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For entrepreneurs, new Reg A will let us build businesses

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For entrepreneurs, new Reg A will let us build businesses

By: Steve Sadler, CEO, Allegiancy

May 05, 2015

Recently I was on a panel at the three-day FSXinterlinked Conference in Atlanta and have come to the conclusion that there’s still a lot of confusion out there about the new Reg A (A+) and the opportunities it presents.

So let me help clear some things up here, just as I did as a speaker at the conference. The new Reg A is all about opportunity — growing Main Street businesses, creating jobs, and getting the U.S. economy rolling.

As background, FSXinterlinked is an investment conference for microcap, small- and medium-sized enterprises seeking to raise capital.   It includes presentations to investors, broker-dealers, and resident investment advisors.

I spoke in a special session, along with Robert Kaplan and Thomas Voekler, managing partners of Kaplan Voekler Cunningham & Frank, and James Riggs, CFP of Moloney Securities. We discussed the new Reg A and offered advice to attendees on several fronts.

During our panel, I sensed a level of confusion in the audience about the new Reg A and what it represents.

Think construction

Let’s use this analogy to talk through what the new Reg A means, not only for companies like Allegiancy that are raising capital, but also for broker-dealers, resident investment advisors, and investors.

Think construction. In construction, when you build a house or building, you first dig a hole. This hole helps form the foundation of the building. The new rules for Title IV of the JOBS Act are the equivalent of pouring concrete for the footers that go into that hole.

The new Reg A rules went into place in March, and we’re just now beginning to see something come out of the ground from the JOBS Act project. What happens next is going to look like it happened fast. The walls will go up, and we’ll see a building appear quickly.

That’s when the final rules become effective this summer; and by this fall, Allegiancy (and others) will have offerings in the market. (We’re aiming to raise at least $30 million in capital to grow our company and create jobs.) The impact to the larger world will be the democratization of capital.

Role of private equity firms

Today, private equity firms that want to invest in early stage and growth companies like Allegiancy demand onerous terms. With the new Reg A as competition, I believe these private equity options will become far less attractive. What the JOBS Act in general, and the new Reg A in particular, has the potential to do over the next 12 to 18 months is draw a lot of companies away from private equity firms and independent investment bankers.

Seed funding sources will have a better mechanism of investment through crowdfunding, via the new Reg A, rather than being tied to the high costs of the private equity and investment banking crowd.

Expect rapid progress

The foundation of the new Reg A is there and ready to build on, and you’re going to see rapid progress in the short-term. Reg A will allow young companies and small companies — some of these very profitable — to raise capital and grow. Maybe these companies won’t be the next Google – many will more likely be Main Street than Wall Street. Think about the company that delivers your propane, or services your furnace, or owns three-restaurant operation employing around 100 people.

Role of Banks

Banks currently are not willing to take risks. Allegiancy just applied for a working capital line of credit of $1 million from the bank we’ve worked with for nine years. Our cash on hand is $4 million, and we have deposits of $8 million. We were turned down cold.

You cannot capitalize a growing company in the United States of America through a bank. For us to not be able to set up a working capital line of credit of one million bucks tells you that the banks are out of that business.

What’s next?

So getting back to the analogy of constructing a building, how do you build the framing, put on a roof, and install the wiring and plumbing if you have no funding?

The new Reg A has the potential to change all this. It has the potential to give entrepreneurs access to capital, both debt and equity, at far more attractive rates. It has the potential to help entrepreneurs build their businesses. The only people set to lose are the low value-add intermediaries — the people who keep doing business the old way.   I believe that the winners will be small businesses, investors, and financial advisors who recognize and take advantage on this vast opportunity.

About Steve Sadler

Sadler is the driving force behind Allegiancy, a Richmond-based commercial real estate asset manager. The firm is a highly-specialized, fee-based investment manager in secondary markets.

Allegiancy is poised to become a national leader in the new small business crowdfunding movement. Allegiancy plans to raise at least $30 million in capital this year through a public securities offering under the SEC’s new Regulation A (A+), which increases the maximum amount a private company can raise from $5 million to $50 million a year. For more information about Reg A, visit Allegiancy.us.

About Allegiancy

Allegiancy manages approximately $300 million in commercial real estate assets. The company’s portfolio of properties has delivered returns that outperformed their peers by 45 percent since 2006. With a leadership team that has more than 100 years of experience, the company grew by 62 percent last year, largely due to referrals from satisfied clients.

 

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