The securities laws permit a number of other methods for going public. Currently, however, none of these is in wide use, and a number of states prohibit some of the techniques discussed ahead.

Going public through Rule 504, an intrastate offering, or through Regulation S is technically legal. As discussed ahead, despite a recent encouraging change, Rule 504 is prohibited in most states, it can be difficult to properly use an intrastate exemption even with some recent rule amendments, and the wild days of Regulation S have been tamed by regulatory reform. Nevertheless, a full account of these techniques is provided in order to understand the context in which they exist alongside Regulation A+, reverse mergers, special purpose acquisition companies (SPACs), and self‐filings.

Interestingly, in my reverse merger books, old Regulation A was included with this group as an alternative that was not much used. It turns out I may have been a bit prescient in my 2009 second edition when I said, “I have been hearing for a number of years that a potential overhaul of Regulation A is in the works, but no change seems imminent. There was talk, for example, about increasing the amount allowed to be raised.” It was about a year later that I took that idea and presented it to the 2010 Conference.

In my prior book, I also described some of the challenges in making old Reg A successful, noting,

In part because of its reduced disclosure, both at the time of the going‐public event and afterward, Regulation A has been used by some unscrupulous players to use these public entities to manipulate trading and give the public virtually no information about the company. Others have used Reg A to go public and then voluntarily provide some reporting or other information. Most securities lawyers cannot remember the last time someone they know has used Regulation A, but it is out there as an option.

The other big challenge I mentioned was blue sky:

Although I don't have specific experience, I assume the individual states where such offerings are taking place are not too thrilled with Regulation A either, and one of the reasons for its limited popularity may be the inability to “clear” blue sky review and let an offering be completed.

Bingo!

How things have changed. Reg A goes from a brief reference noting its lack of utility to half of this book covering this exciting new technique. Here are a few others still out there, several of which have been the subject of recent SEC rulemakings intended to enhance their attractiveness.

Intrastate Exemption

The SEC and federal agencies are only able, generally speaking, to regulate interstate commerce. This means that a transaction occurring wholly in only one state may be outside their jurisdiction. In fact, the federal securities laws contain an express exemption from registration (in Section 3(a)(11)) for an offering that takes place wholly within one state.

Some have gone to a state where regulation of securities is light (these are becoming fewer and fewer) and completed an offering solely within that state to avoid the necessity of SEC registration. The company also previously was required to be physically located and incorporated in that state. The key is being in a state whose regulation would somehow allow for an easier time than SEC registration. The prior rules also required all offerees to be residents of the single state.

Most states provide that an offering that would otherwise be public for SEC purposes requires the preparation and approval by state regulators of a full disclosure document. It is not clear whether shares are restricted after being offered in an intrastate transaction. If they are restricted, although the offering itself is exempt, the shares still must be held for the requisite Rule 144 period before trading can commence.

In 2016, the SEC adopted new Rule 147A, intended to make meeting the intrastate exemption a bit easier. First, they no longer require that your company be incorporated in the state in question. Second, they no longer focus on offerees, but rather purchasers, who must be state residents. This allows offering information to be available on the Internet, for example. It also facilitates complying with some of the intrastate crowdfunding statutes that have been passed. Again, those crowdfunding rules do not lead to trading and so are not a focus of this book.

Interestingly, the SEC had to sidestep Section 3(a)(11) of the Securities Act, which as noted provides for the intrastate exemption, to adopt Rule 147A. They felt that there was no way to implement the changes above within the confines of 3(a)(11) and therefore took it upon themselves, under their “general exemptive authority,” to adopt the new rule. While this seems a little “inside baseball,” it is important because it shows how the Commission felt it needed to prioritize making this change to enhance instate fundraising.

The important effect of this change is that intrastate offerings now can be conducted with advertising and general solicitation, including over the Internet. Of course it is very important, when conducting a one‐state offering, to ensure that the offering is exempt from state registration as well.

Rule 504

An SEC exemption from registration under Rule 504 of Regulation D, previously considered a rather dangerous transaction to get involved with, may increase in interest following recent SEC changes. Here is how it works: Rule 504 allows an exemption from registration if a company raises a limited amount. The original intent was to let small issuers raise smaller amounts, subject primarily to state blue sky regulation and federal antifraud rules.

