Dangerous Delay

Dennis McCarthy – dennis@boustead1828.com – (213) 222-8260

My colleagues and I at Boustead noticed what may be a dangerous trend among microcap public companies.

When we suggest that microcap public company management should take advantage of the favorable stock market environment to raise some capital, many microcap CEOs and CFO’ tell us they want to wait before raising capital.

Wait for what?

  1. Wait for a Higher Stock Price?

In general, microcap valuations are relatively high now according to an index maintained by LD Micro, the well-respected independent resource.

To quote LD Micro’s September 17, 2017 email  – “After several attempts and a few close calls, the LD Micro Index finally hit an all-time high on Friday.”

Microcap stock prices might rise to yet newer highs, but there’s no certainty.

  1. Wait for Projected Performance Improvement?

We know that company management is often optimistic about a company’s future performance.

Plus, wouldn’t having more capital actually help management to achieve the performance improvement?

  1. Wait Until the Capital Need is Urgent?

Capital is not always available for microcap companies.

We’ve experienced periods, sometimes long periods, when microcap companies can’t access capital at any reasonable price.

Also, raising capital can take longer than expected, even when it is available.

Take Capital When Available

Our Advice is Take Capital When It’s Available

For those who are optimists, waiting for a higher stock price, think of it as averaging up.

For those who’ve lived through periods when capital wasn’t available to microcap companies, recall the anxiety and avoid it this time.

As the Saying Goes “Get Your Umbrella Before the Rain Starts”

It’s ironic but capital is most available when not needed.

Companies raising capital now may have more alternatives, so they can choose an attractive structure.

Microcap Funds Have Capital

At Microcap Funds, Money Is Burning a Hole in Their Pocket

As I noted above, recently, microcap funds have had good performance and fundraising has been productive.

Microcap funds have capital to invest and pressure to put it to work.

Microcap funds typically aren’t very large.  Fund managers want to deploy their capital and then raise another fund.

Investor Preferences

I would note a good development for both managers and microcap companies, many of the new funds permit their fund managers greater flexibility regarding investment structure.

In another article, I’ll discuss those features which seem to be most appealing to microcap public investors.

Consider these when preparing for a financing.

Please contact me to discuss your capital market goals. 

Financing Season

Dennis McCarthy – dennis@boustead1828.com – (213) 222-8260

During this financing season, my colleagues and I are active assisting our clients with a number of financing projects.

We’re raising private capital, arranging debt and organizing public offerings.

This is a great time of year for a company to be in the capital markets.

Investors and lenders are ready to focus and make decisions before year end.

Here are some ideas where investment capital is available now.

Cash Flow Investments

Many investors prefer businesses or projects which give them a current return, like a dividend, often with some equity upside.

We know lots of investors ready to invest to get a current return.

Click the link below to view a video on that capital source.

http://capitalmarketalerts.com/investor-demand-cash-flow-deals/

Growth Capital

Growth capital is available for companies which are past the venture capital stage but not yet mature enough for classic private equity.

Growth capital, in either debt or equity, can help your company to accelerate its growth.

Click the links below to view  videos explaining more about growth capital.

http://growth-cap.com/types-growth-capital/

http://growth-cap.com/growth-capital-in-capital-markets/

Public Offerings

The public offering market is available too.

One of my current projects involves a traditional registered public offering.

Others at Boustead have raised capital using the newly revised “Reg A+” public offering.

Click the link below to view an interview of my colleague, Dan McClory, about one of our recent Reg A+ offerings.

https://www.boustead1828.com/single-post/2017/08/22/Small-Cap-Nation-SCN-interviews-Dan-McClory-on-Bousteads-recent-Reg-A-and-IPO-deals

Whichever form of public offering, we’re finding investor demand for attractive companies.

Conclusion

So, the bottom line is, this is a good season to consider raising capital in a variety of forms.

Please contact me to discuss your goals.

New S-1 Registration Provisions

A provision of the recently enacted legislation, known as the FAST Act, makes it easier for smaller public companies to conduct registered offerings.

