401(K) 2012 via Wikimedia Commons
Here I describe the biggest success factors for you to excel with your capital raise, and contrast with some of the mistakes that I see happening so far. This will help you determine if Regulation A+ is a good fit for your company and how best to maximize your path to success.
As the CEO of a capital raising platform specializing in Regulation A+ Manhattan Street Capital, I advise many companies that are considering raising capital using Regulation A+. I have had meetings with more than 300 companies so far. Since December 2015, I have published a monthly Reg A+ status update, which requires me to research the success and failure of offerings as they happen. These experiences–coupled with my background as a serial entrepreneur, my involvement with two IPOs and a long history investing and raising startup capital for numerous companies–have put me in an advantageous position to assess what does and does not work in Reg A+.
- Only Do a Reg A+ Offering if Consumers Love Your Product – Seasoned investors and angel investors are skeptical about new developments in the financing business and generally hyper-cautious about jumping into anything new until it is proven. So at this stage, Reg A+ companies must appeal deeply to consumers to be viable, because consumers are early adopters and will invest if they love what your company does. Many companies that do not inherently appeal to consumers have tried Reg A+ anyway. This is the single biggest cause of failed Reg A+ offerings so far. Make sure that Regulation A+ is a good fit for your company before you move forward. BrewDog, VidAngel
and Elio Motors (ELIO) are good examples of companies with strong consumer appeal. VidAngel raised $10 mill in five days of live investing. Generally, ideally suited categories for Regulation A+ are in: Real Estate, Food & Beverage, Biotech, Cancer treatments, disease vaccines and cures, personal security, medical devices, pain treatment, tech gadgets, IoT, Virtual Reality, Drones, alternative energy, electric vehicles and consumer AI. If giving a discount on your product to an investor will motivate them, you are looking good.
- If You Can, Make Your Investment Terms Appeal to Main Street Investors – If you can pay a dividend to your investors, you will significantly broaden the appeal of your offering. Interest payments are already a major factor in the success of Real Estate offerings in Regulation A+. These days, it is remarkably difficult for investors to earn 6.00% or 8.00% on capital, so providing this return can make a big difference. If your business generates a strong profit flow such that you can afford this approach, this could make your offering appeal greatly to main street investors. You might even bypass the consumer appeal requirement in item #1.
- Engage a 360 Crowd Investing Marketing Agency – Some companies have attempted to promote their own offerings. Crowd investing is a very specialized field that requires a 360-degree marketing agency that covers all the bases (meaning PR, advertising, social media, creating a beautiful offering, video production and more), incorporates careful project planning, and utilizes highly cost effective methods. There is simply no choice but to engage a top-notch Crowd investing marketing agency. Reg A+ is a funding system that is truly open to the public, and as a result, early success must be delivered and shown for the later weeks to work well. Weak early traction leads to failed offerings. Find an excellent agency, agree on a budget, and manage the heck out of the project for maximum success.
- Partner With a Broker-dealer Syndicate – It is not a requirement in Reg A+ that you use a Broker-Dealer. Some companies have maxed out the available consumer investor pool without achieving their funding goal though. The Elio Motors offering, for example, was a tour-de-force of consumer marketing, but the company ended their raise at $17 mill, even though they intended to raise $25 million. Had they included a Broker syndicate they would have easily raised the full amount – brokers wanted in. The fact is, as a practical matter you cannot go back and retrofit a BD Syndicate after you have started your offering. It’s a requirement that the syndicate file with and be approved by FINRA and be included in a company’s SEC filing.
- Ensure a Short Stay in Testing the Waters (better yet, avoid it entirely) – In theory, testing the waters is a great concept. It allows companies to test the market to find out if their products are interesting enough to make a Reg A+ offering worthwhile. The trouble is that too many companies end up in this informal marketing mode for far too long. If there is a delay in the audit or the SEC filing, and a company is still in “test marketing” mode, it risks losing its earliest and most enthusiastic would-be investors. Stretch the process out for 6 months and the impact can be fatal for an offering.
