Financial innovation in microcap public offerings

This paper examines external financing of small and growth firms using a regulatory experiment in the US microcap market. The paper focuses on a new financing method for entrepreneurial firms – small public offerings under Regulation A, which was significantly expanded by 2015 amendments. Regulation A offerings serve as a financing alternative for issuers that seek public capital but are unable to conduct a traditional registered public offering. Compared to small registered public offerings, Regulation A involves fewer requirements and draws smaller, younger companies, often raising capital without intermediaries or on a best efforts basis. Regulation A companies raise less capital on average after accounting for their historical financials. The use of Regulation A increased significantly following the 2015 shock, particularly in market segments that had more private placements and traditional public offerings. Different types of issuers are pursuing Regulation A and registered offerings, and Regulation A does not appear to draw issuers away from traditional public offerings.