Regulation A+, which allows mini-IPOs of up to $50M, has largely been viewed as an opportunity for retail investors (who have historically not had the ability to invest in private companies) to gain access to the asset class. However, traditional investors with a history of active early-stage angel investing also stand to benefit from this new type of offering.
Regulation A+ could help boost angel returns by providing a mechanism for achieving liquidity faster and in more of their investments. Angel investors’ portfolios often contain investments in companies that are not candidates for a full blown IPO and whose founders do not wish to sell. Angel investors refer to these as “zombie” investments because the companies do not die, but they also do not provide an exit where the angel can get their money back. These companies could utilize Reg A+ to raise capital while also allowing early investors and employees to sell their shares to the public.
If earlier liquidity is very important to an angel investor, they could include Reg A+ registration rights in their financing documents (though this may be viewed as an aggressive ask by many startups). Registration rights are a rarely used right by minority shareholders to force companies to make a public offering to provide a liquidity event. Typically, these have been used to give minority shareholders leverage to negotiate a liquidity solution with the company rather than actually being exercised. (See VCExperts for more information on Registration Rights)
A sample provision might look something like this (based on the National Venture Capital Association Form Investor Rights Agreement):
Form 1-A Demand. If at any time after [the earlier of (i) [three (3) – five (5) years] after the date of this Agreement or (ii)] [one hundred eighty (180)] days]after the effective date of the registration statement for the IPO, the Company receives a request from Holders of [_______ percent (___%)] of the Registrable Securities then outstanding that the Company file a Form 1-Aregistration statement with respect to [at least forty percent (40%)] of the Registrable Securities then outstanding [(or a lesser percent if the anticipated aggregate offering price, net of Selling Expenses, would exceed $[5-15] million)], then the Company shall (x) within ten (10) days after the date such request is given, give notice thereof (the “Demand Notice”) to all Holders other than the Initiating Holders; and (y) as soon as practicable, and in any event within sixty (60) days after the date such request is given by the Initiating Holders, file a Form 1-A registration statement under the Securities Act covering all Registrable Securities that the Initiating Holders requested to be registered and any additional Registrable Securities requested to be included in such registration by any other Holders, as specified by notice given by each such Holder to the Company within [twenty (20)] days of the date the Demand Notice is given, and in each case.
As June 19th approaches and Regulation A+ goes into effect, angel investors may want to think twice before dismissing the importance of this historic shift in securities law. The opportunity for earlier and more frequent liquidity events stands to benefit even the most seasoned angel investor.
This post is not a substitute for professional legal advice nor is it a solicitation to offer legal advice. No attorney-client privilege is created herein. Seek the advice of a licensed attorney in the appropriate jurisdiction before taking any action that may affect your rights.
This post was written by James Han on September 15, 2016
Even Seasoned Angels Stand To Benefit From Reg A+