Who Are Equity Crowdfunding Investors?

My AI image generator made this “photorealistic” illustration of the title of this article. DO NOT ZOOM IN, especially to the stroller. I warned you!

My AI image generator made this “photorealistic” illustration of the title of this article. DO NOT ZOOM IN, especially to the stroller. I warned you!

Everyone is potentially an equity crowdfunding investor. That’s the beauty of the laws that made offerings under Regulation A (Reg A or Reg A+, it’s all the same) and Regulation Crowdfunding (Reg CF) legal.  You no longer have to go to rich people or those who are well-connected or to banks or lending sources to raise capital or to grow your company.

Anyone can invest.

Okay, technically there are some people who can’t invest. For example Kim Jung Un. He lives in North Korea and nobody in North Korea can invest because of sanctions and OFAC and “reasons.” But hey, you get the point.

That customer of yours who comes in every week to buy your product? He can invest.

The banker who helps with your accounts? She can invest.

That celebrity who happened to find out about your company and now wears your product? She can invest.

BlackRock? They can invest.

Your hard working loading dock workers that keep deliveries coming in smoothly? They can invest.

Your neighbor’s grandmother? She can invest.

 Keep in mind, with equity crowdfunding under Reg A or Reg CF, your company is responsible for finding your investors. There is no database of “Reg A investors” or “Reg CF investors” sitting around with their checkbooks out waiting to write a check. Then again, does anyone actually have a checkbook anymore?

 When you go on a funding portal to hold a Reg CF offering, a majority of their “1,000,000 investors” in all likelihood only invested in one deal – and that was because some company just like yours sent that investor to the funding portal to invest in their company. Most of those one time investors are not likely to even look at your offering.

 Let me repeat: your company is responsible for finding investors. Your company is responsible to drive traffic of potential investors to your online securities offering page whether it is on a funding portal, a broker-dealer website or on your own website.

 So who do you target? Who are the “investors” who will allow you to raise the capital your company needs to grow and prosper? I’m going to break down some groups to analyze, and bust a few myths along the way about who the best Reg A and Reg CF investors are.

 Let’s start with some broad categories:

 Institutional Investors

 Institutional investors are large companies or funds that typically pool a lot of other investors into one large basket and, because of their size and clout, account for a large percentage of public stock trading volume. Because of the large numbers involved, they can have a huge impact on individual stocks and the stock market as a whole. Examples of institutional investors are banks, insurance companies, mutual funds, hedge funds, and pension funds.

 Because institutional investors typically require immediately liquidity and often need to show a history of an ROI to justify the investment, you rarely see institutional investors playing in the Reg A or Reg CF market. That may change over time, but for now, I tell most of my early-stage and startup clients not to waste time chasing this category because it is very unlikely to be fruitful.

 Private Funds and Family Offices

 Private funds are pooled investment vehicles that are not required to be registered as an investment company under federal law. They are not publicly traded, but are typically run by professional fund managers. These may include hedge funds, private equity funds, and venture capital funds

Family offices are private companies that usually manage a very wealthy family's financial needs while assisting that family with sustaining and growing their wealth for generations.

 Private funds and family offices, in most cases, do not invest in early stage companies and startups because they typically have managers focused on low risk investments. While you occasionally find these groups investing in Reg A and Reg CF deals, it is usually because they have some ideological alignment or because they know someone at the company raising capital. Again, I tell most of my early-stage and startup clients not to waste time chasing this category unless they already have a connection to the private fund or family office, because the time put into trying to crack this market very likely will be better put to other use.

 Venture Capital and Private Equity

 Venture capital (VC) provides financial backing (and often much more such as expertise) to certain startups and small businesses in exchange for equity. Most VC firms raise money from investors and pool it to fund startups and early stage companies. While VC firms will invest in startups and small businesses, they typically want better terms than everyone else gets, and under Reg A and Reg CF all investors typically must be treated the same, so cutting a special deal to make a VC firm happy is not going to be in the cards.

Private equity (PE) is similar to VC in that a private equity firm buys stock in a private company that is not publicly traded to try to increase the company's value and then sell it for a profit. There is overlap between PE, VC and the funds discussed above. But the same issues I discussed above make most PE firms reluctant to invest in Reg A or Reg CF deals.

