The Small Company IPO Delusion and Reg A+ Solution

Doing some holiday reading, I picked up the Orange County Business Journal, and to my surprise, I saw two stories about two companies preparing for an IPO in 2017.  I thought to myself, “wow, it looks like some really great companies are coming out of Orange Country.” But reading through the articles and reviewing some public information about the companies in question, I quickly thought “these are likely not IPO ready companies.”  One of the companies was on their way and appeared to be growing rapidly with strong investment dollars behind them.  The other seemed to be a very small (sub $5M revenue) and they were only now starting to test their new product in the market.

Unfortunately, in the times we currently live in, the small-Cap IPO’s are non-existent.  The high regulatory burden in both man hours and dollars is a huge hurdle to overcome for a small company, even if it is doing well.  What’s more, business owners tend to think that everyone knows their business or will want to know their business because of the growth potential that can be unlocked.  Unfortunately, I can tell you more often than not business owners have trouble finding qualified investors without a previous history successful.  Companies struggle to separate their uniqueness to investors.  In any case, both the companies I read about would be well served NOT going through a traditional IPO process in my opinion.

With all that doom and gloom, here is the pot of gold at the end of the rainbow…Regulation A offerings.   My guess was that neither of these companies were advised on a Regulation A (“Reg A+”) offering that lets companies raise up to $50M annually through accredited and unaccredited investors in a Mini-IPO style process.   What’s so great about the Reg A+ process is that unlike the traditional quite period of a traditional IPO where everything is very hush-hush, Reg A+ contains what I like to call a loud period. This is a period where the company markets the offering and the company itself.  It’s reaching out to retail investors to invite them on a journey.  In that sense, you are actually spending money to market your company to potential customers while also soliciting investor dollars.  It’s a win-win when done correctly.  Reg A+ can also reduce the regulatory burden compared to a traditional IPO or you can use it to reach a national exchanged just like an IPO.  Therefore, you have more options under Reg A+ than a traditional IPO.

Bottom line is if your company does under $100M in revenue and you are thinking about an IPO, strongly consider Reg A+ as a better alternative. 

dbbmckennon is a full service CPA firm with offices in Orange County, San Diego and Santa Monica.  We specialize in companies filing with the SEC and utilizing equity crowdfunding through Reg A+ and Regulation Crowdfunding. For additional complimentary information regarding this topic or other questions you may have please call one of dbbmckennon‘s offices located in Southern California or contact us here.