Canadian and US companies can now raise up to $50 million with accredited and non-accredited investors.

By Jeffrey Stanger of ITB Solutions

Accessing capital in today’s world is harder than ever – even though regulators in Canada and the US have opened up the door to new methods through various exemptions. On March 25th 2015, the Securities and Exchange Commission (the “SEC”) adopted new rules to amend Regulation A under the Securities Act of 1933, as amended (the “Securities Act”). The new rules, referred to as “Regulation A+,” were mandated by Title IV of the Jumpstart Our Business Startup (“JOBS”) Act with the goal of increasing access to the capital markets for smaller issuers. Regulation A+ expands upon and modernizes the existing Regulation A. To date, Regulation A has been little used due to its limited offering size (up to $5 million of securities in a 12-month period) and the disclosure burdens it imposes relative to other private placement exemptions, such as Regulation D. Regulation A+, however, may provide a meaningful new tool for private issuers wishing to access the capital markets.

Regulation A+ is generally open to both United States and Canadian companies.

Regulation A+ creates two tiers of capital raising opportunities. Tier 1 allows for offerings of up to $20 million in a 12-month period, including not more than $6 million in offers by selling securityholders that are affiliates of the issuer. Tier 2 allows for offerings of up to $50 million in a 12-month period, including not more than $15 million in offers by selling security holders that are affiliates of the issuer. More importantly, the securities issued under either Tier are not subject to the restrictions on transfer imposed by United States federal securities laws.

A Regulation A+ financing, in concert with a subsequent listing on one of the approved stock exchanges in Canada such as the NEO Exchange or the Canadian Securities Exchange  – can be a liquidity creating mechanism to not only get the financing but provide investors with a potential exit. Since they are both recognized exchanges with the OTCMarkets and the Frankfurt Stock Exchange a company can expand their after-market reach into the United States and Europe.

…I call it the moral obligation with investors who put money in. They need to see liquidity and of course we have employees as well who put in a lot of blood, sweat and tears to make Uber successful, and they own equity and so we have to ultimately find liquidity for all shareholders. Uber CEO, Travis Kalanick discussing an IPO from a March 29, 2016 interview on CNBC.

The benefit of a Regulation A+ offering is that issuers are able to sell to both non-accredited and accredited investors which will be freely trading without restriction in the United States. Regulation A+ creates a truly tradable security. An additional significant benefit is that companies may solicit interest prior to filing an offering statement for a Regulation A+ offering.

Let’s now take a look at a couple of different aspects of a Regulation A+ offering, the business aspect and investors viewpoint. On the business side just raising the money is not a hole in one. Just as in golf you must always follow through on your swing for a chance to get that hole in one.

Hopefully with all of these Reg A+ rules coming into effect some of that will change.” – Mark Cuban in an April 1, 2016 interview on CNBC discussing the trend of companies staying private too long and going public when their ‘hyper-growth’ is greatly diminished.

Companies must also follow through on a financing by providing an exit. All investors know that it’s easy to get into an investment; the problem is exiting with a viable liquidity event. One such liquidity event could be a “going public” transaction, which will attract more investors and a possible exit for founders and earlier stage investors. Many of these financings will not automatically gain the company the necessary qualifications for a listing on NASDAQ or NYSE but they will certainly qualify for one of the over the counter markets in the US such as the OTCQX and OTCQB.

For several reasons, however, not all investors like over the counter markets. As mentioned above, one solution is a listing in Canada on one of the approved stock exchanges such as the NEO Exchange or the  CSE – Canadian Securities Exchange. Canada has just under 4,000 stock exchange listed public companies with a population of only 35 million people, while the US with ten times the population has just over 6,000 public companies – and that includes companies quoted on the OTC markets.

This shows that Canada is one of the largest small cap company markets in the world with clear rules and a strong but fair regulatory regime. In addition, as a fully recognized offshore markets by the Securities and Exchange Commission, a public listing on the  NEO or CSE facilitates a fast and easy quotation on the OTCQX/QB AND the Frankfurt exchange in Germany and thus opening up the security to millions more investors in North America and Europe.

Having a liquid trading market for your securities before, during and after your Regulation A+ offering will attract more investors who need to know their exit strategy – and, if possible, precisely what and when that liquidity event may be.
One of the problems faced by VC’s, Angel Groups and crowdfunding investors is that they have invested in numerous companies often with very few exits. The tide is changing to the point that investors want to see a solid, realistic liquidity event to support the exit strategy.

With a Regulation A+ offering and a listing, on either the NEO Exchange or CSE, companies can provide investors with a very cost-effective market for them to trade their shares, and at the same time providing the company and the marketplace with a true value of the corporation.

Since 2005 ITB Solutions has provided listings development services to stock Exchanges in Canada such as the Canadian Securities Exchange. ITB Solutions currently provides New Listing Services to the NEO Exchange. We assist companies with the listing application and managing the process to become publicly tradable in Canada, as well as offering advice on how to make the most of your public listing. You can reach Jeffrey Stanger at 647-500-0492 or by email at jeffrey@itbsolutions.ca