High Net Worth Individuals (“Angel Investors”)

High Net Worth (HNW) individuals, also known as “Angel investors,” are generally wealthy individuals investing their own money in startups or early-stage companies in exchange for equity or convertible debt. Angel investors often get involved in the early stages of a company's development, when more traditional financing options like bank loans are very limited. Angel investors are a huge part of the Reg A and Reg CF world, and are worth the effort to target as part of the equity crowdfunding marketing process.

“Retail Investors”

“Retail investor” is an investment banking term of art that basically refers to individual investors that are not investing hundreds of thousands or millions, but rather invest smaller amounts and usually only in publicly traded companies so there is liquidity. Retail investors usually invest smaller amounts of money infrequently, and they usually invest in their own funds. They often make their own investment decisions but rely on brokers to execute their trades.

Retail investors are a big target in the Reg A and Reg CF world, despite that they typically only invest in public companies.

Community or Passion Investors

The terms “community investor” or “passion investor” is not one you will ever hear on Wall Street. I use these terms, as do others, to refer to individuals who are not necessarily “retail investors” but will pull out their credit card and drop $100-$1000 in a company they love in a Reg A or Reg CF offering.

This group is the lifeblood of the online equity crowdfunding world of investors. 

Some of these folks have never made an investment before. Some will never make another investment again. But the classic example of one of these investors is someone who uses your company’s product, loves that product, tells their friends or social media followers about your product because of their passion, and then gets an invitation from your company to invest in a Reg CF or Reg A offering.

They are already passionate. They are already a part of your community. They are excited that they can take a small amount of money and be a part of your company and future success.

Tapping into this group of investors, if you have such a group, is the true magic of online equity crowdfunding. That community or passion investor will not only invest their own money, but they will help spread the word to others about the investment opportunity, and will help you sell even more of your products, now that they have a vested interest in the future of your business.

Now, let’s look at more specific categories of the investors your company needs to reach out to. Most of these fit into the Angel Investor, Retail Investor and Community or Passion Investor categories. The first four categories below will make or break your Reg A or reg CF offering. If you are able to also tap into the fifth and sixth categories, you have a great chance of success at raising the capital you need with equity crowdfund.

This is how I advise my clients to break down their equity crowdfunding marketing outreach plan.

1. Founders, Management and Directors’ Friends and Family

This is the first group to reach out to. By far, this is the lowest hanging fruit. You have been building a business, your friends and family have heard about it and have seen your successes. You should be proud to go to them and offer them the opportunity to be a part of what you are doing!

This goes for all of your founders, managers, directors and others who already have a vested interest in the company. If they are not willing to ask their friends and family to invest and grow with you, are they really that committed to your business?

2. Employees and Others Your Company Works With

This is often overlooked, but should not be.  It is the closest thing to the first category you will get. They work with you, they see what you are doing, why not give them a chance to invest in what you are doing together. Also, why not have them reach out to their friends and family also? I have seen companies raise hundreds of thousands just from the first two groups listed here.

3. Your Company’s Customers, Clients And Email Lists

This is the category equity crowdfunding was built for. If you have a large enough group of happy customers and clients and a big group of people who have opted in to your email marketing, this is an opportunity to raise all of the money you are looking for.  That person who loves your brand, buys it religiously, talks about it on social media? They may never have invested in anything before, but ask them to invest a few hundred dollars in the company they already love and get in at an early stage... this is the goldmine of Reg A and Reg CF.

4. Your Company’s Social Media Followers

This group is very similar to your customers, clients and email list, and there will be a lot of overlap with that group. People who affirmatively chose to follow your company are also a great source of potential investors. Typically, this group does not convert at the same high percentage as the category above because (a) they are generally not as passionate and (b) because of social media algorithms they may not see your posts about investing, but they are a valuable group to go after. The best part about social media followers investing is that they are very likely to amplify your message to their social media friends. Spreading the word outside of your sphere of influencer is important to every equity crowdfunding offering.

5. The General Public

Obviously, this is what most people think of as the “crowd” they are going after to invest. Why stick to thousands of rich people when you can choose from hundreds of millions of potential investors around the world!

