Inside the Alternative IPO Path Bringing Retail Investors to Wall Street

Kristin Myers: Today, we're going to be talking to somebody who helped build the road that companies take from being private onto the bell.

Now, for most of Wall Street's history, the traditional underwritten IPO was the dominant path to go public. Investment banks would price and distribute the shares primarily to institutional investors.

Now, for smaller companies, that process could be expensive and difficult to access. And then Congress opened a second door. It's called Regulation A+. You can think of it as a lighter IPO or a mini IPO that allows ordinary retail investors to participate.

And with this new pathway, somebody had to figure out how to get a company through it and onto a real exchange market.

Its Managing Director at Digital Offering is at the desk with us. The road from an idea to the opening bell starts right now.

For a growing company, getting to Wall Street isn't easy. Wall Street veteran Mark Elenowitz has helped develop a framework that opened a new path for smaller companies to raise money from everyday investors through Regulation A+, and that work helped lead to the first successful Regulation A+ IPO to list on a national securities exchange.

And that's where Digital Offering comes in. Founded in 2013, the boutique investment bank was built around a changing capital markets landscape, helping growth companies raise money and pursue listings on the New York Stock Exchange and the Nasdaq.

Its team has worked with companies looking for an alternative path from private ownership to publicly traded stock, including through Regulation A+. And more than a decade later, Digital Offering remains focused on one big question: How do you take a company from private to public?

And joining us now is Mark Elenowitz, Managing Director at Digital Offering. Mark, thank you so much for joining us today.

Now, I know you want to do a small correction.

Mark Elenowitz: I do.

Kristin Myers: We called, I called, Regulation A+, or the way that some companies go public through Regulation A+, almost like a mini IPO.

Mark Elenowitz: Yes.

Kristin Myers: You want us to challenge that?

Mark Elenowitz: I will.

Kristin Myers: I will give you the floor to challenge that.

Mark Elenowitz: Well, the whole idea is most people don't realize, or maybe they do realize, but the capital markets have been somewhat... it's been difficult in the last couple of years.

The number of IPOs that we've seen on Nasdaq and the NYSE American has diminished quite a bit. And transactions that we see coming out are usually now, with the new minimum standards, $15 million.

The type of IPOs that we're going to be talking about today, the most recent one we did was $75 million. So if that's a mini IPO, then I don't know what these other competitors are doing.

And more traditional, because a $15 million IPO to a $50 or $75 million, I wouldn't call it mini.

Kristin Myers: And that's, I believe, up to $75 million, right? That's a Tier 2.

Mark Elenowitz: Correct.

Kristin Myers: And Tier 1 is something that is just a little bit smaller.

Mark Elenowitz: Well, Tier 1 is not something we even talk about. Tier 1 is a whole other type of product. It has constraints related to Blue Sky, and it's not what we use to do IPOs.

The whole concept of what we're trying to do is create democratization of offerings, to allow everybody to be able to participate in what we call a crowd-financed IPO.

We don't even use the word Reg A or Reg A+. It's basically a traditional IPO that utilizes things under the JOBS Act to allow investors now over the age of 18 to be able to participate in their favorite brand, in something they follow, something that they want to be a part of, and now they can be a shareholder.

Kristin Myers: Okay. So to that point, these rules are fairly recent, right? About 11 years old. That allows this sort of crowdfunding, as you're mentioning.

But you laid the framework for these to trade on a national exchange. So talk to us a little bit about, besides the retail investor sort of involvement, what was really missing before?

Mark Elenowitz: Well, in 2012, the JOBS Act started to become a conversation piece. And when we would go to the conferences or sit on the panels or listen to webinars, everyone was primarily talking about Title II, which is general solicitation of private placements, or Title III, which is Reg CF, Regulation Crowdfunding.

But there was something called Title IV, which was Reg A+. And we looked at it and said this was a great way to bring back the small-cap IPO.