In 2016, the SEC amended Rule 504 to increase the amount that can be raised in a 12‐month period from $1 million to $5 million. This change was effective in January 2017. To my knowledge, there were no requests for this change; the SEC acted on its own. Some feel it was a gift to the states following the harsh treatment they received with the Reg A+ rules preempting state merit review. This change may indeed increase the attractiveness of this previously maligned technique.

Other Regulation D offerings require significant disclosure to any nonaccredited investors and limit the number of nonaccredited investors participating in a deal to 35. In a Rule 504 transaction, a company can complete an offering to any number of accredited and nonaccredited investors.

There are two ways to complete a 504 offering. If the company does not desire for the stock to trade, it can complete the offering much like any other private placement, file Form D with the SEC, and inform investors that they must hold their stock for at least a year under Rule 144 unless it is registered. With this option you can go to an unlimited number of accredited or nonaccredited investors. Advertising and general solicitation, however, are not permitted with this option. There are also no specific information delivery requirements with this approach. This, then, creates the opportunity to conduct a private placement of up to $5 million to any number of investors, whether or not accredited, and do it all with a simple subscription agreement and no other information provided.

The major attraction of 504 had been, however, a separate option to conduct a small public offering, issue unrestricted securities, and allow trading of the stock. With this approach, you can do advertising and general solicitation to seek investors. Because the company will not be reporting after the offering, the only trading option would be on OTC Pink.

To utilize this option to get to trading you must choose one of three approaches. First, you can offer and sell only in states that require formal state registration, public filing, and delivery of disclosure information to investors. Some practitioners try to choose “friendly” states where review tends to be minimal and quick. Others are willing to go through full state review and feel it is still better than dealing with the SEC.

The second option to get to trading is that you pick at least one state that requires registration, go through that process, and then you can sell in states that do not require registration as long as you deliver offering materials to all investors in all states. The third way to conduct a 504 and start trading is to go to any state, even those that do not require registration, as long as they permit general solicitation, but then you must limit the offering to accredited investors.

Think about that last one. Now you can raise up to $5 million from accredited investors, not register in any state, and start trading your stock. When 504 was limited to $1 million there was not that much attraction to using it, and many states effectively prohibited it as noted earlier. It will be interesting to see if that begins to change as dealmakers and investment banks see a new way to crowdfund a private or otherwise non‐reporting company. Blank checks cannot use Rule 504, nor can SEC reporting companies or investment companies.

As historical reference, during the 1980s and 1990s in particular, Rule 504 caught on as a way to take companies public. Unfortunately, many players in this field were unsavory types and many SEC investigations and actions resulted from Rule 504 offerings gone bad. That is why prior to this SEC change only a small handful of states permitted 504. It is not clear whether that will change with the increase to $5 million. I know of a number of players starting to inquire about the process of completing a 504 offering given the recent increase.

One hopeful change the SEC made when they increased the amount that may be raised in 504 offerings was to ban bad actors from being involved. Previously no such restriction existed. In general one is a bad actor if he or she has had a securities‐related legal problem in the recent past. The SEC bans bad actors from involvement in basically all Reg D offerings (and Reg A+ for that matter as has been discussed).

Regulation S

In 1990, the SEC passed the now‐infamous Regulation S, or Reg S. After several court cases, the SEC had to admit it had no jurisdiction over events outside the United States. Then it came up with a way to regulate foreign companies and offerings as long as some U.S. connection existed. Regulation S originally exempted from registration securities offerings by U.S. companies if the investment came completely or partially from foreigners, or where a foreign company raised money from foreign sources but some directed selling efforts took place in the United States.

The major advantages were, first, that no information delivery or accredited investor status mattered, and second, that the original rule seemed to suggest that shares issued in a Regulation S exempt offering could be resold publicly without restriction 41 days after being issued. So one could offer shares to any number of offshore investors, whether or not accredited, without any information and without requiring SEC registration by a U.S. company. There were some who argued the SEC had no right to regulate this kind of offshore offering in any event, but because the regulation focused on U.S. companies, the SEC won the argument.

