Video: An Update on Regulation A Offerings

Greg Mausz, ADISA’s immediate past president and chief operating officer of Preferred Capital Securities, interviews Robert R. Kaplan Jr., partner at Kaplan Voekler Cunningham & Frank, on Regulation A offerings. Kaplan explains the history and growing popularity of Regulation A offerings, as well as regulatory requirements and developments, potential diversification benefits, and the current redemption options available.

Video Transcript

Greg Mausz   00:08

Welcome to another edition of Focus on Alternatives sponsored by ADISA, the Alternative and Direct Investment Securities Association. My name is Greg Mausz, I’ll be your host today and we have Rob Kaplan with Kaplan Vogler. He’s an attorney he’s been working on Reg. A deals for many years and so we want to have a conversation but to get us started can you just define Reg. A plus and kind of level the playing field there for us?

Robert R. Kaplan Jr.   00:33

Sure, so regulation A plus really refers to revisions that were made to regulation A which has been on the books with the SEC since the 1930s as a result of the Jobs Act of 2012. It created two tiers of regulation A type offerings. Tier one is the closest to the original regulation A offering class and Tier 2 is where we really saw the radical changes. So tier one now has a $20 million offering cap as opposed to the old $5 million offering cap. However, it is still subject to state blue sky it doesn’t have the reporting requirements of Tier 2, but you do you do have to go through the state process, and you don’t have to have qualified purchasers. But it tends to be a bit more laborious because of the state regulatory regime that you need to work with then. and it’s also does not have the transparency of Tier 2.

Tier 2 is what people commonly refer to as Reg. A plus, and is really where we’re seeing the breadth of the new securities transactional activity that’s going on in regulation A. So in in Tier 2 the cap is currently $50 million in a trailing 12-month period. You are exempt from state securities processes which make it a lot more feasible to get your deals done within a reasonable period of time from the standpoint of registration with the SEC and the legal work that needs to be done.

There is also an exemption from the traditional what we call as lawyers’ rule 12G which is a requirement that issuers who have a certain number of investors and have a certain number of assets within their capital stack must register under the Securities Exchange Act in 1934 and become a reporting company. Tier 2 act has an exemption from that, as long as you’re using a an appropriately registered transfer agent and you meet what is essentially the small public issuer definition under SEC regulations. So, from the standpoint of the activity, we see in the space it’s typically going to be that Tier 2 because you’re dealing with a size that’s meaningful for the distribution networks to work with. It’s a streamlined process the reporting processes or requirements of Tier 2 allow for the transparency that the the distribution networks want to see when they’re assessing those deals and those issues.

Greg Mausz   03:15

So, the transparency is good for investors. The higher dollar amount is good for sponsors that are they’re trying to raise money. How is this Reg. A structure different from the other types of alternative investments that you know broker dealers and RIAs are used to dealing with?

Robert R. Kaplan Jr.   03:33

You know it’s really what I tell people all the time keep in mind that regulation A only deals with the method of offering the securities. So much like Reg D what we’re dealing with is an exempt securities offering type. Now a little different from Reg. D from the standpoint of a regulation a security itself is exempted from the registration quote requirements of the Securities and Exchange Commission. But it really relates to how the securities get pushed into the marketplace. So, you’re going to see a lot of structures that actually broker dealers registered investment advisors within the alternative space have seen quite often fund structures reach structures bond structures, it’s really just how they’re offered in the regulatory scheme of how those get into the marketplace and who can invest that’s different.

Greg Mausz   04:29

So, the regulation A plus, it’s kind of newer to the marketplace, how is the adoption coming along what’s what’s the deal flow like these days?

Robert R. Kaplan Jr.   04:38

Sure to be perfectly honest we were a little surprised at how slow slowly the offering type was being adopted in independent broker dealer channels and in the alternative space. And I think that had was a result of just you know people needed to work up the learning channel on this. I think there was some inconsistent messaging that came out from state regulators as well as FINRA and the feds originally that caused some confusion in the industry. But fortunately, we’ve seen quite an uptick in the number of deals that are being done and the success that issues are having in getting their deals done within the space. I think in the traditional ADISA style IBD RIA community you’re you’re typically seeing yield product that is what’s being picked up in that space. So, bonds or REIT structures that have a preferred dividend associated with them.

