What an issuer must know and have in place to start a private company crowdfunding raise

Crowdfunding is a good option for high growth private companies – particularly start-ups and those who want to remain private while aiming for rapid scalability.

However, before launching a crowdfunding raise, private company issuers must consider whether this is the correct route for their company. Among the many points, these are key:

  1. Are you financially committed to your capital raise?

As an issuer raising capital, you face upfront costs such as filing a Form C with the Securities & Exchange Commission (SEC), third-party escrow agents, plus ongoing costs such as:

  • business financial reviews
  • audits
  • transaction fees
  • broker dealer fees

Plus an all-important budget for an aggressive PR, advertising, and marketing drive.

So, an issuer (private company raising capital) needs strong financial commitment and security to sustain a crowdfunding investment campaign, reach potential investors, and cover legal costs.

Going into this ‘undercooked’ could hugely damage your business and equity crowdfunding investment offering.

  1. Are you willing to cater for and build your own investment community of advocates?

Along with capital, a successful private company crowdfunding campaign will gather a crowd of investors expecting a return on investment and clear communication channels and updates, so they can stay informed on your company’s progress and be your advocates in the marketplace, thereby attracting more investors and business.

Once you’ve considered whether you can deliver a strong return on investment to appeal to investors, consider whether you can and want to cater for an ever-growing, engaged community of advocates.

  1. Have you considered all the relevant funding alternatives to increase your access to the right capital?

Following the JOBS Act going live in 2016 crowdfunding is one of the most popular ways for exciting private companies to seek growth, but it’s not a one-size-fits-all process. Much larger private companies may want to consider going public via an Initial Public Offering IPO (IPO) to raise funds.

And start-ups and private companies can use other methods of gaining capital, such as a bank loan or venture capital.

So, consider all these alternatives or a mix before deciding if this is the right time for your company to start a raise. Or does your company perhaps need more time to solidify itself before a crowdfunding launch?

If, after considering all the above, you still opt for a crowdfunding capital raise, there are six essentials you need in place from the beginning to the end of your offering:

  1. To fix the crowdfunding regulation you will file for

You must decide whether you want to raise up to $5 million via a Regulation CF or go straight to a Regulation A+ where you can raise up to $75 million a year.

Discuss your strategy here with a broker dealer such as Rialto Markets or perhaps go straight to a Reg D institutional round, for example. It’s essential to get some upfront advice on the right combination for your private company’s current and future capital requirements.

  1. Consider how and where you will host your private company crowdfunding investment offering

A private company crowdfunding issuer can host the investment offering on its own website or use one of many crowdfunding platforms to utilise as a host.

Crowdfunding platforms have their own investment audiences you can access, but you will be competing for attention and investments against many other private issuers on the same platform.

You may also lose control of your investor audience data/relations, with investor IP usually sitting with the crowdfunding platform, so your marketing efforts can potentially help build the crowdfunding platform’s brand and investment community rather than your own.

Alternatively, having your investment offering hosted on your website means you control the messaging and focus. Potentially, you can also persuade investors to reinvest and follow their money into later or even existing rounds. More and more private company issuers are taking this route and Rialto Markets can help you  make the right decision for your business.

  • Appointing a securities lawyer with specific knowledge within private securities, private company crowdfunding and the JOBS Act and/or institutional investment.

A good securities lawyer who fully understands the private security compliance landscape will make sure your entire offering is fully compliant, giving you a level of indemnity, plus ensuring all your promotion language and financials align with SEC and FINRA best practice, all filings to the SEC and FINRA are correct and protect you in the event of due diligence mistakes or misjudgements.

Private company issuers cannot take this lightly. Regulators will penalise companies who consistently don’t adhere to their processes. The initial and ongoing costs of a securities lawyer will provide you with an essential layer of protection throughout your raise(s), potentially insuring against further SEC and FINRA scrutiny and the high burden and additional costs that come with non-compliance.

Hire a private market specialist broker dealer to advise you where to host your private company crowdfunding investment offering

A regulated broker dealer will enable you to sell shares in your private security investment offering by executing the investors’ purchase on your behalf. Without a broker dealer in place, the buying and selling of shares within your company cannot occur.

You need an SEC and FINRA regulated broker dealer with expertise in private security trading, crowdfunding, and institutional investment that can operate across all 50 US states – as Rialto Markets does. This ensures you have a secure, reliable, and fully regulated process for selling shares, protecting you and your investment community.

Note there are a handful of states such as Florida, Texas and Washington that require a broker dealer when offering shares to the public.

Recruit a specialist marketing and communications firm that truly understands private company crowdfunding

A marketing and communications firm that knows the private equity crowdfunding space can reach high numbers of potential investors, warming them up before converting them into actual investors and your brand advocates, while helping you with the messaging and supporting you with compliance alongside a securities lawyer.

Of course, you can manage or operate your private company crowdfunding campaign marketing in-house, but it’s not advisable. Without a specialist marketing and communication agency’s investor outreach and expertise, you will limit your investment offering’s potential, miss out on many investors, and possibly even sink your investment offering.

Make great efforts to attract committed, early investors ready to pump prime your investment offering from day one

As with other forms of investment, you need early lead investors to ‘pump prime’ and encourage a crowd to follow and build momentum. These early investors will already know your business or leadership team and understand the mission.

This early priming of the pump is also needed to support the ongoing marketing, advertising and other communications, giving people the understanding and confidence to buy into your company’s mission, rather than just sit on the fence and wait for others. A good example here is Rialto Markets’ highly successful $5 million Regulation CF raise for Atlis Motor Vehicles last year, which secured $2 million within 24 hours.

And finally, make sure you do your research and talk to people who have walked this walk, to ensure that you’re following this path for the right reasons for your business, and with your eyes wide open to what it takes to be successful.

IMPORTANT NOTICE

Investors should recognise and accept the risks associated with investing.

Certain investments may require you to keep your holding for periods of many years with limited or no ability to resell unless there is a strongly regulated secondary market.

You may also have limited access to periodic reporting, see your holdings decrease and increase in value, or even lose your entire investment.

Investors should decide for themselves whether to make any investment, basing this on their own independent evaluation after consulting with financial, tax and investment advisors.

The Knowledge Hub does not constitute financial advice whatsoever, but rather provides basic general industry information.

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