The problem is...how do you get your message in front of hundreds of millions of people. With friends and family, customers and clients, and social media followers – you can reach a very targeted audience of warm to hot leads at virtually no cost. Reaching millions of people you do not know requires marketing, public relations, ad dollars, influencer outreach or other means that cost money. And it can cost a LOT of money. I have clients who are generating $3-$4 per $1 of digital ad/PR/paid outreach spend. I also have had clients who did not generate $1 for each $1 spent. Success depends on many factors – what is your business about, what is your messaging, who is running the ads, are you targeting the right people with ads, what is content of the ads, where they are placed, etc. It's fascinating data when you comb through it, and there really is an art to it as well as a science.  

But if you have to rely on this category of investors for success with Reg A or Reg CF, you are facing a lot of expense to raise the capital you need.

6. Funding Portal “Investor” Lists. While the online sites may tell you differently when they brag about their huge list of investors to get you to use their platform, the reality is you are building their investor list sending them your clients, customers, friends, family and social media followers, and you are paying them often 6-8% of the money you raise from people you sent to them that they will market to for every other company that hires them.  My experience has been that the funding portals may bring you 5-10% of the money your raise from their audience, but they will even show your offering to their audience until you have hit some benchmark from your own crowd – usually $50K-$100K.

Put simply, if you think you are going to raise $1M from a funding portal’s investor base and none of that is going to come from your own group of possible investors, you are in for a very unpleasant surprise in most cases.

7. Paid for investor lists. Not to insult people who market these “lists of investors” or “Lists of high net worth individuals” but, in my experience, every single client who has spent money on one of these lists (against my adamant recommendation to not waste their money) has raised very little or no money from them. I’ve never had a client even raise the cost of the list from the lists. Maybe there is a list that works out there, but in all my years of helping clients raise capital, I have not seen one yet that was worth paying for.

There you go. Understanding who Reg CF and Reg A investors are is the first step to doing equity crowdfunding right. Learning who to reach out to, when to reach out and how to reach out is part of the magic of Reg A and Reg CF.  These laws are incredible tools when used correctly, but they are not magic wands that make investors appear like a rabbit out of a magician’s hat. Strategic targeting of the right possible investor at the right time is the key to initial success, and continuing to leverage your strategy is the secret to overall equity crowdfunding success!

#regulationA #RegA #RegCF #regulationcrowdfunding #equitycrowdfunding  #crowdfunding #RegAPlus #funding #capitalraise #fintech #JOBSAct #capitalraise #smallbusiness #smallbusinesstips #securities #securitieslaw #equity #StartupLife #startups #marketing #securitiesfraud #marketingsecurities #generalsolicitation #506(c) #regD #regulationD

This article is not and should not be considered legal advice. Yes, I am a securities lawyer but no, you did not hire me to provide you with legal advice. In all cases, consult with your own lawyer as every legal situation is unique and do not rely on my educational and informative article as legal advice.

Marketing Securities Online Is Different From Marketing Everything Else: Three Basic Rules To Follow To Avoid Trouble

I’m not sure that my AI image generator could possibly make a creepier person than this guy

Since the advent of the intertubes, we live in a world of constantly being marketed to. Back in the “good old days” it used to just be TV and radio commercials, junk mail in the mailbox and ads in newspapers and magazines. You could easily avoid or ignore them. You could change the station on the radio when commercials ran. You could fast forward past taped TV ads in shows, or switch channels while watching live. Newspapers had ads, but your eyes knew to ignore them. But today, wherever you are online, it’s impossible to not be bombarded by ads. They are everywhere, and they are so well done that sometimes you do not even know you are seeing or hearing an ad. 

This is truly the golden age of marketing. So much data is available that you can literally drop an ad in front of a group of people online in your exact customer demographic  and have that ad tailor made for your product or services, then have that ad follow them everywhere they go online. Nearly everyone buys things online now, and we never have to look far to find what we want because the wonderful people at Google and Meta and Microsoft mine so much data that they can have an ad in front of you in seconds after you showed even the most remote indication that you are interested in buying something. 

With the passing of the JOBS Act in 2012, we suddenly had the ability to sell something else online – investments in private companies and startups. Small businesses had a new tool to raise capital and the restrictions against advertising that existed for more than 80 years were gone. The prohibition against the general public investing in startups and small businesses that were not publicly traded were gone.

