Small businesses drive our economy, serving as the primary engine for job creation. The Jumpstart Our Business Startups (JOBS) Act, which former President Barack Obama signed into law in April 2012, facilitated their growth, easing regulatory restrictions to encourage start-ups and other small businesses to create jobs and stimulate the economy. While Regulation A (Reg A) has existed for more than 80 years, Title IV of the JOBS Act expanded dramatically the ability to use it as a viable finance option in today’s market.
Reg A permits a much more diverse range of companies to reach the general public for investment with regulatory and “right sized” cost burdens as compared to the traditional IPO market.
Why Reg A?
Reg A grants issuers access to new-found flexibility to raise capital directly from the public, including their own customers (something quite attractive for strong brands). All investors now have access to pre-IPO deal flow that was previously only reserved for institutions and hedge funds.
Individual investors can now participate with low investment minimums, opening up a whole new set of asset classes, like real estate investment trusts, which represent compelling investment opportunities with potentially strong returns. Issuers across a wide spectrum of industries — including manufacturing, real estate, pharmaceuticals, and retail — have embraced Reg A+’s appeal by tapping into the capital markets and raising funds directly from individual investors under the SEC’s watchful eye.
Is Reg A the Right Choice?
All investments have potential risks, and it is up to the individual (and perhaps their respective advisers) to gleam from company materials, SEC filings, industry and financial research, etc., to make informed investment decisions. So, what should investors consider before they put capital into play?
- Similarly to any other investment and not just Reg A/A+, investors should seek companies with sound business fundamentals, well-defined strategy, and strong management. Investing in the right team with the right platform and vision is paramount to any successful business venture and there is enough information in the public domain to review prior to investing.
- Investors should look closely at the industries in which they are investing. Is the industry stable, declining, or growing? What are the key drivers for the industry over the coming years? Are there other factors beyond management’s control that can impede a company’s vision and strategy? There are always industries that are in periods of stagnation, but within, there are companies that win, take market share, and deliver consistent returns.
- Investors should identify whether a company’s offering is unique and whether it is or will be in demand. This goes back to basic economic principles of supply and demand. But one can’t look at this as a stand-alone criteria. Once a prospective investor has addressed the first two points, differentiation becomes a key criterion.
- Does management have “skin in the game”? Have they invested their own capital? Are their interests aligned with shareholders? If the answers are yes, there undoubtedly will be a greater focus on value creation in the best interest of all shareholders.
- Perhaps one of the most important aspects of the due diligence process is corporate governance. For companies looking to go public, look at the quality of not just management, but the board of directors, which is responsible for strategic oversight and their fiduciary responsibility is to act in the best interests of all shareholders.
As a leader in the Reg A space, KVCF regularly works with issuers who are good candidates for Reg A. That experience also allows us to advise retail brokerages working with individual investors, as well as forward-thinking institutional investors, looking to take advantage of this dynamically growing market to do so effectively.