Resell after 41 days? Doesn't Rule 144 require a six‐month waiting period? And doesn't everyone else have to be registered if they want to sell before that? The SEC says they meant the shares could be sold publicly outside the United States in 41 days. But the rule neglected to make that distinction. So savvy promoters, with extremely well‐paid lawyers in tow, went forward, doing these deals with solid legal opinions as to the shares' ability to be resold in the United States in 41 days.

So what happened? I will give you the end of the story and then we can go back to talk about how Regulation S involved the birth of PIPEs. In 1998, the SEC finally got its act together and, rather than admit the mistake, it simply amended the rule to say you can resell publicly after one year—in other words, the same basic time period as was then the case in Rule 144. (As mentioned earlier, that period is now six months in most cases.) This effectively mooted the question of whether it meant “sale in the United States.” That was pretty much the end of the use of Regulation S in the manner I am about to describe.

So what happened when Regulation S came along? Offshore hedge funds and investors had a field day. Company after company went public through a Regulation S offering where the offshore investors resold their shares in the United States just 41 days after what was basically a private offering permitted under Regulation S. Investors loved that they could invest privately and then have a public market almost immediately. Sound familiar? Yes, these deals were the predecessors to modern PIPEs, and indeed many PIPE players got their start doing Regulation S deals in the early and mid‐1990s.

Some unscrupulous actors clearly took advantage. They made no disclosure, got foreign investors in, and then got them out in 41 days. The company got its money, the original investor made a tidy profit, and shares traded after that based on essentially no information. Good guys made disclosure prior to the investment. Some became reporting companies voluntarily. Some took the conservative approach and only allowed resale outside the United States.

Since 2002, life has been much different in the PIPEs world. The PIPE market mostly took a pause after the 2008 crash and following some well‐publicized SEC investigations and class action suits against some PIPE funds relating to how they calculated the value of their illiquid securities, among other things. PIPEs and PIPE funds have resurfaced along with the current bull market and PIPE investors truly are more like investors now, betting on the longer‐term upside potential of a company's stock. The Rule 144 amendments in 2008, which shortened the holding periods, included some conforming amendments to Regulation S that basically mirror the holding periods in amended Rule 144.

These days, about the only real benefit Regulation S has is for a foreign company seeking to raise money from foreign investors, but possibly through a U.S. investment bank. The 41‐day exemption still applies in that circumstance. But for some, it was quite a ride there for a while.

Reg S often is utilized to handle a foreign piece of a traditional Reg D private placement. We do not get into too much detail of that since the focus of this book is on methods to become a company whose stock is publicly traded. Companies and investment banks appreciate the flexibility of allowing non‐accredited foreign investors into a deal.

Reg D can be used for foreign offerings but the same limitations on accredited versus nonaccredited investors apply. Of course it is also important to remember, if you are conducting an offering in a foreign country, that you comply with any applicable securities regulations in that country.

And so . .

As should be clear at this point, I strongly favor Reg A+, and in some cases reverse mergers and self‐filings as the most regulator‐friendly, efficient, and currently popular techniques for going public without a traditional IPO.

The excitement, performance, and promise of Reg A+ cannot be understated. Heck, it motivated me enough to write a book about it! More and more small‐cap players are building comfort with the rules and are understanding the benefits of this streamlined and cost‐effective process.

A reverse merger with a clean non‐trading shell is probably preferable in most circumstances to a merger with a trading shell. Taking over a trading entity that has minimal operations, if it avoids footnote 32 features, could be attractive to avoid seasoning restrictions. Reverse mergers seem most effective when speed is essential, since it can be the fastest way to get to trading.

Self‐filings provide a way to avoid the dilution of merging with a shell and the cost of shell acquisition, and (one hopes) still raise money, but the process takes longer and developing a trading market may be more challenging. The self‐filing process also requires the steady hand of a Wall Street veteran and has the significant benefit of avoiding the reverse merger seasoning limitations.

Although the guidance provided here should be useful in determining the circumstances in which each of these transaction structures make sense, each company and financial advisor must look at the unique situation in which a company finds itself and analyze which approach is the most logical one, given all the facts specific to the individual company.

Enough from me; now let us see what the real experts think about all this.