A Cheaper Way to Raise Capital for Smaller Companies

Reg A+ offerings – a type of crowdfunded securities sale – has emerged as a possible pathway for capital formation for companies with annual sales of under $1 billion.  But according to a recent report from the Securities and Exchange Commission, as of the end of 2016 only about 56 of the 97 companies that pursued Reg A+ offerings reported successful outcomes.  Part of the problem has been coming up with the right approaches for attracting non-accredited investors and for sparking the interest of Wall Street brokerage firms.

The success of the IPO by Chicken Soup for the Soul Entertainment (CSSE) a producer of video films that is best known for a series of positive, uplifting stories (250 videos and book titles) suggests the right formula has finally been discovered. For Bill Rouhana who bought the company in 2008, it “was time to put the ‘public’ back into initial public offering.” The company raised $30 million as part of the offering that priced shares at $12 apiece under Regulation A+, a portion of the new rules implemented in the last few years as part of the JOBS Act.

At twice the size of the largest Regulation A+ IPO to date, and completed in just about five weeks’ time, this transaction was widely viewed by Wall Street observers as a significant event in the rebirth of capital formation in America for small businesses, and reverse the decline of U.S. publicly traded stocks – 3,900 last year versus 6,500 in 2000.

“Chicken Soup Entertainment has grown rapidly from $8.7 million in 2016 to $20 million by the end of 2017.”

Instead of undertaking a traditional IPO the entertainment company—think of it as the Netflix of uplifting entertainment, the firm sought to capitalize on the more relaxed rules aimed at helping small companies finance growth. These favorable rules come from the JOBS Act where in 2012 Congress passed the Jumpstart Our Small Businesses (JOBS) Act. A section of this law permits companies with revenues under $1 billion to raise up to $50 million in a mini IPO under section Reg A+ of the rules. One major difference of a Reg A+ IPO and traditional IPOs is that issuers are permitted to actively promote and advertise the sale of share—and individuals have the same access to buy shares as the professional investors on Wall Street.

Bill Rouhana, CEO of Greenwich-based Chicken Soup for the Soul, said the absence of a “quiet period” proved an inestimable advantage. “We went directly to our fan base who were very enthusiastic,” he said at a recent appearance at NASDAQ where the firm  now lists on Nasdaq Global Market. With a price of $12 a share, the company raised $30 million.

The company’s business model shows fundamental strength. It currently has two successful shows airing on cable TV, the award-winning Hidden Heroes now in its second season on CBS, and another called Project Dad which is airing on TLC and two other Discovery networks.  The company’s entertainment unit acquired a controlling interest in a millennial-focused online journalism platform called A Plus, the founder of which, Celebrity actor Ashton Kutcher, retains a 23 percent stake. Kutcher is also an investor in Chicken Soup and is producer two new shows for CSSE. The pipeline for CSSE is also promising in that it has entered into agreements for two additional long-form shows with a division of NBCUniversal.

Chicken Soup Entertainment has grown rapidly from $8.7 million in 2016 to $20 million by the end of 2017. Operating earnings are projected to reach $12 million in 2017 compared to $3.7 million in 2016.

Because they were among the first to pursue a Reg A+ offering, Rouhana says the cost and time may not have been cheaper than a traditional IPO, but “we created a methodology others can use,” he observes.

Because investors are making a bet on management, Rouhana advises to get out and “talk to potential investors. They want to understand what you’re doing and who you are.”  Rouhana had his team market the company through social media. “Most small companies trying to raise capital get lost,” he says. “With social media you can reach people who really are interested. If they like your story they will respond.”