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Boustead's Dan McClory on Reg A+

Do you believe Reg A+ could lead to a return of the hundreds of small cap IPOs completed each year before 2000?

DAN: “Reg A+ will definitely be a stimulant for the return of the small-cap IPO, at the rate of a hundred a year…maybe. Hundreds, no way. The vast majority of Reg A+ filings and offerings have no intention whatsoever to culminate with a senior exchange listing. Most are for aspirational companies attempting to up their game and raise semi-public capital for the first time. Many are still daunted by the costs and disclosures of even the Reg A+ Form 1-A Offering Statement.”

Now that we have begun seeing what works and what does not, what types of companies are best suited for Reg A+?

DAN: “As an IPO underwriter, and owner of the online equity crowdfunding portal, Boustead Securities prioritizes as clients those that have the ability and resources to go the route of an ‘industrial strength’ S-1 Registration Statement, and we can then shrink them down into the 1-A context. Being qualified to list on Nasdaq or NYSE, given effect to the offering, is another factor for successful selection, we believe. Companies that have existing and engaged investors in place and standing ready to fund the minimum offering amount or more of the Reg A+ financing is also key. Boustead will provide the liquidity-event-driven IPO as the catalyst for getting its client companies’ existing, committed investors to fund and provide momentum to the Reg A+ offering before it begins broader public marketing."

What are your biggest fears about the rollout of Reg A+? What challenges have you seen in speeding the adoption of Reg A+ by established players?

DAN: “After much fanfare, the failures to fund by many aspirational companies, even those advised by some of the storied names in small-cap investment banking, has taken some of the luster off the Reg A+ glow. Success will encourage expansion, but there are only a few examples of Reg A+ offerings leading to senior exchange IPOs, and only a couple so far have performed well in the aftermarket. There has been a concern that a Reg A+ offering is an ‘IPO Lite’ or ‘Mini IPO’ and not equivalent to an S-1 IPO, which is definitely not the case. Getting the investing public, and institutions and funds to understand that there is no second-string connotation or qualitative drop-off in companies listing thru a Reg A+ IPO versus a traditional S-1, will be key.”

What mistakes have you seen Reg A+ promoters making?

DAN: “Some outlandish claims and marketing pitches are being made in mainstream media by issuers and promoters of Reg A+ offerings, on TV, radio and print. These are borderline non-compliant and will attract a regulatory backlash, as they should, giving the Reg A+ movement a black eye in the process. A major misjudgment by Reg A+ issuers and their advisors including some investment banks has been to erroneously conclude that companies with large social media followings, millions of app downloads, or passionate followers will equate and convert to check-writing investors once an offering is launched. This has been a fool’s errand, as has the ‘testing the waters’ or gathering ‘indications of interest’ prior to SEC qualification and opening of the online investing portal for subscriptions. Experience is showing that 95-98% of these ‘indications’ never even invest. Building an offering’s presumed successful funding around this assumption has led to many failed and pulled deals.”

What if any role do you see for reverse mergers in the years ahead?

DAN: “For the past several years Boustead has de-emphasized reverse mergers in favor of prototypical IPOs onto Nasdaq and NYSE. Frankly, traditional IPOs, even for pre-revenue, early-stage, high-growth companies, are cheaper, faster and certainly better. I think there will be very few reverse mergers in the years ahead, as opening on-Broadway instead of off-Broadway will be seen as the better alternative.  Pragmatically, reverse merger companies have already identified the compliant method for accessing Reg A+: conducting an offering with a 1-A at the subsidiary level, which is allowed by the SEC. Boustead is underwriting and advising some quality issuers right now using that subsidiary-level approach, designed to IPO the sub on Nasdaq or NYSE, resulting in the parent being the majority shareholder of the senior exchange-listed company post-transaction.”

Do you see the SPAC market as retaining its current strength? Will they remain market-driven or continue even through the next downturn?

