Nothing comes free. Raising capital is certainly no exception. Even the best-kept deals require a great deal of upfront legwork. In fact, some of the crowdfunding naysayers are using the upfront costs associated with equity crowdfunding as a deterrent, particularly for those who aren’t intent on raising money above a certain threshold. I’ve also been quoted Regulation A+ Offering costs that have a range differential of five figures–which is pretty substantial. How much should it cost in front-end and back-end fees to raise money with Regulation A+?
Three main costs associated with prepping your Regulation A+ Offering Circular:
1. Attorney filing fees. Filing your Form 1-A with the SEC requires a good lay of the land from experienced securities attorneys, but it shouldn’t cost you an arm and a leg. As with going public, performing a Reg A+ offering–while specialized–is not rocket science. It’s just a great deal of work. I typically compare the Form 1-A to a hybrid between a Private Placement Memorandum (PPM) and an S-1 (used for public offerings). In both cases, the offering docs include everything and anything any crowdfund investor would want to know. I’ve been quoted $25,000 to $80,000 for this service. When the price is lower, there is typically a point or two required in back-end fees gleaned from the “raise” itself.
2. Accounting & audit costs. Both Tier 1 and Tier 2 of Regulation A+ require two years of audited financials. The second tier simply requires a bit more in terms of ongoing reporting, which adds to the complexity and cost. Tier 2–while a bit more onerous on the reporting side–pre-empts the state Blue Sky laws and allows issuers to generally solicit from any Peter, Paul and Mary, regardless of their liquid net worth. The reporting cannot be downplayed. It still remains a cost. However, the audit is somewhat lax as compared to the full PCAOB, Sarbanes-Oxley work provided by today’s public company CPAs. No, this audit–while stringent–will not be held under the same scrutiny. Thus, the cost will be less. We’ve priced out various firms and $12,000 to $30,000 has been the range we’ve been quoted. Auditors are not allowed to take back-end fees.
3. Broker-dealer and other promotional costs. Some of the most expensive of the back-end fees will likely come from your broker or market maker. These folks are the ones with either a good marketing arm to help sell the stock or great connections to deep-pocketed investors that can get you to a fully subscribed offering much quicker. Some may charge a retainer to assist in the promotion and marketing of the stock as well as a back-end fee. For the back-end fee, a range of 5% to 10% of the raise, depending on the involvement is not out-of-the-question. Some will ask for more, but the amount will often depend on the relationship with the investor and the law itself precluding from usury. While somewhat negotiable, this arena is perhaps the most important to actually raising the capital.
In all, the costs are likely going to range somewhere between $40,000 and $100,000 for the front-end and 1% to 10%+ for the back-end. If you’re interested in something closer to the lowest end of this spectrum, please contact us.
“Can I get an investor to pay for it?”
Such fees seem outlandish, particularly for the fledgling startup that is looking for cash in general and doesn’t necessarily have the funds to pay for all the upfront costs. Several potential issuers have already asked, “is there any way to put the onus on the investors for all the front-end fees and just let them make it up on the backend?” The answer is yes.
Investors hungry for yield have money ready and waiting for the right deals. There are those within our network who’re willing to foot the bill for the front-end costs of the audit and Form 1-A filing for a bit more take on the back-end %. The deal has to be right and the team has to be solid, but it is an available option for the best opportunities.
The situation swirling around Regulation A+ is still fluid. In this state of flux, the costs are likely to bounce all over the map. My guess is, however, that as time vindicates the process and supply and demand equalize, the costs will come down substantially and the entire process will become commoditized on some level. When that occurs, I would hope that the cream still rises to the top on the quality of Reg A+ deals that are regularly hitting the market.