In 2021, according to a report by the SEC, over $124B was raised through Reg D 506(c). This may sound like a goldmine to issuers looking for capital, however, when you consider that the median total raise was $850K - you realize it’s not quite that simple.
In this issue of Capital Raising Online, we break down how to think about marketing a Reg D 506(c). And as usual, we will start with some definitions.
The Reg D 506(c)
While there are a lot of similarities between a Reg A+ and a Reg CF offering, a Reg D 506(c) offering has some important differences, even though it is still considered an “equity crowdfunding exemption” that allows issuers to market their deal broadly.
There are two key benefits to a Reg D 506(c):
- The filing requirements are minimal, where only a Form D is required to be filed, which can generally be completed in a matter of hours after the first capital is raised;
- There is no requirement to have two years of audited financials;
The above two points greatly reduce both the costs and time required to launch the offering compared to a Reg A+ or Reg CF.
However, there are two critical drawbacks, namely:
- Issuers can only accept investments from verified accredited investors, which ultimately equates to only ~10% of the general US population. For reference, accredited investors are generally individuals who have $1M in liquid assets or made $200K in income for the last two years (or $300K as a household).
- Issuers must take reasonable steps to verify that the investor is accredited. This can be by reviewing tax documents or obtaining an attestation letter from a CPA, lawyer, financial advisor, or registered broker-dealer.
This second point can become a major friction point in the process. Accredited investors are typically used to being able to self-attest in private placement deals that they are in fact accredited, and upon seeing the extra effort required, may decide to pass on the investment opportunity.
This is where the choice of platform can be critical. At Issuance we developed a novel process where, through our portal, investors can enter the email of their CPA, lawyer, or financial advisor to immediately send them an attestation request. From there, the designated individual can “Click-to-Attest” similar to how they would complete a DocuSign. Once signed, the accreditation verification team can ensure everything is valid and the investment can be completed.
So while issuers are allowed to broadly market their Reg D 506(c) offering to the investing public, the actual pool of people that could reasonably invest is much smaller, and the process more complex. This pool of investors is also typically more discerning, with stronger backgrounds in finance, accounting, and business as a whole, and thereby have different investment criteria.
Let’s dive into those differences and how to accommodate them.
Communication Is The Key
As with any capital raise, communication is critical. Issers need to help investors learn about the story, feel like the business is moving forward, and ultimately build the necessary trust to earn an investment.
There are a few key considerations that issuers should make when it comes to communicating with accredited investors.
Method of Communication
Accredited investors are almost certainly used to investing in mature, public companies that regularly issue updates, typically in the form of press releases.
Issuers should consider utilizing this form of update as it serves a number of purposes:
- It demonstrates an issuer has an understanding of how to communicate to investors on a mature level - something that would be required for any future go-public event;
- It broadly disseminates news “across the wire” where investors who do research can find past updates from the newswire provider or anywhere the release is syndicated online;
- It can be added to the issuer's website or landing page to serve as a source of information, as well as for SEO purposes;
- It generally demonstrates progress in the business. Too often issuers create static landing pages that demonstrate zero progress in the business for months. Investors want to invest in businesses that are building momentum.
Beyond press releases, another important strategy is adding a personal touch. Remember, investors are usually only learning about the deal for the first time. By hosting webinars or making 1-1 calls to high-value prospects (or having a call center for investors), issuers can more rapidly move investors down the funnel.
What is Communicated
Accredited investors are used to seeing historical financials as well as detailed pro formas (financial models). Remember that with a Reg D 506(c) there is no Offering Circular or Form C that contains 2 years of audited financials and other important disclosures.
Issuers need to think through how to properly communicate the financial strength of their company and overall business model. This can take the form of a virtual deal room, or presentations (webinars) to groups of investors (think a quarterly conference call) where they can share their past performance and outlook on their business.
Issuers should always consult legal counsel and include required disclaimers before disclosing any forward-looking information. But ultimately, if an issuer feels that it is too risky to share financial projections with accredited investors due to business uncertainty - they should be asking themselves how an investor could possibly be comfortable investing in the business or management team.
Accredited investors, although more discerning, are also likely to write bigger checks. It often wouldn’t be worth their time to invest $5K or less. This means that every lead is of much higher value compared to a Reg A+ of Reg CF investor lead.
As such, to maximize capital raised, and especially to maximize the efficiency of any marketing efforts, every lead needs to be properly nurtured. From press releases to phone calls, every effort should be made to close on every lead that is generated - and that is why communication is the key.
