A 3-year-old local real estate firm is taking its $30 million stock offering back to the drawing board after its reception from broker-dealers and other investors wasn’t as welcoming as expected.
Allegiancy, a Southside-based startup that oversees day-to-day operations of portfolios of commercial real estate around the country, was unsuccessful over the last three months in its bid to become one of the first companies in the U.S. to complete a public offering using new federal capital raising rules known as Regulation A+.
The company, headquartered in the Boulders office park, is now rethinking its approach, trying to pinpoint exactly what went wrong and is hoping to go back to the market this fall with a modified offering.
The decision was made after the company’s 90-day offering window was reached June 15 and it was still far from the $15 million minimum required to complete the offering.
“We didn’t raise the money we expected to raise,” said Allegiancy CEO Steve Sadler, who founded the firm in 2013 with his brother, Chris. “We are reformatting the offering.”
The Regulation A+ process, dubbed a mini-IPO or IPO-lite, was created through the JOBS Act in 2012 and finalized by the SEC last year. It’s designed to make it easier, cheaper and faster for smaller companies to raise capital through stock offerings up to $50 million, and allows average investors to buy in.
Previously, most equity offerings from smaller companies were limited to accredited investors and capped at lower dollar amounts. The new rules also lift restrictions on advertising an offering, opening up new avenues to reach investors.
When Allegiancy took its show on the road in March, its offering sold the chance for anyone to buy a piece of a company that manages about 5.5 million square feet of mostly Class-A office buildings in the U.S.
With investment banking firm WR Hambrecht at its side, Allegiancy initially sought $14 per share and looked to sell about 2.5 million shares. Sadler said they expected to raise about $20 million from broker-dealer transactions, $5 million from crowdfunding and the rest from institutional investors.
But after 90 days, Sadler said the company only had indications of interest of $5 million to $6 million from potential investors, most of that from crowdfunding.
“We ended up not anywhere close to what we expected,” he said.
One of the main road blocks was when Allegiancy knocked on the doors of broker-dealers, which act as middlemen shopping investment opportunities to investors.
Only two of the brokers-dealer firms Allegiancy approached said they would participate in selling the offering to their clients, Sadler said.
He said this new form of raising capital seemed not to sit well with many of the groups the company’s investment bankers called on.
That’s due, in part, Sadler said, to uncertainty among the compliance officers of broker-dealer firms of how their regulators view this infant IPO arena.
“Once it went to compliance to get approved it would die an ugly death,” Sadler said. “The compliance guys are fearful of Reg A+ because it’s new and they don’t know how FINRA is going to deal with it.”
FINRA, the Financial Industry Regulatory Authority, is a non-governmental organization that regulates brokers. One of the unknowns of Regulation A+ oversight is how FINRA over time will view the shares of these new offerings: as a truly publicly traded security or something that resembles more of a private placement that trades on informal stock exchanges.
That uncertainty has a lot to do with the stock exchanges on which Allegiancy and other Regulation A+ IPO companies are choosing to list their shares.
Allegiancy is planning for its shares eventually to list on the OTCQX stock exchange. It’s one of the “over-the-counter” exchanges, which are not technically formal national exchanges like the NYSE or NASDAQ; therefore its stocks are considered unlisted and often viewed as risky and associated with penny stocks.
“(Regulators and compliance officers) equate them with pink sheet, pump-and-dump, Wolf of Wall Street-type activity,” Sadler said.
Nothing in Regulation A+ rules defines where shares of these offerings should be traded. A company like Allegiancy could list shares on a more accepted exchange like NASDAQ, but Sadler said that comes with higher costs and more burdensome regulations.
“We qualify for that, but it entails a lot of regulatory cost that Reg A+ is intended to prevent,” Sadler said.
Whitney White, a partner at WR Hambrecht who helped Allegiancy craft its offering, said FINRA calls for unlisted securities to be viewed with skepticism, and over-the-counter shares are potentially taboo for broker-dealers to touch.
“They look at that as an unlisted marketplace and they couldn’t get on board with it,” White said.
White said the perception of those over-the-counter trading environments needs to change, at least for companies using Regulation A+ offerings.
“We’ve got to legitimatize the process, and the only way you legitimatize it is by getting deals done,” he said.
One of the few broker-dealer firms willing to sell Allegiancy’s offering was Denver-based Colorado Financial Service Corp.
Its CEO Chet Hebert echoed some of Sadler’s and White’s thoughts on why the company didn’t fare better in its attempts.
“We liked the offering,” Hebert said of Allegiancy. “It’s just been hard to generate interest in Reg A+ or just Reg A in general.”
Part of the problem, Hebert said, is a learning curve for investors, because the process is new and the market for the shares isn’t yet fully established and can be seen as illiquid.
“In the interest of full disclosure you tell (investors) how the offering works and you immediately get this glazed over look in the eyes,” Hebert said.
Aside from broker-dealers, White from WR Hambrecht said there aren’t many investment banking firms doing these new offerings either. That’s partly due to the size of the offerings, which are capped at $50 million.
“For a lot of underwriters that’s too small,” White said. “It doesn’t meet their cost structures. The fees don’t really move the needle for them.”
Allegiancy plans to return to the SEC with modified offering and prospectus documents.
“The current plan is to take the summer off and reconvene,” Sadler said.
He said the modified offering will lower the minimum offering below $15 million and will have a longer sales window, beyond the 90 days it tried with its first go-round. The firm might focus more on finding investors through crowdfunding, while raising commissions to entice broker-dealers.
As it plots those next steps, Allegiancy’s day-to-day business model continues unabated. It has deals in the works to add more properties to its management portfolio and it carries the momentum of being among Richmond’s fastest growing companies in recent years.
While frustrated with the unknowns of its IPO aspirations, Sadler said Allegiancy isn’t deterred.
“We knew this was cutting edge, so we knew there were pioneer-type risks we were taking,” he said. “We’re looking at it as an example of failing forward. We learned a ton about what not to do. The first offering failed, but we still have a profitable company and we expect to come back with a restructured offering.”
Reg. A has never been widely used by the small business community to raise capital and it appears the new amendments to Reg. A courtesy the JOBS Act are not being embraced by the market to any meaningful degree…still too costly and cumbersome as compared to what a company can accomplish through Regulation D.