Many businesses looking to use the internet to raise capital (via the new exemptions made possible thanks to the JOBS Act) tend to get a little shocked at what it costs. This is more true for people who have little experience in raising money than for those who’ve been through the process a number of times. Let’s talk about these…
There costs are fixed and variable, contingent and non-contingent. Some are controllable, some are not. Let’s break these down and, most importantly, look at how it affects your total capital raise and the minimum-per-investor amounts that you set.
Your offering will have a wide variety of out-of-pocket costs that are sunk/spent/gone and not dependent upon whether or not you are successful with your capital raise. Nobody works for free. And, in fact, you may be surprised to learn that it’s actually illegal for anyone to say “hey, if you don’t raise the money, no problem, you don’t need to pay us” unless that person is a broker-dealer.
Pre-Offering – the money you spend to get ready, including your lawyers, accountants, consultants, marketing, etc is just that, “spent”. How much you spend with them depends upon how much work they need to do to help you vs how much you’ve done yourself. And if you are using a broker-dealer, they may need to charge you upfront fees for advisory services, to cover their costs of doing due diligence on your company, and for any regulatory filings you or they need to make. It’s not cheap, and is just a cost of doing business.
During the Offering – there are numerous service providers who you may rely on as you conduct your offering, and they need to get paid regardless of whether or not you are successful. These include your escrow agent and bank (wire fees, ACH fees, check fees, account fees, etc), your technology provider (transaction fees, license fees, etc), AML fees (for LexisNexis and other fees), accounting fees (for people to receive, account and reconcile the funds coming in), marketing fees (e.g. services your ad agency does for you), etc, etc.
Variable, both Contingent & Non-Contingent:
Pre-Offering there probably aren’t any variable fees. Nor are there any contingent fees. You will pay people for the work they do in helping you get your offering ready.
During the Offering – if you’ve engaged a broker-dealer or registered funding portal, they may be charging you a % of the funds you raise. If so, then they only get paid if your offering meets the minimum (that’s “contingent”). If it doesn’t, then they don’t get paid whatever contingent fees you agreed (though you may still owe them for some non-contingent fees & expenses for advice, consulting, due diligence, travel and other services). If you’ve engaged a marketing firm or funding platform then you will owe them the fees and expenses that were incurred regardless of whether or not you successfully raise the money (“non-contingent”); these might include Google AdWord campaign expenses, ads run on various social media sites, transaction fees for using their technology, and other things. And of course your escrow agent will get their fees for the work they did and costs they incurred.
Setting a Minimum:
Part art, part science. And part pain threshold.
Your fixed costs are what they are. $x for legal. $y for accounting. More for marketing, technology, escrow setup and other expenses. If you are conducting a $50M Reg A and spend $100,000 or more in expenses as you get ready, then it’ll certainly have been worth it if you are able to raise that much. But if you’re just looking for $250,000 in capital via a 4(a)(6)/Title III crowdfunding campaign then you probably don’t want to spend that much in prep fees. So go into this with your eyes wide open. Getting ready WILL COST YOU MONEY. How much money you spend depends upon how much work you do yourself vs hire others to do for you.
Your variable costs are more easily quantifiable when considering how to set your investor-minimum. A lot of issuers, especially small crowdfunding issuers, wish/hope for really low minimum’s, like $25 per investor. Others, particularly real estate folks using 506(c), set the minimum significantly higher, often $25,000 or even $100,000 per investor. What factors into this decision?
Costs per transaction are not free.
- Money has to be moved and bank fees have to be paid;
- Funds have to be accounted for, which is a manual process (meaning a person has to review received funds, post to accounting ledgers, reconcile accounts);
- AML should be run on each investor;
- And, worst of all, exceptions have to be dealt with manually (e.g. you expected $25,000 but received $2,500 then someone has to spend time to track things down and resolve it, or you expected $5,000 but got $10,000 because the investor changed their mind and decided to invest more then someone has to help the investor re-sign a new subscription agreement and make changes to the accounting systsem);
- The folks who wrote the technology you use are going to get paid (website host, transaction engine, etc);
- If you’re using a broker-dealer or funding portal, they will get their %. And if using a marketing platform then they will get some sort of posting or transaction fee.
*** All of this adds up. And as much as people may love you and your business, they cannot work for free; the risk of your business, and your capital raising, is on you and you alone.
So, is it possible to get as little as $25 per investor? I guess it’s “possible” but in my mind it’s not practical. If you pay $10 or more in funds/accounting/AML/transaction/etc fees then is it worth it to you to net just $15 (or less) in capital? That’s a decision only you can make. But you really shouldn’t get upset about the costs, just because you want something and wish it were your way, doesn’t make it practical for your service providers.
Well is $250 the right number? What about $500? In my opinion, from a purely numbers perspective, it should be as high as you think the majority of your prospective investors will accept. This reduces the overall % effect on your raise. However we have seen some issuers throw the cost considerations to the wind, accepting the fees and the low-net they ultimately get on the smallest investors simply because they are passionate about getting as many investors as possible, building a base of folks who are emotionally and financially vested in the success of the business. So even though they may pay $20 in fees or more on a $100 investment, they don’t care and so spend whatever it takes on marketing, on technology and on services to drive as many investors as possible to their company.
Just don’t expect the bank, the escrow agent, the technology provider, the law firm, the marketing company, or others to eliminate or drop their fees to the point of unprofitability just because you want to net more from a lower per-investor amount that you’d like to set. It’s neither realistic nor fair to those who make a business of helping companies like yours with their technology-driven capital raises. Everyone wishes you the best of success, both with your capital raise and with your business, but they also expect you to be realistic about, and accept, the costs of doing business.