Recently, the SEC released a trio of reports from the Division of Economic and Risk Analysis (DERA) that provide a host of stats about Regulation A and Regulation Crowdfunding offerings, as well as beneficial ownership of qualifying private funds.
The one that caught my eye was “Analysis of the Regulation A Market: A Decade of Regulation,” as it surveys 1400 Reg A offerings from 800 issuers over the past decade. Here are nine lessons learned that I pulled from that report:
1. Tier 2 is popular
Most Regulation A offerings and capital raised were under Tier 2, thanks to its higher limit ($75 million) and the blue sky law preemption. If you’re aiming to go big and nationwide, Tier 2 might be your go-to.
2. Plan for lower proceeds than you seek
While more than $28 billion was sought, only about $9.4 billion was reported raised. You may need to be conservative in your fundraising expectations and consider best-efforts and self-underwriting realities.
3. Expect to fly without a liquid market
Only 2 – 4% of issuers achieved exchange listings, and about 25% were on OTC markets. You may need to plan for limited liquidity and set investor expectations accordingly.
4. ‘Testing the waters’ can be a strategic advantage
Approximately 37% of offerings used “testing the waters” communications, which allow for gauging investor interest early. Leverage it to avoid a cold-offering launch.
5. Small and scrappy issuers welcome
The average issuer was young (with a median age of two years) and small (with median assets of $0.1 million). Profitability was rare. Regulation A is a fit for early-stage companies that probably aren’t IPO-ready.
6. Intermediary or not? Choose wisely
Only about half used intermediaries. Intermediaries can boost credibility and distribution, but small offerings may not attract underwriters, so weigh your costs and needs.
7. Real estate and biz services offer peer data galore
Top industries include holding companies, real estate and business services. If you’re in one of these verticals, Reg A might be a familiar path – and peer data will be abundant.
8. Use of other offerings is common
Roughly one-third also used Regulation D before, or after, their Reg A filing. And 17% filed registration statements. Consider a staged capital-raising approach combining exemptions.
9. Location considerations
Delaware was the dominant state of incorporation, and California, Washington, DC, New York and Florida led in headquarters. Consider that other states – particularly, Nevada and Texas – are increasingly attractive as states of incorporation due to changes to the laws in those states.
Authored by
Broc Romanek