The reason why this is significant is that smaller public companies face a very unreceptive market when raising capital via private placements, known as PIPE offerings.

Burden to Qualify to Invest in Private Placement

In general, the requirements to qualify as an investor in a private placement leave only a small universe available to consider a private placement offering.

A private placement investor must undergo the paperwork burden to prove the investor qualifies as an accredited investor, with

  • the capability to evaluate the risks of the offering;
  • the willingness to forego immediate liquidity of the securities purchased in the offering; and
  • the ability to sustain the total loss of the investment.

Given the limited universe of investors for private placement offerings, in today’s capital markets, smaller public companies, especially OTC listed companies, typically find only toxic financing available from PIPE investors.  That is, the issuing public company may be able to raise capital but the form of the securities demanded by investors has features which are extremely expensive to the issuer and may, in certain circumstances, result in severe negative impact on the issuer’s stock price, perhaps due to substantial dilution of shares.

In contrast with the limitations of a private placement, an investor in a registered offering:

  • has no paperwork burden to prove eligibility to purchase the securities; and
  • has immediately tradable securities, subject only to the liquidity of the company’s stock.

Given these features of a registered offering, issuers can tap a much broader universe of potential investors for a registered offering which should enable an issuer to obtain better terms than for a private placement.

Why then don’t smaller companies issue shares through registered offerings?

The reasons typically given include:

  • raising capital via a registered offering involves upfront and ongoing costs for legal and accounting work to file an S-1 registration statement without certainty of success in actually raising capital,
  • offering size may be small in relation to the fixed upfront costs noted above; and
  • filing a registered offering is public and would enable a stock short seller to short the issuer’s stock depressing its price then cover the short at a profit with stock purchased on the offering.

The new rules enabled by the FAST Act don’t eliminate all these impediments but eliminate one of the costs and risks, which is the requirement to file additional S-1 supplements once the S-1 is declared effective.

Final rules issued by the SEC on January 13th, implementing the FAST Act, enables companies using the S-1 form of registration statement to incorporate by reference required SEC filings after the S-1 is declared effective.

Up until now, S-1 registration statements could only incorporate by reference prior SEC filings. Larger companies, able to use S-3 registrations could incorporate future SEC filings.

Now a smaller company using an S-1 registration statement, which makes the election to incorporate future SEC filings by reference, need not file an update to its S-1 registration when a new SEC filing is required, such as an 8-K or 10-Q, and risk SEC review and comments.

This is a substantial cost and time saving benefit of this provision of the FAST Act.

Interestingly, this is not the feature which got the attention when the FAST Act was passed or the final rules issued.

Please contact us to discuss your capital market plans.

For background reading on this and other capital market provisions in the FAST Act, please click on the following:

Goodwin Procter article

Excerpt:

The amendment to Form S-1 requires smaller reporting companies that make this election to state in the prospectus contained in the registration statement that all documents subsequently filed by the smaller reporting company pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act before the termination of the offering shall be deemed to be incorporated by reference into the prospectus.

This amendment will permit smaller reporting companies to eliminate the additional costs and delays of manual updates to “shelf” registration statements on Form S-1 for resale transactions and continuous offerings that commence promptly after effectiveness and continue for a period in excess of 30 days after effectiveness. This amendment does not change the current requirement that companies must conduct delayed offerings under Rule 415(a)(1)(x) under the Securities Act of 1933 using Form S-3 or Form F-3.

In addition, this amendment does not change the eligibility requirements for companies that wish to incorporate documents filed after the effective date of the registration statement under General Instruction VII to Form S-1. The principal eligibility requirements include the following: (1) the company is required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act, (2) the company has filed all reports and other materials required by Sections 13(a), 14 or 15(d) of the Exchange Act during the preceding 12 months or such shorter period as the company was required to file such reports and materials, (3) the company has filed an annual report required under Section 13(a) or Section 15(d) of the Exchange Act for its most recently completed fiscal year, (4) the company is not a blank check company, a shell company or a registrant for a penny stock offering and (5) the company is not registering an offering that effectuates a business combination transaction).