It's funny, what I just said a moment ago is that small-cap IPOs are somewhat limited now. Back in 2012 and '15, we go through cycles. It was the same thing. We were having basically a decrease in the number of offerings.

And we were trying to figure out how to inspire entrepreneurs to be able to come to the market, raise capital, and grow their businesses.

So when the JOBS Act came out, we said, this is a great way to allow individual investors that are members of that community. These might be customers or followers or fans that said, "I love that burger," or, "I love that product. Why can't I own a piece of it?"

And the way IPOs historically worked in the past, it's not what you know, it's who you know. If you had the right relationship with an investment bank or you had a relationship with a certain company, you would get an allocation.

What we decided to do was democratize it, allow everybody to get a chance. And we actually came down here to the New York Stock Exchange and I said, "I got this great idea." And they literally laughed in my face. They said, "Come on."

Kristin Myers: I was going to say, how did the exchange react and respond when you said, "Hey, I have this company"? If you want to share which company that was, I mean, please tell us.

Mark Elenowitz: Well, the concept at first was, I came down, I said, "I have this great idea. I want to democratize Wall Street using Reg A+." And they said, "Come on. We're the New York Stock Exchange. We're not going to do that. That's flying-car nonsense. That's like, you know, these pie-in-the-sky, dream, drinking-the-Kool-Aid-type transactions."

And I said, "No. If you think about it, we have the methodology to make it look, act, and feel like a traditional offering, where we can allow the crowd to participate, but at the same time settle the transaction through the Wall Street plumbing, through syndicate, through DTC, and allow the security to trade on the New York or Nasdaq."

And there were two people here at the exchange who actually said, "You know what? Mark might have an idea."

So we came down, we talked to the market rep, we went through the whole process, and at the end of it they said, "Yes, let's do it."

So our first company, and the very first company to ever list on a national securities exchange, I actually bumped into the CEO the other day. It will be 10 years this June, was a company called Myomo.

And Myomo was a medtech device out of MIT where, if you had some type of paralysis and you couldn't move your arm, it would come in and read your nerve endings and allow you to have mobility.

Nobody had ever heard of it, but there were two great things that came from it. One, it was the first exchange-listed security using Reg A, but also it allowed the crowd to see that there was therapeutic benefit that they could give their loved ones.

So I ended up, after we did the offering, we had so many people come up to us and call our firm saying, "I have a loved one who has a problem. Can you introduce me to the company?"

So now, I couldn't quite answer it, but what we ended up doing is, it was the most difficult transaction to raise $7.5 million of my 35 years on Wall Street that I had experienced.

Kristin Myers: Wow.

Mark Elenowitz: No one in traditional Wall Street would participate. We had to go up and down. We talked to institutions, we talked to other broker-dealers, and there was no interest.

So we ended up financing it almost 100% from the crowd. And we built an organic story where we didn't pitch the stock. We talked about the company and the benefits the company offered to its consumers and to the people that were buying the product, and that inspired people to want to become a shareholder.

And what's unique about Reg A+ versus traditional deals is that investors are buying it because they believe in the story and want to be a part of it, versus a player who buys an IPO for the flip.

So you have a group of passionate, thousands of shareholders that participate, that buy these securities.

So we ended up listing it. We did the deal at $7.50. The first day the stock traded down to $7.40. We had very limited buyers, lots of sellers. It remained solid at $7.40.

And then people realized what we had created, and people realized the benefit that this company offered in terms of the product, and it ended up trading up to almost $30 a share.

Kristin Myers: Well, where is it at now? It's still alive on the New York Stock Exchange. Do you know what the list price is or what the share price is now?

Mark Elenowitz: No.

Kristin Myers: Okay.

Mark Elenowitz: All of our investors that participated in the IPO had tremendous returns for months. It traded significantly above deal price with tremendous liquidity.

Kristin Myers: So I want to ask, because obviously that story raises a whole lot of questions, and we have you for several more minutes, so we're going to dive further into it.

