There has been very little attention drawn to Title IV of the JOBS Act which, as proposed, would raise the Reg A threshold to $50 million and exempt these offerings from state blue sky laws.
With the SEC comment period for Title IV long since passed, I wanted to discuss how the Alternative Securities Markets Group and “Crowdfunding Regulation A Plus”, when combined, will transform the small cap equity markets in 2015, and essentially lay waste to the current Small Cap IPO landscape as we currently know it..
Point One: The SEC issued proposed regulations for Regulation A+, Title IV of the JOBS Act, on December 18, 2014, way ahead of the Title III regulations that are still pending.
Probably the biggest surprise was that the SEC came out with proposed rules when they did, given all the blogging and CrowdFunding news today seems to be focused on Title II. The oddest part of Title IV of the JOBS Act is that is the only part of the JOBS Act dependent on SEC rulemaking which did not have any deadline set for the SEC to issue rules. Given the near two plus year delay in Title III crowdfunding rules, and the enormous backlog of Dodd Frank rulemaking going back to 2010, the proposed Regulation A+ rules came as a welcome surprise.
First, to catch up those of you unfamiliar with Title IV, and the Regulation A Reform, there were two major changes (both surprises) in the new proposed new rules…..
The first surprise, the content of the proposed rules! This was the biggest surprise, but in a very positive way! The position the SEC has taken on blue sky pre-emption for offerings between $5 million and $50 million (the so-called “Regulation A Tier 2”). Essentially, it has taken the position that ALL INVESTORS in a Tier 2 offering, both accredited and unaccredited, are “qualified purchasers” – effectively meaning that a company can open up its offering to ALL INVESTORS in a Tier 2 offering and still be exempt from state blue sky review.
The other surprise also involved blue sky pre-emption. For Tier 1 offerings (capped at $5 million) the SEC has requested comment on whether Tier 1 should also be pre-empted from all blue sky review. The issue of pre-empting blue sky review for raises below $5 million, the original ceiling for “old” Regulation A, was never directly addressed by Congress in the JOBS Act – the focus of Congress was on pushing the ceiling up to $50 million and allowing for blue sky pre-emption for the higher amounts – but adding in ongoing reporting requirements.
Point Two; Biggest Unknowns Faced by Companies under the Regulation A+ Rules, in their Proposed Form?
The Alternative Securities Market when coupled with Regulation A+ have a huge potential for revitalizing the smaller IPO market — provided Regulation A+ operates as proposed — a disclosure regime which is lighter than required by fully reporting companies, and an “alleged streamlined” SEC registration review process. This is NOT currently the case with current Regulation A Submissions to the SEC. Currently, companies daring to do Regulation A Registrations with the SEC are experiencing review times equal, if not greater than S1 IPO Registration Statements.
A big unknown, regardless of how final rules look, is what we can expect from the SEC in the Regulation A+ review process in the future when the new regulations go live. Currently in 2014, the average time spent in registration at the SEC for Regulation A Securities Registration was about nine months. Some of this may have been part of a retooling process by us at the Alternative Securities Market and at the SEC, who was not equipped to handle the surge of new Regulation A Filings. Currently, the Alternative Securities Markets Group is experiencing roughly 20-30 days in initial Regulation A submission responses, and about 15 days for amended filings. Qualification timelines can vary upon multiple factors, but a standard expectation should be 60-120 days.
Given our almost six months of operations in working with the SEC on Regulation A Public Offering Submissions, the public statements by the Commission and the overall tenor of the proposed rules is that the SEC is expecting the new Regulation A+ to be a robust method of funding. It is the expectation of the Alternative Securities Markets Group, that with proper representation by SEC and what appears to be strong SEC support for this new $50 million exemption, issuers can reasonably expect Regulation A+ to ultimately perform as advertised – as a streamlined mini-IPO.
Point 3: With Regulation A being open to all Investors, what can be done to make Regulation A Offerings more competitive against the Traditional Small Cap IPO?