Smaller Company Reg A Offering Rules Get Update

Lance Kimmel, a well-regarded attorney and head of SEC Law Firm, provides us with this helpful summary of key developments that should make Reg A offerings more useful again.

To refresh your memory, the current Reg A rules are available by clicking here.

LanceImageFollowing the mandate of the Jumpstart Our Business Start-Up (JOBS) Act, on December 18, 2013 the Securities and Exchange Commission proposed rules to amend largely forgotten and little-used Regulation A.

Having received far less attention than either of the other two major equity raising initiatives under the JOBS Act, general solicitation of accredited investors and equity crowdfunding, the revisions to Regulation A may well be the most far-reaching of the JOBS Act reforms. Informally known as “Regulation A+”.

The new proposal – expected to be adopted by the SEC in the first half of 2014 following a 60-day public comment period – has the potential to become a dramatically less expensive path to going public for many smaller companies whose investors seek an exit strategy or liquidity for their investment.

The SEC’s proposal builds upon existing Regulation A, which is an existing exemption from registration for small offerings of securities up to $5 million within a 12-month period.

The two major drawbacks to Regulation A are the small dollar limit (thereby resulting in high transaction costs as a percentage of the offering) and the fact that Regulation A offerings are not exempt from state blue sky laws, adding additional levels of complexity and cost to completing a Regulation A transaction.

For these reasons, Regulation A receded into relative obscurity over the last few decades. Regulation A, in its current form, will continue as so-called Tier 1 of Regulation A, and we expect reliance on Tier 1 to continue to remain in obscurity.

As proposed, “Regulation A+” will enable companies to publicly offer and sell up to $50 million of securities within a 12-month period under a so-called Tier 2 within Regulation A.

In addition, and crucially, Tier II-registered securities will be exempt from state blue sky laws, something that the state securities administrators strongly oppose. Finally, ongoing reporting obligations will be less burdensome than those for traditional reporting companies.

Proposal
As proposed, both Tier 1 and Tier 2 offerings under Regulation A will:

  • permit companies to submit draft offering statements for non-public SEC review prior to filing;
  • permit the use of “testing the waters” solicitation materials both before and after filing of the offering statement;
  • modernize the qualification, communications and offering process in Regulation A to reflect analogous provisions of the Securities Act registration process; and
  • require electronic filing of offering materials.

In addition, in Tier 2 offerings:

  • investors would be limited to purchasing no more than 10 percent of the greater of the investor’s annual income or net worth.
  • the financial statements (two years in most cases) included in the offering circular would be required to be audited; and
  • the company would be required to file annual and semi-annual periodic reports and current event updates that are similar to the current requirements for public company reporting under the Exchange Act.

The main eligibility requirements to use Regulation A (both Tier 1 or Tier 2) include that the company:

  • must be organized in the United States or Canada;
  • cannot have no specific business plan or purpose or have indicated that its business plan is to engage in a merger or acquisition with an unidentified company;
  • is not or has not been subject to an SEC order revoking the company’s registration under the Exchange Act during the preceding five years; and
  • is not disqualified under the recently adopted “bad actor” disqualification rules.

If you have questions regarding the new SEC proposal, other capital raising initiatives under the JOBS Act, strategic planning to take advantage of the new initiatives or specific fact patterns, please contact:

Lance Jon Kimmel
SEC Law Firm
11693 San Vicente Boulevard
Suite 357
Los Angeles, California 90049
tel. 310/557-3059
lkimmel@seclawfirm.com

Life Sciences IPOs Surge

There were 8 life science IPOs reported in May this year, according to “The Deal” and my colleague, David Feldman of Richardson & Patel.

We’ve just completed the best quarter for IPOs since 2000, reports these sources.

If your company is considering raising capital, now may be the time.

Public companies may find my Public Equity Series of videos helpful in learning the options available to them and the pro’s and con’s of each alternative.

