Reg A+ issuers who qualify for Tier 2 designation under the increasingly popular exemption are unanimously cheering the proposal of rule changes that will see the maximum allowable raise in any 12-month period increased to $75 million from the current max of $50 million.
For Reg A+ (Gray Market) investors, this will mean a chance to participate in a larger scale of financing, implying the potential for a larger value IPO down the road.
For the issuers, this means that they can not only access a larger capital input per year, but would now be able to use up to $22.5 million of any Regulation A+ raise to buy shares from existing shareholders in previous cheaper rounds. This practice could theoretically increase the value of the company by swapping shares purchased at cheaper prices for higher priced ones with no dilution from the swap.
Why is that a good thing for Reg A+ investors?
Besides the obvious bump in valuation, it diminishes pressure from early shareholders to seek a public listing before the company has achieved a level of financial stability that would better equip it to ward off attacks by short sellers and the parasitic yet legal algorithmically driven High Frequency trade strategies.
Going Public Too Soon: The Number 1 Cause of Investor Failure in Startups
Among North American startups who are relegated to the lesser tiers of capital access thanks to the preferential rules that favour large investment dealers, issuers and investors to the detriment of non-affiliated small companies, the pressure from investors to “get public” to provide liquidity to investors is constant and ubiquitous.
But achieving publicly traded status is actually a nightmare for a company and its investors when it happens too soon.
For example, unless you’re a mining exploration company rolling the dice to poke holes into a haystack looking for a pot of gold, a company with no revenue typically has no business being publicly traded.
I mean, think about it. How do you value a company with zero revenue, who nonetheless burns through cash at a furious rate?
The bottom line is that the value becomes wholly subjective, meaning its no more or less than an opinion.
At least a company with revenue can reasonably be expected to continue earning revenue, barring any change in general market conditions.
That’s why small companies that go public with scant or no revenue attract short sellers if there is a decent amount of daily liquidity: they are like rabbits out in the open under a sky full of hawks.
From $50 Million to $75 Million
So why is $75 million as the maximum a start-up can raise instead of $50 million?
The obvious answer is more money means longer runway before shit goes sideways due to a lack of cash.
But it’s more than that. We operate in a marketplace where a bigger number just commands more respect. More respect means greater access to the people and resources needed to carry the ball into the end zone operationally. More people and resources result in more revenue. More revenue, more profit.
As I mentioned earlier, issuers using the Regulation A exemption can also use up to a third of the money to buy the shares of previous investors. This provides a win, removes the pressure to go public, and increases the value of all shares by extension.
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