I came up with a few things. Tier 1 offerings cannot be competitive with other alternatives unless and until blue sky regulations are pre-empted. In previous postings, I have debated the other side of the coin on this point, and I may be on the other side of the fence on this tomorrow. The simple fact is, for ME at the Alternative Securities Market, the pre-empted scenario works best for me. But Investment Banking Organizations, FINRA and the NASAA are all weighing in on this matter, and the the SEC has asked for comment on this, so presumably they believe they have the power to do this through rulemaking, but even the SEC is not sure of what their stance is on this point.
The second thing the SEC needs to do in final rulemaking, is raise the ceiling on Tier 1 offerings, from $5 million to perhaps $10 million. When Regulation A was enacted, the $5 Million cap was reasonable, in 2015, there are just not many small cap companies that Tier 1 Offerings make sense for.
And finally, a point I rarely speak on as Companies on the Alternative Securities Market already agree to Public Reporting that generally exceeds the public reporting required under Regulation A+. With that said, with Tier 2 offerings, the limit on the number of shareholders before full reporting requirements are triggered ought to be modified.
The current ongoing reporting requirement for Tier 2 semi- annual or quarterly, versus full reporting, only remains in effect until a company exceeds the caps currently set for the number of total shareholders – 500 unaccredited investors, or 2,000 accredited investors. Unless the SEC modifies its proposed rules, companies will face difficulties including a significant number of persons who wish to invest smaller amounts of money – those more likely to be unaccredited investors. This defeats one of the purposes of Regulation A+ – allowing a company to do a mini-IPO by going out to a large group of investors.
Let’s do some math: 500 unaccredited investors, each investing an average of $10,000 – that’s $5 million to the company – and they have already hit the 500 shareholder cap. And that’s on the low end of an exemption available for up to $50 million. Something needs to give here. Unfortunately this is not an item being debated by the SEC currently, and does not seem to be an item to be addressed before enactment for Regulation A+ (whenever that may be).
Point 3: Is the Alternative Securities Market the new Competition for the OTC Markets Group, given the pending closure of the OTCBB?
If the SEC were to exempt Tier 1 offerings from blue sky regulations (like with the proposed Tier 2), and modify the shareholder caps, both of which were already done by Congress in Title III of the JOBS Act, and combine that with a vehicle like the Alternative Securities Market, we have the potential for investment crowdfunding in Overdrive. If an Direct Initial Public Offering up to $50 Million on the Alternative Securities Market with a Regulation A Offering is: (1) much less complex than and OTC Market Listing, (2) Tens of Thousands of Dollars cheaper than an OTC Market Listing, and (3) gives the shareholder the same liquidity in the securities being issued to investors, why would an issuer ever go to the OTC Markets for a Small Cap IPO? The only answer is “market liquidity”.
The major drawback of Regulation A offerings in the current CrowdFunding Landscape is “barrier of entry” for CrowdFunding Websites or CrowdFunding Securities Markets. The OTC Markets group today rules the OTC Market landscape, and will only grow its stranglehold on the Market given FINRA’s recent announcement that it will be closing the OTCBB, leaving the OTC Markets Group to rule unchallenged.
Mr. Cromwell Coulson, President and CEO of the OTC Markets Group obviously becomes a focal point of this whole Equity Crowdfunding landscape, as one of the biggest issues that may “investment market industry professionals” have with both Regulation A+ and Title III of the JOBS Act is the fact that the proposed legislation did not have a clearly spelled out mechanism for how there would be a freely traded exchange of the Regulation A and Title III equity securities. The current rules for Regulation A Securities, is that once an issuer sells a Regulation A Security to an Investor, the shares are issues unrestricted and able to be immediately sold, traded or transferred (unless restricted due to the issuer being a Rule 144 Shell Company by definition), and the proposed rules for Title III state that once an investor invests in Title III securities, they must hold on to them for one year before they can sell. Once the year is up however, there is no clear guidance on how the sale to a new buyer will take place.
