Mark Elenowitz Says Security Token Offerings May Thrive via Reg A+
We recently sat down for lunch in Manhattan with Mark Elenowitz, CEO of TriPoint Global Equities, to discuss the anniversary of the IPO of Myomo, a wearable medical products company that he took public in the first Reg A+ deal to list on a national exchange. Mr. Elenowitz identifies some of the shortcomings of Reg A+ in the last year, namely aftermarket support for the shares, and argues that some early-stage companies are the wrong fit for Reg A+. He also predicts that initial coin offerings or security token offerings (ICOs or STOs) are best suited to list through Reg A+ and will embrace the vehicle. While many service providers have talked up their ability to do STO deals, regulators consider listed tokens to be securities, meaning a broker-dealer will be necessary to sell them.
RegAResearch: With the one-year anniversary of the first Reg A+ to list directly onto a National Exchange (either NYSE or Nasdaq) on June 12th, what are some of the biggest takeaways from the first 12 months of offerings?
Mr. Elenowitz: Reg A+ is a great vehicle to get a company’s stock listed onto a national exchange. Specifically, we have learned that the companies best suited for this exemption are those that have a large, passionate affinity group. Whether it be a social media following or customer base, Reg A+ has proven itself successful as a means to convert this loyal affinity group into long-term shareholders. By eliminating a variety of restrictions associated with the promotion of an offering, namely the elimination of a quiet period, Reg A+ lets companies take advantage of their marketing prowess.
RegAResearch: Most Reg A+ stocks have performed poorly since listing. Why do you think this is so?
Mr. Elenowitz: It is really important to understand that Reg A+ isn’t broken. Reg A+ is a vehicle that companies use to get their securities listed on a national exchange. Sticking to this definition, there are many use cases that prove Reg A+ successful. What has not been successful is the after-market support of shares. The affinity groups have shown up to the plate for the initial offering, but not to trade the security in the after-market, and the majority of these companies are not large enough to meet requirements to engage the interest of institutional investors, creating this lack of liquidity or volume in the marketplace.
RegAResearch: Why should an issuer do a Reg A+ offering instead of a traditional IPO?
Mr. Elenowitz: Let me start out by saying loud and clear that not all companies should do a Reg A+ deal instead of a traditional IPO. Companies that have a large affinity group or customer base are best suited. This includes hospitality, consumer, and restaurants. If the issuer is a biotech or has a complex story that requires detailed explanation or education, Reg A+ is not the best-suited offering. In addition, our methodology is for mature issuers. If the company is early stage or start up with unproven technology and needs to raise funds to keep the lights on, a public offering is not the best choice.
RegAResearch: What are some unintended benefit of completing a Reg A+ deal?
Mr. Elenowitz: Reg A+ allows issuers to have customers and followers become shareholders, but also allow the public to become customers. We can point to Myomo that manufactures an exo-skeleton that enables someone with partial paralysis to use their upper limbs. Prior to the Reg A+ offering, Myomo was unknown to many of the patients that could benefit from their products. After the Reg A+ was completed, BANQ (an electronic broker-dealer and division of TriPoint) received a significant amount requests from patients who were suffering from a paralyzed arm and saw an advertisement for the Myomo offering . Reg A+ opened the doors for patients to contact the company and their physician to find relief for their issues. Completing a Reg A+ provides companies the ability to reach a broad audience, one that they would have never been able to reach otherwise.
RegAResearch: Where do you see the future of Reg A+?
Mr. Elenowitz: The future of Reg A+ is going to be utilizing it as a vehicle to complete fully-compliant Security Token Offerings (STOs) also known as Initial Coin Offerings (ICOs). While the ICO market has cooled down in the United States in recent months, the staggering statistics have proven that the market isn’t going to give up on this capital-raising method easily, and we believe that we have the solution for this.
RegAResearch: What advice can you give an issuer who wants to pursue a Reg A+ Token Offering?
Mr. Elenowitz: What the market has realized recently is that a “token” is a security, and the regulators have recently confirmed such through their subpoenas and indictments. There has been a ton of press coming out recently from intermediaries stating that they can support a compliant Reg A+ offering of a token. However, what the market has not realized yet is that in order to effect the sale of a security, you must be a registered broker-dealer, and most every one of these “intermediaries” (commonly taking the form of an online portal), are NOT registered broker-dealers.
RegAResearch: Why not do a 506c Private Placement of a token?
Mr. Elenowitz: A 506c Private Placement is really a road to nowhere. Yes, it can enable you to sell these securities (tokens) to investors, but you can only sell to accredited investors, and most importantly, 506c is only an exemption for the initial sale of the security. If someone buys the security in the initial private placement, when they want to sell that security, they will have to either register it themselves or apply for an exemption. This is why Reg A+ is such a great fit, as it provides a lifetime exemption for the security, so the same exemption that is being utilized in the initial sale can be utilized for all future sales as well.
RegAResearch: Why use a broker-dealer?
Mr. Elenowitz: ICO and Token sales that are using Reg A+ need to use a broker dealer. Many of the advisors who claim to be experts have no real experience. Just recently they were all promoting themselves as crowdfunding experts, then cannabis experts and now ICO Reg A+ experts but have never done a deal. What they do not understand is that if you are selling a security, only a licensed broker-dealer can speak to the public. Only a licensed broker-dealer can take transactional based fees, and only a licensed broker-dealer can effectuate the sale of a security using general solicitation. I imagine many token issuers are going to run afoul by using unlicensed advisors and put their offerings at risk.
RegAResearch: Do you think early stage companies can use Reg A+ to raise capital?
Mr. Elenowitz: I believe it will be very difficult for an early stage company to use Reg A+. There is cost associated with the offerings. Beyond the legal, accounting and filing fees, there is a large marketing component that needs to be spent to attract investor interest. When an early stage company does not have enough capital to operate, to spend a significant amount of money they don’t have to just test the waters, is not efficient. The key point that issuers must understand is that this is a public offering. Issuers are accepting funding from investors and now have the responsibility and cost to creating shareholder value and acting in the best interest of all shareholders. Many issuers don’t recognize that the offering is step 1 in a long journey of being a public company. The costs of being public are just beginning and will be continuous on annual basis. I recommend all CEOs look in the mirror and are comfortable with proceeding with public investors and be sure that other financing alternatives may be more attractive. There are other options like Title III (CF) that might be more beneficial to their needs.
RegAResearch: Some of the early issuers that have filed Reg A+ offers have been criticized for having outlandish terms, including their valuations. What are your thoughts on this?
Mr. Elenowitz: This has been a huge issue. There are companies that have no operations, not funds in the bank or paid in capital but believe they are worth $300 million-plus. These deals are not going to get done and are creating confusion in the marketplace among issuers. Many have come to me with misinformation and guidance. There are many service providers that are not licensed and receive a fee regardless if the transaction is completed or not and these service providers are playing into the issuers dreams of raising huge amounts of money at huge valuations. This is not realistic. The Crowd is not uneducated. They may have an affinity towards the product, but they also recognize potential. Transactions should be structured based upon defensible projections, assumptions and peer valuations. Those CEOs that recognize this are the ones that will have successful offerings.