If a tree falls in the forest and no one is around to hear it…
Assuming an issuer has the right messaging and an exceptional communications strategy if their reach is small, their raise will be limited. This is where marketing comes in - and there are a lot of options to consider.
Broker-Dealers
Unlike a Reg A or a Reg CF, issuers do not need to have a Broker-Dealer or Funding Portal to run a Reg D 506(c). However, if an issuer can engage a Broker-Dealer with a network of investors, this could be a quick and relatively affordable route to raise capital. Typically Broker-Dealers charge fees in the range of 5-7% (cash) on dollars raised, and may include an equity/warrant component as well.
One of the perks of Broker-Dealers is that they are only paid on a success basis (apart from potential one-time upfront "Due Diligence" fees). This means their incentives are generally aligned with the issuer’s capital-raising goals.
The drawback is that brokers operate on a network basis, where they bring deals to their networks of investors. This means they will be more discerning as they want to be confident their network will make money on the deal, so they continue to invest in the deals the broker brings them.
While it's not a guarantee that an issuer will be able to find a Broker-Dealer that wants to support a raise, if they do, it’s worth engaging them. The support of the right broker can immediately increase credibility with investors through a form of third-party validation.
Newsletters
Not dissimilar to a broker network, there are newsletter groups that have a following of investors who look to them for recommendations. This can get a deal in front of a large group of investors, rapidly, and at a fixed cost (or potentially zero cost), and again these newsletters can provide another similar form of third-party validation.
Whether paid or earned, a newsletter marketing a deal can be effective means of filling the investor funnel. However, issuers need to understand that paid newsletters are likely to be less effective than earned newsletters. They also should be mindful of the “accreditation” level of that audience. It can be very resource inefficient to have to sift through hundreds or even thousands of unaccredited investors who won’t be able to actually invest.
Direct Outreach
This is the equivalent of a good old fashion cold call. With platforms like LinkedIn and the various “LinkedIn Marketing” companies that exist, it’s possible to target high-net-worth investors, angels, family offices, brokers, etc.
This typically needs to be managed by a third party as the volume of outbound that needs to be sent to get meetings set up is high. But if a founder or CEO can have 15-20 1-on-1 meetings with qualified, interested investors, they should be able to convert those meetings into meaningful investment.
Paid Marketing
Paid marketing can be a challenge with Reg D 506(c) campaigns. As we noted above, only ~10% of the US population could be classified as accredited.
It would be highly inefficient - from both a marketing spend and time perspective - to broadly market via paid channels (Google, Meta, Native Ads, etc.). This means any paid advertising efforts need to be hyper-targeted to high net-worth investors to be effective. This typically requires proprietary data sets that have a high degree of “accreditation” confidence or are known as “Reg D” investors.
Social Media
Much like there are newsletter groups or broker networks, there are also pockets of investors and investing groups across the various social media platforms. This is especially true for Twitter, where there is a very large “FinTwit” community that could serve as a massive source of capital.
While targeting these groups can take a number of different forms, the only surefire way is to engage directly with these people. That is the beauty of Twitter - individuals can generally engage with anyone else (and vice versa).
It’s a lot of hard work, and an issuer will certainly need to be able to defend their story, but if done right, it can be a low-cost means of generating investor interest.
Earned Media
If an issuer has a unique story that is newsworthy, obtaining earned media can be an effective way of generating investor interest. This again serves as a form of third-party validation and can be extremely cost-effective. However, not every company is doing something “on trend” that the media will want to cover.
It’s important to note that not every marketing channel will be right for every issuer. It’s important to think critically about whether something is likely to work. If a marketing channel could be effective, or even if there is uncertainty, it is worth trialing before buying.
The Missing Piece
True with any capital raise, but especially so with equity crowdfunding, it’s important to create a why now incentive, especially with smart, discerning investors.
Ask yourself: why would they invest today and risk the business (or the broader market as a whole) facing an existential crisis when they know they can invest in 5 months when the campaign closes at the exact same valuation?
From a global pandemic to negative regulatory changes to AI disruption to losing a major competitive edge - these are all risks any discerning investor considers.
This means issuers need to carefully consider how to create a proper why now incentive. From doing tiered closings on the back of achieving major milestones to adding perks for the first X investors to invest Y, finding ways to encourage investment today can be critical to gaining early traction. And of course, these initial inflows can be reinvested into marketing to continue building momentum.
