There is a great deal of excitement among companies looking at executing an offering using the recently released Regulation A+ rules. Often referred to as a “mini-IPO,” Reg A+ is designed to make it easier for small and medium-sized companies to raise up to $50 million via small public offerings without going through the full SEC registration process, and in some cases not going through the state qualification or registration process.
While the filing process has been reduced, the work that a company needs to execute in order to be successful has not. While it is true that Reg A+ offerings will have reduced fees as compared to the traditional costs of going public, which can be in the hundreds of thousands to millions for small and medium-sized companies, the investment from a time and fiscal perspective will still be considerable, with no guaranteed promise of results.
As anyone who has ever traded on Over the Counter (OTC) markets likely knows from experience, just because you list it, does not mean investors necessarily follow. One of the most beneficial provisions of Reg A+ offerings is Rule 2551, the ‘testing the waters’ provision, which allows those executing a Tier 2 offering to preempt state-level registration and qualification requirements to determine interest before the offering has been filed. The ‘testing the waters’ provision allows preliminary communication with little restriction using the Internet, social media, and other means of widespread communication. Chris Tyrrell, CEO of OfferBoard, a leading equity offerings platform, puts it in even plainer terms: “Using the test-the-water provisions, companies should not only have a sense, they should know – well before their Reg A offering is actually made – whether there is investor interest in the marketplace for it.” 1 Final rules at 21,898–99; Solicitation of interest and other communications, 17 C.F.R. § 230.255(a).
This provision is likely to save companies a great deal of time and money, as it will allow the issuing company to gather critical information from prospective investors before they spend a great deal on attorneys and accountants, qualifying the offering under Regulation A. Issuers may ask prospective investors if they would be interested in investing, what amounts they would invest, which securities would be of most interest, and where the investors live. This information will be critical in helping companies and their counsel refine offering terms before and during the offering process, as they take in feedback from prospective investors. ‘Testing the waters’ communications may continue even after the Offering Statement has been filed with the SEC and review has started, although changes after the filing may result in additional review by the SEC.
Issuers must be diligent in complying with anti-fraud provisions at both the state and federal level. In addition to providing a link to the Offering Circular if it has been filed, issuers must also include the following required notices to prospective investors when testing the waters:
• No money or consideration is being solicited and will not be accepted until after the offering is qualified;
• No offer to buy can be accepted nor can any part of the purchase price be accepted prior to qualification; and
• That a person’s indication of interest involves no obligation or commitment of any kind.
The ability to gauge market interest before spending a great deal on legal and compliance fees is an amazing opportunity. However, one still needs to prepare for the extra attention this will bring to a company and its management team, as you only get one chance to make a good first impression.
Before we get into the mechanics it is important to mention that a Regulation A+ offering, like any securities offering, requires educated partners that understand the process.
It is important in any financial communications campaign to set up a conference call between your legal team, broker dealer and communications firm so they can all be on the same page. You want to ensure that your internal and external communications team, as well as people within your firm that will be spokespeople, are all aware of the regulatory guidelines.
Regulation A+ provides a tremendous opportunity for companies looking to raise capital from non-accredited investors. Anyone used to raising money in ‘private placements’ will need to become comfortable with the more extensive regulatory requirements. Even more than with Reg D offerings, the advent of a Reg A+ makes it imperative for issuers and broker dealers to provide prospective investors with the support structures they need to confidently buy, hold and eventually sell these securities. That structure must be online and highly efficient to support many investors with smaller investment amounts, do it at a reasonable cost, and be designed from the ground up to manage the complex legal and regulatory requirements of securities issuance, trading and custody in the U.S. For example some platforms are leveraging online brokerage account infrastructure for publicly traded securities in support of privately issued debt and equity.
Every company looking to execute an investment offering must grow their brand awareness in addition to increasing operational efficiency. For a private company preparing to debut in the public markets, OTC or otherwise, this is especially true. According to Ernst and Young’s guide to going public, investors base an average of 40 percent of their IPO investment decisions on non-financial factors, including quality of management, corporate strategy and execution, brand strength, operational effectiveness, and corporate governance. The right public relations strategy can tell a story that builds the brand, highlights the experience of the management team, demonstrates innovation, and often has the added benefit of drawing new customers and increasing sales. Sophisticated and unsophisticated investors alike, confronted with a broad array of investment opportunities, lean toward those where the potential is the most evident.
While securing press coverage and reaching analysts for a private or smaller public company is challenging without a household name, there are steps that companies can take to increase their presence in the market. Here are some of those steps that companies preparing for a Regulation A+ offering should be taking now to build their brand ahead of their capital raise:
• Honesty is the only policy. Honesty is not only the best policy, it is really the only policy when raising capital, especially in the public markets. When you are raising capital you are putting a spotlight on your business and leadership team.
• Everything you say and do will be examined. It is critical not only from a brand and reputational standpoint but also from a legal standpoint that your communication be free from errors and omissions as well as puffery.
• Do not overstate potential in media interviews or give numbers off the cuff that may be inaccurate. When speaking with media assume you are “always on the record” and make sure you are giving honest, non-forward-looking information that can be backed up. It is always better to be a little conservative, especially when you are going on record. When raising capital and communicating with investors, honesty and openness need to be the cornerstone of every corporate communications’ strategy. This is where an experienced investor-relations firm can be integral to a company’s success. It is also essential that, through its spokespeople, a company remains accessible to shareholders – especially during periods of slower growth. Shareholders can forget mistakes, but they will never forgive deceit or silence.”
