The most recently quarterly results show that the Reg A+ space has never been more active. In the first quarter of 2018, the SEC qualified new Tier 2 offerings for 26 issuers. Since the end of 2015, when rules enhancing Regulation A went into effect, 157 Tier 2 offerings (not including those that were subsequently withdrawn or used for merger purposes) came to market. This compares to just 27 qualified offerings under the old Regulation A in the four years prior to the end of 2015.
Reg A+ ready for upgrades?
Yet, despite the steady growth in Regulation A issuances, lawmakers and regulators are disappointed with the impact Reg A+ has made on small business capital formation. In its October 2017 report to the President regarding the state of the capital markets, the Treasury Department noted issuers’ “relatively modest use” of Regulation A Tier 2, and outlined three key proposals to encourage wider adoption: (i) raising the offering limit from $50 million to $75 million; (ii) allowing Exchange Act reporting companies to use Regulation A; and (iii) urging states to exempt Tier 2 securities from secondary trading restrictions, or else the SEC using its authority to preempt state registration requirements for secondary trading.
The SEC has authority to review and adjust fundraising limits under Regulation A every two years. According to a recent public dissent letter posted by SEC commissioners Michael Piwowar and Hester Pierce, the SEC has decided against raising the limit for now. Currently, the fate of Regulation A+ Improvement Act of 2017—which would statutorily increase the maximum to $75 million and then index it for annual inflation—is up to the Senate after being passed by the House. However, it’s unclear that raising the limit would entice more issuers to Reg A+, especially as current issuers have struggled to raise their own maximum offerings.
Or is too late to resuscitate Reg A+?
While Washington contemplates expanding the exemption even further, earlier this month, Reg A+ took some significant reputational hits. Longfin Corp, a fintech firm and the only Reg A+ issuer to both later list on a public exchange and sustain share prices in excess of its IPO price, became the subject of an SEC investigation over public disclosures. In response, Nasdaq froze trading of its shares, and several executives resigned.
Matthew Smith, executive chairman of Royalty Flow, another would-be Regulation A-to-IPO issuer, blames the Longfin fiasco on the collapse of his company’s Reg A+ offering. The prospects of that deal started off promising, aided by media attention over the company’s underlying assets; Royalty Flow was to purchase royalty interests in popular recording artist Eminem’s 1999-2013 catalog. After securing commitments to fund an offering in excess of $20 million, Nasdaq rescinded its conditional approval to list Royalty Flow’s shares on the exchange, which Mr. Smith believes was in response to the Longfin scandal. Institutional commitments, which were dependent on the listing approval, evaporated, and Royalty Flow had to close on the Eminem deal with internal financing instead of through Reg A+ funds.
Mr. Smith’s experience prompted him to declare that “Reg A+ is dead.” While the data says otherwise for now—and an increasing number of qualified issuers are disclosing an intention to list their shares on public exchanges—Nasdaq’s recent move in Royalty Flow’s case may be a vote of no confidence in Regulation A’s ability to incubate viable candidates for public listing. If it is, Mr. Smith’s words should be heeded by at least for issuers seeking a path to an IPO.
Niches outside of the Reg A+ mainstream
With these stories dominating coverage regarding Reg A+, it’s easy to forget the relative success that direct participation plan issuers can have with the exemption, especially for offerings sold through the retail investor channel. We continue to see real estate-related issuers file for Reg A+ offerings as similar companies have been able to raise significant capital under the exemption. These issuers can advertise to and draw from a larger pool of investor than if they were funding the same strategy through a private placement (although costs to undertake the offering may be lower under Reg D). For now, it seems like real estate and other DPP sponsors have carved out a niche in the Reg A+ space, far away from the headlines.
We are also monitoring a handful of ICOs currently filed as Reg A+ offerings. If the SEC should qualify these deals, Regulation A could take on an entirely different profile with the investing public.
Interact with FactRight’s database
Below is an interactive summary of FactRight’s Tier 2 Regulation A database, updated for offerings qualified through the end of the first quarter. The charts below are dynamic; if you click on a single data point in any chart, it will filter the data displayed on the sidebar at left and in the remaining charts. Hover your cursor over a chart for additional information.