It’s sometimes easy to overlook the fact that the size of the US capital markets are very attractive to international companies and investors as well as domestic ones.
DealFlow Events has been organizing topical conference events for the institutional financial community for 20 years. Its latest symposium, The Reg A Conference 2023, included in-depth discussion of international opportunities as well as taking the Reg A offering straight to the Nasdaq or OTC markets – invaluable information for those who follow microcap stocks and small cap companies interested in a public offering.
This article recapping conference highlights is fourth in a series.
Peter-Paul Van Hoeken, CEO of Frontfundr, and Avraham Ben-Tzvi, founder of Abz Law Office, discussed how overseas companies are using the flexibility of Reg A to either substitute or augment their public listings in their homegrown markets.
Van Hoeken and Ben-Tzvi both advise US issuers to consider opening Reg A offerings to Canadian investors. The borderless nature of digital marketing and the appetite for appealing Reg A investments up North make neglecting the Canadian investment potential a poor decision to a company’s own detriment.
Ben-Tzvi explained that the Israeli market has similar rules to Reg A in the United States, such as a relatively unlimited number of investors and disclosure requirements. In fact, crowdfunding in Israel uses English documents and companies there will often look to get a sponsor for getting a US listing as their eventual exit strategy. One difference is that Israel has no majority written consent rule like in the US. Of course, international and US securities regulations have other specific compliance requirements, so retaining an attorney conversant with the jurisdictions in question is essential, he said.
Israeli companies in the technology, biotech, pharma, military defense (with customer base), and research & development industrial sectors are the types that may opt to issue a Reg A filing. Some companies may enter into an OTC Reverse Merger, SPAC, or other kind of vehicle and then issue subsequent Reg A capital raise rounds as a subsidiary.
They also cited other active international markets worth considering include: UAE, Singapore, Hong Kong, and London.
They noted that Reg A or crowdfunding is better than “Bad Money”, i.e., aggressive institutional players who will want ratcheted death spiral warrant kickers and other incentives that can severely hurt a small company. Safe Harbor regulations also have to be observed.
Van Hoeken and Ben-Tzvi also pointed out that crowdfunding has now become much more mainstream with Angel and VC investors. As a result, these private equity players are now increasingly becoming involved in deals ahead of a Reg A filing.
Reg A Straight to NASDAQ and OTC
A panel discussion on taking a Reg A offering to the Nasdaq and OTC exchanges included:
Gene Massey, Founder of Media Shares – Moderator
David Weild IV, Chairman & CEO, Weild & Co.
Aaron Shafton, Sr. Manager, Marketing & Sales Enablement, Dealmaker
Rachel Nussbaum, VP of Corp Services, OTC Markets
Mark Elenowitz, Managing Director, Digital Offering
The panelists discussed:
- Crowdfunding in comparison to standard Reg A capital raises;
- The differences in costs between straight Reg A offerings and other types of raises, such as Reg CF, and in going from the different OTC Markets categories to NASDAQ;
- Communications and cooperation in dealing with retail investors.
Rachel Nussbaum detailed the three (3) tiers of OTC Markets listings:
- OTCQX (most cost efficient, requirements are lighter) – a good initial stepping stone for a development stage or microcap company debuting in the public markets;
- OTCQB – especially useful if there is a predetermined base to define liquidity;
- OTCPINK – the highest level OTC Markets tier, it must have a fixed price Reg A.
Citing the numerous fees and potential noncompliance penalties with each successively higher ranked category, she said, “It’s easy for a public company to get wealthy, but harder to stay wealthy.” Going public is resource intensive, so companies need to evaluate their costs very closely and not take on more compliance obligations than absolutely necessary and affordable within their respective budgets.
She also pointed out a strategy that the structure of Reg A afforded issuers: in order to create liquidity, a company can get listed while still raising a new round with Reg A or a new S-1 with market maker support. This inevitably shortens the waiting period investors would have to undergo under a Reg D or other kind of capital raise. As a result, the quicker liquidity potential makes the Reg A investment an easier sell, especially to retail investors who may be buying fractional shares.
Mark Elenowitz concurred with the general sentiment that the market was in the doldrums, albeit with a couple of bright spots. He noted that the paradigm had shifted so that current deals are investor driven, not issuer driven. Institutional investors often will demand 200% warrant packages, and other dilutive structures, which negatively impacts the cap table.
As a solution, crowdfunding (i.e. Reg A+) can give corporations more control over deal terms. Another benefit to Reg A+ is that it allows an issuer to avoid S-1 quiet periods and other restrictions. This is especially valuable to small companies, since most bankers can get you public, but Wall St doesn’t care about companies below a $200 million market cap.
Further making his point about the value of Reg A, IPOs come out and routinely fall 50% with no exit strategy. Naked shorts can kill companies’ bid prices and they can create potential delisting risk problems.
Reg-A is the solution to help expand the investor base as well as raise capital in several ways but primarily by allowing a raise up to $75 million without excessive Blue Sky regulations (though still requisite in some states).
Elenowitz also offered strategic advice:
- Use Reg A to eliminate variable rate raises with exploding warrants, a perfect tactic for OTC markets.
- Consider the example of non-traded Reg A asset class shares in Fatburger as another example of raising capital without exposing the company to naked shorting risk.
- Reg CF (with its $5M cap) is often paired with a Reg 506C, as that will allow an upsell without upsetting the Reg CF cap.
Aaron Shafton observed that a Reg A listing on its own is great advertising and lends itself to a community. This is because a syndication of brokers for Reg A allows a company to build its brand for investors in the early stages. More sophisticated transactions often call for additional brokers in order to do subsequent raises, as needed.
David Weild IV, who was involved with the legislation that created the Jobs Act of 2012, cited the previous Reg A rules that prohibited approaching strangers in the course of any Reg A capital raise. He also warned that some stocks trade prematurely before the market is ready for the stock. True distribution is crucial to prevent excessive selling in the aftermarket, which is often the fate of many unprepared issuers and why stocks get slammed on the bid side by insufficient market support in the face of excessive selling.