What you need to know today about Regulation A+
Congress may have taken action in 2012 to address serious issues in the capital markets that have, for decades, left small and medium sized companies (SMEs) at a disadvantage in raising capital. But it’s today—RIGHT NOW!—that people are starting to really talk about the JOBs Act and the two key components in it that allow for greater solicitation (advertising) for new investors—crowdfunding and Regulation A+ (Reg A+).
At Allegiancy, our analysis focuses on Reg A+ because this is the area that has the most potential to transform the American economy.
Why? The original rules under Reg A that allowed for limited public offerings (circa 1934) had been very little used due to the $5 million annual fundraising cap and the high costs of getting an offering on the street. In other words, it cost too much to raise too little to make an impact on business.
The proposed revisions under Reg A+ and the rules issued by the SEC (expected to be finalized any day now) are expected to have a dramatic impact. The new Reg A+ provision allows companies to raise up to $50 million each year and requires all 50 states to permit sales of the securities once the SEC has blessed the offering.
These changes will have a dramatic impact in reducing the effective costs for each dollar of new capital raised and could change the landscape of how small and medium sizes companies raise capital.
In short, it enables them to raise the money they never could before thanks to increasingly tighter regulations and bank lending practices, allowing them to create the jobs that can truly transform the American economy.
A Massive Opportunity—The US Private Equity Market
Forget talking about Brazil, Russia, India and China (BRIC countries) as global emerging markets. There is a large, untapped market right here in the U.S. And no one seems to be paying attention to it.
There is seemingly endless media coverage and analyst discussion on the U.S. Public Equity market, estimated by the World Bank at around $19 trillion.
Similarly, in the recent past we have seen an awful lot of ink spilled in writings and musings about those Emerging Markets. The BRIC countries have captured the attention of seasoned and novice investors alike, with their promise of diversification and higher growth.
So, how big are the BRIC markets? Well, our friends (a term used advisedly) at the World Bank tell us that the total public market capitalization for the BRICs is about $7.5T (Brazil: $1.23T, Russia: $0.91T, India: $1.28T, and China: $4.15T).
If the Emerging Markets are worth paying attention to, those are big numbers and they amount to more than a third of the US markets, one would hate to completely ignore an opportunity of at least that size, right?
Perhaps the $69 Trillion Private Equity market in the U.S. would be worth some investigation?
The vast majority of companies that employ your clients, deliver services to your clients and are the backbone of the US economy. That’s who we’re talking about here.
And that’s the scale of the opportunity presented by Reg A+….the opening up of the capital markets to over 75% of the US business community is earth shaking, ground breaking and every other movie-announcer phrase you can think of to use. We are talking about ready access to a ‘new’ market that is more than 300% larger than US Public equities today and almost 10X bigger than the much vaunted Emerging Markets.
It is time to get busy, my friend. Opportunity is at your door and he is knocking. There is work to be done, information to gather, questions to ask, clients to educate. This has been over four generations in the making….and you are lucky enough to be here to participate. Make sure you are ready, equipped and able….much more fun to ride a wave this big than to have it roll over you.
Opening Bigger Money: $5 million to $50 million
The Securities act of 1934 set up Regulation A with a $5 Million annual limit for fundraising. For the last four generations that number has remained the same. This would be like taking your kids to school in a Pierce-Arrow classic car; no anti-lock brakes, no air conditioning, no air bags. It is more than high time these limits were modernized and the new fundraising cap under Reg A+ is set at $50 Million.
This means that the legal and offering costs that are always a part of raising money can now be spread over a securities offering that is 10 times larger….creating more efficient offerings and lowering the effective cost of capital for issuers.
At the same time reduced offering costs should allow investors to receive a larger share of company profits and enjoy higher returns on their investment.
Creating Broader Access: 1 state vs. all 50 states
Under the old way of doing things each issuer was required to gain permission on each offering from each state where the security was to be sold. This state-by-state process was enormously time consuming, very costly and creating significant uncertainty for issuers, registered representatives and investors. Many times eager investors were left out when a specific state regulator imposed a draconian requirement on the offering and many an issuer was left spending tens of thousands on legal fees trying to navigate the maze of state authorities.
Under Reg A+, through a process called ‘coordination’ (I know, try not to laugh) the issuer and his attorneys need only navigate the byzantine processes at the Securities and Exchange Commission. Once the SEC requirements are satisfied and the subject offering is “effective” then the securities are allowed to be sold in all 50 states without the need of further regulatory review. This relieves a huge burden on issuers and opens up a significant opportunity for registered reps and their clients to invest in smaller companies earlier in their life cycle.
Introducing More Investors: 8.5 million accredited equity to 171 million non-accredited equity
Under the old regime, most investors were not even allowed to consider making capital available to smaller companies. Generally these younger growth companies would raise money through private placement offerings (under Reg D) that were only open to accredited investors meeting the much higher net-worth and income standards defined by the SEC.
Currently the best estimates indicate that there are approximately 8,500,000 accredited investors in the US who meet the 2013 standard. While that may seem like a lot of folks, the best information available reveals that there are more than 171,000,000 equity owners in the US. So, the market for potential investors (issuers) and clients (registered reps & RIAs) just increased by nearly 20X. That is a very big deal and a huge opportunity for investment professionals to increase their client base.
Helping More Companies: 63,000 US public market to 27.1 million US private companies
While the public equity markets in the US get almost all of the attention from the media and government, there are only about 6300 companies trading there. Are they big…. sure they are. And these companies are very important; they are the household names we are all familiar with.
But other than the big name investment banks, you know like Goldman Sachs or JP Morgan, how many investment professionals have the opportunity to help them raise capital or to introduce a client into that latest IPO? Not many. With the Reg A+ revolution, there are about 27,000,000 private companies whose access to the capital markets is about to get much better.
Many of the leaders of these companies are already your clients….and almost all of them are so busy trying to lead, manage and grow their companies that they have not paid any attention to these coming changes and the opportunities that Reg A+ will deliver.
More investment professionals than ever will have the chance to help clients with truly valuable information that can meaningfully impact the client and his company. More of you than ever before will have the opportunity to help clients raise capital, implement succession planning solutions, estate planning programs and recapitalizations. Don’t miss it….and don’t let somebody else bring these solutions to your clients because you were not paying attention.
If you are interested in learning more about the opportunity Reg A+ and the JOBs Act can provide for you and your firm, then call Allegiancy today.
CALL US 1-866-842-7545
10710 Midlothian Turnpike, Ste 202, Richmond, VA 23235