good companies can easily raise much more from angel investors in traditional private financing transactions to accredited investors under Rule 506(b) (or even in generally solicited offerings under Rule 506(c)).”
So what did Singh’s report uncover?
There have already been several reports published on Reg CF totals but this may be the first that rolls in Reg A+ crowdfunding offers. According to the document, from January through December 2017, 636 companies filed forms to conduct new offerings under Regulation A+ or Regulation Crowdfunding the bulk being Reg CF. Under Reg CF, companies raised more than $33.2 million with $25 million of that amount reported in the final six months of 2017.
There were 514 initial Form C filings submitted during 2017 with the bulk coming in Q4. November was the best month ever tallying 76 initial filings. The five largest FINRA approved funding portals accounted for 72% of all offerings. StartEngine led the way having taken part in 133 offerings. Wefunder and SeedInvest were next which were was used by 105 and 66 offerings respectively.
In reviewing Reg A+, the research states that in 2017 there were 122 qualified Regulation A+ offerings filed by prospective issuers under both Tier 1 and Tier 2. Reg A+ Tier 2 offerings comprised 80% of the offerings. Under Tier 2 issuers may raise up to $50 million and preempt state Blue Sky laws regarding securities offers.
Of the issuers that filed statements for qualified offerings, 13 reported the amount raised through a Form 1-U. Collectively, these companies raised approximately $236.5 million. The average amount raised per company was $18.2 million. The maximum amount raised by any one issuer during that period was $55.6 million and the minimum was $174,862.
Another interesting aspect of the research report is the cost to issuers attempting to use Reg A+. The research states:
“The average company that reported costs associated with a Regulation A+ offering spent just over $93,000 in legal fees. The average audit cost was reported as approximately $33,735. Significantly fewer companies reported costs associated with remaining fees. From the limited data available, the average costs were as follows: sales commissions, $1.8 million; finders’ fees, $800,000; underwriters’ fees, $1.3 million; promoters’ fees, $529,630; and Blue Sky compliance fees, $19,819.”
Reg A+ entails a far higher cost for companies utilizing the exemption but then these issuers stand the chance to raise quite a bit more than a Reg CF offer. Issuers using Reg A+ may enlist the assistance of a platform or broker dealer but they may also post the offering on their own website. Another interesting aspect of Reg A+ is the fact securities issued following a successful funding round are freely tradable and thus we have seen multiple companies quickly list shares on an ATS or national exchange. For more information on Reg A+ you may read about the rules here.
The securities crowdfunding market continues to grow as issuers and intermediaries fine tune their processes. Both exemptions reviewed in the report can stand for improvement with Reg CF clearly in need of some Congressional or Federal help. There has been some talk of raising the Reg CF cap to $10 million and several other key upgrades but it is unclear if policy makers are willing to take the much needed action.