On May 18, 2023, Monogram Orthopaedics—a cutting-edge medtech company revolutionizing joint replacement surgery—achieved the ultimate goal so many startups aspire to: listing on the Nasdaq.
Going public is widely considered to be the pinnacle of success for a business. Not only does it allow companies to raise capital from a much broader audience… it also lends a great deal of credibility and validation to the companies themselves. (Not to mention, it gives the founding team and other shareholders a path to liquidity—the opportunity to cash out some or all of their shares.)
This is an incredibly exciting next step for Monogram Orthopaedics. And for other companies that are still earlier in their journeys, it’s an excellent demonstration of a unique new way to reach the public markets: by starting with a Reg A raise.
Only a handful of companies have taken this route so far, but we may see that trend increase. Here’s why:
According to Mark Elenowitz, Managing Director of Digital Offering LLC, community-building—and the momentum it generates—is the main reason companies choose to use Reg A+ as a stepping stone to a public listing. It’s a great way to convert customers into shareholders and shareholders into customers.
“People who do a Reg A usually have a good following,” he said. “For them, the Reg A appeals to a following of people who will participate in that offering, regardless of whether the company has institutional buy-in or not. Their community are their real supporters who believe in the company—which is why they give them the opportunity to come on as investors too.”
He added that a Reg A+ raise is less restrictive in terms of marketing and communications than a traditional S-1 filing—mostly because it allows general solicitation. That means companies raising via Reg A+ can cast a wider net to find investors, nurture lead lists, and drive interest in the offering with paid advertising.
“When you do an S-1, you have to go into a quiet period,” Mark said. “It’s very constrictive in terms of what you can do and how you communicate. and that doesn’t work in the modern world, where everyone uses Facebook and Instagram and communicates in real time.
Reg A allows the ability now to be able to market and use general solicitation and use modern techniques. You’re still disclosing all the risk factors; you’re still giving investors the information they need to make informed decisions. But you’re getting it to them in a new and modern way. Now, they can go to Instagram and see a 30-second ad about an investment opportunity, and click on that to learn more.”
Those same leads and Reg A+ investors become an engaged community of followers and fans that are ready and excited to buy shares post-listing—driving significant early momentum when the company goes public.
Reg A+ offers a scaled-down version of the regulatory requirements compared to a traditional IPO. It provides exemptions from certain reporting and disclosure obligations under the Securities Act of 1933, making it less burdensome in terms of compliance and ongoing regulatory obligations.
Companies that raise capital via Reg A+ can more or less use the raise as a springboard to a public exchange; it’s a way for them to access capital and generate interest while they go through the lengthy process of filing for a public listing.
According to new data from Carta, there were 3.5X more down rounds in Q1 2023 than in Q1 2022. Down rounds made up nearly a fifth of all funding rounds last quarter—and a greater proportion of those deals granted investors participating preferred stock. For founders, this means:
• Fewer VC deals are happening
• Valuations are dropping for those that do happen
• Negotiating power is shifting to favor investors
• Equity crowdfunding is becoming an even more critical resource to leverage
By raising capital online, founders can avoid the "Valley of Death," offer shares to their communities, and set their own deal terms (including valuation, share type, and more). It's an incredibly powerful tool for issuers seeking capital, no matter what the overall funding market looks like. And while VC deals continue to drop, equity crowdfunding is holding strong with steady YoY growth.
VC deals aren’t just fewer and farther between than usual… they're also happening on heavily investor-favored terms. Deals offering participating preferred stock jumped to a whopping 15.6% in Q1 2023 (compare that to just 6.5% in Q1 2022).
All these factors combined create a very tough funding climate for startups seeking capital. They also create an exciting opportunity for equity crowdfunding to bridge the gap.
Founders that raise from their communities get to stay in the driver's seat... meaning they can set the terms of their offering without the pressure of the current market conditions. That means they can choose to issue non-voting shares and even have the final say on their valuation.
So what does the future hold for this pathway to the public markets? Mark says that while adoption is currently increasing, we likely need a major household name company to take the lead before this model really takes off.
Of course, for companies of that size, the real value of a Reg A+ raise is the brand-building aspect of it. These are massive, VC-backed unicorns we’re talking about; they don’t need to raise money from the crowd in order to keep growing. Still, it would be an incredibly powerful community-building play, breaking down barriers for their customers and fans to share in the success of the company.
“The industry just needs to find a company that can do it right. If Instacart decided to use a Reg A—that would really accelerate adoption of the model,” he said. “If an Instacart, a Canva, a Stripe-sized company did a Reg A, we’d see a much higher acceptance level. The model works; we just need the right candidates to use it.”