How to market a Reg CF

In the intricate world of capital raising, Regulation Crowdfunding (Reg CF) is the new kid on the block. Reg CF allows businesses to raise up to $5 million annually from a diverse range of investors through a FINRA registered Funding Portal or Broker-Dealer.

Having recently eclipsed $2 billion in capital raised, the Reg CF market is compounding at a staggering rate. In this issue of Capital Raising Online, we break down how to think about marketing a Reg CF offering. But first, we will start with choosing the right regulatory route.

Confirming it's the right route for your campaign

Choosing the right fundraising pathway is akin to selecting the best route on a highway; some paths are more straightforward than others.?

Reg CF offers a streamlined avenue, welcoming both accredited and non-accredited investors, and allowing for fundraising up to $5 million annually. Not only does Reg CF permit general advertising, but it also has simpler audit and legal requirements compared to other options like Reg A+.

In the context of Reg CF, industry pundits broadly concur that several meaningful interactions are often needed to transition an investment lead into a confirmed investor. These interactions can range from "Testing the Waters" (TTW) emails to social media updates, webinars hosted by the CEO, or even one-on-one phone calls.

This practice received a boost in March 2021 when the SEC approved that TTW is permitted before filing a Form C (Offering Statement) with the SEC. TTW allows startups to gauge investor interest early on, helping you estimate potential investments before incurring any expenses.?

Your choice of fundraising regulation depends on multiple variables, including your target investor base, capital needs, and budget. In the upcoming sections, we'll dive into the nuts and bolts of demystifying a Reg CF offering, building a successful Reg CF campaign, and guiding you through the labyrinth of communication regulations to ensure you're compliant every step of the way.

Your highway to crowdfunding success...

Reg CF allows companies to access up to $5M in capital annually from both accredited and non-accredited investors, but issuers must be?based in the U.S. This offering type not only offers a viable channel for raising growth capital but also opens doors for community-driven fundraising and establishing a loyal investor base.

Before launching a Reg CF offering, issuers are required to file a Form C with the SEC. This comprehensive disclosure document, drafted in collaboration with securities lawyers, typically encompasses the overall business model, company history, and its financial standing. The form aims to be transparent to potential investors and usually takes a few weeks to draft, review, and file.

In parallel to filing a Form C, issuers will need to engage an SEC-registered Funding Portal or Broker-Dealer to host the offering. Funding Portals are required to conduct “bad actor” background checks on officers, directors, and 20% equity holders of issuers raising capital and are also subject to anti-fraud and anti-manipulation provisions.?

Issuers must provide comprehensive information about their business plan, operations, and the intended use of proceeds. Despite being an early-stage company, companies must offer full disclosure, whether they have a short history or fully developed operations. The company is legally obliged to file annual information, including financial statements, regarding its business. In addition, the bedrock of a Reg CF raise is a tiered system of financial disclosure, which must be followed rigorously to file Form C.

Tiered Financial Disclosure

The level of financial disclosure required varies based on the amount raised in the offering:

• $124,000 or less – financial statements and specific line items from income tax returns, both of which are certified by the principal executive officer of the company unless the company has certified or audited financial statements prepared by an independent public account available.
• $124,000+ to $618,000 – financial statements reviewed by an independent public accountant and the accountant’s review report, unless audited financials are available.
• $618,000+ to $1.235M – if it is the company's first time crowdfunding and audited financial statements are not available, then financial statements are reviewed by an independent public accountant and the accountant’s review report.
• More than $1.235M (up to the max of $5M) – financial statements audited by an independent public accountant and the accountant’s audit report.

Diving deeper on a Reg CF...

There are some key benefits to a Reg CF offering:

• Expansive Investor Pool: Reg CF allows fundraising from a broad spectrum of accredited and non-accredited investors.
• Cost-Efficiency: The associated legal and compliance expenses are often less burdensome compared to other forms of equity crowdfunding.
• Speed to Launch: Unlike the Reg A+ exemption, the regulatory timelines for a Reg CF are comparatively short, allowing you to access growth capital faster.?

But there are also a number of critical features and considerations that need to be understood, which include:

Investment Caps:?The amount each investor can invest varies based on their accreditation status and income, namely:

• Under Reg CF, if you are an accredited investor,? there are no limits on how much you can invest.?
• If you are a non-accredited investor, then the limitation on how much you can invest depends on your net worth and annual income.
• If either your annual income or your net worth is less than $124,000, then during any 12-month period, you can invest up to the greater of either $2,500 or 5% of the greater of your annual income or net worth.?
• If both your annual income and your net worth are equal to or more than $124,000, then during any 12-month period, you can invest up to 10% of your annual income or net worth, whichever is greater, but not to exceed $124,000.? Investors can determine their limits individually or, if married using their combined incomes.

