Regulation CF, Regulation A+ and 506c offerings

What is Regulation A?

Tue, 28 Jul 2020 02:45:01 GMT

Regulation A governs how private and public companies can raise a substantial amount of equity and debt capital from their friends, family, business network and the general public.

Many companies are using Regulation A to raise substantial amounts of capital. Under this regulation, a company prepares financial statements, files an information statement with the Securities and Exchange Commission and when qualified, can raise investment capital from the general public.

Since the government allows companies to use general solicitation to advertise their offerings and permits both accredited and non-accredited investors to participate in these offerings, there are limitations to how much a company can raise and how much each investor can invest. These limitations are designed to protect the general public but are less restrictive than the equity crowdfunding rules found in Regulation CF.

Companies that use Regulation A to raise capital typically spend more than $100,000 in accounting, audit, legal, regulatory and other expenses to comply with the various transparency, disclosure and reporting requirements.

Regulation A is a great way for certain companies to raise capital using general solicitation, from both accredited and non-accredited investors, whether they raise capital on their own or through a licensed broker/dealer.

What is Regulation CF?

Tue, 28 Jul 2020 02:35:32 GMT

Regulation CF governs how equity and debt crowdfunding can be used by entrepreneurs seeking a relatively quick and cost effective way to raise capital from their own network and the general public.

Many early-stage companies are using Regulation CF, otherwise known as "equity crowdfunding" to raise capital. While referred to as "equity" crowdfunding, the same rules and regulations can also be used to raise debt financing.

Under the crowdfunding rules, a company needs to file an information statement with the Securities and Exchange Commission that contains a description of the business and financial results. Once files, a company can utilize a licensed platform to raise capital from the general public.

Companies that seek to raise more capital, would need to use different regulations that will require significantly more transparency, disclosures and reporting.

Equity crowdfunding can be a great way for earlier stage companies to raise capital quickly, easily and relatively inexpensively from friends, family, business associates and the general public.

What does it really cost to go public?

Tue, 28 Jul 2020 02:27:37 GMT

The cost for a private company to go public varies based on many factors. Startups can go public for less than $125,000 while larger companies will certainly spend more.

The main costs to go public include accounting, audit, legal, regulatory and various third-party fees. A company can spend more or less, depending on who guides them through the process and which professionals are engaged. For example, a company can hire a "top five" accounting firm and easily pay six figures for an audit, or they can hire a highly qualified smaller accounting firm at a fraction of the cost. The same applies for law firms, IPO consultants and others engaged in the process.

What is important to understand is that it costs companies a lot less to go public than they probably think. The stories passed on about entrepreneurs spending millions on an IPO is often inaccurate and misleading, since numbers that high typically include investment banking commissions for raising many millions of dollars. Smaller companies who complete their own offerings don't have any broker fees and thus can complete a public listing for a fraction of the cost.

How long does it take to go public?

Tue, 28 Jul 2020 02:17:58 GMT

It takes about eight months for a private company to go public in the United States.

The process to go public in the United States is very defined. The broad strokes include organization (and sometimes reorganization), planning, preparation of financial statements, audit of those financial statements, drafting of a registration statement, review by the Securities and Exchange Commission, filing with FINRA for trading and then applying to the desired stock exchange.

Most of these steps happen sequentially and the timing of each is dependent on the company, consultants, accountants, auditors, lawyers and the professionals working at various regulatory agencies.

Why do private companies go public?

Tue, 28 Jul 2020 02:10:50 GMT

Private companies decide to go public to raise capital and make it easier to recruit talent and complete acquisitions.

Companies typically pursue a stock exchange listing to raise capital to accelerate their sales, marketing, distribution business development and research initiatives.

While most investors think that capital availability drives management towards making a decision to go public, other very important reasons to go public include the ability to use stock option incentives to attract high quality talent and the ability to use common stock to make strategic acquisitions.

Some companies are driven to going public as part of the founders succession strategy, while others go public to provide their investors with a pathway to selling some or all of their shares to others.

What is a special purpose acquisition company (SPAC)?

Tue, 28 Jul 2020 01:58:58 GMT

A SPAC is a company created to go public, attract capital and then complete a reverse merger transaction.

A special purpose acquisition company has no ongoing business operation until it completes an acquisition of a private company.

Investments in a SPAC are risky because the management team seeks to create shareholder value solely through a strategic transaction.

As an investor in a SPAC, you are counting on management to attract a high-quality private company, structure a good transaction, close the deal and then hope the new management team can further increase shareholder value.

Investing is hard enough when presented with detailed information about a company and their team, product/service, strategy and financial results. When investing in a SPAC, investors are taking an additional level of risk.