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Advisors, Private Equity

Clearing the Path for Middle Market IPOs

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Last week, the government officially made it easier for small and mid-sized companies to go public. Although the initial JOBS Act was supposed to have accomplished this feat with Regulation A, the results were underwhelming. To fix the issue, an amendment  with two modifications to Reg A — which has now become known as “Reg A+” — was finalized and has significantly impacted how smaller businesses can raise capital through the public markets.

First, the new rules raise the cap for the public sale of securities over a 12-month period by smaller companies from $5 million to $50 million. More importantly, however, the amendment also reversed the requirement that public offerings between $20 million and $50 million must be registered with state regulators in every state where prospective shareholders reside.

Although both changes are significant and will help smaller companies access the public markets, the shifting of the state requirement was received particularly positively, being identified as the major burden to previous Reg A adoption. The greater flexibility with Reg A+ comes with stricter SEC requirements, as policymakers look to ensure that improved capital access does not come at the cost of investor protection.

While changes to standing regulation were slow moving, last week’s announcement signals a positive direction for small and mid-sized businesses and the overall movement to make it easier, more efficient, and less bureaucratic to access the public markets.

The changes are particularly important since middle market IPOs have been relatively sparse in recent years due to compliance challenges, investor preferences, and the increasing effectiveness of the private capital markets. As Steven Davidoff and Paul Rose explained in their research paper on The Disappearing Small IPO, “Percentagewise, the number of small IPOs [in 2013] was one of the lowest since 1996. The trend instead is toward ever larger IPOs. The number of large IPOs was the largest since at least 1996.”

The amendment to create Reg A also raises questions about future modifications to Title III Equity Crowdfunding Rules. Much of the investor community has been anxiously seeing if there will be new allowances for online capital sourcing or crowdfunding. VentureBeat published a helpful breakdown of how the old and new rules apply to different sized businesses, all with one major question in mind: As the capital markets open up and more options are available to privately-held business owners, how do you decide what type of capital and what growth path is best for your business?

These changes are emphasizing the “democratization of capital” concept and the growing competition among advisors and capital providers of private middle market business. As entrepreneurs and CEOs have increased optionality as they go to market, and are better able to create competitive processes in their search for advice and capital, it is much more likely they can achieve a better price and the best outcome for their business.

[Related reading: The 4 Trends Redefining Key Players in the Middle Market]

Although these are favorable trends for middle market business owners, deal professionals should consider how to stay ahead of these changes. As CEOs explore all of their options — old and new — it is more critical than ever for investors and advisors to have fully developed online presences and strong business development strategies.

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