The term IPO refers to an “Initial Public Offering,” which is when a large and successful privately owned company sells its shares to the public, usually on the NASDAQ or the NYSE. Through an IPO, a company gets access to public capital source, and its investors and employees become able to sell some of their shares and, theoretically, make a profit.
Startups are everywhere and are revolutionizing our economy. You would think there would be a flood of IPOs so that these companies could get the capital they need to grow. Surprisingly, the past year and a half in the world of IPOs has been slow. While experts anticipated 2015 would be a great year for IPOs, the reality was much different. In fact, IPOs ran at the slowest pace since the banking crisis in 2009.
The statistics show how dead it’s been in the world of IPOs. In the San Francisco Bay area, there were only 11 IPOs in the first half of 2014. In 2015, the nation’s tech hub only saw three IPOs: Box, Apigee, and FitBit, which went public in June for a valuation of $4.1 billion. Nationwide there were only 8 venture-backed IPOs in 2015 at mid year (compared to 115 for all of 2014). As former hedge fund manager Andy Kessler noted in the Wall Street Journal, aside from Tesla and a few other exceptions, most hot companies stayed private. Payments innovator Square has grown 43 percent in the most current venture-funded investment, but only after slashing its original price by 25 percent, in a dynamic that became more common late in 2015, according to NASDAQ. Three other companies, in fact, postponed their IPOs, citing less than ideal market conditions.
Why the cooling? For starters, IPOs tend to work best for extreme cases (such as Uber, for example), and as we all know, extremes work best when the circumstances are ideal. Now is not ideal, as the stock market in 2015 showed – ending essentially flat, which tends to keep the pace of IPO entries down. We can also put some of the blame on Sarbanes-Oxley, a law that has beefed up the oversight on public companies and made it more expensive to be a public company. Another major factor is the 2001 decimalization of stock transactions, which reduced broker profits by two thirds, thereby making smaller IPOs unattractive in any environment, and even large IPOs unattractive in mixed market conditions.
Regardless of the reasons, there are ample incentives to delay or avoid going public altogether if a company can raise sufficient private capital instead. In fact, some founders who have gone public have regretted their choice. Jack Ma, co-founder of Alibaba, reflects the opinion of many founders when he told the WSJ. “If I had another life, I would keep my company private.”
The Need for A Middle Ground
In all, the dearth of opportunities in the traditional market highlights the need for a middle ground that allows excellent companies to raise capital, particularly during periods when the IPO market is less than ideal. One of the emerging answers is Regulation A+. The ability to achieve fair valuations and to raise prudent amounts of capital (up to $50 million per year) can sustain growth in markets like the one we’re currently in.
By my estimates there are some 660,000 mid-stage US companies between $4 million and $200 million in sales who have no place to go for growth capital. For companies in this tier that are successful and have genuine traction, Regulation A+ is not only a good solution, in many cases it is quite possibly the only attractive option they have.
Consider the advantages of Reg A+: It allows private companies to efficiently promote their offerings for the first time in places you might not expect – social media, PR and advertising. With Reg A+ you can promote your business freely, so long as you stick to the facts, and avoid hype and exaggeration (and shouldn’t that be the way you promote your organization regardless)? The cost of making the offering are far less than an IPO ($300k for a sizable offering including marketing and SEC registration/legal costs), and the costs of post offering reporting are far lower too – primarily the cost of an annual audit.
Main Street investors worldwide can participate. Offering companies can elect to list their stock on the OTCQB or OTCQX markets for better liquidity, or they can minimize reporting requirements. The company gets to choose. By mid 2016 and for seasons to come I believe Regulation A+ will enable many U.S. and Canadian companies to raise the capital that will expand their market presence and significantly increase GDP.
Clearly the boom season for IPOs in 2015 did not happen, and 2016 is currently looking pretty bleak. But for the mid-stage sector that comprises more than 660,000 ventures, Regulation A+ makes it possible for profitable companies that ask for sensible terms to do well in many market conditions. And that possibility is a great development for all.
Rod Turner is the founder and CEO of Manhattan Street Capital, helping successful mid-stage and high growth startups to raise the capital they need to scale faster under the newly-approved criteria of Regulation A+. Turner has played a key role in building six successful companies including Symantec/Norton, Ashton Tate, MicroPort, Knowledge Adventure, and ArtSlant, Inc. He is an accomplished investor who has built a Venture capital business (Irvine Ventures) and has made angel and mezzanine investments in companies such as Bloom, Amyris, Ask, and eASIC.