In theory, Wall Street has always been available to American businesses of any size to form capital. In practice, and for a host of reasons related to the expense and regulatory burden that has grown exponentially in the past two decades around IPOs, only the largest companies have had access to Wall Street.

For most issuers capital market access has been limited to the private placement of debt or equity with certain individuals and private fund investors who are willing to agree to significant restrictions on the resale of these securities. To buy these securities, investors must be limited in number or meet significant net worth or earnings thresholds to be classified as "accredited investors."  The end result is that the variety of investment options and the audience to which those options were made available have been severely limited.

Expanded Regulation A now gives a much broader variety of issuers and businesses the ability to offer their securities to a much broader segment of the population. As such, financial advisors will have far greater opportunities to find unique and quality investments for their clientele and recruit new clients by offering the same.  

Restrictions on the manner of solicitation have typically meant that businesses face a very inefficient raise process.  That meant going primarily to individual or institutional investors that could take down investments in large increments, and, more to the point, restrictions on liquidity has been translated into demands by these investors for big returns on riskier investments.    

However, under Regulation A, there is the opportunity for many mid-market and lower mid-market companies, for example, that have solid fundamentals, the ability to consistently produce dividends or potentially be a lucrative acquisition target in the future, to reach a much broader segment of the population with performance goals that are realistic and achievable.  Furthermore, many of these opportunities could potentially be in the investors" "backyard" further lending to the notion of transparency and knowledgeable investing.   

That should afford the opportunity for many smaller and regional investment banks to be able to bring to market unique products, public in nature, as compared with what most investors can obtain from Wall Street.  Further, the size of these deals would likely not attract the large, Wall Street banks, making this a unique, niche play for "Main Street" securities dealers.

How does it work?

An offering under Regulation A requires that the issuer file the Regulation A Offering Circular Form 1-A with the SEC. The SEC will review the form for adequacy of disclosure and compliance with the regulation. They will then have the opportunity to comment on the offering and request amendments to the disclosure.

While this is analogous to the registration process for public companies, this is a much more abbreviated process than public registration with less onerous rules. That equates to less expense. Where an issuer would easily be looking at anywhere from the high-six figures to several million dollars in expense to "go IPO," most Regulation A deals would likely incur somewhere in the range of $100,000 to $200,000 of costs.

It should be noted that securities sold in Regulation A offerings are subject to state securities (Blue Sky) requirements in those states wherein the offering is made or the securities are sold. Therefore, issuers and their placement agents must think tactically about the states in which the offering will be made in order to keep distribution and compliance costs within reason.

 

In addition, Finra treats Regulation A offerings like any other public securities offering, and it requires underwriters and dealer managers to submit the offering to the Rule 5122 review process prior to making sales.      

The expansions and revisions to Regulation A by the JOBS Act translate into the possibility of an entirely new form of public securities market to develop that would provide diversity and opportunities for growth in investor portfolios and businesses alike.

Robert R. Kaplan, Jr. is a founding partner at Kaplan Voekler Cunningham & Frank (KVCF).  KVCF is a multicity, boutique law firm that focuses on capital formation and compliance with an emphasis on emerging to mid-market clients and alternative investments.  He can be contacted at [email protected]

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