So why has this golden age of marketing not allowed free-wheeling, Katy-bar-the-door marketing of these securities online? Sure, we see ads for companies raising capital, but why are these ads so limited in what they say, or how they look?

This article will explore some of the reasons why marketing securities online is not as easy as marketing almost anything else online. It will also delve into some tips on how to stay out of trouble when your private company decides to sell securities using marketing and advertising online and in traditional media.

For the most part, this article will discuss three methods of raising capital online: Reg A, Reg CF, and reg D, Rule 506(c) which are all parts of the 2012 JOBS Act. Some of what I write may apply to all securities in general, but I’m mostly focused on how small businesses raise money online under these three JOBS Act laws to raise capital to try to become big businesses.

The First Step: Avoiding “Securities Fraud” in Marketing

I know what you’re thinking. “I’m not committing fraud, I’m just running an ad to try to sell stock in my company!” The reason rules for marketing securities are different from the rules about selling almost anything else online is that if you screw up in your online securities ads, you may be guilty of what federal law refers to as “securities fraud.” You could face civil penalties. You could face lawsuits. You could go to jail. This is serious stuff. Imagine running a relatively innocuous ad about how your company’s new T-shirts are the best and most comfortable T-shirts in the world, and having someone knock on your door and arrest you. That never happens. But say that the stock you are selling in your company is the best investment in the world, and you can expect a knock on your door, or more likely a nasty letter from a state or federal securities regulator before a knock.

Securities fraud under federal law is the misrepresentation or omission of information to induce investors into purchasing securities. The primary applicable federal law is Rule 10b-5 of the Exchange Act of 1934. Rule 10b-5 states that criminal and/or civil liability may occur if (a) there was a misrepresentation of a material fact (2) done knowingly (3) that a securities purchaser relied on and (4) the reliance on the material misrepresentation caused a loss.

In addition, state governments may also impose civil and criminal liability on those engaged in securities fraud based on state laws. But for the most part, if you follow the federal law as it applies, you will almost always be in good shape with state laws.

The key here that makes securities marketing different is the absolute prohibition on misrepresentation in your ads. We have all seen ads for cereal, shoes, cars and almost every consumer good that say things we all know are simply not true. Companies selling products and services have, for decades, been given some leeway for “puffery” or certain exaggerations of marketing claims. The courts tend to use this test, or something similar, to walk the fine line between puffery and false advertising: Is the claim “blustering and boasting that no reasonable consumer would rely on?” If so, it is puffery and not false advertising. One court said “a general claim of superiority over comparable products that is so vague that it can be understood as nothing more than a mere expression of opinion” is puffery, and not false advertising.

Unlike the rest of the marketing world, there is no place for “puffery” when marketing securities. Don’t expect the general rules of puffery above will be used when the SEC, a state securities regulator or a competitor makes a complaint or starts an investigation into a potentially false or misleading statement.

Under securities laws, you must be clear to not be false or misleading in any manner. When you plan to make any statement, or use any language or graphics in any marketing material, review it in the most critical fashion you can – not in the most favorable manner. Assume the regulator or court will construe it in the worst manner possible, not in a manner favorable to you. If it could be considered misleading, don’t take any chances. Do not use it.

You do not want that knock on your door.

Here are the three basic rules to avoid committing securities fraud. Of course, there are just guidelines. In all instances, get legal advice from a securities lawyer.

Basic Rule 1: Be 100% truthful and use verifiable facts in all marketing communications

Ads, interviews, social media posts, emails and every other form of marketing need to be 100% truthful and all statements presented as facts must be 100% verifiable as true.

My basic rule is... if it could be read in any way as being misleading, do not say or use it at all. There is no reason to take a chance. Securities regulators do not care about “puffery” and will look at any statement that exaggerates, even if it is not believable at all, to be a false or misleading statement and a violation of securities laws.

Basic Rule 2: Use Qualifying Words and Terms When Giving An Opinion

If you have to discuss anything uncertain (I’m not talking about something false or misleading) make sure you qualify your statements.

For example, if you want to talk about your product being the best in the marketplace, understand the fine line between these two statements:

(1) We have the best product in the marketplace.

