WSJ: Myomo’s Crowd Sourced IPO

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Image credit: PYMNTS.com

Medical-robotics maker Myomo Inc. is taking a shortcut to go public. If it is successful, other small businesses could follow, perking up a dormant corner of the U.S. IPO market.
Initial public offerings by small companies have dwindled since the dot-com bust. Last year, 18 companies completed IPOs that raised less than $50 million, according to Dealogic. In 1996, 557 companies did.

Myomo is selling shares by using rules that grew out of a federal law designed to make IPOs quicker and less costly for small firms. The rules also aim to encourage more small firms to debut in the stock market without exposing investors to too much risk posed by some young, untested companies.

Proponents of the new rules, known as Regulation A+, appear to be “willing to risk a little more fraud if the dollar risk is less,” said David Feldman, an attorney who has championed the rule and is providing legal guidance for several offerings.

Myomo is the first Reg A+ offering poised for a major U.S. exchange, the New York Stock Exchange. The company is in the process of trying to sell two million shares at $7.50 apiece, after which it is tentatively approved to list on the NYSE MKT exchange.

Based in Cambridge, Mass., Myomo spent years relying on money raised from a venture-capital firm, individuals and its revenues, which are growing but remain less than the company’s expenses. Chief Executive Paul Gudonis said he wanted to ramp up sales and production of the company’s orthotic braces that can facilitate movement in paralyzed limbs.

A traditional IPO wasn’t an option. Myomo hopes to raise $15 million—too little to interest big banks, which collect fees based on deal size, Mr. Gudonis said. The cost and regulatory burden of a traditional IPO for Myomo were too high, he said.

Instead, it is tapping Reg A+, a provision of the Jumpstart Our Business Startups Act, a 2012 law designed to help fund small-business growth and increase employment by removing some hurdles for companies trying to go public.

Reg A+ allows companies to raise up to $50 million by pitching their IPOs to all investors—not just those with a certain net worth or income—in fast-tracked deals.
So far, one company, three-wheel-car manufacturer Elio Motors Inc., has listed shares via Reg A+. It raised more than $17 million from thousands of individuals, the bulk of which it said in its filing is going to fund the building of prototype test vehicles.

But Elio’s stock investors haven’t fared so well. Elio’s shares listed last year for $12 apiece on the top tier of the OTC Markets Group, an over-the-counter marketplace that caters to small U.S. companies as well as some large international firms, Recently, shares were at $6.70, and infrequent trading has plagued the stock.

“There is risk here,” said Jason Paltrowitz, executive vice president of corporate services at OTC Markets. “Risk is not necessarily a bad thing…So long as customers understand what they’re getting involved in, they should have the right to get in.”

Reg A+ came at an opportune time for Joseph Collins, chief executive of Punch TV Studios Inc. Last year, he said, he started selling shares for $1 apiece. The 53-year-old went door to door in his neighborhood in South Los Angeles, plugging his vision of a production company and television network aimed predominantly at the African-American community. He pitched his case at Sunday morning church services.

Dethaniel Henry, a 43-year-old retired veteran who lives in Gates, N.C., said he heard about the IPO on the radio. In December, he bought $100 worth of shares, the first time he’s owned stock, and read up on Reg A+.

Mr. Henry, his wife and his 20-year-old son have spent five months driving across the country in their Toyota Camry, promoting Punch TV. He plays the company’s ads on his CB radio and regularly paints the back window of his car with information about the IPO. He also keeps buying shares: he has now spent more than $4,000 on shares.

“For the urban community, you don’t have IPOs that can get you out of one tax bracket to another. Reg A+ makes it easier for folks,” he said.

The stock isn’t listed on an exchange—meaning there is no regulated public marketplace for buying and selling issued shares. In traditional IPOs, once shares are sold in the offering, they begin trading on a regulated exchange the next day.

Former SEC Chairman Mary Jo White, when Reg A+ was being debated in 2013, said the rule’s mandate was to increase access of smaller companies to capital but it “very importantly, also builds in necessary investor protections.”

The protections include limitations on the amount of money some individual investors can put into the deals. And the rule requires certain companies to release audited financial statements and ongoing disclosures after the offering is completed.

Myomo is trying to smooth its path by mimicking a traditional IPO, according to people familiar with the deal. It organized its regulatory filings to look like that of a typical IPO. And it is limiting the so-called crowdfunding portion of its offering, which it is aiming to total about a third of the funds raised. For the other two thirds, Myomo is using small-shop bankers and broker-dealers to sell the stock to institutional and high-net-worth clients.

Myomo made a pitch to investors in late March in the basement of a Southern-themed bar in the Hell’s Kitchen neighborhood of New York City over beer and mini chicken-and-waffles with spicy syrup.

“What we’re trying to do is show Reg A+ can be a new way to do IPOs,” said Mark Elenowitz, chief executive of TriPoint Global Equities, which is underwriting Myomo’s offering.
Jessica Peters, a stroke survivor, practices picking up a foam cube with a device, made by Myomo, Inc., that exploits the body’s electrical signals to help people regain the use of arms and hands.

This story originally appeared in the Wall Street Journal. Read it here.