How to Fix ‘Testing the Waters’

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Reg A+ allows a company to reach out to its friends and family, its employees, its customers and vendors, its Facebook (FB) friends, and even the general public to ask “if we raise money and offer this stock/bond, would you like to invest? And if so, how much?” – that’s called “Testing the Waters” (“TTW”) and can be done before a company ever spends the time or money to file with the SEC, and it can also be done during the filing process (there is no “quiet period”). It’s meant to be a way to test the potential success of a Reg A capital raise, and to get potential investors excited and engaged ahead of the live offering.

But it’s Broken…

We’ve seen companies use TTW to get email addresses and amounts people say they are interested in investing, and – thinking they can take that to the bank – make terrible sales & marketing decisions that severely hamstring their capital raise once it goes live. And we’ve seen companies NOT use TTW, convinced that because they have millions of users or lots of customers their offering will naturally be a success, then spend huge sums on accounting and legal to get the offering qualified by the SEC, only to learn the hard way that their users and customers don’t have any type of emotional connection to their brand and thus no interest in investing in the company. We have seen several businesses waste $100,000 on offerings that never had a chance in the first place; money and time that could have been saved if they’d properly conducted TTW before moving forward with the Reg A+.

So Let’s Fix It.

The biggest problem is technology. We (FundAmerica) can solve that. Until now, a company (or broker-dealer) has created a webpage with the proposed offering information, details and videos and marketed it to their base and even the public. Interested persons were asked to add their email address and pledge an amount of money, which rarely come through.

The Proper Way of Doing TTW

First, create a web page with the offering information. Make it as detailed and real as possible (including any required SEC disclosures, of course).
Next, put a “Reserve Shares” button on the offering.

Now, when someone says they would be interested in investing, the system will:

1. Capture all their vesting information (individual, JTWROS, company, trust, IRA), address, email, phone, etc
2. Get their accreditation information and ensure that the amount they are saying they would invest is, in fact, allowable per regulations (and correct it right then and there if needed)
3. Get their ACH information
4. Get their 2111 suitability information (only if a broker-dealer is involved, otherwise this is skipped for issuers who are doing a direct offering and not using a broker)
5. Send the investor a “thanks for indicating your interest” email “from” the issuer
6. Provide the issuer with a detailed report of all completed, and even incomplete, interested investors

Thus, while still low friction, there is enough weight to separate the wheat from the chaff. It gives the company a base of people who really are interested, and allows better budgeting and “go/no-go” decisions.

Next:

a. KEY! => When the offering goes live, the queued investors are sent an email (“from” the company) with a link for them to e-sign the subscription agreement and make their commitment. Once the investor signs, their funds are immediately moved into escrow. No hassle, no work for either the investor or the company (or the broker).
b. And of course the system provides the issuer with reports and tools to email all the interested investors, anytime and as often as they want in order to keep them engaged, provide updates, etc.

The result is less money and time wasted, more confidence in your offering, and better ability to plan and set sales & marketing strategy. Test The Waters is now a useful tool.

$$$: Cost of FundAmerica’s “TTW” technology? Free. No setup fee, no transaction fees. Free.

About the Author: Scott Purcell is the CEO of FundAmerica, a fintech services provider to the emerging equity and debt crowdfunding industry. His firm provides escrow, payment processing, and compliance technology for numerous broker-dealers, investment advisers, portals and others who make a business of online capital formation pursuant to rules now in effect thanks to the JOBS Act. FASTransfer is the only tech-driven SEC registered transfer agent focused on the crowd-industry. He is a founding Board member of the Crowdfunding Intermediary Regulatory Association (CFIRA) and the author of the book “The Definitive Guide to Equity and Debt Crowdfunding” as well as the “Industry Best Practices for Funding Portals”.

Legal Disclaimer:
These materials are my personal opinions and for informational purposes only and not for the purpose of providing legal or tax advice. I am not advocating, advising or recommending anyone purchase any specific or general investment of any type, ever. The issues discussed include complicated areas of law and legal advice should only be obtained and relied upon from a securities attorney about your specific circumstances.