Small companies can now raise money as public companies thanks to the 2012 JOBS Act through a mini-initial public offering (IPO). Although risk is higher since small public firms are not held to the same financial reporting standards as larger public companies, the advent of the mini-IPO opens the door for small investors to participate in new investment opportunities.
Understanding the Mini-IPO Concept
The JOBS Act, signed by President Obama in 2012, was designed to make raising capital easier for small businesses. It allows for equity crowdfunding similar to how sites like Kickstarter work, in which individuals with modest net worth can invest in a small company’s development. Under what is called Regulation A+, a mini-IPO allows the issuer to sell stock and raise under the $50 million cap with five years to reach $1 billion in revenue before it must deliver full financial reports to the public. The main risk involved with investing in a mini-IPO is investors will not have much financial data to work with when making trading decisions.
Famous rapper Eminem considered issuing a mini-IPO for fans to invest in his song royalties, but the Wall Street Journal reported in 2018 the recording artist decided to abandon the idea. The previous year Eminem received significant press in financial publications that he was moving forward with the plan. Barron’s reported in 2018 that most mini-IPOs “fail the market test.” However, Fatburger restaurant chain owner Fat Brands Inc. became the first company to complete a mini-IPO, which occurred in 2017 on the Nasdaq Stock Exchange. The company raised $24 million, boosting its valuation to $120 million. Since then mini-IPOs have included Lending Club and GoPro.
Reasons for Small Companies to Issue Mini-IPOs
Small companies have multiple reasons for issuing a mini-IPO. Not only can they reward customers for their loyalty by allowing them to own a piece of the company, they can maintain control of their operations. This reward can translate into stronger loyalty, leading to higher revenue. Another reason is that it can raise brand awareness by gaining press from financial publications. It also allows owners to take profits when they need proceeds for expenses while the mini-IPO provides a direct path to a conventional IPO.