Bringing Innovation Back (to Main Street)
Equal Opportunity IPO Brings Innovation Back to Main Street
When Linux broke all records for the largest first-day trading gain in an initial public offering, or IPO, (698%), Wall Street financiers gasped in delight.
Main Street sat on the sidelines … most of that IPO’s shares had been allocated by investment bankers and lawyers who showed their appreciation in ways that were later explained in court. Quipped Investopedia, a how-to guide for small investors, “Bottom line, your chances of getting early shares in an IPO are slim to none unless you’re on the inside,” reflecting a frustrating truth of the early part of this decade.
Has anything changed?
In almost every way, yes. In the wake of court battles where many high flying investment bankers were fined for their IPO practices, the nation’s economy is now struggling to absorb the sub-prime mortgage blow. While the country looks to our inventive nature to solve modern energy problems, billions of venture capital flees for the growing expansion in China and India.
IPOs are stalled – in fact, none in the second quarter of 2008, according to Tech Crunch, which tracks technology start ups. The dearth of recirculating capital is worsened by flagging dollar value and looming retirement obligations faced by Social Security. Inflation adjusted, interest on bank CDs is negative and, although banks may charge 35% on Credit Cards, they could still be strangled by non-performing loans. Still, for those looking for creative opportunities nearby, one very useful remnant remains in “disclosure” states – inventors’ direct access to investors, among them – workers benefiting from the technology brought to market in this new way.
A few savvy companies may use a new breed of two-stage IPO to bring innovation back to Main Street. The first stage in this revolutionary approach to first-day trading allocations, is called an S.E.C. Regulation A exempt offering.
Reg. A allows a startup to simplify funding, offering ground floor participation to the public. KeepTrack USA is one such venture, hoping to take public their end-to-end shipping security using patented access control tech. Regulation A … what their management team is calling the “equal opportunity IPO” (EO-IPO), is the vehicle of choice.
Regulation A is a special exemption by the SEC for companies raising $5 million or less from the public in any 12-month window. For many small companies, this Common equity, five times typical VC “Series A” debt or preferred stock, could easily see them through the first phase of development. Exploratory notices to investors are written in plain English, and can be previewed through “test the waters” (TTW) advertisements, whereby a company gauges public interest through testimonial-style, multi-media general advertising + feedback from the general public.
Interested parties can request more detail through a “Form 1-A Offering Memorandum.” At the same time, they can indicate by checking a box, how much they might consider investing.
Years later, when the time is right for a full blown S-1 IPO to ultimately become effective, the allocated warrants (first-day IPO trading rights) can be exercised by the investor. Meanwhile, the Reg. A shares and warrants offered can trade without restrictions on the over-the-counter market (also known as “Pink Sheets”).
The other benefit of a simplified first round of funding is that it opens the doors to a new breed of inventor. Umair Hague called for the “democratization” of the IPO in his April 2008 Harvard Business Journal article titled, “How to Fix Venture Capital.” Perhaps direct access to simplified funding does more than fix venture capital … it may also boost a new innovation cycle, where market solutions come from previously ignored corners.
Where else might Reg. A be applied?
The MIT Ignite Energy Forum and MIT Enterprise Forums are watering holes where inventors can meet teammates, refine a business model, and present ideas to a host of funding prospects. Many entries … few VC dollars … but a lot of interest. Will we see Regulation A offer an EO-IPO way for bright minds to take their case to smaller investors directly? Change would allow great ideas to reach an audience, allowing inventors to “Test the Waters” (TTW) with preliminary public outreach ads (also reviewed by SEC), organize their Offering, be able to get the critical first stage of development underway, list their shares, and make it through The Big Funnel.
Emerging companies benefit, but so do whole communities. In the case of KeepTrackUSA, the technology ultimately protects stevedores and teamsters from terrorism-related weaponry. For a worker handling unknown cargo, staking out equal opportunity to first day trading in technology that could save his life, makes financial sense … and then some.
Venture capital has just moved to Main Street.
By Amy Bauman – © 2008, 2009, 2010