I’ve seen hundreds of deals go through our systems, many successful and some unsuccessful. What’s the difference between the two? What are the key to success? The deals that don’t get funded are grouped into a few easy buckets…
1. Terms: the securities offered just aren’t interesting to investors. I see this a LOT in the market. And am afraid it’ll continue in Title III. Issuers offer equity when, in my opinion, no investor wants equity.
► Start-ups – professional angels typically take convertible debt, and wait until the company gains traction and a venture or institutional investor comes in with a large round and sets the valuation. And for businesses that are never likely to get venture or institutional investment? Debt or revenue-share securities with a defined exit strategy. Period.
e.g. real estate people have gotten this right and are using 506(c) to great effect. While the securities may often be “equity”, they are shares in SPV’s which provide minimum stated returns, have add’l upside via distributions from rents or a sale of property, and have articulated exit strategies (e.g. a sale or refinancing or the property). Reg A and Title III issuers should take note of this.
► Small-medium businesses – are rarely, if ever, going to go public or get purchased for an interesting multiple, thus debt is the security of choice, not equity. Or some form of revenue-sharing securities with a defined exit strategy.
► Larger businesses – if an IPO is possible, then perhaps equity is an interesting “swing for the fences” option to investors. Setting the price/valuation is tricky though.
Reg A: Equity can work when the issuer has a huge crowd of enthusiastic supporters who are buying out of passion and a belief in the company (e.g. Elio). But even then, I think that issuers ought to consider alternative and more interesting securities offerings (debt, rev-share, etc).
4(a)(6): Personally, I don’t believe that equity is the right security for almost any Title III offering. Now, that said, maybe retail investors will feel otherwise and leap at the chance to buy equity in a pizza parlor, dentist office, machine shop, warehousing firm, or startup technology company. We shall soon see!
2. Offering Minimum: set too high. It’s surprisingly common to see people over-estimate investor interest and carelessly set the minimum way too high, thus sending money back to investors when they could have kept it if they’d planned a little better. Of course, as req’d by rules, the offering minimum does need to be an amount that they issuer needs to execute on their plan, so the minimum should be set with that in mind.
3. Marketing: lack thereof. Incredibly, some people still think that if they simply “post it on a portal” the world will beat a path to their door. They spend no time and allocate no money on marketing their offering and finding investors. THIS IS THE BIGGEST PROBLEM. Sure, brokers, platforms, and portals may work hard to help find investors, but even they need tools and assistance from the issuer. A great video, PR support, well designed email campaigns, and more are all needed…and all require planning and cost money.
4. No Funds – it costs money to raise money. “I have a great idea/company, people should want to fund me!” seems to be too common a thought process. Blunt truth: if you have no funds available to assist with your crowdfunding campaign then it’s probably best that you don’t even try. You need money for lawyers, for accountants, for marketing, for assistance with your offering terms, for more marketing, for due diligence costs, for escrow fees, for offering transaction fees, for regulatory filing fees, and for more marketing. You may have the coolest thing in the world, but nobody works for free and you’ll only get what you pay for in terms of services and quality.
The keys are basic: set terms appropriate for your prospective investors, keep the offering minimum as low as possible, spend serious time on your marketing plans, and allocate a budget to get this done. Do this right and you’ll give yourself the best chance at getting funded. Miss any of these and you’ll likely see your time, money and effort wasted as the investors you did manage to get are refunded from escrow.
These materials are my personal opinions and for informational purposes only and not for the purpose of providing legal or tax advice. 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.