• Ensuring committed management. In order to grow a company’s brand, management must be committed to a multi-pronged effort in which they actively participate. They will have to dedicate time for interviews, marketing resources for editorial opportunities, content creation and brand development; often bringing in outside consultants and resources to aid in the process. Leadership should have a clearly defined strategy with an aggressive, focused communications plan to reach the correct audiences. “Management at young companies have their plates full with the day-to-day rigors of growing a business and often feel they don’t have time to prepare for proper marketing of a Regulation A+ Mini-IPO. Marketing of a public offering is just as important as the legal, compliance and regulatory aspects. You need the time to properly and honestly communicate their message to the masses, and in most cases, you need qualified marketing professionals to help do it effectively.
• Messaging that speaks to the desired audience. Executive biographies and targeted company messaging are among the most important foundation elements to completing a successful financing event, but often the most overlooked. Investors—particularly sophisticated ones—typically place as much emphasis on the competency and experience of a company’s leadership team as they do on the product or service in which they’re actually investing. Founders’ biographies should not just rehash their resumes, but rather position them as knowledgeable industry experts with track records of success. When developing this key messaging, think in terms of what an investor would be interested in from a past performance and future potential standpoint. Company messaging should also be clear, polished and free from errors, omissions and forward- looking statements. All messaging should be reviewed by experienced legal counsel to ensure compliance, as regulators will likely be reviewing early Reg A+ issuers closely. Regulators will additionally be comparing the contents of the ‘testing the waters’ materials to the disclosures made in the formal filing.
• Having a story told by you and others. As mentioned previously, 40% of why investors invest is often non- financial. It is because of how innovative they believe your company is, how your brand is perceived in the market, how strong they feel your leadership team is, and many other non-financial factors. This story of overall strength is often based on what investors read, see, and hear about a company in aggregate. It is how they perceive a company after reading stories the CEO has been quoted in, listening to industry podcasts, reading white papers the company has written, and seeing the trail of press releases that have been released over the last 12-18 months outlining the overall past accomplishments of the firm. News releases not only provide valuable opportunities to get your company in front of the right influencers, analysts and reporters in your industry, they also paint a story over time. Each news release that highlights past accomplishments, from new executive hires, to awards your company has won, to new major clients and partnerships, to closed funding rounds and other major milestones, helps to paint a full picture of who your company is and what you have accomplished.
• Increasing brand awareness through thought leadership. Simplicity and brand awareness are often key to capital raising success. One of the reasons big brands like GoDaddy have successful IPOs is because they made their brand easy to understand and were very visible prior to going public. For companies that do not have the benefit of mass-market brand awareness, or have largely remained quiet during the early and growth stages of development, making oneself known as a leader within an industry is critical to being seen as “investment-worthy” down the line. Thought leadership that highlights customer case studies, contributing articles that discuss current industry trends, announcements that have been reviewed by your investment and legal team are all examples of how company leadership can build up a more prominent profile within their own field, while laying a solid foundation of media coverage that ideally comes out before and during any financing event. Additionally, companies can and should be applying for speaking engagements and awards that highlight the company, community involvement, and their industry knowledge to enhance their overall profile in the market and community.
• Inserting a company into larger trends. A key mistake many companies make is assuming whatever they’re doing is interesting to everyone, and that the news of their launch, raise, or other company-related event is always relevant to top-tier media, potential capital partners and other big players. The reality is, just announcing that a company is ‘testing the waters’ or actively fundraising may or may not be particularly newsworthy; it depends on the news cycle, the brand recognition of the company (or lack thereof), and other factors that are outside anyone’s control. However, what companies can do to increase the likelihood of attracting the media’s (and therefore the public’s) attention is to fit themselves within broader trends happening in the market. What greater problem is the company solving in the market? How is this product/service disruptive to the bigger players? These are the types of questions that could yield some interesting stories to tell both reporters and potential investors.
• Understanding that timing is everything. The more time you can dedicate to amplifying your brand awareness through media outreach before an offering, the better. For companies going public, the need to communicate should begin more than a year before the company actually files a registration statement. This need continues, although the scope and focus changes, as the offering process proceeds to reflect different demand and legal limitations. By communicating a company’s story through media in their target verticals, the company reaps the multi- faceted benefits of third-party validation as it attracts attention, establishes an image, and sustains visibility among customers and potential investors — supporting and enhancing the eventual offering. “Reg A+ is the greatest advancement for entrepreneurship in a generation. The greatest barrier to launching powerful and valuable new innovation is getting funded. Now an entrepreneur can turn customers into partners and partners into brand ambassadors – providing they prove their concept to the wisdom of the crowd. While an effective communications program to prepare a company for a Regulation A+ offering is hard work, it can do wonders to frame early perceptions about future performance on which investment decisions are based. Because communications reflect a company’s culture and persona, a good program can lend management credibility, which is a key ingredient investors use to evaluate a company’s investment potential. Fast growing, emerging companies with continuing financing needs and possible acquisition plans cannot afford to wait to be discovered.
* Sources & ©: Joy Schoffler principal @ Leverage PR, Ron Miller Start Engine, Dara Albright, Kendall Almerico Crowdfunding Professionals