Born out of the 2012 JOBS Act, Regulation A (Reg A) was amended to provide a streamlined pathway for companies to raise up to $50 Million while benefiting from general solicitation, ‘testing the waters’ and state Blue Sky preemption.  SEC reporting companies were originally excluded from using Reg A; however, in January 2019, the SEC adopted new rules to expand Reg A to SEC-reporting companies, enabling public companies to raise capital in a similar manner to a traditional IPO via an S-1 registration or an S-3 shelf registration.

This recent change will benefit OTCQX and OTCQB-traded companies that may have otherwise been limited to raising capital via a PIPE transaction (discounted, non-freely tradeable stock) or by effecting a reverse stock split and listing on a national exchange.  These types of “alternative financings” often have negative consequences that are costly for issuers and shareholders.  In a study performed by Oxford Metrica, companies that effected a reverse split to qualify for a national exchange lost 4.1% of their value following their offering and, at the same time, may not have seen an increase in their long-term institutional shareholder base. The latest Reg A amendments also provide an alternative for OTCQX and OTCQB traded companies that do not meet the $75 million public float requirement to conduct an S-3 shelf offering.  SEC reporting companies can look to community banks and REITs, which have successfully used Reg A for small public financings.

REITs and Community Banks are paving the way for small cap companies to follow

In July 2018, Generation Income Properties Inc. (OTCQB: GIPR) closed its Reg A offering and raised approximately $4.2 Million.  The Tampa-based REIT has been using the proceeds from the initial raise and subsequent investments to acquire properties and build out its portfolio.  In March 2019, the REIT began trading on OTCQB under the symbol “GIPR” to offer its investors liquidity and provide another form of capital for future acquisitions.

David Sobelman, GIPR’s Founder and CEO stated, “With our current portfolio and pipeline of potential future investments exceeding $300 million over the next three years, we feel that the regulatory steps we took to get to this point in our growth are providing our shareholders more options to invest as well as the ability to diversify their real estate exposure.”  

Victory Bancorp (OTCQX: VTYB) is an established community bank that used Reg A to raise $4.4 Million in February 2017.  Established in 2008, the Bank was chartered as a de novo commercial bank with an initial capitalization of $10.3 million primarily from local investors, including its board of directors and executive management.  Through the Reg A offering, the bank was able to raise additional proceeds from existing and local shareholders, save in offering costs and offer immediate liquidity to its investors.  Typically, a capital raise of this size could amount to over $200,000 on commissions and underwriting fees.  Since shares issued to non-affiliates under Reg A are freely tradeable, in March 2018, the Bank began trading on OTCQX under the symbol “VTYB” to provide a secondary trading market to its investors.

We believe that online capital raises will eventually become as mainstream as online trading has become among retail investors.  By using Regulation A, companies can leverage their customers and existing shareholders to conduct a self-directed public offering via a funding portal or their own website or an underwritten offering through a broker-dealer.

OTC Markets Group has been a strong proponent and advocate for the JOBS Act since it was enacted in 2012 and continues to support initiatives that promote small company capital formation, entrepreneurship and small business growth.

For additional resources on Regulation A, please click here.  If you are interested in more information about Regulation A, please contact Joseph Oltmanns, Senior Vice President, at joe@otcmarkets.com, or Rachel Nussbaum, Vice President, at rachel@otcmarkets.com.