A shark is never your friend, even if he or she happens to be carrying big bags of money. After all, sharks eat people. They do this literally in the ocean and figuratively in shark tank competitions. Best case: they invest in your deal at such a low valuation that you’d be better off walking away. They prey on your emotions, dreams, and aspirations—and then take a bite. They’re sharks; it’s their nature.
Fortunately, there’s an alternative. In 2012, the JOBS Act created new, more accessible methods for raising capital—and not just for start-ups. Reg CF allows businesses to raise up to $1,070,000, while Reg A+ permits a raise of up to $50 million. Both are ways of raising money from everyone, welcoming investors of every level of wealth, income, and experience.
I hate to call it crowdfunding. Instead, I call it direct-to-individuals capital-raising. Let’s explore why.
I’m not a lawyer, but here’s the gist: Reg CF requires a few legal documents, some light accounting, and, unfortunately, an SEC-certified platform to run your offering. There are currently 51 Reg CF platforms in the U.S., according to Crowdfunding Insider. They all work pretty much the same.
First, you pay them a fee, then post your information into their content management system.
You have a lot of flexibility to make it appealing. For instance, you can upload videos, photos, logos, downloadable files (like .pdfs), and color choices. You do all the writing, and then wham—the content management system makes a webpage referred to as an “offering page,” complete with their invest button.
Once clicked, the invest button gathers information and allows investors to invest by ACH, wire, check, or even debit and credit cards. You get a unique URL to send to your investors, friends, and family, and that you can use for marketing.
There is, however, one downside: your offering is then added to all of their other offerings in a sortable table of contents. Each platform sorts differently.
Some have registered users to promote your offering—for a fee, of course. You can also “generally solicit,” which—in English—means that you can advertise your offering to anyone. It used to be that most private companies could show their offerings only to rich people (read: accredited investors), but not anymore. Social media, press mentions, podcasts, webinars, blast emails, and advertising are all perfectly legal (but consult a lawyer and ALWAYS stay compliant). Post a sign on the street, or promote it at a sporting event. Promotion is welcome and encouraged.
Some of the platforms will even ask to do advertising for you—at a fee. Beware, as this is not their core business and they aim to profit from it. Some will also prod you to spend money on your own outreach to new potential investors while refusing to offer you access to their registered users until you hit a predetermined number of investors and/or dollars raised. They make money on your listing: a monthly fee and a small fee for every investor who goes through their “transaction engine.” There are so many of these platforms that they have become commoditized. Play them against each other. They need your business—all of them. No one is so successful that you have to pick them.
Reg A+ is a whole other story and closer to my team’s focus.
Reg A+ is for more established firms, as well as start-ups that are a little more advanced (and have the cash to get it going). Reg A+ allows firms to raise up to $50 million directly from individuals, regardless of wealth, income, or investing experience. This allows customers who support a company to become shareholders and potentially influencers, too.
RegA+ requires various legal filings, an audit (light compared to going public), a Fintech firm to digitally process investors and accept their investment into escrow (including self-directed IRAs), and usually a RegA+ specialized broker-dealer to legally market your deal in all 50 states (Texas and Florida, for instance, require a broker-dealer). They also make sure investments are coming from real people and not terrorists or criminals. The broker-dealer is also obligated to perform due diligence on the deal: they check investors’ backgrounds for any criminal behavior, ensuring the books and records are real and that the company is capable of doing what it claims. The beauty of RegA+ is that the entire offering can be conducted on the firm’s (known as the issuer, because they issue shares to their new shareholders) own web site.
In fact, investor acquisition firms recommend doing just that for three reasons.
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Investors trust that they are on the issuer’s own website and that the web address root doesn’t change when looking at investor information or when investing. The fintech firm provides the software and the entire process appears to happen—really securely—right on the issuer’s own site. Why bring investors to a platform to share? They are not paying you, but probably should for doing so.
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It costs way less than going onto a Reg A+ platform. Most platforms promise that they will bring investors and then show investors other deals besides your offering. But why would an issuer want that when they can bring potential investors right to their own site? Platforms compel each investor to register, whether they invest in your deal or not, just so they can have more names in their database. If the platform is a broker-dealer, they may charge as much as 8% of the money you raise, plus warrants and cash fees, and a charge for processing every investor. Absurd!
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Branding and acquisition. A big part of acquiring investors is driving people to the offering page. When they visit your site, you are building your brand, and you can show them your products and services. Why would anyone do that on another site when they can drive them to their own site? This also goes for press articles, social media, paid ads, and emails. Why spend money to drive investors to someone else’s site?
Acquiring investors is no easy task. Do the math: one issuer wanted lots of investors, so they kept their minimum investment down at $200 to keep it accessible. They are raising $25 million. At the minimum investment, then, they would need 125,000 investors. Thank goodness for great transfer agents! For most companies, however, the median investment should be around $2,000 to $2,500 each, from something like 11,500 investors. You still need a great transfer agent. The transfer agent issues shares on behalf of the company, and processes share transfers and calculates and distributes dividends.
Sounds too complicated?
Firms have built ecosystems that help entrepreneurs launch, fill, and service a RegA+ offering; communicate with potential investors and shareholders, and handle all the details.
Consider, too, that a successful RegA+ offering can prepare you and your team for an eventual IPO. It’s a great next step in the growth of a company. And with a RegA+, you already have a built-in shareholder base that includes fans, customers, and influencers.
Let’s keep in mind that those fans, customers, and influencers outnumber the sharks of TV fame. They’re also real people. They are accepting the deal on your terms when they invest. They won’t haggle over-valuations or try to dictate the direction of your firm. In an offering, you are seeking advocates, not people to boss you around and tell you what is right for your company, dreams, and heartfelt goals. Your Reg A+ team will help guide you through the process, but they are not permanent members of your board. They are not influencing you by owning an outsized part of your firm. Instead, you have thousands of supportive shareholders as long as you try your best to do what you promise.
Why not start your journey toward entrepreneurial success in supportive waters? You’ve seen Jaws. You don’t want that to happen to you or your company. You might still need a bigger boat, though—not to kill the sharks, but to bring all your new supporters along with you.
Andrew Corn is the CEO and director of strategy of E5A Integrated Marketing, a systematic, data-driven investor acquisition firm. They specialize in raising money to manage for asset managers and capital raises for real estate and emerging growth companies. Corn can be contacted at acorn@e5aim.com