Click here to go to David Feldman’s blog.

Post by Dennis McCarthy
Google

Crowdfunding Update from Rick Citron

My friend and colleague, Rick Citron of Citron and Deutsch, provides an update on the type of crowdfunding currently available and the expectation for equity crowdfunding.

Rick has a Youtube channel on which he offers a series of educational videos on raising capital for early stage companies (link).

PIPE Investor Trend

Dennis McCarthy – (213) 222-8260 – dennis@monarchbayassociates.com

Today, a small cap public company considering raising equity may find the alternative of using a PIPE, a private investment in a public entity, to be a more attractive option.

That’s my conclusion from the 2012 tally of PIPE investors by Placement Tracker, the well-regarded source of this data.

So, here’s the background.  When I created my Equity Series of videos to help small cap public company executives to better understand the options available to them when raising equity, I created a video on PIPEs.

In my video, I said that because a PIPE is a private investment, historically, hedge funds have been the primary investors, not the larger universe of traditional institutional investors which typically invest in public securities.

Hedge funds invest in PIPEs but negotiate terms that are expensive for the issuing company.

PIPEs, therefore, have come to be considered a relatively more expensive method for a small cap public company to raise equity vs other offering alternatives.

This year, 2012, however, reveals an interesting development.  In the 2012 PIPE investor tally, produced by Placement Tracker, 10 of the top 25 PIPE investors were not hedge funds but more traditional institutional investors.

In fact, the number one PIPE investor is a traditional institutional investor, Fidelity Investments.

So today, a small cap public company’s PIPE may be sold to a larger universe of investors including those traditional institutional investors which purchase stocks on more favorable terms, such as investing at the market price without a discount and without other sweeteners such as warrants.

This is a positive development and makes the option to raise equity through a PIPE offering more attractive.  I hope this trend continues.

I’ve included a link to the online magazine, Growth Capitalist, which first tipped me to this development.  Also, I’ve provided the 2012 PIPE Investor tally from Placement Tracker as well as the link to all its 2012 tables.

As always, please contact me to help your company to raise equity or to complete any capital market project.  

2012 US PIPE Mkt Institutional Investor League Table

Growth Capitalist Article: http://www.growthcapitalist.com/?utm_source=Growth+Capitalist&utm_campaign=a7c6c3845e-RSS_EMAIL_CAMPAIGN&utm_medium=email

Placement Tracker Article: http://www.globenewswire.com/news-release/2013/01/09/515496/10017525/en/PlacementTracker-Publishes-2012-PIPE-Market-League-Tables.html

Raising Equity for Small Cap Public Companies Series

Dennis McCarthy – (213) 222-8260 – dennis@monarchbayassociates.com

See “Equity Series” above on navigation bar.

Today, Wall Street investors are receptive to buying public company stock, even IPOs, initial public offerings, which is a sure sign of investor appetite. 

So, in this receptive Wall Street environment, many small cap public companies are considering raising equity capital.

Now, small cap public companies have many more options for the mechanics of raising equity.  That’s a good thing but requires company management to make some choices, preferably good choices.

To help companies to better understand what options are available as well as some of the tricks and traps, I created a series of videos on raising equity for small cap public companies.

In this equity series, I’ll address topics including:

  • How to get the best deal.
  • What are key regulatory rules.
  • What are the available mechanisms for raising equity and
  • What are the pro’s and con’s of each mechanism.

Each of my videos will be short and focused on one element of the topic.

I plan to supplement my videos with contributions from other professionals who will add their special expertise to the series.

I hope you’ll enjoy this series.  Give me your feedback to make it even better.

 

Microcap Funding Twist

Dennis McCarthy – (213) 222-8260 – dennis@monarchbayassociates.com

Raising equity capital for smallcap companies, defined as companies with market values $2 billion or under, has gotten easier because of techniques like shelf registrations which permit overnight offerings and ATMs or at the market dribble out financings.