Broker dealers who have a history of working with what I would call micro-cap public companies and what have you and the new portals that are allowed with the marketing that has been permitted in crowdfunding and regulation A under the Jobs Act tend to be more focused on those value what I would call a value-add deal. So maybe there’s not a big yield component to it today but really what they’re playing to is an opportunity in a security that that has the opportunity to double triple quadruple in value when it when it reaches a listed market. Beyond that we’ve also noticed some interesting developments regulatorily the SEC is looking at as well as Congress raising the raise amount for Tier 2 from 50 million to 75 million and regulations have changed which will allow now 34 act registered companies companies that have securities listed on exchange to use Reg. A for future capital offerings.

So that’s a positive step that I think will attract more trading houses and broker dealers to the space. And then finally we have noticed that some of these securities are now being picked up by alternative trading platforms such as Ameritrade, Schwab, Pershing to be traded as CUSIP and DTC qualified securities on their platforms. So very very encouraging to us that we’re seeing the marketplace while still definitely smaller than Reg D it is growing in its maturing to reach a number of different sophistication levels within the securities marketplace.

Greg Mausz   07:30

Sounds like there’s a lot going on. So, our audience is mostly broker dealers, RIA’s. If they’re looking at integrating a Reg. A offering into a client’s portfolio, what are some of the things they should be thinking about?

Robert R. Kaplan Jr.   07:44

Yeah so, I think some of the things that they need to understand moving into the marketplace is most of the of the issuers that we’re seeing right now are really what I would call capital driven as opposed to fee driven. They are looking at a long-term capital structure or excuse me, capital strategy to grow a core business that they have. And so, as a result they’re not focused on fees deriving from the investment structure, you’re not going to see a lot of single project or single asset type syndication structures right now in the Reg. A space. But I also think that’s a positive, because the management teams associated with these things have a big picture and they’re very goal driven which is a lining from a management perspective and an investor perspective at the end of the day. I do think they need to be sensitive to because Reg. A does allow an issuer to cast a very broad net when it comes to investors.

There are a lot of people who misunderstand the use of it and so you’ll see a lot of startups in there. So they need to be sensitive to what kind of company and what kind of growth milestone are they at when they go to the reggae format. I think they really want to look for companies that are at a growth stage or have a history of established revenue with a very defined long term capital strategy. I guess some of the other things I would say about it is it’s very interesting we’re seeing a very diverse range of industry sectors associated with the securities. You don’t have to have accredited investors for Tier 2 you you deal with what’s called qualified purchasers. Meaning they can either meet the accredited investor definition or they merely represent to the issuer that their investment is less than the greater of 10% of their stated net worth or their annual income.

So, you can reach a much broader investor base with these securities. The 12 G exemption that I talked about a little while ago, means that you can deal with and typically seeing much smaller minimum investments with these securities. So, you have the opportunity to expand your client base but also create some diversification for your clientele if they’re looking to explore the alternatives market or perhaps, they’ve spent some time in real estate, but they’d like to go look at energy now or some life science. So allows the financial advisor to work with that client to experiment explore but minimize risk associated.

And then finally I think the the other thing they must must must keep in mind right now when they’re looking at these securities is while Reg. A does permit for the trading of the security so they’re not restricted securities like regulation me there really hasn’t been as of yet an established secondary market to develop for these securities. I think there’s still some things that SEC needs to do to to foster that process, but you know I think the OTC can take these securities. There are some other alternative trading systems but it’s just not there yet so I think that the financial advisor needs to soberly look at this with their client and understand that these are essence a a non-traded security at this point and you’re going to be holding this security for for quite a while.

Greg Mausz   11:21

So, when you talk about non-traded securities, what are the different redemption options or how do you liquidate these securities if that if trading out of them really isn’t developed yet?

Robert R. Kaplan Jr.   11:32

Sure, so I think again I harken back to the comment I made before most of the structures you’re going to see in Reg. A are not going to be unfamiliar to RIA’s and B’s that that operate in the alternative space. So for instance bond offerings will have a maturity associated with them, and so the issuer will repay the the principal of the bonds at at that maturity date that’s one example. Other types of issuers REITs or fund structures or company structures could have share redemption programs associated with them not dissimilar from what they had seen in Reg. D and and publicly publicly registered non-traded securities. So, a certain percentage of securities could be redeemed in any given year and there’s usually discounts associated for the sooner you use the redemption as as opposed to later. But really the same things you’ll see in any other context.

Greg Mausz   12:31

Great, well Rob thank you so much for kind of walking us through a complete overview on Reg. A and how they apply…

Robert R. Kaplan Jr.   12:37

Sure.

Greg Mausz   12:38

… to investors and thank you for watching another addition of focus on alternatives. For more information about Reg. A or other alternative investments please visit adisa.org.

Thank you.

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