Usage and Reporting: Issuers must be transparent about how the raised capital will be allocated and are also required to file annual reports to the SEC and make them available on the Issuer's website for its investors.

Discussion Boards: Forums where questions and responses are posted for all members to see shared research, discussions, and sometimes free professional advice.

Ability to close on funds (notice period): Investors can cancel their investment commitment up to 48 hours before the deadline identified in the issuer's offering materials. The intermediary will notify investors of the target offering amount. If the issuer reaches the target amount before the deadline, it may close the offering early by providing at least five days' notice of the new deadline, unless there is a material change. If an investor does not cancel their commitment within the specified time, funds will be released to the issuer, and they'll receive securities in exchange for their investment.

Restrictions on Resale: Securities purchased in a crowdfunding transaction generally cannot be resold for one year, unless the securities are transferred to the issuer of the securities, to an “accredited investor, as part of an offering registered with the Commission; or to a member of the family of the purchaser or the equivalent.”

Key Advertising Considerations:?There are two types of advertising communications, each with their own rules:

• Tombstone:?A tombstone is a brief and limited record of factual information about the offering.
• Non-terms:?Communication materials that omit any mention of terms or offering details.

An issuer may not, directly or indirectly, advertise the terms of an offering (i.e. a Tombstone communication), unless they meet the following requirements:?

A notice may advertise any of the terms of an issuer's offering if it directs investors to the intermediary's platform and includes no more than the following information:?

• A statement that the issuer is conducting an offering;?
• The name of the intermediary through which the offering is being conducted, and information (including a link in any written communications) directing the potential investor to the intermediary's platform;?
• The terms of the offering; and?
• Factual information about the legal identity and business location of the issuer, limited to the name of the issuer of the security, the address, phone number, and Web site of the issuer, the email address of a representative of the issuer, and a brief description of the business of the issuer.

As with any online capital raise, it is vital for interested issuers to consult securities lawyers and accountants to comprehensively understand the benefits, limitations, and compliance requirements before launching their campaigns.

Building the Freeway: How to Pave the Way for Your Reg CF Campaign

For entrepreneurs navigating the world of Reg CF, understanding the "Investor Experience" is paramount for a successful campaign. Think of this as the counterpart to the marketing "funnel." The Investor Experience begins when someone first indicates interest in your offering—let's call them an "investment lead"—and extends through to a finalized investment.

For a successful Reg CF raise, it is crucial to maintain streamlined processes and cohesive communication:

• Efficiency is Key: Just as in e-commerce, where platforms like Amazon have perfected the "one-click checkout," the investment process should be frictionless. Hence the introduction of tools like Issuance Express, designed to complete an investment with ease. Issuance Express accommodates a wide array of payment options, including Apple Pay, Google Pay, and standard methods, enabling you to meet investors where they are—online.

• Consistent and Effective Communication: You're not just selling an investment; you're selling the promise and potential of your business. Regular updates, ideally via your own email CRM are vital. Whether it's drip campaigns, CEO interviews, or weekly updates, communication helps build the necessary trust and excitement around your offering.

The Nuts and Bolts: Execution is Everything

Your investor funnel, much like your marketing funnel, needs two things: quality leads and continuous optimization. Initial TTW efforts, combined with regular advertising, help populate the funnel. But unlike traditional advertising, these efforts must comply with SEC regulations—making each communication not just a touchpoint, but a legal exhibit, therefore enhancing the need for meticulous record-keeping.

Summing It Up: Planning, Compliance, and Adaptation

The Investor Experience is not static; it requires regular adjustments based on performance metrics and lead behavior. Moreover, a campaign's timing needs to be well-planned. Most successful campaigns last 2-3 months, with some platforms (including Issuance Express) allowing for a "rolling close" that lets you access funds before the campaign officially ends.

In summary, the pathway to a successful Reg CF campaign hinges on understanding and optimizing the Investor Experience. From the initial TTW efforts to regular, compelling communication and a streamlined investment process, every touchpoint is an opportunity for compliance, engagement, and ultimately, investment.

As always, consulting legal experts for SEC compliance is non-negotiable. A well-executed campaign that adheres to legal constraints not only raises capital efficiently but also builds a long-term relationship with your investor community.?

Driving Traffic: Navigating Communication Regulations

When diving into the marketing sphere for your Reg CF campaign, the SEC mandates two primary types of communications: "Non-terms" and "Tombstone." Non-term communications allow you to discuss the offering without divulging specifics like price or volume. On the other hand, Tombstone communications focus purely on factual, essential details like the offering terms and where it's hosted.

Digital Strategies

As digital platforms provide a versatile arena for promotions, consider creating a separate landing page featuring Tombstone information only. Social media posts are effective but need to fall under either non-terms or tombstone categories. Be prudent when linking to external content; if that content violates SEC regulations, your initial post would, too.