But for anyone that is watching and, you know, just really needs to sort of, in plain English, what is, because obviously, as you were saying, a lot of the normal folks that you would go to in an IPO said closed doors. They were uninterested and super reticent to get involved.

So what is the difference in terms of what a company has to do in a traditional IPO versus this route?

Mark Elenowitz: Well, it ended up after we did that deal, all the banks on the Street started calling us to want to participate. A stock that goes from $7 to $30 and trades and prices like that for many, many months, everybody saw an opportunity.

And then fast-forward years later, we ended up doing, just most recently, Newsmax, where we raised $300 million using two types of the JOBS Act.

The difference, though, is this product doesn't work for something that takes 30 minutes to explain, that that cup of coffee could cure cancer. You need something that is a 30-second pitch, because the way Reg A+ works is you drive people to a landing page by using social media and other types of digital marketing.

The beauty of the JOBS Act is it allows full general solicitation using modern techniques.

The one problem that we have with the traditional IPO is you have to go into a quiet period. You're not able to communicate to the Street. You can't have an integration of two types of offerings. All financings have to stop.

And to me, it doesn't make sense. In a modern world, how do we not communicate daily? We all live by our phones, we live by social media, and a company can no longer talk about what they're doing, right? Makes no sense.

But Reg A+ is the opposite. So you can go out and use that distribution not only to talk about the offering, but you're also talking about the company, which inspires people to want to become in the offering.

So customers become shareholders. Shareholders become customers.

So an issuer needs to be able to tell a story in 30 seconds, drive them to a landing page that has all of the information, pluses, minuses, the risk factors, where an investor can make an informed decision.

But what's great about it is there's no broker calling them. There's no one pitching them during dinner or getting that phone call. The investor takes their time, does their due diligence, hits a button that says, "Invest Now," and in a matter of minutes, they now own the stock.

Kristin Myers: So I would imagine, and we're going to talk about this more, some of that ease obviously has its upsides, but of course some of its downsides.

Let's take a look at the differences in accessing the public market now.

First, a traditional IPO. That requires full registration with the SEC. There's no ceiling on what you raise, and you cannot advertise it. That's that quiet period that Mark was talking about just a moment ago. Shares are allocated by the bank, mostly to institutions, and afterward, full public-company reporting forever, as long as that company is public.

And then you have Regulation A+, or Reg A+, as Mark has been calling it. A shorter filing, up to $75 million in 12 months. You can advertise it, anyone can buy it, and the ongoing reporting is lighter.

It's faster and cheaper on one side, with less disclosure and a retail investor holding the shares on the other.

We're back now with Mark Elenowitz, Managing Director at Digital Offering.

So Mark, we were discussing obviously a lot of the upsides that come with that sort of ease. I'm curious to know, as you were mentioning, investors can really do this from their phone. They can see this on social media. Who is the typical buyer or investor in some of these companies that you've worked with?

Mark Elenowitz: So it all kind of depends on the company. But what we found is that most of the time, the buyer is somebody that's familiar with it.

For instance, we did an offering for a company called Newsmax. We made history the first time when we did Myomo onto the NYSE American, and we made history again when we did Newsmax onto the main board of the New York Stock Exchange.

What was great is that we could go out on air and do interviews and be able to talk to the viewers that participate in and support Newsmax, and they were the ones that turned into the buyers of the IPO.

That happened to be a fantastic offering. We raised, as we said, the cap is $75 million. We actually, before we even realized what was happening, we were at $106 million in four days. We had to turn it off, refund people some money.

One thing, though, it's interesting that you said, because I got into a debate with some of the guys over at CNBC after you said "lighter reporting."

The way we do our IPOs is it's the same reporting. It's to an S-1 standard, which is in a traditional IPO.

And the way our methodology works is, Reg A as a whole has a lot of reporting if it's not traded. But the minute you go onto the New York Stock Exchange or Nasdaq, you have the same reporting standards as any other public company.

