CTO 2010 Alumnus Arcimoto First to Go Public Using JOBS Act’s Regulation A-IPO

Posted by Emily Lundberg on

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Since participating in the 2010 Cleantech Open accelerator and ranking as a Western Regional Finalist, Eugene, Oregon-based Arcimoto has spent a decade and millions of dollars to develop its 1,000-lb., 2-seat, 3-wheeled all-electric vehicle that the company calls a fun, useful, and affordable vehicle for the global mass market. To raise the funds to bring the SRK, the eighth iteration of Arcimoto’s concept to production, next week Arcimoto will complete the process of becoming the first Cleantech Open alumnus to make use of the JOBS Act, passed in 2012 and in effect since 2015, which expands entrepreneurs’ access to greater capital via the “crowd.”

This new and simplified system—called “Regulation A”—has helped the EV company quickly go public while forgoing a number of lengthy and expensive processes. With a novel “Reg. A+ IPO,” both accredited and non-accredited investors can participate in the offering, the public portion of which is available through the end of next week on Arcimoto’s website. Underwritten by WR Hambrecht + Co., the offering is intended to raise up to $30 million to pay debts, set up a large Eugene factory, and ramp up production of its futuristic-looking SRK. The vehicle is a classified as a motorcycle, with a driving range of 70 miles with a 12 kilowatt-hour battery pack and 130 miles with a 20 kilowatt-hour pack. Top speed is 80 miles per hour. Target base price is $11,900.

In an interview Wednesday, Arcimoto founder and President Mark Frohnmayer explained how Arcimoto found itself at the forefront of financial innovation. Of those companies that have filed under Regulation A and then listed in a public offering, Arcimoto is merely the fifth. The other four went “Reg. A-Public” over the summer. (The prior four are MYO, ADOM, and PIXY, and CSSE.)

Talking on his cell phone as he walked through Manhattan, Frohnmayer explained the movement toward Reg. A: “The Securities and Exchange laws in place before the 2012 JOBS act made it very difficult for companies to appeal to the general public, even for a venture that is clearly in the public interest. The JOBS act has four key components—from the crowdfunding rules all the way up through the different tiers of ‘Regulation A’ changes—that are going to have far-reaching impact. We are just at the beginning of that.”

“It is a very new pipeline that kind of merges the crowdfunding kickstarter approach with the more traditional seller/broker/dealer institutional side,” explained Frohnmayer. “So, what you see on the Arcimoto website in terms of ability to invest now, that is the direct sales to the crowd. However, likely the actual bulk of the round will be carried by the seller/broker/dealer group.”

Though the Reg. A +IPO merges a crowdfunding approach with the more traditional institutional approach, the discipline a “Reg. A+IPO” enforces makes it more like the latter. “This is a real public offering. This is not a crowdfunding campaign in the kickstarter sense,” clarified Frohnmayer. “We are using that approach to sell stock directly but it is an audited SEC-qualified offering with the intent to list on the NASDAQ immediately at the conclusion of the stock sale.”

Problem Solved: Enter Investor-Activist and Legend Bill Hambrecht

So how did Arcimoto find itself on the tip of the spear of financial novelty? By the intervention of investor-activist and legend Bill Hambrecht. The octogenarian banker had witnessed first-hand how over the last two decades the road to becoming a public company had grown chillingly long and costly. A recent survey found that 87% of U.S. CFOs who had taken companies public in the past several years indicated that their firms spent more than $1 million on one-time costs associated with the transaction. Between the fees paid to investment bankers and the money left on the table in the IPO, it is common for a company going public in the U.S. to give away 5% of its value on the day of the IPO. Indeed, it is not unusual for going public to eat up an entire year’s worth of pre-tax operating profits.

Enter Bill Hambrecht, who had a hand in the successful capitalization of three of today’s four tech giants, who is an investor in Arcimoto, and was a huge advocate and evangelist for the JOBS Act. The Jumpstart Our Business Startups (JOBS) Act, successfully passed by Congress and President Obama in 2012, was designed with help from Hambrecht to encourage small business and startup funding by easing federal regulations and allowing individuals to become investors. Normally a company can only sell to accredited investors through a middleman.  Under the JOBS Act, a company can raise as much as $1 million a year directly from individual investors. “One of our key investors is Bill Hambrecht and he was a huge advocate for the Jobs Act—specifically for this kind of an IPO,” said Frohnmayer.

Bill Hambrecht founded WR Hambrecht + Co in January 1998 to level the playing field for investors and their corporate clients. Hambrecht, who helped Apple Computer, Google and dozens of other technology firms go public over almost half a century on Wall Street, went on to push for policies that leveled the playing field. “Really, it is a response to the insane increase in costs and complexity of public offerings which happened over the last twenty years with the massive increase in reporting costs and S-1 filing costs,” said Frohnmayer. “That is why we see the giant unicorns out there that have not gone public. Reg. A is really the cure for that. It brings the IPO back to something that earlier-stage, more market-cap companies can still effectively leverage.” In “unicorns,” Frohnmayer refers to the increasing number of the startups like Uber and Airbnb that have reached the “unicorn” mark of valuations over $1 billion on the private market.

“Looking at it now, I think it will become the future of the IPO,” concluded Frohnmayer. “It is such a dramatic reduction in costs for the company that it makes the IPO a real viable process once again where it has been all but out of reach for the vast majority of start-ups. Going again and again back to Sandhill Road, round after round, you just have a much smaller pool of people to go talk.”

Indeed, the turn away from IPOs has contributed to growing inequality. The dearth of IPOs in recent years has led to broader development of private markets for hot emerging technology companies so that wealthy investors who can invest have cashed in, while less wealthy public-market investors have missed out. According to economist Thomas Piketty, because of limited public access to private capital markets, when the rate of return on capital exceeds the rate of economic growth, as it has for quite some time, inequality tends to rise and it is now at a high only parallel that of the 1930s.

