Classroom

An Entrepreneur's Guide To IPOs, SPACs And Regulation A

If 2020 was the year of social distancing and being private, then I believe 2021 is the year of going public. This year has already seen 250 initial public offerings. That’s 191% higher than the same time in 2020, according to CNBC. More investors are diversifying their portfolios into direct investments through public offerings, and companies are raising enormous amounts of money at unthinkable valuations.

Every business leader must carefully evaluate all options available for capital formation. Back in 2017, I had an opportunity to lead a company to NASDAQ. We considered an IPO and merging with a special purpose acquisition company, and, finally, we decided to go ahead with NASDAQ. Each capital formation strategy has its own pros and cons. Legal, procedural and capital constraints must be weighed to decide which path a company should eventually take.

Initial Public Offerings

The traditional route to taking a company public is to go through an IPO. However, IPOs can be time-consuming and expensive endeavors. They have to be underwritten by an investment bank, scrutinized by the Securities and Exchange Commission and extensively marketed to ensure shareholders see demand for their shares. Only after all of that does the offering actually go public. Additionally, IPOs come with certain restrictions such as lockup periods, and they can open shareholders to much steeper price volatility, as seen in Airbnb’s share price since its December IPO.

The brand image and funding advantages typically outweigh the hefty time and financial expenses associated with IPOs. In my experience, public companies typically have an easier time raising more funding, securing debt and seeing a higher valuation than their private counterparts. But in the best-case scenario, IPOs take five months to conduct, and investment bankers aren’t always known for their affordable rates, either.MORE FOR YOUThe LSE Alumni Turning Their University Into A Startup Powerhouse Four New Microsoft Surface Computers Plus A Folding Phone—And Other Small Business Tech News ‘We Can Control Our Own Destiny’: John Zimmer Shares Lyft’s Vision For The Company’s Future And $1 Trillion Market Opportunity

Special Purpose Acquisition Companies

A special purpose acquisition company, SPAC for short, is a corporation created for the sole purpose of bringing a private company public. The SPAC is listed publicly but does not have any operations or assets of its own. Instead, the SPAC will purchase a private company, effectively taking that formerly private company public. The catch is that investors in the SPAC don’t identify which company the entity is targeting to acquire. So, it makes sense that SPACs are sometimes referred to as “blank check companies.”

SPACs have been around in some form since the 1990s. However, it wasn’t until recently that SPACs really took off. This method to go public was typically seen as a last resort option. Now, they’re widely viewed as a clever workaround for the challenges often associated with IPOs. However, since the entity’s success is entirely dependent upon its acquisition target, it’s important to have full faith in the management team.

One person who I believe has lots of faith behind him is William Ackman. His SPAC, Pershing Square Tontine Holdings, raised $4 billion in 2020 and is the biggest blank check company. Ackman’s fund tried to acquire 10% of Universal Music Group earlier this year, but the deal fell apart "after discussions with the U.S. Securities and Exchange Commission," CNBC reported. Earlier this year, Elon Musk also caused speculation on whether he supports SPACs when he tweeted “Green eggs & SPAC.”

You might get the impression I’m anti-SPAC. Truthfully, I’m not. Like any other financial vehicle, they have their pros and cons. Virgin Galactic went public via a SPAC. That gave the company the cash injection it needed to continue innovating in space flight. Draftkings also went public in 2020 through a SPAC.

So, we found a way to make going public quicker and cheaper. But from my perspective, SPACs are sort of the financial vehicle equivalent of buying a mystery box, which means they may not be the best investing strategy for everyone. What if you want something with more SEC oversight than a SPAC but smaller than an IPO? Is it possible to have a mini IPO?

Regulation A

In 2015, the SEC introduced Regulation A filings as a part of the JOBS Act. Regulation A filings, referred to as "mini IPOs," allow companies to raise up to $20 million under Tier I and $75 million in a year under Tier II. By filing for Regulation A with the SEC, private companies essentially are able to raise public dollars while still remaining private. It’s not the wild west, though. A company still has to meet certain eligibility requirements, and in Tier II, there are limits on what non-accredited investors are allowed to invest.

