The dust is settling from the stunning announcement on new Regulation A+, which legalizes $50,000,000 mini-IPOs to unaccredited investors. Interested parties are now digesting the 453 page rules and trying to figure out what it all means.
How will Reg A+ will fit into the Venture Capital and startup ecosystem? I can see it playing out in a couple of ways:
Reg A+ as a Friend to VC – Early Exit Opportunity
Reg A+ could give venture capitalists another avenue for an early liquidity event. Selling shareholders are allowed to sell up to 1/3 of the shares in a Reg A+ offering (i.e. $15M of a $50M offering). These shares could be offered to the public and allow a VC to have an earlier exit rather than wait for a full blown registered IPO.
Reg A+ as a Foe to VC – More Competition
Companies raising Series B+ rounds may use Reg A+ as negotiating leverage against VCs. Currently, many companies moving toward an IPO also dual track an M&A process. A similar dynamic could play out here where companies seeking venture capital also dual track a Reg A+ process.
This additional funding option would, at a minimum provide negotiating leverage against the VC, or could ultimately turn out to be a better option. Venture capital often comes with many strings such board control and protective provisions (where the VCs can block certain actions).
Issuers in Reg A+ offerings are unlikely to give up as much control and may end up with better terms. These companies will also be well positioned for a true IPO down the line (under a short form 8-A filing).
Of course – Reg A+ comes with significant legal/accounting/time costs, but perhaps these are relatively small costs for companies seeking large Series B / Series C+ funding rounds with founders who want to maintain control.
How do you think it will play out for VC? Do you think “dual tracking” is a threat to VC? Let us know in the comments.
This post was written by James Han on March 27, 2015
Reg A+: Friend or Foe to Venture Capital?