Mini-IPO = Big Risk

Author: Chelsey Franks

We’ve blogged recently about mega-funding – let’s shrink it down and discuss another area of risk for the investor: the mini-IPO.

Several articles have been written over the course of the past year or so, discussing the potential and pitfalls of the mini-IPO. One such article, published by Bloomberg, defined mini-IPOs as having grown “out of the Jumpstart Our Business Startups (JOBS) Act, a 2012 law that was supposed to eliminate red tape, help small companies go public and, ultimately, spur the economy…Under the law’s Regulation A+, adopted by the Securities and Exchange Commission in 2015, tiny companies can sell shares with limited disclosure requirements and seek money from less well-off investors even if the securities don’t trade on a major stock exchange.” In reading this definition, it’s easy to spot the red flags for investors. But should you find yourself tempted to take a bite of this mini-market, the same scale of due diligence should apply to the mini-IPO space as it would to any other investment you consider.

In this same Bloomberg article, in three mini-IPOs alone, one executive was said to have been convicted of filing false tax returns, another for obstructing justice and a third was reported to have been accused of selling unregistered stock. As noted by the publication, “None of the companies have been accused of wrongdoing. But these super-small initial offerings are seriously high-risk investments. All of the companies have lost value since going public, by an average drop of 40 percent.”

A recent article in Restaurant Business Online speculated whether mini-IPOs were even necessary, given their poor track record and riskiness, stating that “those companies have struggled to win over Wall Street.”

Barron’s released a report in early-2018 after it studied hundreds of mini-IPOs made under the JOBS Act. The report questioned whether, five years in, “these mini-offerings delivered on their promise to create jobs” or make money for investors. Barron’s ultimately credits mini-IPOs with doing little more than having “created jobs for stock promoters with checkered stock market histories.”

Whether it’s a huge cliff or a tiny hill, look before you leap by doing thorough due diligence.