In my experience, Reg A is lesser-known than SPACs, but it has its own success stories. Exodus, for example, raised $75 million from 6,800 shareholders during a Reg A that closed in May of this year, according to a press release by the company. Similarly, Knightscope has raised more than $40 million from more than 9,000 investors through Reg A, a press release by the company also said.

I believe Regulation A's offerings are the best-kept secret in public funding. As more retail investors enter markets on the tails of services like Robinhood and Webull, accessibility of investment vehicles has never been more important. Regulation A offers the transparency and vetting of a traditional IPO while remaining accessible to small companies and non-accredited investors. From my perspective, it will certainly pick up on the democratization of investing where SPACs left off, albeit with more due diligence this time around.

But, like every other capital formation strategy, Reg A comes with its own set of issues. The company that takes this path must address regulatory issues. The ecosystem for Reg A issuance is still evolving with just a few key players. Digital marketing can also be a big task for companies raising capital using the Reg A path.

These are the early days for these emerging trends. This holds hope to open up early-stage investing to a much larger population through a proper regulatory safety net.

The information provided here is not investment, tax, or financial advice. You should consult with a licensed professional for advice concerning your specific situation.

Published first in Forbes.

DISCLAIMER

EQUITY CROWDFUNDING INVESTMENTS IN PRIVATE PLACEMENTS, AND START-UP INVESTMENTS IN PARTICULAR, ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK AND THOSE INVESTORS WHO CANNOT AFFORD TO LOSE THEIR ENTIRE INVESTMENT SHOULD NOT INVEST IN START-UPS. COMPANIES SEEKING STARTUP INVESTMENT THROUGH EQUITY CROWDFUNDING TEND TO BE IN EARLIER STAGES OF DEVELOPMENT AND THEIR BUSINESS MODEL, PRODUCTS AND SERVICES MAY NOT YET BE FULLY DEVELOPED, OPERATIONAL OR TESTED IN THE PUBLIC MARKETPLACE. THERE IS NO GUARANTEE THAT THE STATED VALUATION AND OTHER TERMS ARE ACCURATE OR IN AGREEMENT WITH THE MARKET OR INDUSTRY VALUATIONS. FURTHER, INVESTORS MAY RECEIVE ILLIQUID AND/OR RESTRICTED STOCK THAT MAY BE SUBJECT TO HOLDING PERIOD REQUIREMENTS AND/OR LIQUIDITY CONCERNS.

