More or Less

What’s a mini-IPO?

Photo: Dan Morgan. Source: Wikipedia

A mini-IPO is a limited stock offering that doesn’t have to jump over all the regulatory barriers of a regular IPO. The new rule is known as Reg A+, and it’s part of the JOBS act—a measure designed to make it easier for companies to raise capital.

When the rules took effect in June, almost 100 firms signed up right away. But so far, only a handful have actually sold any stock under the bill. It turns out that getting investors in a start-up isn’t as easy as it seems. Companies can offer their shares, but that doesn’t mean anyone has to buy them. Just because the SEC has eased some of the registration rules doesn’t mean investors have relaxed the rules of due diligence.

Elio Motors, a mini-startup. Source: Bloomberg

For example, start-ups can sell up to $20 million in company stock without providing audited financials. But most investors still want them. And for good reason: the financials provide the clearest picture of how a concept is actually working out. Without auditors to prove those numbers back to actual bank balances, the temptation to fudge the numbers could be overwhelming. I certainly won’t commit capital to an enterprise when I can’t have an independent party check it out.

Miniature horses were bred to do a big horse’s job in a small space—like hauling rail cars in coal mines. A mini-IPO should work the same way—allowing public registration in a limited context. But it doesn’t work that way. Part of what makes an IPO work is the buzz that comes when lots of investors are excited. With mini-IPOs so limited in scope, that buzz never builds.

Pit ponies stabled in a mine. Illustrator: Albert Sidney Bolles. Source: Wikipedia

The markets aren’t a giant piggy-bank with investors dying to put their cash into new, untried concepts. Lots of people can tell a good story. But it takes a lot of work to turn a story into a profitable enterprise. New SEC regulations don’t change that.

Douglas R. Tengdin, CFA

Chief Investment Officer

Leave a Reply

Your email address will not be published. Required fields are marked *