The ongoing government shutdown is hurting startups. Regulation A was amended in 2015 to give early-stage companies a way to raise funds from the general public, including online.
While Reg A offerings are often referred to as “mini IPOs,” they really aren’t, for a number of reasons. IPOs are held when a company is ready to become a fully-registered company. They typically involve a cast of thousands, a long timeline, an extensive price discovery process and they generally aren’t held when the company is in desperate need of money. Reg A offerings, in contrast, are more usually used as an alternative to an angel or VC funding for startups, especially for companies that are not in locations or industries that VCs invest in. These are companies that are all too familiar with the “Valley of Death,” where lack of capital can prevent even a good idea from getting enough traction to attract institutional funding.
In general, an offering needs to be cleared by the SEC before sales of shares can be made. This clearance is called “effectiveness” for regular IPOs and “qualification” for Reg A offerings.
Companies making IPO filings with the SEC have a kind of “nuclear option” in that they can do something called “removing the delaying amendment” from their filings and go effective 20 days after making a filing without the delaying amendment. The SEC reminded people that this worked when it issued shutdown guidance. In all likelihood, not many IPOs are going to take this route unless the shutdown continues for many more months; IPO attorneys and compliance officers at investment banks are cautious creatures. Startups by necessity are not so cautious, and if there was such an option open to them, they would definitely be using it. But there isn’t.
But is there another option? Reg A offerings are reviewed by the Staff of the Division of Corporation Finance and qualified by Corp Fin’s Director by “delegated authority.” Delegated from the Commission, that is. The Staff are mostly furloughed and it may be that the Director is prohibited by the terms of the Deficiency Act (which sets some of the conditions for a shutdown) from qualifying filings. But the Commissioners are political appointees, so matters may be different for them. Does the Deficiency Act prevent them from undertaking actions that they have delegated to others? Commissioners certainly have the right under normal circumstances to exercise this authority; is there anything preventing them from being able to do so under shutdown conditions?
If the Commissioners are able to qualify Reg A offerings, offerings meeting the following parameters might be good candidates for that process:
- The issuer should have received at least one round of comments from the Staff and have filed a response which it believes respond to those comments.
- All exhibits should have been filed.
- At the time of any filing, and at the time of qualification, the issuer’s financial statements should not be “stale.”
- The issuer should undertake to file a supplement to its offering statement in the event that the Staff later reviews the filings and has further comments.
So, any shutdown experts out there? Does this work?