DAN: “SPACs seem to come into and out of fashion every few years, depending on the strength of the IPO market, and the perceived challenges that prospective issuers believe will make the completion of a traditional IPO difficult or uncertain.  Other than a name-brand investor or established operator that invests significant capital into his or her SPAC personally, and then goes public for additional capital, and embarks on a search for a suitable target, I don’t see the speculative or purely opportunistic SPACs as having much appeal or longevity. When you consider the ‘greenmailing’ that takes place by many arbitrage-driven investors in SPACs, who never approve (or never even intended to approve) a ultimate acquisition, instead getting all their cash back and keeping the warrants, the viability of SPACs is even further eroded.”

Spotify is the latest company considering a “self-filing” to go public without a new offering. Do you see more companies, flush with cash, considering this option to obtain a trading stock especially since the NYSE is now poised to permit it?

DAN: “I do see the advent of an ‘introduction’ onto a senior exchange such as NYSE and Nasdaq, for strong issuers with investor interest and momentum, as a viable listing design. This has been the case on the London Stock Exchange’s Official List and Alternative Investment Market for some time, and there is no reason Nasdaq and NYSE shouldn’t allow ‘introductions’ for issuers who don’t currently need additional capital, in my opinion. Allowing the now-listed issuer to see how the aftermarket reacts to the share price and drives it up or down will be telling, and dictate if and when those ‘introduced’ companies may seek additional capital.”

What regulatory changes affecting small public companies would you like to see under new SEC Chair Clayton and the Trump Administration? (proposals include allowing all reporting companies to use Form S-3, shortening Rule 144 holding period to 3 months, reporting twice instead of four times per year, allowing all smaller reporting companies to be eligible to be emerging growth companies under JOBS Act)

DAN: “Making S-3 available to all and reducing Rule 144 to three months (similar to Canada’s regulation for ‘four months and a day’ hold periods) are proposals that should be implemented. Quarterly reporting is essential, if only to allow smaller companies to be comparable to large caps who would most certainly continue file every three months. Otherwise, the perceived qualitative gap between Reg A+ IPOs and traditional IPOs on senior exchanges would continue to exist. Let’s not give investors any more reasons to disregard small caps coming to Nasdaq or NYSE via Reg A+ than they already have. Let’s do allow all smaller reporting companies to be eligible to be emerging growth companies under JOBS Act.”

What changes would you like to see to Reg A+? (Suggestions have included allowing at-the-market offerings, allowing foreign companies to use it, allowing reporting companies to use it, clarifying the testing the waters requirements, and allowing resale offerings without having to conduct a contemporaneous IPO)

DAN: “There should be a phase-in period for eventually allowing foreign companies to use Reg A+, perhaps beginning in 2019 after an assessment of the current US and Canada eligible offerings can be completed. Depending on the geography and complexity of the foreign issuer, the faster approval times we have seen for the SEC qualifying Reg A+ offerings will likely extend out beyond the current 72-day average.  Reporting companies should not be allowed to use Reg A+, as they have ‘graduated’ but can contemplate subsidiary-level access to Reg A+ as mentioned previously.  In the same vein, ATMs don’t have a place in Reg A+; once you have completed your Reg A+ offering and listed on a senior exchange, you have moved up the food chain and you now fall under an S-1 or S-3 filing for future registered offerings. Testing the waters is vital from a marketing standpoint, if only to create awareness of the offering prior to its qualification and launch. As previously mentioned, the ‘indications’ obtained from online equity funding portals are not very useful in gauging the success of an upcoming offering.  Traditional investment banking pitches and roadshows are, and the ability to test the waters in this manner is vital and a distinct advantage of Reg A+. Stand-alone resale offerings have no place in the spirit, intent and desired result of Reg A+ and the JOBS Act; both were designed to get capital from those that have it to those that don’t: small and mid-sized companies, not selling shareholders at their expense.”

What do you see as the most attractive features of Regulation A+ for companies you have been working with?

DAN: “Faster approval times, lower costs as a result, and greatly enhanced marketing flexibility are the three most attractive benefits of a Reg A+ offering and IPO for Boustead Securities’ clients.”

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