So, up and to the evolution of the Alternative Securities Market, this came down to the OTC Markets Group. The OTC Markets Group has it three tiers to choose from, the OTCQX, the OTCQB and the OTC Pink (you can get more information at www.OTCMarkets.com)
Out of the three options, the OTC Pink Marketplace is going to generally be the most popular choice for most Regulation A+ and Title III Issuers. This option is the “least costly” (in terms of OTC Market listings) to issuers of CrowdFunded Securitiies to comply with. Of course, regardless of if a company becomes capitalized through CrowdFunding or intends to do a small cap IPO in order to gain capitalization on the OTC Market, there are the dreaded OTC Listing Steps a company must complete In order to list on the OTC Marketplace.
To become an OTCQX, OTCQB or OTC Pink company, at least one broker-dealer must quote the company’s securities on OTC Link® ATS. OTC Link® ATS is operated by OTC Link LLC, an SEC-registered Alternative Trading System (ATS) and FINRA member broker-dealer wholly owned by OTC Markets Group. Unlike on stock exchanges (or the Alternative Securities Market for that matter), companies do not list their own stock for trading. Rather, broker-dealers begin quoting new securities on OTC Link® ATS by submitting a Form 211 with the Financial Industry Regulatory Authority (FINRA). In some cases, there may be an exemption available that permits a broker-dealer to begin quoting a stock without filing a Form 211. Generally, this happens when the broker-dealer is already quoting the stock on another platform or if the broker-dealer is only representing an unsolicited customer order, not making a market.
Of course there are the dreaded costs of filing an S-1 or a Form 10 Registration Statement, Costs of the required financial audit, costs of retaining a stock transfer agent and clearing “DTC”, and then you get the OTC Market upfront application cost of $2,500 with an annual fee to be on the market of $10,000 (for OTCQB, the costs for the OTCQX is a $5,000 Application fee and $15,000 Annual Fee). Most companies can expect to have a total out of pocket expense in the range of $35,000 to $50,000
So, why all of this information? The answer is a simple one, Alternative Securities Market Listed Companies can enjoy all the comforts of doing an IPO of free-trading shares without all the costs, and without all of the mind-numbing paperwork required for an OTC Market Listing! Investors get the same market transparency and liquidity in their holdings as they would have on the OTC Market. Can this spell the end of the OTC Markets Group?
Lets do the math:
OTC Market IPO of Free Trading Shares (below are just estimates, for exact number you will need to contact industry professionals working in the below related fields):
- Legal Preparation and Filing of an SC S-1 or SEC Form 10 = $15,000
- Stock Transfer Agent Retainer = $5,000
- Clearing DTC = $5,000
- Financial Audit = $5,000
- OTC Application (OTCQB) = $2,000
- OTC First Year Listing = $10,000
BARE BONES MINIMUM (100% upfront and out of pocket) = $42,000
Alternative Securities Market Listing:
- SEC Form 1-A Submission to the SEC = $2,750
- Financial Audit (None Required a this time) = $0.00
- Legal Opinion Letter = $1,000
- State Registrations = $10,000
Total = $13,750
Total Out-of-Pocket = $1,000
Financed by the Alternative Securities Market = $12,750
It is this fact, with strong financial backing from Investors, the Alternative Securities Market in 2015 will quickly become a fierce competitor for the OTC Markets Group.
Closing Point:
With what we believe is the last legal opinion / legal comment letter from the SEC issued last week, we are assured we will be open to all private and institutional investors on January 5th, 2015. This might be six months later than anticipated, but we delayed our opening six months to continue coordinated efforts in working with the SEC to be the very first “Legal Equity CrowdFunding Marketplace” that provides the very best products and services to both issuers and to investors.
The small businesses in America need the Alternative Securities Market as a “source of capital formation”. The future economy stands to gain significantly from CrowdFunding and Companies like the Alternative Securities Markets Group Corporation, and those that will copy us, and potentially improve upon our processes in the future.
I am happy to announce that on January 5th, 2015, when the Alternative Securities Market opens its doors to Investors, we will only then begin to see economic prosperity spread to ALL DEMOGRAPHICS OF THE GLOBAL POPULATION, and have it done in one of the most transparent marketplaces available.
Mr. Steven J. Muehler
Founder & Chief Executive Officer
Alternative Securities Markets Group Corporation
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