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Financial Innovation in Microcap Public Offerings

62 Pages Posted: 20 Sep 2017 Last revised: 11 Oct 2017

Anzhela Knyazeva

U.S. Securities and Exchange Commission

Date Written: September 12, 2017


Access to financing for small and growth companies characterized by high information asymmetries and financing constraints has long been an important question in corporate and entrepreneurial finance. This paper provides evidence on the role of a novel financing alternative available to entrepreneurial firms from a quasi-natural experiment involving 2015 amendments that significantly expanded Regulation A, a method of conducting a small direct public offering without registration under the Securities Act of 1933. Compared with traditional small public offerings, Regulation A draws a greater share of smaller, younger companies undertaking their first public offering of securities, typically without an intermediary, on a best efforts basis. Consistent with it, the market reacts less to information about the historical financial condition of such companies. Individual tiers of Regulation A fit into a revised pecking order of financing alternatives for private issuers going public. The 2015 shock expanded the use of Regulation A, with most of the increase accruing to market segments that had capital market access through other private or public financing methods. In particular, private placements and Regulation A public offerings exhibit a complementary relation, which becomes more pronounced after the 2015 shock. There is also some evidence to suggest that Regulation A public offerings may be a financing alternative for private issuers seeking public capital that are unable to conduct a traditional registered offering or unwilling to bear its costs. Consistent with different types of issuers pursuing Regulation A and small registered securities offerings, there is no evidence of significant substitution out of small registered offerings into Regulation A offerings after the shock.

Keywords: Entrepreneurial Companies, Private Companies, Microcap Issuers, Regulation, Information Costs, Financial Innovation

JEL Classification: G32, G38, L26

Suggested Citation

Knyazeva, Anzhela, Financial Innovation in Microcap Public Offerings (September 12, 2017). Available at SSRN: or

Anzhela Knyazeva (Contact Author)

U.S. Securities and Exchange Commission ( email )

United States

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