(2) We believe we have the best product in the marketplace.

The second statement is clearly an opinion, and while it is best to avoid even these types of statements when discussing a securities offering, sometimes it happens anyway, especially in a live interview. In those cases, be sure to qualify your statement with “we believe” or “we feel” or similar language. It’s not a perfect defense, and if the words after the qualifying statement are false or misleading, then qualifying it will not help. But always train yourself and your marketing team to qualify any opinion statement that cannot demonstrable be proven as fact to give your company the best chance to avoid problems.

Again, review all securities marketing statements in the most critical and negative way before using them because that is how a regulator or court will read them. They do not care if you interpret what you said differently. Your opinion as to how it could be interpreted the way you want it to be interpreted means nothing in this context. That is not how a regulator will interpret it.

Basic Rule 3: Try to avoid making statements about future projections unless there are lots of disclaimers and qualifying language

Projections of future sales, revenues, profits, etc. are rarely accurate, despite everyone’s best efforts. Once those projections are made public, they become fodder for regulators and plaintiff’s lawyers to make claims that you promised something that was false or misleading. It’s better to stay away from projections altogether. I almost always advise my clients to not use projections at all to promote the sales of their securities because of their uncertainty and the potential liability. But in circumstances where projections are used despite the great risk they bring to the table, there should be significant and thorough disclaimers surrounding the projections if they are in writing. If used in a media interview, they should be tempered by qualifying words and language – and best to do so in excess of what I discussed above given that you are talking numbers that people will rely on to make investment decisions.

But in my opinion, the best policy is to not use projections at all when marketing securities.

#regulationA #RegA #RegCF #regulationcrowdfunding #equitycrowdfunding  #crowdfunding #RegAPlus #funding #capitalraise #fintech #JOBSAct #capitalraise #smallbusiness #smallbusinesstips #securities #securitieslaw #equity #StartupLife #startups #marketing #securitiesfraud #marketingsecurities #generalsolicitation #506(c) #regD #regulationD

This article is not and should not be considered legal advice. Yes, I am a securities lawyer but no, you did not hire me to provide you with legal advice. In all cases, consult with your own lawyer as every legal situation is unique and do not rely on my educational and informative article as legal advice.

How To Make An Effective Equity Crowdfunding Video

Take an AI generated movie set background, sprinkle in some bad photoshop of my head, and Voila! I’m a film director!

Why is a securities lawyer talking about making videos? Those who know me understand, but for those who are new to the world of Kendall Almerico, let me give you a tiny bit of background.

I’m been shooting and editing film (and later video) since I was a teenager. Not to date myself, but that means I was making Super 8 movies and cutting them with a razor and using tape to hold clips together. I remember when video cameras first came out and there was no way to edit them at home, so anything you shot had to be shot in order — no mulligans — to make a cohesive movie.

Go ahead, make dinosaur jokes.

I later worked in television and radio stations and I have an undergraduate degree in broadcasting. You used to have to pretty much work in broadcast related business to have access to video editing equipment. Now, anybody and everybody can shoot and edit quality video with the tiny device we all keep in our pockets (or our hands)  — but that doesn’t mean everyone can make a great video that tells a story and sells a product or company. That takes not just technical knowhow, but a certain set of skills that involves knowing how to communicate to the masses in a persuasive manner.

I’m not a professional videographer, but I know how to tell a story. I know how to communicate with investors through video. And I’m smart enough to know that a style of video that works for one company, does not necessarily work for every company.

There are some common elements in most successful equity crowdfunding videos, and this article will talk about those elements, and give you some real world examples of videos that I have used personally with clients to successfully to raise significant capital in the equity crowdfunding space.

Get Attention Quickly

You only have a few seconds to grab a viewer’s attention and to keep it. Many experts (people who write things on the internet are always “experts” so you know they’re telling the truth!) say that if you don’t grab a viewer’s attention in the first 10 seconds of an online video, you will lose that viewer. It’s true. People have short attention spans — especially when watching video online. So you need to grab people’s attention right away. I’m not sure 10 seconds is really a make or break point, but you definitely need to do something at the beginning of the video to keep people engaged.

