JOBS Act Converting Customers Into Shareholders

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Capital Formation

By Stephen Joyce

Sept. 13 — Startup companies are using Regulation A Plus offerings as a marketing tool and turning customers into investors.

Startup executives and their lawyers told Bloomberg BNA that constructing a community of enthusiastic consumers who can spread the word about products, sometimes using social media, can lead to a flourishing investor base and in time catapult firms to an initial public offering.

“Reg A is developing a lot differently than I expected and a lot of my colleagues expected,” securities specialist Anna Pinedo, Morrison Foerster LLP, New York, told Bloomberg BNA. “Thus far, the motivation behind most of the companies using Reg A are affinity-based or customer-based offerings. They want their customers to be their shareholders. That was unexpected,” she said.

The Jumpstart Our Business Startups Act's Title IV allows startups and other growth companies to raise up to $50 million every 12 months from everyday, non-accredited investors without having to register the offering with the Securities and Exchange Commission, provided certain disclosure and reporting standards are met.

The agency has already qualified nearly 50 Forms 1-A filed by companies using Title IV, which was implemented by 2015 amendments to Regulation A—commonly known as Reg A Plus. Phoenix-based Elio Motors Inc. raised nearly $17 million using Title IV while beer producer Brewdog USA Inc. aims to break that record, its lawyer told Bloomberg BNA.

Compliance Expense

One drawback to using Title IV can be its relative expense. Obtaining other JOBS Act registration exemptions and tools to boost capital raising are relatively inexpensive compared with Title IV, securities lawyers said. Required disclosures, attestations and reporting add to the complexity and expense. Preparing a Title IV offering could cost a company up to half a million dollars, the lawyers said.

“When we've talked to clients about doing a Reg A Plus offering, almost all of them have decided against it because it's almost as rigorous a process and expensive a process as the IPO process, which is a very expensive process,” Stephen P. Wink, Latham & Watkins LLP, New York, told Bloomberg BNA.

“[I]n many cases if the company is considering a Reg A Plus type offering, then the question is, ‘Well, why don't you just consider an IPO?' Because you're almost going to be investing that kind of time and effort and money to do the Reg A Plus offering,” he said.

Nonetheless, Wink acknowledged that companies are using Title IV offerings to raise money at the same time they're building a community of customers and product evangelists.

Customers as Investors

When Elio was looking to raise capital to manufacture a fuel-efficient, high-speed three-wheeled vehicle costing less than $7,500, he turned to Title IV. His company raised $17 million through its Reg A Plus offering in about two months.

“I don't think we'd exist if it wasn't for Regulation A Plus,” Paul Elio, Elio Motors founder, told Bloomberg BNA. “We were not getting the attention of the institutions. And now, with the momentum that money gave us and then going public, I think we're over the hump.”

The capital influx was due mostly to potential Elio customers: 64 percent of the investors participating in the offering had reservations to buy one of the vehicles, Elio told Bloomberg BNA. Following the offering, Elio took the company public, and it is now listed on an OTC Markets Group Inc. over-the-counter exchange.

Justin Bailey, founder and chief executive officer of Loose Tooth Industries Inc., also said connecting with customers is paramount to the fundraising process. His company, which does business as, funds video-game development and publishing by running reward and investment crowdfunding campaigns. Bailey said he wasn't interested in a Title II offering in part because it only allows accredited investors to invest. “Title II, it only gives us part of the equation. We don't get the potential, which we think is huge, of having an actual community that is not only emotionally invested but financially invested,” Bailey said.

Reaching for the Record

Scotland-based craft beer brewer Brewdog Plc, through its “equity for punks” program, currently has about 46,000 shareholders drawn to the investment by the brewer's product, beer-related events and social media campaigns. Its U.S. affiliate, Brewdog USA Inc., started selling equity shares in early August, as soon as its filings were qualified by the SEC staff. It sold $1 million in equity in the offering's first three days, Sarah Warman, Brewdog project manager, told Bloomberg BNA from Scotland.

