Capital Raising Alternatives: Latest Developments


On February 1, at The Florida Bar's 36th Annual Federal Securities Institute, a group of panelists discussed the state of capital raising alternatives. Their conclusions and insights were not entirely surprising. The consensus was that over the last few years, as a result of various legislative and regulatory endeavors, the number of capital raising alternatives multiplied into a convoluted web. This web is rife with so many divergent and often conflicting requirements that the lawyers have resorted to creating decision trees and comparison tables, much like this one, just to keep all the exemption conditions straight in their heads. With the availability of general solicitation, testing-the-waters mechanisms and confidential SEC filings, the line between public and private offering has gotten blurred. Integration issues prevail. All in all, the legal side of capital raising is now a wonderfully confusing world of many possibilities and equally many billable hours. Let’s take a quick look at how some of these options are faring.

Regulation Crowdfunding

That wayward regulatory child, Regulation Crowdfunding, is still plagued by its numerous limitations - the biggest being the $1.07 million cap - and continues to disappoint. One of the panelists lamented that though the SEC staff tried, they couldn’t really improve a poorly drafted and very stringent piece of legislation. Issuers using this exemption typically have an existing customer or social media base. They are tapping into this existing base to sell their services and products but are not really aiming to reach wider markets. Issuers are using this exemption either to jumpstart their fairly localized business or as a bridge financing option between an initial seed round and a bank loan.

Regulation A

Regulation A on the other hand is showing promise. Sebastian Gomez, Chief of the SEC’s Office of Small Business Policy, provided some recent statistics. Since being split into Tier 1 (cap of $20 million) and Tier 2 (cap of $50 million) in March of 2015, Regulation A was used in 262 offerings. Tier 2 boasted 168 offerings as compared to 94 offerings conducted under Tier 1. Mr. Gomez noted that in the first year of the new Regulation A, the offerings conducted under the two tiers were equal in number, but since then Tier 2 has become much more popular. Issuers have reported 78 completed offerings, but Mr. Gomez speculated that most likely many more offerings have been completed but not yet reported.

Most Regulation A offerings have used an intermediary like a registered broker dealer. The underwriting has typically been done on a best efforts basis, but as the Regulation A market grows it will be interesting to see whether it will attract more interest from intermediaries and the underwriting norm evolves into a firm commitment. 

Regulation A + Exchange Listing

There are indications that Regulation A market will grow over the next few years. To improve liquidity for their shares, some companies, for example, have started listing securities that they issue in a Regulation A offering on a securities exchange. The first such listings were done in June of 2017 by ADOMANI, Inc., which listed its shares on Nasdaq and Myomo, Inc., which listed on NYSE MKT. Mr. Gomez noted that so far eight Regulation A issuers have concurrently with the Regulation A offering registered their securities under the Section 12(b) of the Securities Exchange Act of 1934 and then listed them on an exchange. He indicated that this strategy may be the path to bring back the $10 million to $20 million IPO. 

Speaking of Smaller IPOs …

So how have the smaller IPOs fared over the last few years? According to Bloomberg LP (see graph below), after peaking in 2014, IPOs raising less than $50 million have been on an overall decline in both deal count and deal value.

 

IPOs

Not-surprisingly, many of these IPOs came from the biotech (13 percent), pharmaceutical (15 percent) and financial (18 percent) sectors. Fourteen percent of these issuers were backed by venture capital firms and 11 percent by private equity firms. Twenty-five percent of these IPOs were underwritten on a best efforts basis. Stifel and Jefferies led the financial advisers in the number of completed deals. The most popular legal advisers on these deals, taking a bit over four percent of the market share each, were Goodwin Procter, Loeb & Loeb, Ellenoff Grossman & Schole, and Cooley.