However, raising capital for the microcap end of the public market, defined as companies with market values of $100 million or less, hasn’t gotten much easier, in my opinion. 

It could be several factors, fewer microcap investors, generally lower liquidity or other causes.

This is a problem because many microcap companies need capital to grow.  If capital is too expensive or not readily available, it stifles their growth.

Therefore, when my firm helps microcap companies to raise equity, we often include less conventional sources of capital in the mix.

In addition to the hedge funds which have been the main source of capital for microcaps, we often approach three additional sources:

(i)                strategic investors,

(ii)             private equity crossover funds and

(iii)           wealthy individual investors.

These sources may not be as speedy but they may offer better terms.

First, strategic investors.  Many large companies have lots of cheap capital available but need growth.  This has opened the door for microcap companies to obtain capital from strategic investors.

What strategic investors want from the investment will vary, maybe it’s a co-marketing arrangement or a technology license, but they typically don’t want to consolidate the microcap’s performance in their financials.   

The key point here is that the strategic investor is expecting to get a return in ways other than those of traditional financial investors.  This creates some interesting opportunities.  For example, I’ve seen several recent strategic investments made at a significant premium to market.

The second group of investors are called private equity crossover funds.  Because the competition among private equity groups is so intense, some private equity funds have taken to making investments in public companies.

It’s important to distinguish these private equity crossover funds from classic hedge funds.  These crossover funds look at different metrics.  They look at IP position, capital efficiency and size of addressable market, and less at current profitability and liquidity.

Private equity crossover funds take a longer term view more in sync with corporate management.

The third group is wealthy individual investors.  These are the ones who survived the Great Depression with capital so they’re savvy investors, survivors.

They seem to come in two types, passive or active. 

The passive investors know they don’t have time to closely monitor their investment so they may appoint or hire someone to help them.  In a recent example, individual investors selected a representative to review documents and serve as their eyes and ears.

The other type of individual investor, the active investor, may serve as a board member and company mentor.  The active investor’s perspective is that he provides capital and advice, combined.

I suppose I should mention that we may see a return of the old style passive individual investor, investing very small amounts of capital in higher risk situations.  The recent crowd-funding legislation may spark the return of that style where an individual investor’s stake is so small in relation to his net worth that the complete loss is not too painful.  We’ll see how the new rules are drawn and what develops here.

In summary, we think it pays to include these less conventional capital sources to get your capital on the best terms.

Please contact me to help your company raise equity or debt or complete an M&A project.

The JOBS Act – Update

Dennis McCarthy – (213) 222-8260 – dennis@monarchbayassociates.com

The new JOBS Act, intended to make it easier for smaller companies to raise capital, was signed into law by the President on April 5th.

First, let me say that I welcome the reduction in the regulatory burden on smaller companies.  I hope this spirit of deregulation will be extended to existing small cap public companies which continue to operate under the old burdens.

However, some needed changes to encourage capital formation by smaller companies aren’t as easily handled through legislation.  For example, thin liquidity in many small cap stocks has several causes and would require several fixes.  Lack of liquidity, therefore, will likely continue to plague smaller cap stocks.

Also, we can’t legislate good judgment.  Even under the former, so-called stricter rules, investors shoveled money into Chinese stocks, many of which proved to be unwise investments.  The new JOBS Act places even greater responsibility on investors to exert good judgment.

Experience tells me that companies considering raising capital should take advantage of these relaxed rules as soon as possible before some visible blow-ups or disasters trigger re-tightening of the rules.

The following links provide helpful summaries and analyses of the JOBS Act.  Thank you.

Sheppard Mullin: http://www.corporatesecuritieslawblog.com/capital-markets-president-obama-signs-jobs-act-landmark-reform-for-small-and-emerging-growth-companies-now-law.html

TroyGould: http://troygould.com/index.cfm?fuseaction=content.contentDetail&ID=9187&tID=303

Latham & Watkins:http://w.on24.com/r.htm?e=445288&s=1&k=17FD77D843F6EAE8A36641AD5AE93257