Regulation A as an IPO Alternative for Israeli Companies in the United StatesGoing Public, Securities Attorneys (Securities Act)
Regulation A is a provision under the U.S. Securities Act of 1933 that allows companies to raise capital, up to $75 million within any consecutive 12-month period, through public offerings without having to go through the more rigorous and expensive process of a traditional S-1 initial public offering (IPO). For Israeli companies seeking access to the U.S. capital markets, Regulation A can be an attractive avenue to go public, raise funds and expand operations, especially in the U.S. market.
However, because Regulation A requires that the issuer be organized in the U. S. or Canada, for a company organized in Israel to undertake a Regulation A IPO, it would either have to restructure into a U.S. or Canadian company or conduct the offering through a subsidiary that is incorporated in the U.S. or Canada. In addition, as discussed in more detail below, the issuer (i.e., the restructured Israeli company or its subsidiary) will have to have its principal office in the United States or Canada.
Benefits of a Regulation A IPO Versus the Traditional S-1 Registered Offering:
- Disclosure and Reporting: Regulation A involves less rigorous disclosure and reporting requirements compared to an S-1 IPO. The offering circular for a Regulation A offering is similar to a prospectus but with less detailed financial information and fewer ongoing reporting obligations post-offering.
- SEC Review: Regulation A offerings undergo SEC review but face less scrutiny and a shorter review period than S-1 IPO filings, making the process generally faster and less costly.
Cost and Complexity:
- Cost: Regulation A offerings are typically more cost-effective than S-1 IPOs due to lower legal, accounting, and compliance expenses.
- Complexity: S-1 IPOs involve more complex procedures, stringent financial reporting, and exhaustive due diligence, which can be daunting and costly, especially for smaller or foreign-based entities.
- Access to Retail Investors: Regulation A offerings allow companies to reach both accredited and non-accredited investors, including retail investors. This broader access can help microcap companies attract a more diverse investor base, potentially increasing exposure and interest in their offerings compared to a traditional S-1 IPO, which might be primarily focused on institutional investors.
- Testing the Waters: Regulation A allows companies to “test the waters” before the offering, which means they can gauge investor interest and collect non-binding indications of interest from potential investors before formally filing with the SEC. This can provide insights into market demand, allowing microcap companies to refine their marketing strategies and potentially generate buzz and anticipation for the offering.
- Reduced Marketing Restrictions: While both Regulation A and S-1 offerings involve marketing efforts, Regulation A offerings typically have fewer marketing restrictions. Companies utilizing Regulation A can engage in general solicitation and advertising, subject to certain limitations, which can help microcap companies reach a wider audience and promote their offerings more freely compared to the more restrictive marketing guidelines associated with S-1 filings.
- Brand Visibility and Awareness: Regulation A offerings can enhance a company’s brand visibility and awareness as the company engages in marketing and promotion activities to attract investors. Microcap companies may benefit from the publicity generated through the Regulation A offering process, potentially increasing their visibility within the investment community and among potential customers.
- Cost-Effective Marketing Strategies: Regulation A offerings might be more cost-effective from a marketing perspective for microcap companies compared to traditional S-1 IPOs. The ability to reach a broader “crowd” for an investor base, coupled with potentially less stringent marketing regulations, can allow for innovative and cost-efficient marketing strategies.
Foreign Issuer Regulation A Restrictions:
Non-U.S. based issuers, including Israeli based companies organized in Israel, looking to utilize Regulation A must meet the following Regulation A issuer eligibility criteria:
- Entity Type: They must be incorporated or organized in the U.S. or Canada. This requirement is straight forward.
- Principal Place of Business: The principal place of business of the issuer must be in the U.S. or Canada. Although not defined under SEC rules, the term “principal place of business” is understood to mean the primary location where a company conducts its most significant management and administrative activities. It’s the central place where the key decisions are made, corporate records are kept, and high-level executives operate. This location might not necessarily be the company’s largest office or the site of production, but it holds importance in terms of managerial control and decision-making.
For Israeli issuers, this “principal place of business” requirement could be a deal breaker unless the company determines that it is in its best interest and the best interests of its shareholders to move its headquarters to the U.S or Canada. If, however, the Company’s primary market is the U.S., it might be a realistic option to organize a marketing and sales operation to be incorporated in the U.S. and raise Regulation A capital through that entity. Additionally, an Israeli based company could license its technology to a U.S. or Canadian based subsidiary or affiliate which would then undertake the Regulation A offering to raise capital for its own local operations.
It is important to note that while Regulation A offerings offer multiple advantages, they still involve regulatory compliance and disclosure requirements and certain specific hurdles for foreign based companies. Microcap companies considering a Regulation A offering should carefully evaluate the associated costs, regulatory obligations, and potential benefits in terms of operations, marketing and fundraising compared to a traditional S-1 IPO or other fundraising methods. Additionally, seeking professional advice from legal and financial experts experienced in securities offerings is crucial when navigating the complexities of the IPO process.
Contact Bevilacqua PLLC Today
Please do not hesitate to contact me at firstname.lastname@example.org or (202) 869-0888 (ext. 103) if you need help evaluating your options for going public in the U.S, whether through Regulation A or otherwise.