When discussing the benefits of conducting an offering under the newly enacted rules for Regulation A+ under Title IV of the JOBS Act, most industry insiders mention benefits such as fewer disclosure requirements, reduced ongoing reporting requirements, increased shareholder limits, and increased allowable offering size. However, conducting a pre-IPO public offering may provide benefits not only in it of itself, but also lower fees associated with a subsequent IPO.
Pursuant to FINRA Rule 5110(C)(2)(A), no member may participate in a public offering for which they receive unfair or unreasonable compensation. What is considered unfair and/or unreasonable is currently unknown. It has long been the policy of FINRA’s Corporate Financing department (“the Department”) not to publish or disclose their internal guidelines as to what constitutes unfair and/or unreasonable compensation. In fact the last published guidance by the Department on this topic was back in 1992 via Notice 92-53. However, FINRA Rule 5110(c)(2)(D) does provide clarity on the factors involved when determining whether underwriting compensation is fair and reasonable. Specifically, the Department considers the size of the offering, the type of securities being offered, whether the offering is being conducted on a firm commitment or best efforts basis, and whether it is an initial or secondary offering. Of particular note is this last factor: whether the offering is an initial or secondary offering.
Under the notice, a secondary offering will have a lower amount of allowable underwriting compensation than an initial offering since in theory, the secondary offering possesses less risk to the underwriter and its syndicate members. In addition, since an offering conducted pursuant to Regulation A+ is considered a public offering under FINRA Rule 5110(b)(9)(G), any subsequent IPO would be classified as a secondary offering. As a result, issuers who have initially conducted a Reg A+ offering could face potentially lower underwriting costs when it comes time for a full blown IPO. Any issuer thinking of conducting a Reg A+ offering, should first consult with their counsel to understand its requirements and determine if it is a good fit for their capital raising needs.
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 aryehfriedman on June 11, 2015
The Hidden Benefit of Doing a Regulation A+ Offering Prior to a Full Blown IPO