IPO for All or How to Create Your Own Currency

Okay, let me state upfront that I am completely biased when it comes to running a compelling business: for I believe if you happen to live in the 21st century, your company's stock should be worth money, and you should be able to turn around and sell it.
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Okay, let me state upfront that I am completely biased when it comes to running a compelling business: for I believe if you happen to live in the 21st century, your company's stock should be worth money, and you should be able to turn around and sell it.

In other words, every operational (and ethical) venture, regardless of its size, industry and even growth rate (that is probably not high enough to command market multiples satisfying VCs' appetites and their "hit-or-miss" business model), should have an opportunity to pitch its investment offerings to all types of potential investors (including avid customers) and go public so that its stock eventually could become a currency for its founding team and employees.

Do-It-Yourself Mini-IPO is on

And we are almost there since a long-anticipated provision of the JOBS Act (aka Reg A+) went into effect on June 19th which now allows small businesses to raise a maximum of $50 million from both accredited and un-accredited investors (investment limits apply) in the form of a "mini-IPO". Subject to approval and reporting standards imposed by the SEC, most companies are permitted to utilize Reg A+ as long as they have their principal place of business in the U.S. or Canada -- and are comfortable with levels of self-disclosure that are a typical side effect of any publicly traded company. The question is - who wants to be a "mini-public" player?

Well, someone like Snoop Dogg for example probably won't. He is quietly raising $25 million for his cannabis venture fund, Casa Verde Capital ("casa verde" is "green house" in Spanish) via traditional Reg D and something is telling me he will be oversubscribed. It is a scalable business he is entering into.

What about companies that are typically under-served by VCs -- socially impactful companies, local mortar and brick businesses, or any companies that somehow did not make the cut in a "Shark Tank" zone?

Let's start from the basics.

Initial public offering (IPO) is a process that is undertaken by a private company motivated by two main goals: to raise capital from the general public and to provide liquidity for its existing shareholders. The last presumes that shares of the new born public company can be easily monetized and/or traded among investors on stock exchanges.

Freely tradable securities is what I call the owners' currency and since there are no secondary trading restrictions on Reg A+ securities I feel we've made a turn in the right direction. But the question is -- how to attract the attention of a wide range of investors -- which is the key guarantee in achieving a liquid secondary market?

Blast from the past

The fact is Reg A+ is an updated version of Regulation A exemption which has been around for decades but gained practically zero popularity among business owners. From 2009 until recently there had been only 19 Reg A offerings. To place Reg A+ under crowdfunding rules is a stretch unless you want to define the process of going public as crowdfunding and in this case we've been doing it since around 1780. But who can blame you if you are modifying the wheel a bit.

For example, OTC Markets Group is admirably on it. This month on June 12 it published its own proposed rules and standards for businesses seeking to go public on OTC marketplaces under Reg A+.

The OTC that is a home for already over 1,100+ small and micro-cap companies, can be a poster child for bringing much needed attention to smaller companies - and not only from the general public, but from the institutional investors as well.

Large trading companies vs. small trading companies - you've been warned

To drive my point home, I need to clarify that securities trading of large companies and small companies has an entirely different route - and this is why Reg A felt out of favor in the first place.

While an ownership of a large public company (over $1 billion in market capitalization) typically consists of over 80% of institutional investors; a small company (less than $100 million in market capitalization) traditionally has very few institutional investors and relies almost entirely on high-net worth individuals and other retail investors.

This has resulted in disparity of research coverage. A large publicly traded company has on average 14 analysts covering its every move; while 40% of small companies has no research coverage at all and those are primarily companies with a market capitalization of less than $50 million (typically referred to as nano-cap stocks). Smaller companies have less public float, resulting in less trading volume -- which explains much smaller dollar amounts involved and the lack of analyst coverage.

The evidence is strong for what I expected all along: small businesses and young ventures, the primary creators of jobs, could not make it to the public markets under Reg A not only because of a low ($5 million) limit on funds that could be raised, notorious regulatory complexity (Blue Sky Laws) and a cost-barrier (up to $120K to be traded on OTC markets) but also because a company could not communicate its story to potential shareholders since fewer broker-dealer firms (or "market-makers") operate in this space.

Turning fans into investors -- or else

There is a fine line between being optimistic and being delusional and that's why my favorite part of the Reg. A+ is what is called "testing the waters": before committing to a "mini-IPO", a "soon-to-be-issuer" company can test if there are any preliminary indications of investment interest.

The good news -- as long as your investment pitches are not misleading, you can utilize Internet/social media. But be careful - solicitation material used before qualification of the offering circular must contain an information stating that no money is being solicited and none will be accepted. Needless to say, all of your communications are subject to the antifraud provisions of federal securities laws.

The challenge is -- your value proposition might be not as sexy as Snoop Dogg's so the argument that you, for example, bring a measurable economic development impact should be delivered to a right target.

Call me an idealist, but I would like to believe that businesses and consumers are increasingly driven by ethical decisions. And in the aftermath of a financial crisis there are -- and there will be -- plenty of companies to help you out. IPOforAll.com for example, is one of them.
Stay tuned -- stay educated.

Victoria Silchenko, Ph.D. is an alternative funding expert, Founder & CEO of business consultancy Metropole Capital Group and Creator and Producer of the Alternative Funding Forum set to be in Los Angeles on Nov 6th this year. She is also an Adjunct Professor on "Entrepreneurial Finance" at CalLutheran University and is on the Board of Los Angeles Venture Association. LinkedIn:www.linkedin.com/in/victoriametropolecapital/, Twitter @MetropoleGlobal

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