Brewdog relies on its investors for more than just capital raising. Business intelligence and marketing opportunities are also part of the strategy. “At the moment, with our fundraising in America, we're looking at the states where we're flagging up the most investors, because obviously it makes a lot of sense to get our beer out into those areas,” Warman said.

Money raised in the U.S. will be used to help construct a brewery near Columbus, Ohio, that is expected to produce its first brews later in 2016. Future plans include launching a series of craft beer-focused brewpubs across the U.S. “We absolutely embrace turning our customers into shareholders. But our shareholders, by default, become customers themselves. We basically create brand ambassadors through our shareholders,” Warman said.

“There are no brokers out there selling [the shares] to their client base in most cases. People are doing this online, reaching out to consumers or investors to bring in money and build their base of support financially for the offering as well as for their business,” Kendall Almerico, Brewdog's U.S. lawyer and a JOBS Act specialist, told Bloomberg BNA.

“There has not been a single successful [Regulation A Plus] offering that has relied on brokers to actually sell to their customer base. People who have tried that have failed,” Almerico said. “You're building a fan base and a customer base at the same time you're building your investor base,” he said.

Brewdog USA, a Delaware corporation, wants to raise the full limit of $50 million under Title IV, smashing Elio's current capital-raising record using Title IV, Almerico said. “We very much expect to break through that at some point relatively soon,” he said. Warman said the firm intends to list on a U.S. exchange in the future.

Corp Fin Assist

Several lawyers said Title IV may be best suited to companies that have already raised money from venture capitalists, family and friends, or through some form of crowdfunding. Title IV, however, does permit entrepreneurs to raise money at an earlier stage and go it alone.

Tony Ramos, Washington-based Rural Broadband Co. Inc. president and chairman, told Bloomberg BNA that his company prepared its own Title IV filing with the SEC's help. Rural Broadband, a professional services firm seeking to expand carrier-neutral broadband infrastructure to rural America, didn't hire any outside lawyers or accountants to help prepare its Title IV filings, he said.

Several companies gave the SEC's Division of Corporation Finance high marks for answering questions and generally helping them to meet their Title IV obligations.

“It's actually not a very unpleasant process,” Almerico said. “I found the SEC to be incredibly cooperative and very positive about the whole thing,” he said.

Some company owners and their legal advisers said they weren't ready to label the modified regulation a success or failure because the ability to use the exemption is so new. They did say, however, that the rule has materially increased the use of Regulation A—just one Reg A offering was qualified by the SEC in 2011, according to SEC data—and said its development and continuing use could improve financing for the millions of U.S. growth and small companies.

“It only seems to be gaining momentum,” Pinedo said.

Facilitating Capital Formation

Before the JOBS Act, emerging companies could raise money two ways: from pre-screened accredited investors who participated in private placement offerings exempt from SEC registration rules and through traditional initial public offerings.

Companies using Title IV, which was implemented by an SEC rule rolled out in June 2015, have the choice of a Tier 1 offering or a Tier 2 offering. Companies can raise up to $20 million in any 12-month period using Tier 1 and aren't subject to ongoing reporting requirements other than a final report on the offering's status. Companies can raise up to $50 million during any 12 months using Tier 2.

A Tier 1 company's financial statements don't have to be audited by an independent accountant but the offering isn't exempt from state securities laws. A key benefit to Tier 2 offerings is that they're not subject to state securities laws, though companies issuing Tier 2 offerings are required to file semiannual and annual reports on an ongoing basis, and financial statements need to be audited by an independent auditor.

Perhaps lost in the excitement is the fact that investing in private companies involves a great deal of potential downside risk—investors can lose all of their money if the company fails. That's widely known among accredited and serial investors, but not necessarily to everyday investors hooked on a consumer product.

“People are going to be disappointed. You're probably dealing with people who have an unrealistic expectation of success,” Pillsbury Winthrop Shaw Pittman LLP partner Riaz Karamali, Palo Alto, Calif., told Bloomberg BNA

To contact the reporter on this story: Stephen Joyce in New York at

To contact the editor responsible for this story: Phyllis Diamond at

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