OTC Markets Group recently held a Regulation A+ Bootcamp at our OTC Market Center in Manhattan to educate public and private companies about how to do a successful Reg A+ offering and go public under the Jumpstart Our Business Startups Act (JOBS Act).
Speakers included the team behind Elio Motors’ Reg A+ offering – Ron Miller of StartEngine Crowdfunding, Inc., Darren Marble of CrowdfundX, Scott Purcell of FundAmerica, LLC, and Seth Farbman and Yoel Goldfeder of VStock Transfer, LLC – as well as other crowdfunding industry experts who discussed everything from the current state of the Reg A+ market to how to crowdfund an offering to legal and accounting considerations, the escrow process, selecting a transfer agent and making shares tradable in a public market.
Here are our six top takeaways from the event:
1. Assemble the right team
One of the resounding messages was the importance of assembling a team that has prior experience doing a Reg A+ offering. “Work with the platforms that are most likely to bring you to the promised land,” said Ron Miller, CEO and co-founder of StartEngine Crowdfunding, Inc., the crowdfunding portal that launched Elio Motors’s successful Reg A+ offering.
Aside from legal and accounting help, a company’s Reg A+ team should include a crowdfunding portal, a social/digital marketing company and a transfer agent if you plan to take your company public.
2. Crowdfunding is, ultimately, about marketing. So, choose a powerhouse digital marketing agency. And start building your crowd now
According to Darren Marble, CEO of digital media/marketing agency CrowdfundX, “Reg A+ is an exercise in two things: storytelling and digital marketing.” He outlined several elements of a successful crowdfunding campaign starting with the need for companies to have an existing paying customer base or loyal online following.
“You need a crowd before you fund,” he said. That doesn’t mean companies without a preexisting customer base or a consumer focus can’t succeed in a Reg A+ offering; it will just be a little tougher, said Marble.
Marble explained the key to any crowdfunding campaign is capturing the hearts and minds of investors. Using the video CrowdfundX produced for Elio Motors’ Reg A+ campaign as an example, Marble explained the key to a successful pitch is “not to sell the what, it’s the why. People don’t care about what you do, they are about why you do it. So, sell your vision, your mission and your values.”
For that reason, a great educational video will become a key sales tool for future Reg A+ campaigns, said Marble: “The modern prospectus is a two-minute video.”
That said, one of the most effective marketing tools for doing a crowdfunded campaign is traditional e-mail marketing. For companies on a budget, e-mail marketing may be the place to invest your money. Marble said he and his team use multi-month e-mail campaigns to spread the word about a new offering and build a company’s audience.
3. Consider a hybrid deal
Several speakers at the event said they foresee companies doing more hybrid offerings in the future wherein a company begins by raising money under JOBS Act Title III and Regulation Crowdfunding (Reg CF), and then flips it to a Reg A+ offering. “If you’re not ready for Reg A+ yet, but you still want to raise capital from your affinity crowd, you can raise money from both accredited and unaccredited investors under the new Regulation Crowdfunding provisions through any of the 20 FINRA approved crowdfunding portals,” said Doug Ellenoff, a partner at Ellenoff Grossman & Schole LLP.
Ron Miller of StartEngine said he is strongly encouraging companies to do that and is providing fee credits to companies doing a Reg CF offering through their portal if they then go on to do a Reg A+ offering.
4. Make sure to dot all the “i’s” and cross all the “t’s” in your offering documents
One of the topics of discussion was the SEC’s recent temporary suspension of MedX’s Tier 2 Reg A+ offering because the company had not filed an annual report for the fiscal year in which the offering statement had been qualified. According to Sam Guzik of Guzik & Associates, the event is a cautionary tale in what not to do when you’re preparing your offering and is a common stumbling block for small, startup companies who may be unfamiliar with doing a regulated securities offering.
The most important piece of information to include in your Form 1A filing is a description of your risk factors, according to Mark Roderick, an attorney at Flaster Greenberg. “You need an extensive list.”
He also recommended companies include an extensive description of the securities and of any insider transactions.
While most attorneys at the event agreed the SEC is placing a high priority on processing Reg A+ offerings, they noted that the Commission is scrutinizing every filing and few come back without comments. On a positive note, the Commission has been upholding its promises in terms of the time it takes for approvals. “If they promise 28 days, you’ll get it in 28 days. If they promise a comment in 10 days, you’ll get it in 10 days,” said Roderick.
5. Consider your exit strategy – to a public market
While some speakers predicted many companies will use Reg A+ to raise capital and remain private, others explained the tremendous value of being publicly-traded. “There’s greater value to your securities if you have a public price for investors,” said Andy Kyzyk, Vice President of Advisor Relations at OTC Markets Group. Indeed, one of the benefits of Reg A+, compared to other exempt offerings, is the ability for the securities to be tradable immediately after the offering is closed.
Kyzyk went on to explain the numerous benefits of being publicly-traded, as well as why OTC Markets’ OTCQX and OTCQB dealer-driven markets may be a better fit for smaller companies than the auction-based model of a stock exchange: “Dealer-based markets like ours treat liquidity as a resource and a service that can be provided for investors by broker-dealers. For smaller, less-actively traded securities, the ability for broker-dealers to compete directly with each another on cost, execution quality and the amount of liquidity they provide to the market is essential to helping generate activity.”
Kyzyk cited a 2014 study by the IPO Task Force about the high costs to trade on an exchange as a reason for Reg A+ companies to join the OTCQX or OTCQB markets: “It costs an average of $2.5 million to go public on the New York Stock Exchange or Nasdaq and about $1.5 million annually to be publicly-traded. That’s simply out of reach for many small companies.”
OTC Markets Group has also rolled out specific onboarding requirements tailored to Reg A+ companies, said Kyzyk.
6. We’re in early days, but things are looking up
“It takes decades for changes in securities laws to take root. For being just a few months in for an alternative asset class, we’re doing really well,” said Dr. Richard Swart, Chief Strategy Officer of NextGen Crowdfunding and a former Research Scholar at the Institute for Business and Social Innovation at the University of California Berkeley’s Haas School of Business.