By Jason Paltrowitz, Executive Vice President at OTC Markets Group
Reposted with permission
General solicitation, crowdfunding, and testing the waters have fundamentally changed the public offering process. Raising capital online is emerging as an exciting, innovative new way for companies to access capital directly from investors. While technology and the internet have transformed the way we shop and access goods and services over the past two decades, it’s only in recent months that companies are able to market themselves and solicit interest on the web when selling their stock.
Leading the charge, a new class of financial intermediaries has emerged, aimed at leveraging the modernized securities regulations and disrupting the existing framework of how capital is raised in the U.S. Online financing portals (think Kickstarter and Indiegogo for stock equity) are becoming ubiquitous and popular in search engine results when seeking information on Reg. A and equity crowdfunding. However, given the novelty and minimal track records of some of these upstarts, it may be hard to assess which option best fits your needs.
Know What You’re Buying
It’s important to bear in mind that the terms portal, platform and market are not well-defined by regulators. This means a website can call itself a “financing platform,” but without the proper FINRA registration and broker-dealer licenses, it can do little to facilitate capital raising. When offering securities, an issuer is required to register those securities with the SEC or rely on one of the available exemptions, such as Regulation D, Regulation A or Regulation Crowdfunding. A third-party service provider helping the issuer sell securities must be a registered broker-dealer, and along with the issuer, take reasonable steps to verify whether investors are eligible purchasers under the applicable exemption.
Next, review what deals they’ve been involved in and how successful they’ve been in working with companies like yours. It’s important to look beyond how much money a platform has raised and look more closely at how they raised it. Were the deals strictly financed using the portal? Was there a partnership with a traditional broker/dealer? Was it all individuals? High net-worth angels? Institutional? There are so many types of structures and deal options that a company should think about what type of deal they want to do and the mix of investors they want to attract and then find a partner with that experience.
Online Capital Raising vs. Investment Banking
Fundraising via the internet can significantly reduce some of the costs issuers face when marketing and soliciting interest in their stock offering. Gone are the days of cold calls, closed-door meetings, confidential-only materials, and private roadshows. Today’s investors are savvier, self-directed, and prefer accessing information online and through social media. Companies with a large customer base, social media presence, or affinity groups should consider how to leverage these relationships to broaden their investor reach. After all, someone who wants to buy your product may very well be interested in becoming a shareholder. One of the unique benefits of Reg. A is that money used to market your securities can also be viewed as money spent marketing and advertising your product or service to your customers and community. Also, unlike in traditional IPOs, where the investment bank handles everything, Reg. A allows you to pick the best in breed partners that cover different facets of the raise. There are many companies that focus on the marketing component of the deal and that partner nicely with your investment bank/portal provider.
Companies in non-consumer-facing sectors such as healthcare, hardware and telecom, that require a significant amount of capital for development, may struggle to achieve their financing needs through crowdfunding alone. Investment banks and financial advisory firms play crucial roles in corporate financing as they provide the due diligence and valuation services that larger and more sophisticated investors require. The crowd is only so big, and for issuers that may need to fund themselves through both crowdfunding and traditional institutional outreach, you will need to find partners that understand how to work on a hybrid deal of this nature.
Lastly, its important to remember that this is all relatively new. There is no right way or tested way to be successful. This breeds creativity, innovation and open-mindedness. It also means that you, as the issuer, can take a greater role in leading the charge rather than simply taking a back seat to the “experts.”
For more discussion on Regulation A+, visit our blog.