FORWARD-LOOKING STATEMENTS

ALL STATEMENTS, OTHER THAN STATEMENTS OF HISTORICAL FACT, CONTAINED IN THIS WEBSITE CONSTITUTE “FORWARD-LOOKING STATEMENTS”AND ARE BASED ON THE REASONABLE EXPECTATIONS, ESTIMATES AND PROJECTIONS OF REALPHA ASSET MANAGEMENT, INC. (THE “COMPANY”) AND THE COMPANY’S MANAGEMENT AS OF THE DATE OF THIS PRESENTATION. THE WORDS “PLANS,” “EXPECTS,” OR “DOES NOT EXPECT,” “IS EXPECTED,” “BUDGET,” “SCHEDULED,” “ESTIMATES,” “FORECASTS,” “INTENDS,” “ANTICIPATES,” OR “DOES NOT ANTICIPATE,” OR “BELIEVES,” OR VARIATIONS OF SUCH WORDS AND PHRASES OR STATEMENTS THAT CERTAIN ACTIONS, EVENTS OR RESULTS “MAY,” “COULD,” “WOULD,” “MIGHT,” “WILL” OR “WILL BE TAKEN,” “OCCUR” OR “BE ACHIEVED” AND SIMILAR EXPRESSIONS IDENTIFY FORWARD-LOOKING STATEMENTS. FORWARD-LOOKING STATEMENTS INCLUDE, WITHOUT LIMITATION, STATEMENTS REGARDING OUR PROJECTED NUMBER OF PROPERTIES, REVENUES, ASSETS UNDER MANAGEMENT, VALUATION, INVESTMENT RETURNS, EXPECTED CUSTOMER DEMAND, AND THE COMPANY’S BUSINESS STRATEGY. FORWARD-LOOKING STATEMENTS ARE NECESSARILY BASED UPON A NUMBER OF ESTIMATES AND ASSUMPTIONS THAT, WHILE CONSIDERED REASONABLE BY THE COMPANY’S MANAGEMENT AS OF THE DATE OF SUCH STATEMENTS, ARE INHERENTLY SUBJECT TO SIGNIFICANT BUSINESS, ECONOMIC AND COMPETITIVE UNCERTAINTIES AND CONTINGENCIES. THE ESTIMATES AND ASSUMPTIONS CONTAINED IN THIS PRESENTATION, WHICH MAY PROVE TO BE INCORRECT, INCLUDE, BUT ARE NOT LIMITED TO, THE VARIOUS ASSUMPTIONS OF THE COMPANY SET FORTH HEREIN. KNOWN AND UNKNOWN FACTORS COULD CAUSE THE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS. SUCH FACTORS INCLUDE, BUT ARE NOT LIMITED TO, OUR SUCCESS IN RAISING CAPITAL THROUGH OUR REGULATION A OFFERING AND THROUGH OUR PLANNED SUBSEQUENT OFFERING TO SYNDICATE MEMBERS, OUR ABILITY TO OBTAIN THE FINANCING REQUIRED FOR THE DEBT PORTION OF THE PURCHASE PRICE OF PROPERTIES OUR ABILITY TO OBTAIN THE DEBT FINANCING REQUIRED TO PURCHASE PROPERTIES, OUR ABILITY TO ACQUIRE THE NUMBER OF RESIDENTIAL PROPERTIES WITHIN OUR PROJECTED TIME FRAMES, CHANGES IN DEMAND, INDUSTRY COMPETITION, LEGISLATIVE, FISCAL AND REGULATORY DEVELOPMENTS, ECONOMIC AND FINANCIAL MARKET CONDITIONS INCLUDING BUT NOT LIMITED TO THE CURRENT COVID-19 GLOBAL PANDEMIC OR FUTURE LAWSUITS. MORE INFORMATION ON THE FACTORS, RISKS AND UNCERTAINTIES THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES IS INCLUDED IN OUR FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION, INCLUDING IN THE “RISK FACTORS” SECTIONS OF OUR OFFERING STATEMENT ON FORM 1-A. MANY OF THESE UNCERTAINTIES AND CONTINGENCIES CAN AFFECT THE COMPANY’S ACTUAL RESULTS AND COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED IN ANY FORWARD-LOOKING STATEMENTS MADE BY, OR ON BEHALF OF, THE COMPANY. THERE CAN BE NO ASSURANCE THAT FORWARD-LOOKING STATEMENTS WILL PROVE TO BE ACCURATE, AS ACTUAL RESULTS AND FUTURE EVENTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN SUCH STATEMENTS. ALL OF THE FORWARD-LOOKING STATEMENTS MADE IN THIS PRESENTATION ARE QUALIFIED BY THESE CAUTIONARY STATEMENTS. THESE FACTORS ARE NOT INTENDED TO REPRESENT A COMPLETE LIST OF THE FACTORS THAT COULD AFFECT THE COMPANY. THE COMPANY DISCLAIMS ANY INTENTION OR OBLIGATION TO UPDATE OR REVISE ANY FORWARD-LOOKING STATEMENTS, EXCEPT TO THE EXTENT REQUIRED BY APPLICABLE LAW OR REGULATION. THE READER IS CAUTIONED NOT TO PLACE UNDUE RELIANCE ON FORWARD-LOOKING STATEMENTS.