How Regulation A+ IPOs are connecting entrepreneurs with small investors

The popular fast casual dining chain Fatburger has built an enthusiastic customer base for its generously sized hamburgers. Now the California-based burger joint’s parent company hopes to generate enthusiasm among investors by taking advantage of a new kind of initial public offering (IPO).

In August, FAT Brands, Inc. (it stands for “fresh, authentic and tasty”), parent of the Fatburger and Buffalo’s Café franchises, announced plans to take the company public with an IPO that successfully closed on October 20. Raising a total of $24 million, the company hopes investor interest will fuel additional expansion of their franchise chains.

“The demand we’ve seen from the investment community and every day consumers looking to become shareholders of FAT Brands has been outstanding,” said Andy Wiederhorn, CEO and founder of FAT Brands, in a press release. “With the proceeds raised from our IPO, we will be able to acquire new concepts and continue to grow our company globally under our asset-light model.”

“I am thrilled that FAT Brands’ offering was so well received by not only Wall Street, but also Main Street. TriPoint has been a pioneer in Regulation A+ and the JOBS Act for years, having developed a methodology that allows companies to reach a diverse audience of investors and trade on a National Securities Exchange,” said Mark Elenowitz, CEO of TriPoint. “FAT Brands leads us into exciting new territory where iconic brands can offer fans the opportunity to not only be a customer, but to be a shareholder as well.”

But this IPO differs from other public offerings you may have seen in the news. FAT Brands will pursue investors through what’s been described as a “mini-IPO” under Section A of the Jump Start Our Business Start-ups (JOBS) Act that became law in 2012.

In a nutshell, Section A of the JOBS Act created a streamlined public offering process that allows smaller and mid-sized companies to gain access to the deeper funding pools of the U.S. capital markets, but more quickly and with a less demanding filing and regulatory regime.

The process is informally nicknamed “Regulation A+,” or Reg A+. Though the JOBS Act became law in 2012, federal regulations related to Reg A+ offerings were not completed until 2015, so these offerings are still relatively new to the market.

We’ve written previously about equity crowdfunding, established under Regulation CF of the same 2012 law, which allows start-ups to raise funds from investors through web-based platforms without going public. (For a deeper dive into how one company made use of Reg CF financing, check out our recent profile of Texas-based ArtCraft entertainment, a gaming start-up that raised nearly $2.7 million from equity crowdfunding platforms to develop the online role-playing game Crowfall).

Regulation A+ may have received comparatively less attention, but it’s another innovative form of business finance that’s changing how many start-ups and mid-size companies pursue funding. The Reg A+ process differs from traditional IPOs and the Reg CF crowdfunding process in important ways, so let’s take a closer look.

How a Regulation A+ offering works

The process of making the leap from privately held to public company opens up opportunities for a dramatic increase in capital funding. That distributed pool of funding opens doors to expansion and brings instant credibility in the eyes of banks, creditors and customers.

But an IPO is not for the faint of heart. The process of taking a company public is arduous, time-consuming and expensive, with substantial legal and regulatory hurdles. And once a company goes public, it’s met with ongoing compliance demands and a much higher level of scrutiny from regulators, board members and investors. That can be good for transparency and accountability, but can also be a source of frustration to founders and managers who are accustomed to the more nimble decision-making of the start-up phase.

We described the Reg A+ process above as a “mini-IPO.” The New York Stock Exchange (NYSE) offers a capsule summary of the benefits of a Reg A+ offering, which allows a company to:

• Raise up to $50 million in a 12-month period using a “public solicitation” of its shares and have the offering be exempt from SEC and state securities law registration.
• Confidentially submit its offering memorandum to the SEC and enjoy the opportunity to “test the waters” before pursuing a mini-IPO.
• Enjoy a streamlined, expedited review process where the company is required to make its offering memorandum public just 21 days before SEC qualification and the beginning of its roadshow.
• Combine public funding (through Reg A+) with private funds from venture capitalists to create a larger round of fundraising.

The NYSE also offers a summary of how the filing process for a Reg A+ offering works. For more details, check out the SEC’s fact sheet on Reg A+.

Advantages and disadvantages of a ‘mini-IPO’

Entrepreneurs considering Reg A+ may particularly appreciate the ability to “test the waters” by communicating with potential investors. Communications with investors under Regulation CF crowdfunding, for example, are limited by substantial regulatory constraints. But under Reg A+, a company can market the offering to investors via social media and other web tools, which may be a tremendous advantage in reaching a more diverse and non-traditional sector of investors. However, the company cannot accept any funds from potential investors until the SEC qualifies the offering, and anti-fraud liability rules still apply during the “testing the waters” phase.

The Reg A+ process is less costly than a traditional IPO, and moves more quickly. For example, when Oregon-based electric vehicle manufacturer Arcimoto completed its Reg A+ IPO in September, it took six weeks from filing to completion.

There are also potential trade-offs. A company that goes public through the Reg A+ process still faces additional burdens of regulatory compliance, compared to a private company. However, those requirements are still less than what a traditional public company faces. In addition, the Tier 1 and Tier 2 offerings limit the amount a company can raise in a given year ($20 million and $50 million, respectively). If a company reaches a stage where they need to go beyond those limits, they may need to pursue other financing options.

In addition, Tier 1 offerings must satisfy particular state securities law regulations that investors reside in and there are discrepancies amongst states in the timing to accept filings and qualification requirements. Manhattan Street Capital highlights some additional trade-offs between Tier 1 and Tier 2 filings, including that Tier 2 filings do not have to satisfy state registration requirements to raise capital, but there are additional upfront audit and post-offering reporting requirements.

Rod Turner, an entrepreneur and Reg A+ expert writing at Forbes, suggests the ideal candidate for a Reg A+ offering may be a mid-stage company looking to move to the next level, rather than smaller start-ups (smaller firms may be better served by more traditional financing by venture capital firms or angel investors). He notes that real estate offerings, alternative transportation, lifestyle companies and gaming companies are among the types of consumer-facing businesses that might do well in the Reg A+ IPO approach.

For example, a few Reg A+ offerings from recent months include the following:

· Chicken Soup for the Soul Entertainment Inc., a producer of inspirational and motivational media content (actor Ashton Kutcher sits on the board as an executive producer) raised $30 million in an August Reg A+ offering.

· California-based Storm Sondors, a crowdfunding veteran, is pursuing a Reg A+ IPO to raise funds to expand its line of electric bikes to the global marketplace.

· Royalty Flow Inc. of Colorado, which owns copyrights to part of hip-hop superstar Eminem’s catalog, filed in September for a Reg A+ round to raise equity funds based on royalties from the music’s future revenues. (Project Invested wrote previously about how rock legend David Bowie securitized his catalog by selling future royalty rights in a $55 million bond issue.)

An additional benefit of Reg A+ (as well as Reg CF equity crowdfunding) rounds is that they may democratize capital investing further by opening the process to a wider range of investors. In a sense, they make it possible for even small investors to take a stab at being a venture capitalist.

However, investors should recognize that the same warnings about risk apply to investing in any corporation, so do your research on the company’s fundamentals, and talk to your investment advisor or a financial professional, before committing to a Reg A+ offering.

Reg A+ offerings are still new, and it remains to be seen how they’ll play out in the long term. For now, it appears they offer a comfortable middle ground between the limitations of remaining privately held and the demands of going public through the traditional IPO process. In an upcoming article, we’ll take a closer look at a company that’s benefited from Reg A+ funding.

Further reading on Project Invested:

The JOBS Act: Five Years Later

Lessons from an Austin gaming company’s $2.7 million crowdfunding experiments