The Mini IPO: Public vs Private Equity



What is Mini-IPO

The SEC has recently passed a very promising regulation for startups and small-mid size companies looking to raise capital. This new regulation has enabled a substitute to the traditional initial public offering (IPO). The new set of rules was approved and put into effect from June 19, 2015 as an amendment to the Jumpstart Our Business Startups (JOBS) Act of 2012 and has been termed as “Regulation A+ or Mini-IPO”. Under this new regulation startups can raise up to $50 million via rolling their own Mini-IPO. In many ways, through the new Reg A+, companies can avail the benefits of a complete IPO under much less strenuous requirements and obligations.

Difference between Public Offer and Private Placement

Conventionally, privately owned businesses could only raise capital through an IPO or via a private placement. Through an IPO, companies are able to offer shares in their company to general public and can in most cases will enhance the company’s overall valuation. However, an IPO makes a company liable to certain SEC regulations that they have to fulfill in addition to the complicated preparation and reporting requirements.

Raising capital through a private placement implements no such restrictions and liabilities that are associated with a traditional IPO. But a private placement constricts capital overall reach in comparison to a Mini-IPO because investors are bound to meet certain financial standards/ requirements and thus 99% of the population is not allowed to invest into the issuers offering. Private placements can also be very restrictive due to venture capitalist terms, etc in regards to control and ways to obtain newer investments due to certain control factors which are set by many institutions investing into companies on a private equity bases.

In the past, Regulation A was scarcely used. Under this regulation, companies were bound to register securities in every state due to Blue Sky laws and were limited to a $5 million max capital in the offering. Due to these restrictions, most of companies used to opt for Rule 506 of Regulation D to get investments through these unregistered offerings.

Under rule 506(b) companies were only allowed to offer unregistered securities on the following bases 1) they do not utilize traditional advertising 2) purchasers are limited to only accredited investors and only up to 35 non-accredited investors were allowed 3) bound to provide detailed disclosure to non-accrediting investors; and accredited investors must successfully meet certain financial requirements which must be met and thus a filtration/ approval process must be conducted by the issuing entities. Also, companies who wish to offer securities to general public are bound by the Rule 506(c) to take “reasonable steps” and they have to ensure that all their new investors are accredited. Rule 506(b) requires certain legal documentation and reporting requirements other than the internal certifications.

There are “restricted securities” that investors are issued under Rule 506 which they can only resell after meeting certain legal requirements.

The New Venue

The final rule under Regulation A provides a great new balance between public and private offerings to facilitate private companies. The offerings are in two levels:

Reg A+ Tier 1: Companies can offer up to $20 million in a year and limits the affiliated shareholder offers to $6 million.

Reg A+ Tier 2: Companies can offer up to $50 million in a year and limits the affiliated shareholder offers to $15 million.

Through Regulation A+, companies can now offer unrestricted securities to the general public. Companies are allowed to offer shares to anyone; their family, friends or even the public at large. They are not bound by regulations to limit the offering to only accredited investors and they are also allowed to use general advertising and marketing practices to drive investors.

It Comes With a Price

There are many requirements that investors are obligated to adhere to:

  1. Issuers are bound to report and fulfill the registration requirements more so than with private placements, however, these requirements are not as strict as that of a traditional IPO.
  2. To conduct Tier 2 offerings, companies are required submit detailed statements to the SEC and become liable to same level of inspection as companies which are registered for an IPO. Under the Tier 2 offering, companies must also submit audited financial statements for the past two fiscal years.
  3. Companies undergoing a Tier 1 are not bound to submit any reporting requirements, while Tier 2 requires certain annual and biannual reports structured on the abbreviated versions of Forms 10-K, 10-Q and 8-K.

The obligatory requirements for Tier 2 offerings are a little more more demanding but there are certain disadvantages associated with Tier 1. Companies who opt Tier 1 are obligated to follow the Blue Sky laws, that is not a requirement under Tier 2 as well as certain capital limitations. This is why fewer companies opt for Tier 1.

The lucrative Choice

The Reg A+ Mini-IPO is logically an attractive option for companies which are not yet prepared or at a stage to afford a traditional Large IPO. Mini-IPOs are definitely a very lucrative option for companies who want access capital on a large scale without using private placements or venture capitalists.