So shares need to be registered or exempt to come public. You utilize either S-1 or, in our methodology, Reg A. But the day you're public, everybody has the same responsibilities to provide disclosure and updates to the investors through 10-Ks and 10-Qs.

Kristin Myers: So I want to ask you about the companies that didn't necessarily work, right? And we see this even in the traditional IPO route.

So there are some, especially in the early Reg A+ names. They raised real money from folks, and then they essentially went nowhere.

So what did those deals really get wrong in the early days?

Mark Elenowitz: So the problem with Reg A+ and crowdfunding as a whole is it comes down to valuation, and valuation is more of an art than a science.

We've been very careful in the transactions that we do, where we model it off of comps and peers. We look for companies that have fundamental growth and fundamental opportunities that investors could actually look at: earnings, revenue, and continued growth.

Now, certain things happen outside. We see that. And that's the whole risk of investing in the market.

But after we did, we did a few more of these. And what ended up happening, unfortunately, was a lot of other banks jumped into this opportunity.

And when you see investors that believe in that Kool-Aid, let's call it, and a banker or a financial advisor doesn't say no to the issuer, or what we see in Reg A+ right now is there's no professional guidance around.

So just because an investor wants to pay a certain price, not realizing that [unclear in original transcript] investment is actually a $3 billion valuation and the company is doing $10 million in revenue, there's a danger, and people got harmed.

So what you saw after we did our first few is other banks jumped in and basically turned a blind eye because they said, "Well, if an investor is willing to pay it, who am I to say no?"

We say no. And those stocks went from $20 or $30 a share, and many of them are out of business today.

Kristin Myers: So you're highlighting, it sounds like, the standard that comes from a company that Digital Offering is willing to take on versus another bank or another organization that might be willing to help a company through Reg A+ go public.

So I want to dive a little bit deeper into that criticism, which is that, frankly, this lets companies that wouldn't survive, you know, the full underwriting process essentially go public with ordinary investors essentially holding the bag, who don't know how to appropriately assess risk of an investment.

So what do you say to some of that criticism?

Mark Elenowitz: Well, generally, no. No, in general, I would say that's actually not accurate because there are phases that go through in order to bring a company public.

So the form of registration is not the deterrent. The form of registration does not determine also how successful a deal is going to be.

So there are steps that have to happen. You have to have full audited financials. You are filing with the SEC. A banker is supposed to do an analysis.

The difference is, in a traditional IPO, you get price discovery from the Street and from institutions. In a Reg A, it's the responsibility of the banker and the issuer to determine price discovery. And that's where that danger lies.

But then there's part two. You're actually filing with the stock exchange. Nasdaq and the New York have qualitative as well as quantitative review requirements.

So it's not like you can just say, "I just raised $40 million. Please, exchange, let me list." They still go through and evaluate to make sure that the company is acceptable.

And what we're seeing, unfortunately, in the small-cap market, whether it's S-1 or Reg A, is that transactions are not always working.

So there are alternative ways that people are getting public through direct listings. And to me, that's actually the danger, because those are the companies that actually did these valuations that were just astronomical.

There's no underwriter bringing them public. They're doing a direct listing. And those are the ones we're now seeing collapse.

It's not Reg A. It's really the banker's responsibility.

Kristin Myers: I'm curious to know, for any investor that's listening to this and maybe has even seen a company, right, going public with Reg A, Reg A+, what should they be looking out for on their end before they go and jump into an investment?

Mark Elenowitz: So I think the biggest thing that you have to look at is don't look at price, but actually look at fundamentals.

Meaning, if the company is doing it the proper way, there's full disclosure in the offering circular, which is, as I said, the way we do it is equivalent to an S-1, where you can look at the balance sheet, you can look at the income statement, you can look at the cash flow.

And then it's really easy to do simple math, where you just take the number of shares outstanding, you multiply that by the share price, and that gives you valuation.

So even though you might think this is the greatest company in the world, you have to look at it.

