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Why Regulation A+ IPOs Should Be Avoided

For most retail investors, the acronym “IPO” has some pretty positive connotations. That’s because IPOs are typically associated with good times in the market. Take China as an example, where the IPO frenzy has seen some recent offerings oversubscribed by over 600X. Essentially, this means that the number of shares demanded by investors was 600 times higher than the actual supply. Here’s a look at a few more companies that have similar demand:

Source: Bloomberg

That’s no surprise when you see IPOs like China Literature which returned +86% on the first day of trading. Of course this goes right along with today’s popular notion that everyone can be a winner, everyone can participate in venture capital now with the emergence of ICOs, and anyone can be a VC with just a bit of training. Of course we all know that these are just misinformed people being propelled by the notion of easy money to be had when in fact there is no such thing as easy money. We see these sorts of people taken advantage of all the time with over-the-counter (OTC) companies, most of which seem to have gone quiet lately, leading us to believe that they’re just being manifested in different forms – like weed ICOs. One other disturbing trend we’ve noticed lately in addition to the ICO is the emergence of Regulation A+ IPOs (or mini-IPOs as they’re also referred to). In one sentence, a Regulation A+ IPO allows companies to raise up to $50 million by selling pre-IPO shares to non-accredited investors, and it has emerged only recently.

Remember when everybody got all excited about crowdfunding? Then people started to see it as an opportunity for funding their pity parties, or products that never had a snowball’s chance in hell of making it to market. Shortly afterwards, equity crowdfunding was introduced, but the rules limited the amount to be raised at just over $1 million, so we all got stuck with lifestyle businesses and “artisenal spirits“. All of this was made possible by something called the JOBS Act.

It was with the best intentions that the Jumpstart Our Business Startups Act, or JOBS Act, came into fruition. While it’s meant to be a way of encouraging funding for small businesses in the United States by easing many of the country’s securities regulations, it largely turned into a complete isht show. The Regulation A+ IPO came out of that as well, and it only came into effect July of 2015. Since then, things have been in full swing according to a document we found on the SEC website:

As of October 31, 2016, prospective issuers have publicly filed offering statements for 147 Regulation A+ offerings, seeking up to approximately $2.6 billion in financing. Of those, approximately 81 offerings seeking up to approximately $1.5 billion have been qualified by the Commission.

While those are the number of approved offerings, the ones that actually raised enough money and went public is a different story. In an article by Forbes, Mark Frohnmayer, CEO and founder of Arcimoto, said the following which pretty much sums it up:

Regulation A+ is a breath of fresh air. After 10 years working in the desert of corporate finance, we did this raise in just 4 weeks.

Well Mr. Frohnmayer, that’s all fine and dandy for the people that are raising the money but from where we’re sitting, it doesn’t look like a very good deal for retail investors. Arcimoto raised $19.5 million for their three-wheel electric vehicle by selling 3 million shares at $6.50. Today, those shares trade at $3.75 which equates to about a -42% loss so far. Of course those are short term losses, and anyone who believes in their vision should be backing up the truck and loading up on “cheap shares” in hopes that this $11,000 electric vehicle proves to be a hit:

The fact is that these Regulation A+ IPOs are not of the caliber that serious institutional investors would be interested in, thus the need to try and raise capital from non-accredited investors (in other words, your average retail investor who really shouldn’t be encouraged to these sorts of risk). Some of these companies look more like OTC companies when it comes to the amount of hope it takes to believe in their vision as opposed to say, actual sales of widgets today. Let’s take the example of a recent Regulation A+ IPO called PogoTec which is looking to raise a minimum of $10 million.

Founded in 2014, Virginia startup PogoTec raised around $2 million before filing for their Regulation A+ IPO which hopes to raise up to $32 million to commercialize the world’s smallest, lightest camera which can attach to virtually all glasses. The camera retails for $149 and can capture up to six segments of 30-second video or XX images.

The product looks kind of cool, but are people really going to buy it at scale? We already have those dumb looking vending machine glasses that people can buy now for $129.99. Then there are competing solutions that are not as small but still serve the same function:

The company plans to use their social media following to hawk their wares to along with a sales-force and plans to put some installations in eye-wear stores like Foster Grant. They have 166 patents out to protect their technology of which a handful have actually been granted. You can tell these guys are scrappy and hustling to get this thing off the ground and it’s commendable. If you had some money to speculate and the desire to see where the whole thing goes, you might buy some shares. But the likelihood of this business getting off the ground and turning into a sustainable cash generation platform seems low. By the way, you can pick one of their devices here if you’re interested which is probably what they need the most right now – sales.

The Regulation A+ is said to be useful to those companies that have a clear value proposition that investors can understand and a following of sorts that might be apt to invest for some reason aside from just trying to achieve returns that beat the market benchmark. That’s cool and all but we invest because we want superior returns. The only way we can avoid corporate slavery and being tagged like a cow is to have our money work for us in a way that we can have some sort of financial independence. Investing in Regulation A+ IPOs isn’t going to be our ticket to financial independence.

The fact is that retail investors just don’t have the ability to conduct the appropriate levels of due diligence required to make sure they know what they’re getting into, not to mention the ability to assign an appropriate valuation to a business. Sure, the SEC performs the function of screening out any blatant scams, but they’re hardly the equivalent of a Silicon Valley venture capitalist who has seen 100s of businesses fail or a veteran institutional investor who can quickly differentiate between a lifestyle business and a business that is built to scale. Proceed with the utmost caution.

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