- Be Paranoid When Selecting Your Auditor – Some audit firms delay the audit and raise their price when it’s too late to switch away from them. This has happened already. Take extra care in selecting your auditor up front. Click here to find out how long your audit will remain valid in the Reg A+ process.
- Set a Low Minimum Capital Goal – For offerings raising capital to grow your company, “no-minimum” offerings are allowed by the SEC – this is one of the advantages of Reg A+. Some offerings have been launched with very high minimum funding goals, causing failed offerings because time ran out with the minimum not reached – leading to cancellation and refunds to investors. A low minimum allows an early first closing, which is essential to get the Broker Syndicate to engage – in their eyes, an offering that has not exceeded it’s minimum is just a lightweight concept, and they will not exert effort until the offering “goes live” by exceeding its minimum.
- Only Move Forward When You Have Sufficient Cash on Hand to Do the Offering Right – Seventy-five percent of Reg A+ companies need to raise Capital to fund their offering before they can get started. In some cases companies move forward optimistically with their marketing process anyway with a low budget marketing approach… which is a recipe for disaster. Early slow traction causes the rest of the offering to become extremely difficult, or impossible. So start early in the process by estimating what you think you’ll need for all the necessary budget items—the biggest is marketing—and raise that capital ahead of time.
- Include International Investors – Many companies have restricted themselves to US-only investors. International investors have fewer exciting investment options and can be reached at lower cost through digital marketing.
- Keep it Simple – Avoid complex investment terms, and generally avoid LLC’s too, and keep your offering simple. Remember, you need to appeal to consumers. They understand owning shares of stock, and they like being paid interest. Stick to terms they can quickly recognize and that appeal to them. Make a simple offering and communicate it clearly so consumer investors can quickly and efficiently make their investment in large numbers.
- Set a Low Minimum Amount Per Investor – Part of what makes Reg A+ great is that people of any wealth level anywhere on the globe can invest. To engage with the broadest audience of investors, set a low minimum, of perhaps $200 to $300 or less. Remember, we need great consumer investor traction to get the Broker-Dealer to see the success that they need before they will put their client relationships on the line. And of course, the average investment amount will end up being far more than the minimum anyway – typically 4 to 8 times higher to date for successful deals.
- Steer Clear of Reg A+ Tier 1, Do a Tier 2 Offering Instead – Tier 2 extends from zero up to $50 mill per company per year. Tier 2 solves the problem of having to satisfy the various States’ Blue Sky Laws. Each State has a different system and some are very slow indeed. The only time Tier 1 makes sense is if you can raise all your capital outside the USA or from one or two states that are easy to satisfy for Blue Sky filings. Notably California is one of the most difficult to qualify for, they require an audit and a Merit review in which they judge the risk versus return level of your business – which is far more difficult than the SEC. Tier 1 is theoretically easier because the SEC does not require an audit, or financial results reporting post offering. The cost of satisfying the states could easily cost double what it costs to use an attorney to file with the SEC, and could take a year versus 60 days for the SEC filing too. Seriously slow and expensive for Tier 1.
In summary, take your time and evaluate how well Regulation A+ fits your company carefully before you get started. If you do move forward, make the time to do it right. Apply these guidelines to maximize the likelihood of your Reg A+ becoming a great success. Keep me posted on your progress so I can include your success in my Reg A+ Updates.
(See the full version of this article published on Forbes here.)
See more at: https://www.manhattanstreetcapital.com/blogs
Rod Turner is the founder and CEO of Manhattan Street Capital, the #1 Growth Capital marketplace for mature startups and mid sized companies to raise capital using Regulation A+. Turner has played a key role in building successful companies including Symantec/Norton (SYMC), Ashton Tate, MicroPort, Knowledge Adventure and more. He is an experienced investor who has built a Venture Capital business (Irvine Ventures) and has made angel and mezzanine investments in companies such as Bloom, Amyris (AMRS), Ask Jeeves and eASIC.