Reg. A+IPO Endorses Discipline

Again, the “Reg. A+IPO” enforces discipline. “It was easy enough to do a Reg. A-round,” said Frohnmayer. “Even in another company, I wouldn’t want to do it any other way. You just need to have the discipline to put together a Reg. A. And then, all of a sudden: 1.) It is a much more complete document in terms of an investment prospectus with real audited numbers; and 2.) It does not carry a significant cost in terms of what a typical IPO would cost. It has not been an onerous and horrible process like I had been led to believe an IPO typically is.”

Frohnmayer acknowledges that a Reg. A+IPO not only enforces discipline in terms of the need to generate realistic numbers, but also enforces discipline by accelerating and hence shortening the timeline to production and profit. “The challenge shifts from really curating your thesis to fit the venture market’s time horizons,” said Frohnmayer, “to telling a public story and building momentum in the world at large. That being said, it certainly enforces the discipline of actually becoming a profitable company in a nearer time horizon than your typical 7-year venture fund.”

Turning Likes into Shares: A New Type of Social Media Fan-based IPO

Just as social media has transformed how we market products and connect with customers, so will crowdsourcing revolutionize the way that we launch businesses and build our customer loyalty from one like/share up. Indeed, since the passage of the JOBS Act in 2012, there has been a dramatic increase in the use of crowdfunding platforms to help fund everything from startups to music projects.

Social media offers many opportunities in the turn from institutional investors to individuals. With the ability to attract individual investors, small businesses and startups must market their product to the general public and activate advocates on day one of the venture. Crowdfunding requires attracting a community of supporters at all phases of the business.

Today, many social media-anchored companies like Uber and Airbnb have skipped going public. The high costs of going and remaining public, as well as the accompanying legal risks, are cited as the primary reasons for staying private. In light of this, Frohnmayer foresees a movement of social media-anchored companies turning to the Reg. A+IPO approach. “I think that particularly if you look at some of the companies now that are in that unicorn land—the Airbnb and Ubers and Lifts and WeWorks of the world—in the public market you have got these companies with these gigantic user bases and fan followings and all the rest: those are just natural companies to truly be public companies through a Reg. A IPO. Had these rules been in place years before I would expect that a lot of them would have gone through the Reg. A+IPO process,” said Frohnmayer.

Attn. Cleantech Entrepreneurs: Using Your Impact to Market a “Reg. A + IPO”

Arcimoto’s offering circular describes “the problem”: “The world’s current transportation system relies on oversized, overweight vehicles powered by fossil fuels and antiquated drive train technology. Consumers increasingly feel the impact of congested urban traffic and sense the urgency of looming climate crises.” Arcimoto’s answer is the SRK: At ¼ the mass footprint of the average passenger vehicle, the SRK is also 10 times more efficient than the average passenger vehicle at 230 MPGe.

Frohnmayer is realistic about the challenge of running a mission-driven company. “It is necessary to become financially successful in order to achieve our mission,” he said. “Arcimoto is totally a mission-driven company. Having a lot of money doesn’t do very much good when the planet is burning down.”

“We took the tack of really clearly looking—over and over—at the problems that people have to solve every day trying to get from point A to point B,” said Frohnmayer. “And it took us a long time. Over eight generations of product development to find something that really fits how people use cars today. We are not asking people to change their behavior patterns as much as finding the right-sized tool for the job.”

Way back in 2010, Frohnmayer and his team found participation in the Cleantech Open accelerator useful when it came to guiding them through the realities of marketing and fundraising for an impact-driven company. “We went through the Cleantech Open at a pretty formative time at the company,” remembered Frohnmayer. “My prior venture was one in which I never went through the fundraising process; we just bootstrapped it and sold it. And so CTO was really a great help in terms of the process of building kind of a more traditional venture-approach that is still targeted at having a meaningful impact on the world. I think it is a difficult line to take. It particularly was back then difficult to be a very impact-focused company in what is traditionally a very capital-intensive industry. So the contacts I made down there, the friendships built, and then certainly the help spreading the word and fine-tuning the business approach were all very helpful.”

Both Frohnmayer and Hambrecht recognized the unique opportunity that the “Reg. A+IPO” offered to cleantech startup entrepreneurs who are appealing to the public interest from day one. “For companies, and for funders particularly, one of the big challenges of being an early-stage cleantech funder is you are really counting on someone coming in on the next stage. This provides a pathway where companies can make their appeals directly to the world versus having an intermediate layer of gatekeepers. There has already been a synergistic effect in that we have seen a big uptick in preorder reservations since we launched the IPO. So there is a very synergistic effect between sale of the product and sale of the stock,” said Frohnmayer.

Taking Green Global

You don't have to strain to see Arcimoto’s eighth-generation SRK being a big hit in third-world cities where people drive a lot of dirty two-strokes, tuk tuks, or rickshaws and where urban pollution has become a daily challenge. While Arcimoto has discussed licensing the platform abroad, the company's only focus now is raising enough money to produce the SRK here in the U.S. next year.

“The first seven generations that we built were too big for the world market,” said Frohnmayer. “And what really in hitting the sweet spot of a 1000 lb. vehicle that can carry two people very comfortably and can park in the space of a motorcycle – a little bit wider—you can fit three of them in a parking space. And the amount of road that it takes up is just dramatically less. So all of a sudden with generation 8 we built a cost-competitive vehicle for the world market that actually fits the world. We are here and we see a transportation problem here but we wanted our solution to be something that would be easily adaptable to the global stage.”

 

  • By Emily Lundberg on in

Updated on September 8, 2017 6:07 PM