Guest Post By: Darren MarbleIn 2017, eight companies completed Reg A+ IPOs by listing their shares to national securities exchanges including NYSE and NASDAQ. Several of these issuers utilized a “hybrid” approach to Reg A+, raising capital from both Wall Street and Main Street investors.
In a traditional IPO, the underwriter helps the issuer raise capital from institutional investors and retail customers – “Wall Street” investors – most of whom are accredited. “Main Street” investors refers to non-accredited everyday Americans, as well as international non-accredited investors who invest online in Reg A+ deals via digital investment banking platforms.
This article explores the motivations behind hybrid Reg A+ IPOs, and walks through the methodology for successful offerings. The conclusion looks towards the future with a list of recommendations to increase the likelihood that investors in Reg A+ IPOs see a return on their investment.
It’s important to clarify why an issuer would consider a hybrid approach to Reg A+ in the first place. After all, a hybrid approach requires more capital, time and resources. So what’s the draw?
The primary motivations for a hybrid Reg A+ IPO are as follows:
- Issuers can raise more capital by targeting multiple investor segments;
- Issuers can build incredible brand equity by marketing their Reg A+ offer online;
- Issuers can create an army of brand ambassadors by converting customers into investors, and;
- Retail crowd investors are the stickiest money in the deal – they hold the stock.
The ability to raise more capital, coupled with the benefits of general solicitation, are the most compelling factors driving CEOs towards hybrid Reg A+ offerings. For some issuers, the ability to market their offer online will drive new customer acquisition and revenues, too, providing a double benefit.
Recruiting a Quarterback
To run a hybrid Reg A+ campaign, the issuer first needs to partner with an experienced underwriter. The underwriter performs due diligence, works with the issuer on market analysis, valuation, deal terms, and liaises with NYSE, NASDAQ , or OTC Markets Group to facilitate a listing. The underwriter can also refer in other key service providers to the issuer including securities attorneys, auditors, marketing or IR firms, transfer agents, and financial filing firms.
In a hybrid Reg A+ IPO, all digital marketing efforts must map to the timeline laid out by the underwriter, including any Test the Waters (pre-qualification) marketing, launch of the live offer (post-qualification), and closing of the live offer.
As of this writing, active underwriters in the Reg A+ space include TriPoint Global Equities, WR Hambrecht + Co., Boustead Securities, Maxim Group, HCFP/Capital Markets LLC, and ROTH Capital Partners. We should anticipate larger, more established underwriters to enter the market in 2018, and they will inevitably bring with them higher quality issuers.
The Planning Phase
Once the issuer files their Form 1-A with the SEC, the marketing or IR firm begins planning a comprehensive digital marketing campaign. The objective of the digital campaign is to drive awareness of the issuer’s offer with likely investors who may include the issuer’s customers and fans, certain affinity groups, and online investors.
Deliverables from the marketing or IR firm during this phase generally include a digital marketing plan, paid media plan, campaign page, video, press kit, and press release. Within the digital marketing plan are sub-plans which often include an email marketing plan, social media plan, and influencer marketing plan.
All marketing collateral created during the planning phase (i.e., script for the video, art and copy for emails and Facebook ads, etc.) should be reviewed and approved by both issuer’s and underwriter’s counsel. Additionally, all collateral should be submitted as part of the Form 1-A filing, or as an amendment as it is material to the deal.
The Digital Banking Platform
Once target audiences are identified, online traffic is funneled to the issuer’s campaign page which is often hosted by a digital investment banking platform. The banking platform allows investors to review offering documents, open an account, and invest directly online.
Prospective investors can place non-binding indications of interest in a deal during Test the Waters, or complete a subscription agreement to invest once the issuer’s Form 1-A has been qualified by the SEC. Banking platforms leverage third-party clearing broker-dealers such as VIA Folio that provide an integrated online brokerage, custody and clearing platform to process subscriptions.
The Live Offer
Once qualified by the SEC, several key activities commence in parallel. First, the marketing or IR firm begins executing their digital and paid media plans to drive traffic to the issuer’s campaign page.
Retail crowd investors begin to complete subscription agreements online, although many abandon midway through the process. Investors who start but do not complete subscriptions can be emailed, retargeted online, or served Facebook ads as a reminder to complete their investments. The underwriter can also assign high value leads to broker-dealers in syndicate for calling and closing.
(Note: our experience tells us that issuers would be wise to hold off on marketing their campaigns until they are qualified by the SEC, otherwise they risk generating hundreds or thousands of leads that go stale quickly. However, some issuers choose to strategically announce their campaigns prior to SEC qualification, to attract bridge financing, for instance.)
Meanwhile, the underwriter takes the issuer out on a traditional IPO roadshow where the CEO and executive team present their deal to institutional investors and retail brokers. The underwriter takes indications of interest and allocates shares to investors who desire to participate in the IPO.
Closing and Listing
Institutional and retail brokers settle and close like a regular way IPO, through a DTC broker-to-broker account. Retail crowd investors settle through the banking platform and online escrow. Ultimately, hybrid Reg A+ IPOs close in a way that looks, acts, and feels like a traditional IPO.
As the offer is closing, the underwriter liaises with NYSE, NASDAQ, or OTC Markets Group to ensure that the issuer has met the listing requirements, all closing paperwork is submitted, and shares begin trading shortly thereafter. Both Wall Street and Main Street investors are liquid upon listing, with no lockup.
Opportunities for Improvement
Although Reg A+ levels the playing field for everyday Americans who are now able to participate in IPOs side-by-side with Wall Street Investors, it is apparent that there is room for improvement. As PubCoCEO noted in a recent article, only one of 2017’s Reg A+ IPOs ended the year above its IPO price.
In order for our industry to grow and thrive, investors – both Wall Street and Main Street alike – need to see a return on their investments, which will increase confidence in future deals.
The following is a list of recommendations for the industry to consider to ensure we deliver better outcomes for both issuers and investors in 2018:
- Service providers should better educate issuers not ready for public markets
- Underwriters should increase valuation and pricing scrutiny
- Higher quality issuers are needed to attract wider institutional adoption
- Regulators should allow a greenshoe to assist with stabilization post-listing
- The SEC’s alternative uptick rule should to be amended to restrict short-selling in IPOs
- Issuers need stronger aftermarket support plans in place prior to listing
About Darren Marble
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