Historically, companies can raise funds through public offerings (stock market, open to everyone) or private placements (large investments from qualified investors, called Reg D). With the emergence of numerous innovations in technology and blockchain, up-and-coming companies are looking for new ways to raise money. For a long time, the time has come to invest in new businesses that are limited to institutions and “qualified investors” (in the US, those who have enough assets in the United States, who have sufficient risk tolerance).
In 2015, the US Securities and Exchange Commission passed Regulation A+, which stipulated that certain securities offerings are not subject to registration restrictions and are designed to facilitate the financing of smaller US companies and Canadian companies and start-ups. Reg A+ allows companies to raise funds from qualified and non-qualified investors, expanding the scope of investors and making the process more democratic.
Blockstack and YouNow, the first companies to be approved by the US Securities and Exchange Commission (SEC) to issue tokens under the Reg A+ framework, will provide examples of public participation in compliance and legal securities token financing, which means more and more The general public will be able to participate in the financial growth of startups. For example, after you purchase a corporate token as a customer/user, each of your consumer behaviors can bring benefits to your favorite business. The better he manages, the more valuable your token will be.
- With a Reg A+ license, is Blockstack's compliant token in the last exchange?
- Below the Reg A+ and Reg S prices, Blockstack may face further selling pressure
- Babbitt interviewed to find real use cases for blockchain, Blockstack wants to sand in the app waves
This article will start with the financing model we are most familiar with in history, and see what happens when Reg A+ appears. Will Reg A+ become the usual way to market cryptocurrencies in the future?
Historical funding model
When raising money, the company has two options:
Public offerings (stock market, open to everyone) or private placements (large investments from qualified investors, called Reg D).
Generally speaking, when the company reaches a certain level, an initial public offering (IPO) will be conducted, and the stock will be listed and circulated on the public exchange. The buyer's profit and loss comes from dividends and price fluctuations in the stock market. The company receives investment from buyers and uses it for business expansion and financing new products.
Historically, stocks have also been a financial tool for the wealthy in the United States, but in recent years, more and more ordinary Americans have begun to invest in stocks, and the emergence of platforms such as Robinhood, which is relatively easy to use, has made public offerings popular.
Private placement means that the company sells its shares to wealthy investors with specific qualifications. In general, these stocks account for a much larger share of the company than regular stocks, which allows private investors to own more shares in the company. Private placement is often considered to be extremely risky. The US Securities and Exchange Commission (SEC) has launched a listing program called "Reg D," which allows companies to raise private capital without officially registering shares with the SEC as securities, but the process requires several disclosure forms. And make sure to comply with the state laws of each state.
What is Reg A+?
In 2015, Article 4 of the JOBS Act came into force. Without specific legislative details, the Act expanded the existing scope of regulation, allowing for a new distribution method known as Reg A+.
Reg A+ allows companies to raise up to $50 million in capital from the public without a formal IPO. It is even called a mini IPO because it functions like an IPO that is not officially listed on a stock exchange. Although Reg A+ still needs to submit an application to the SEC and obtain approval, these restrictions and related application fees are significantly lower than the IPO, so it is easier for the company to raise funds through the Reg A+.
Unlike Reg D, Reg A+ allows companies to accept investments from qualified and non-qualified investors, greatly expanding the number of people who can invest in such businesses. Securities sold under Reg A+ can be bought and sold immediately compared to securities approved for sale by Reg D, while the former requires the buyer to hold at least one year to transfer.
Specifically, what is Reg A+ release, how does the company start to apply?
There are currently two major Reg A+ distribution methods.
Level 1 Reg A+: The maximum financing amount is US$20 million. Due to the low ceiling of financing, the regulatory requirements are also low. There are no provisions for the scope of investors, nor do they require formal audits or public financial audit reports from the states. However, at the time of application for Level 1 Reg A+, the company must pass the government review of the location where the proposed financing is located.
Level 2 Reg A+: Allows companies to raise up to $50 million in funding. With the increase in the ceiling of financing, it is clear that there are more restrictions on enterprises. First, uncertified investors can only invest up to 10% of their income or net assets (whichever is higher). Although they do not have to be separately registered and filed in any state as specified by the blue sky laws, their finances must be audited and annual, semi-annual and general reports must be submitted to disclose information to the public in a timely manner.
So, what if the company wants to issue securities through Reg A+?
1) First, the issuer submits a Form 1-A that includes information about its company and what they intend to seek from the SEC. After submitting the documents, the company needs to conduct a Howay test to assess the likelihood of successful financing;
2) Assuming investors are interested, the company decides to issue Reg A+ and then enters the SEC approval process.
