Sixty days after going public, shares of YogaWorks (NASDAQ: YOGA) and Chicken Soup for the Soul Entertainment were down by at least 40% from their IPO price. Shares of toy manufacturer Funko (NASDAQ: FNKO) fell 41% in just the first day of trading.
These businesses -- yoga studios, video curators, and toy producers -- have virtually nothing in common, except for how they went public. They were sold to the public through "mini-IPOs," raising less than $50 million under Regulation A+, a special type of public offering process with fewer restrictions and less regulatory oversight.
Investors who want to avoid the worst IPOs might want to write off Reg. A+ IPOs in wholesale. Here's why.
The upside to Regulation A+
Regulation A+ is well intended, put into place by Title IV of the Jumpstart Our Business Startups (JOBS) Act of 2012. The rules allow for really small companies to raise up to $50 million in a 12-month period, with fewer restrictions, making it easier, and more cost-effective, for small companies to raise capital.
One of the biggest differences is that Regulation A+ enables businesses to sell shares direct to the public, raising funds from ordinary people, rather than professional investors. Whereas large companies are restricted from marketing their shares, many Regulation A+ companies have gone so far to solicit investments from the public on Facebook and other social-media sites.
It's seemingly a win-win deal. Small companies find it easier to raise money, and individual investors get the opportunity to invest in companies at the ground floor, rather than see the gains accrue to venture capital investors on Sand Hill Road.
The Wall Street Journal summed up the subject succinctly, using virtual-reality company Oculus VR as an example of how Main Street investors missed out on big investment wins because companies couldn't sell securities direct to the public:
When Oculus VR sold to Facebook for $2 billion in 2014, some asked: What if the people who backed the virtual-reality start-up two years earlier on the crowdfunding site Kickstarter had received shares instead of T-shirts or VR headsets?
Image source: Getty Images.
The downsides of Regulation A+
Many of the advantages of Regulation A+ are also disadvantages. Anyone can invest in Reg A+ IPOs, and where there are limitations, investors have to simply "self-certify" that they aren't investing more than they can afford to lose.