Email and Media Communications

Both email campaigns and press releases are powerful tools, but must adhere to non-terms or tombstone categories. In particular, press releases should not contain any language explicitly mentioning offering terms. Multimedia elements like videos and images also fall under these guidelines.

Event Dynamics

When participating in demo days or industry conferences, sticking strictly to tombstone information might leave your audience wanting more, thereby undermining the event. "Ask Me Anything" (AMA) sessions that delve into offering terms are permissible only on the crowdfunding platform hosting your campaign.

Personal Communication Considerations

While discussions with friends about the offering are allowed, it is illegal to incentivize them to promote it. For personal queries received via email, direct them to your crowdfunding platform to ensure all potential investors have equal access to information.

Mastering Lead Generation

Lead generation is pivotal. Merely driving traffic to your landing page isn't enough; you must capture potential investor details, typically through email. This starts with having proper lead forms on your landing page and nurturing those leads with informative series that build understanding and trust.

Exploring Social Media Pockets

Social media, particularly Twitter’s “FinTwit” community, could be a goldmine for investor engagement. One viral post can translate into a significant investment. However, your story must be robust and defensible.

The Power of Earned Media & Press Interaction Risks

Newsworthy stories can earn valuable third-party validation through media coverage, offering a cost-effective channel for increasing visibility and credibility. However, this interaction with the press isn't without its risks. Journalists may include information that renders an interview non-compliant with regulations, putting the company in a precarious position. While companies are generally not liable for articles written without their input, sharing or linking to such pieces can expose them to liability. Thus, while earned media can provide significant benefits, it is crucial to navigate press interactions carefully.

Newsletters

Paid or earned, newsletters place your deal in front of a broad audience, often offering a level of third-party validation. However, earned newsletters usually perform better compared to paid ones.

Direct Outreach for Bigger Fish

Reaching out to larger investors like VC funds or family offices can dramatically boost your raise. This is where platforms like LinkedIn come in handy for targeting high-net-worth investors, although it typically requires third-party management due to the volume of outreach needed.

Additional Regulatory Cautions

Exercise caution with 'side-by-side' communications. If you tweet a non-terms post followed by a tombstone one, understand that the SEC has yet to provide clear guidance on this. And remember, emojis are as legally binding as text, so ensure all your communications are compliant and honest.

By understanding these rules and strategies, you can optimize your Reg CF campaign's marketing efforts within legal bounds, ensuring not just compliance but also effectiveness in reaching and converting potential investors.?

The final piece of the puzzle in executing a successful Reg CF raise is creating the “Why Now” incentive for an investor.

The “Why Now" Incentive: Creating Immediate Appeal in Your Reg CF Campaign

One invaluable piece of advice we emphasized in our recent newsletters on marketing a Reg D 506(c) and Reg A+ offerings, is absolutely crucial for a successful Reg CF campaign: the importance of creating a compelling "why now" rationale. This strategy is critical, especially for sophisticated, discerning investors who are pondering the timing of their investment.

Consider the following: What would prompt an investor to contribute to your venture today, with the looming uncertainties of the business environment or broader market risks, rather than waiting until the campaign's final months when the valuation remains the same??

Savvy investors are likely considering a multitude of variables, from the ongoing global health crises and regulatory shifts to technological disruptions and competitive landscape changes. As an issuer, it's your job to craft a strong incentive for immediate investment.?

Several strategies can help you achieve this such as:

• Offering tiered investment options that are contingent upon reaching certain milestones; and
• Providing exclusive perks to the first set of investors who meet a certain investment threshold.

When running a Reg CF campaign, offering perks can encourage investors to contribute more. To conserve funds for business operations and meet investor expectations, consider offering experiences (especially “limited time” or “early investor” perks) rather than physical items. Unlike donation-based platforms, Reg CF provides a financial return, making perks a bonus for different investment levels.

Perk Examples:?

• Experience-Based Perks: Invite to Grand Opening, Private Tour of HQ
• Sentimental Perks: Name on founders wall at HQ, or founders page on the website?
• “Swag” Perks: Branded Hats, T-shirts, etc
• Discount Perks: Free items, discounted service?

Early investment inflows not only build crucial momentum but also provide funds that can be reallocated into further marketing efforts to keep that momentum going.

So, as you venture into the world of Reg CF, be sure to prioritize the "why now" factor in your campaign planning. It could very well be the pivotal element that kickstarts your fundraising journey and sets you on a path to success.

More information regarding the Issuance Express Funding Portal can be found here regarding disclosures, and here regarding other informational content.?

Capital Raising Online: Equity crowdfunding (regulation financings) is the new frontier of capital raising and they are digital-first and democratizing early-stage investing for the masses. Every month we discuss the ever-changing regulation financing industry as it continues to expand. From important developments to critical considerations and insights, we provide an experienced perspective on the industry.?

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