3) All of the above are completed. After approval by the US Securities and Exchange Commission (SEC), the company can begin to issue securities according to the corresponding level.
Why do companies want to issue securities through Reg A +?
There are several reasons.
It has greatly expanded the scope of investor participation. It may be difficult to convince a qualified institutional investor to bet on a venture capital investment. Therefore, by allowing non-qualified individuals to invest as well, this opens the door for a company in terms of successful financing. In addition, many companies and their institutional investors have different visions for the future, such as differences in how companies should develop and what markets they should focus on, which may create many problems in the future.
This is a great way to connect and interact with users. First, Reg A+ products essentially require companies to have robust, well-thought-out value propositions that can actually be delivered to anyone. This is no longer to convince people that a particular business model or a particular function can create a 10x return; rather, to show people that their products meet the real needs of people's lives. This means that Reg A+ companies are more user-centric and focus on developing real value. Second, this is a good way to develop a user ecosystem. If a customer buys a product from a company and realizes how good they are, then decides to buy the company's stock to support it, which is actually supporting the company's continued growth; incredibly, if the company can do this Continuous support gives users a return, creating a cycle in which customers and the company are highly engaged in buying more products and funding new businesses.
For companies that have just stood in the market, locked in a round of seed financing, and entered the product development period, fundraising through Reg A+ is a good model. You don't have to be in troublesome investor relations, you can focus on raising a good amount of money for your next stage of product development, and you can also prepare for a larger institutional investment in the future.
Is Reg A+ really so good?
Let's sing the opposite.
the cost is too high. Businesses interested in Reg A+ need to hire the right lawyer to get approval from the SEC and respond to all regulatory requirements, which can be costly during this period. In addition, the approval process can take 3-6 months to complete, which is critical to the early development of a company. The company's obligations to more investors will also increase, which may greatly affect the company's vision and motivation.
The public may not have enough interest to bet on the company, or the public does not understand enough about the problem you are trying to solve, and may therefore not be able to raise enough funds. On the other hand, good institutional investors can guide you to a better value proposition, help you understand the nuances of a company in the market, and see where the next 100 times return will come from. Inexperienced public investors may not have this keen sense of smell, and even worse, there may be investors who are unfamiliar with the company and seek quick profits because they have not made money to sue the issuer.
If you are still a seed company, the financing scale of the mini IPO is too big for you. In general, mini IPOs target investments ranging from $3 million to $50 million, so this is more useful for mid- to late-stage companies looking for continued investment. In order for a company or product to take off, the seed stage company does not need such a large amount of money, and an institutional investor willing to vote for you and provide guidance may be more appropriate.
Finally, I want to say that managing a huge equity structure is too difficult.
So far, has any company adopted the Reg A+ model? How is the progress?
The two most eye-catching are Blockstack, and Younow's live platform, Props Network.
Blockstack is essentially a decentralized application and computing platform that allows people to build their own products on a decentralized, distributed basis while users enjoy 100% autonomy over their data and privacy. . They have raised funds from Foundation capital, Winklevoss capital and Blockchain capital. The Wall Street Journal reported earlier this month that the SEC had approved a digital token worth $28 million under Reg A +'s secondary standard.
Blockstack will issue 62 million tokens called STX, each selling for $0.30 and selling 78.33 million tokens to users holding tokens for $0.12. As the first SEC-certified token release in history, Blockstack also paid a lot of money. According to reports, Blockstack spent $2 million just to get approval from the SEC, which is about 7.1% of its fundraising ($28 million).
YouNow is an online live broadcast platform where users can broadcast live and share and interact with other live broadcasters. Based on the Ethereum release, they use a token called Props that can be easily integrated with the application. You can develop blockchain props on top of them and reward content creators on those platforms. The US Securities and Exchange Commission approved YouNow's application to sell 133 million item tokens at $0.1369 per share and an additional 45 million tokens to YouNow's content creators. The company pre-sold $22 million in tokens. In summary, two examples show that Reg A+ has a good start.
Written at the end
Like the technology sector, the investment community is changing rapidly. Reg A+ provides companies with a new, highly customized approach to raising large amounts of money from qualified and non-qualified investors; this is a vision for a decentralized, democratized financial system. Steps so that everyone can participate. Whether Reg A+ will be the ultimate goal of all mid-listed companies and private companies mixed-listed companies remains to be seen, but it is certainly a good attempt to lead the investment field to a more democratic future.
Source: Orange Book