May 10, 2020
ISSUE
Regulation A+ issuers are required to present the Offering Circular to prospective investors at the time of solicitation with a "clickable URL". This is not possible on television, radio, newspaper print advertisement or billboards causing an undue and significant advertising expense burden to issuers. It also precludes issuers from even mentioning an offering on a television or radio interview or while speaking at a conference. Most issuers are having to spend exorbitant amounts in advertising in order to raise the capital (memo: in 2017 we spent $3.8 million in advertising to raise $26 million in equity). These ad expenditures are over and above the broker-dealer fees, transaction costs, accounting, legal, etc. We do not believe the regulation was intended to be punitive to Reg A+ issuers in this manner.
OBSERVATIONS
I thought to share some observations that may better inform the SEC regarding the situation - especially as we are on our 2nd Reg A+ raising $50 million:
1. Digital Divide - the regulation unintentionally disenfranchises investors that are not online or are of a generation that do not consume financial news from the internet - and continue to rely on a physical print version of The Wall Street Journal, ads on CNBC television, or Bloomberg radio. Moreover, this likely older generation, does actually have the capital to invest as opposed to a younger generation that may be digitally savvy but may have not yet built up the wealth to make meaningful investments. Knightscope has closed over 8,000 investors and I write from direct experience with these issues.
2. Dubious Digital Ads - placing ads on Facebook, Twitter, Instagram and Google can not only be inefficient in hitting the right target market, some investors view it as desperate (why are you raising capital on my private social media feed?), not brand enhancing or confidence inspiring, and in numerous cases believe it to be spam or phishing. This negative optic is not helpful especially for companies trying to get off the ground.
3. Limiting Access - approximately 50% of the advertising spend in the U.S. is in traditional forms representing over $100 billion a year – which Regulation A+ issuers are precluded from utilizing. The regulation forces Reg A+ issuers to only use digital means which is highly problematic during the capital formation process.
4. "Not Normal" - it is not yet 'normal' in society or generally accepted for investors to go online and buy shares in a private company. I've spoken to thousands of financially astute savvy investors that either don't believe this is possible and/or have not even heard of a Reg A+ (this includes addressing multitudes of bankers and CFOs). Until the day that a major trading platform (broker-dealer) is interested in and allowed to carry a Reg A+ issuer (e.g., Fidelity, TD Ameritrade, Robinhood, E-Trade, etc.) the amount of friction to educate and get the word out about the mechanism and offering is a significant burden to issuers and is not in keeping with the spirit and intentions of the JOBS Act.
5. Cap - it seems to us that in order to raise the maximum capital today of $50 million for a Tier II there is a high risk an issuer would have to spend north of $12 million in advertising. We have yet to see an issuer with that level of discretionary capital to spend on advertisements to educate and find investors. Changing this max item to $75 million seems to be out of step with the reality in the marketplace.
PROPOSAL
Respectfully, it would be wonderful, at least for the balance of 2020 during this pandemic, that the SEC allow Reg A+ issuers to advertise on TV, radio, print and in-person but require both a suitable written disclaimer (similar to a Reg D offering) as well as formal sign-off of the advertisement by the broker-dealer for compliance purposes. We appreciate your kind and timely attention to this matter.