And what we do as a banker is, it's easy to raise the first money, but now it's the second money. Once you get to Wall Street, are they going to respect the valuation that you brought out, right?

And we're very careful with Newsmax. And I'm going back to that. The first money we raised was the $300 million between the Reg D and Reg CF—I mean, the Reg A—and we priced it at comps and peers.

We priced it where we thought it should trade and where it would open as if it was an S-1.

What happened with it is it became irrational exuberance. We did the IPO at $10, and within two days it was $220 a share. And that doesn't do anybody any good.

So investors that participated in the IPO did great. The guy that bought in the aftermarket probably didn't.

So you as an investor, if you're making your first decision to go into it, very first thing I have to say is look at the revenue. Look at that valuation and make sure it matches.

Because there are many companies that are doing financings that have $5 million to $10 million in revenue with billion-dollar valuations. You know the Street would never accept that. And it will reprice to where it should be, which is maybe $30 million or $40 million, not $2 billion.

Kristin Myers: So I have like two minutes, so we're going to try to get through so much.

Mark Elenowitz: No, no, no.

Kristin Myers: This is absolutely fascinating.

So the price volatility is something else that I want to talk about a little bit. Obviously, with Newsmax, as you were mentioning, a lot of exuberance that came out. There were a lot of reasons why that happened with Newsmax.

That probably doesn't happen with some other companies, right? But you do have something, you have lower float rates, and you do have price volatility.

And some of these companies that have gone public through Reg A+ now are trading far below their debut price. So what are your thoughts about that, particularly around this type of filing? It tends to be more volatile, at least when it comes to the price and the share price.

Mark Elenowitz: Well, I think what it comes down to is, so there's a misconception.

So first of all, with Newsmax, in every deal that we do, all the shares are free-trading day one that we sell in the IPO, and they're able to trade.

But the difference, what I was saying, is these are investors that are buying it because they want to invest in the long term. They're not a flip.

So where on a regular IPO, when we do one of an S-1 transaction, usually most of the stock comes back to us within a couple of days. Where in a Reg A IPO, these are investors that the starting point was the IPO, not the finishing point.

So they're investing to see where the company is going to be in a year or two.

If it's priced properly and priced based upon fundamentals, then the company should be up a year or two later if the company executes. There's always business risk. Is the company going to execute?

But on a quarter-by-quarter basis, if you're investing in a company that's growing, then it should be reflected in the stock price.

What tends to happen, and if you look actually at a lot of these Reg As that are now down, is they didn't raise enough money, they spent too much money, and they had to go back to the market using traditional tools that, unfortunately, in today's marketplace are toxic.

They're structured deals, they're down-round deals, they have toxicity associated with them. And it's this death spiral that happens.

Where, when I try to do a transaction at Digital Offering, we fund them with enough money that they can execute, that they don't need to take a financing later on.

And unfortunately, this isn't limited to Reg A. It's also S-1. So many companies are coming public with not enough capital, and the Street knows it and knows they're going to do a down-round deal.

Kristin Myers: That is very true. I've covered many companies that were going the traditional route that, frankly, just didn't make a lot of sense.

I want to ask you, last 10 seconds or so, I know this is going to be a quick one. What would make you turn a company down that wants to go public?

Mark Elenowitz: I think the biggest thing, the reason we say no, is it's just too early.

Not because the entrepreneur doesn't have a great idea, but the beauty of Reg A is you can do a non-traded, where you raise a small amount of money first, let them grow. We've done this now with two companies, and then they come back a year or two later and do the larger round.

Going public, as I said, is the beginning, not the end.

So if you don't have enough capital, you don't have enough revenue, you don't have enough growth, the cost of being public nowadays is over $1 million. Why go public? You don't need to.

So we tell them, "It's just not right today."

Kristin Myers: Right. Start of the race, not the end of it.

Mark Elenowitz: Exactly.

Kristin Myers: All right. Thank you. Mark Elenowitz, Managing Director at Digital Offering.