Crowdfund | Everyone Isn’t a Good Candidate for Reg A+
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Everyone Isn’t a Good Candidate for Reg A+

We’re fielding more and more interest in Reg A+, but that doesn’t mean we’re slam dunkin’ it. In fact, the number of companies who’ll make great candidates for a Regulation A+ offering is much smaller than the crowdfund evangelists would have you think. The reality is that the best crowdfund deals–namely, those that are worth an advisor’s time to consult on–are about as rare as any other type of investment. Reg A+, which is being touted as the new mini-IPO, is a good hybrid between traditional venture capital and microcap stocks.

In the venture capital world, it’s all about dealflow. It’s about finding those unicorn deals that haven’t been heavily-touted to other investors. It’s about finding those deals that can scale with a massive audience with little to no DA on the EBITDA. It’s about being able to put less in for the same amount of massive impact and worldwide touch.

But perhaps the biggest similarity Regulation A+ has is with the microcap stock world. The smaller alternative and direct public offerings of the world are never successful without a large investor-base. Large groups of retail investors flock to the sizzle, not the steak. They’re less interested in some oil rights or even real estate.

True, startups are eligible, but investor confidence is greatly bolstered by the required two years of financials. The list that follows will be helpful in understanding who might be a better candidate for a Regulation A+ crowdfunding deal, including what sets companies apart from the pack. This list is not meant to be exhaustive. It’s also not a checklist. I expect that there will be many firms that fit within the confines of some of these characteristics that will likely fail in their efforts to raise their desired funding using Regulation A+. Without adieu:

  • Companies with access to a large potential shareholder base. This could include existing product users, customers, suppliers, partners or investor groups. The larger the audience, the better. A good example might be an online community with >1 million in monthly unique visitors and an email list of several hundred thousand. If done correctly, such a company could also perform a very telling “gauge of temperature” soft outreach to their existing contacts to see if there was interest before the company paid for the Form 1-A and Offering Circular, etc.
  • The team must be above reproach and absolutely stellar. Nothing will engender investor confidence like an experienced, knowledgable and trustworthy team with a good track-record of success. Not only will investors want to see this, but often this type of team has the network to tap a larger swath of investors (refer back to bullet point #1 above).
  • A budget for the process and the stock promotion. Sure there are investors that can help foot the bill for some of this, but where there is no budget, there will be less of a groundswell for the stock. Blasting social media will cost money. The submission of all requisite documents, including the audit with the SEC is only part of the process. True promotion and full offering subscription will best occur when some marketing dollars are put toward outreach.
  • The broker-dealer and deal team are also paramount. These financiers can help point you in the proper direction for sourcing funding from more than just the non-accredited retail crowd. For a truly successful raise, you’ll need to expand out of the $1,000 to $10,000 checks and into the realm of deep-pocketed, interested accredited and institutional equity investors.
  • Technology and consumer product-focused companies will likely perform better for the masses of retail investors. Retail investors like the inventor and the product entrepreneur (e.g. Shark Tank and Kickstarter crowd) while technology is more sexy than a boring services business based in Any-City, USA.

“What’s in it for investors?” Is also a good question to ask. What’s the sweetener for those you’ll be pitching in your Reg A+ offering.

When it comes time to consider the implications of a Reg A+, it is wise to consider whether your company would make a good candidate. Does the company meet any of the above qualifications? Can you sell the sizzle and not the steak? I would expect some of the most successful Regulation A+ deals we’ll be seeing will include all the aforementioned components with a few likely twists. In any event, we continue to expect to kiss a lot of frogs before we find the unicorn that will take to the bank.

What do you think?

 

  • I would expect that ‘frogs’ so to speak are those that carry large ‘egos’ that need to be left at the door. Determining a ‘good fit’ as you’ve so described demands that any potential candidate needs a very honest and truthful soul searching exercise using a team approach (no I’s in team). The culture needs to be ‘participatory’ as any politics will only get in the way of any open and creative team discussions. If a go-ahead is decided then the appropriate budget will drop out naturally. The team’s members should then create focus groups and move into implementation mode at the same time as involving other key players like in-house (or outsourced) marketing experts. Like any IPO, it must be orchestrated in carefully defined steps and only move forward decisively with all key players totally on-board and each steps decision well communicated and documented.

    • Nate Nead

      The vetting process is unfortunately difficult to streamline. The vetting is front-side due diligence, understanding that the client in this instance is the investor in a potential deal as well as the company seeking capital. That said, there is a streamlined process, but the skeletons are usually found in different places in each different deal. So it’s hard to use a one size fits all approach.

      But, we have to be quick at saying no and we’re typically very slow at saying yes, but when the yes comes everyone is fully on-board.

  • Reg A+ could be fantastic, but time is of the essence. Many startups are going to take marketshare from incumbents in almost every industry. The finance side needs to move very fast. ROI’s can be 10X to 100X in 18 months for many IT and automation focussed solutions. Hope you can help make this happen.