The limit on IPOs from Reg A+ companies should rise to $75 million or $100 million from the current $50 million, according to securities attorney David Feldman, known in come circles as the “Godfather” of Reg A+. Mr. Feldman, a Partner at Duane Morris LLP, suggested at an SEC conference in 2010 that the overhauled Reg A program be called “Reg A+” and the name stuck when Congress included it in the JOBS Act – helping him earn the “Godfather” sobriquet.
Mr. Feldman has represented Reg A+ IPO companies including GreenKissNY and Myomo Inc (ticker MYO), and is counsel to others with 2018 IPOs in the works. He has authored four books on finance and entrepreneurship. His latest book, Regulation A+ and Other Alternatives to a Traditional IPO will be available in February. Here’s our interview with Mr. Feldman, where he weighs in on the state of the Reg A+ environment and its future.
RegAResearch: For private companies seeking to go public, what are the most important reasons to pursue a Reg A+ IPO?
Mr. Feldman: Any company that sees the benefit of being public and can bear the cost of doing so should seriously consider it. There is now no reason not to use Reg A+ for any IPO under $50 million, which is its limit (though legislation is in Congress that would raise the limit to $75 million). There are a number of benefits. First, the SEC review is much more limited than traditional IPOs, saving both time and money. Second, only Reg A+ allows a company to “test the waters” with any investor both before and after filing the IPO with the SEC. This allows marketing of the deal online as well as on radio and TV, which is particularly attractive to companies with already-existing customer bases or social media followings. This ability truly allows Reg A+ to bring Wall Street to Main Street. Third, offering costs can be contained since audited financial statements can be as much as nine months old, vs. 4.5 months in a traditional IPO. Fourth, a company seeking to trade in the over-the-counter markets will have reduced disclosure and reporting obligations.
RegAResearch: Are there instances when both a traditional IPO and a Reg A+ IPO are possible, and should some companies choose one over the other?
Mr. Feldman: If a company qualified for Reg A+, given the benefits above, it is now the first choice of many. We are still awaiting the entry of higher-tier underwriters into the space, which is anticipated in 2018.
RegAResearch: Every Reg A+ IPO stock has declined since listing in 2017 while the broad market has risen. What are the reasons for the poor performance?
Mr. Feldman: Most believe that valuations should be scrutinized carefully and that the advent of firm commitment underwritings as opposed to “best efforts” deals could address this issue. However, I believe a company should try not to focus on its first few months of trading in these circumstances and look for its market support to build over time since most go public without typical analyst coverage and other attention that leads to early price gains.
RegAResearch: What is necessary for Reg A+ stocks to perform better?
Mr. Feldman: More analyst coverage and the ability to use “over-allotment” options in firm commitment transactions to help stabilize trading.
RegAResearch: Some critics argue that the poor performance is a manifestation of adverse selection, meaning the worst companies have nowhere else to go for capital. Is this fair?
Mr. Feldman: Most of these companies raised substantial private capital before their IPO so I do not believe that is a fair assessment.
RegAResearch: What predictions do you have for Reg A+ IPOs in 2018?
Mr. Feldman: I believe the acceptance and use of Reg A+ will grow meaningfully in 2018. It may take more into 2019 before it becomes as ubiquitous as many believe it will. It takes time for Wall Street to turn its big ship to doing something new, which will happen, hopefully more in the short vs. long term.
RegAResearch: What legal changes would you advocate to improve the environment for Reg A+ companies?
Mr. Feldman: I believe an increase in the amount that can be raised could dramatically assist in the interest in and adoption of Reg A+. Raising it to $75 or $100 million would have a significant impact on the use of the technique. I also hope the SEC will consider allowing full SEC reporting companies to use Reg A+, which is not currently allowed.