If they stop watching your video after 10 seconds, there is a very strong chance they are not going to invest in your company. So don’t start off your video with something boring. Things like a great visual, an exciting phrase or a famous face will hold attention. Do what works for your company, but do it right away at the beginning of your video.

And I know all of this because I’m an expert!

Here is an example from my client, international craft brewing sensation BrewDog. More about them later (and the full video this screenshot came from), but when they launched their first successful Reg A offering a few years ago, the first thing you saw on their equity crowdfunding video was this:

You may not have known that BrewDog called their equity crowdfunding offerings “Equity for Punks.” You may know anything about them. But you see a vibrant Times Square backdrop and some attention grabbing words: Propaganda Outreach. If you stopped watching after seeing this, you were never the kind of person who was going to invest in their company anyway.

Don’t Go Too Long

A lot of “experts” will tell you that your video should be under 2 minutes. Some will tell you under 90 seconds. While this would be ideal given the short attention spans of your typical TicTok viewer, it’s not really accurate when it comes to equity crowdfunding videos. The reality is, most companies will not be able to effectively introduce their company, explain an investment opportunity and convince strangers to invest in 90 seconds. The random time limitations people impose also contradict the reality that if you make a 60 minute compelling and interesting video, people will watch it for 60 minutes. Hell, every major motion picture made is 90 minutes minimum, and a great film leaves you on the edge of your seat not leaving, but instead wanting more.

This goes back to my story telling comment earlier in the article. If you can tell the complete story in 90 seconds, you should do so. But if it takes 3–5 minutes to do so, and you can do it in a very interesting and compelling way, 3–5 minutes is also okay. It all depends on what you are saying, who is saying it, how it is being said, and if you have a creative team who knows how to keep the subject matter interesting.

I’m going to use three examples of videos made by equity crowdfunding clients of mine to launch their online offerings – one of which is still ongoing as this is published. All three were very successful, and collectively these three offerings raised millions of dollars from thousands of investors. The lengths of the three videos are 2:07, 2:38 and 5:15! When you see each of these videos below, I doubt you will be looking at your watch and wondering why they are longer than 90 seconds. They are compelling, attention grabbing and interesting. But if you are going to use a 5 minute video, you better make sure it’s not boring or repetitive. Show it to a few people when it’s done but before you launch it. If you hear “That was too long” and — believe me, people will tell you if it’s too long — then edit it down and make it tighter.

Get People Excited About Your Company As Quickly As Possible

Remember, you are not making The Godfather or Citizen Kane.

You’re making a commercial for your company. You’re not trying to sell tickets to a movie theatre. You’re trying to sell investments in your company. This is not time for Quentin Tarantino film techniques with a timeline where you have to watch half a movie that seems chronologically challenged then it all ties together at the end (with lots of blood and cursing). You’re making an ad. It needs to grab people quickly. I needs to get people excited about your company quickly. It needs to get people thinking “I’ll watch the rest of this, I’m interested in investing in this company!”

So don’t wait until 30 seconds into a 2 minute video to explain what your company does. Tell the viewer right away. Let them know why your company is special — right away. Use visuals — this is video after all — do not have a talking head spending 30 seconds explaining something that one picture or 5 seconds of video can explain immediately!

Real People Get Real Results

Not every great equity crowdfunding video has someone central to the company in it. But most do. And there is a reason why.

Lots of people bet on the jockey, not on the horse.

Most companies using equity crowdfunding, whether it is Reg A or Reg CF, are at a relatively early stage. Apple is not using equity crowdfunding. Apple can do a video, use its famous logo, throw up great imagery and sounds — and sell you its products — because its Apple! You already know who they are and what they do.

Most companies using equity crowdfunding are not particularly well-known. You have to explain to people what you do, and who you are. And having a face that is integral to the company to do the explaining is usually the right call. Look, I’ll be the first to admit if the founders of a company do not look good or do not sound great on video, this concept gets thrown out the window. But most founders believe in their company, know more about the company than anyone else, and speak with passion about their company and that belief, knowledge and passion come through in a well-made video.

Here’s an example from a Reg A video for my client Armed Forces Brewing Company who sold out their first Reg A offering. They are now on their second Reg A offering which you can read about here: www.OwnArmedForcesBrewingCo.com Their entire launch video is below, but this is the first frame of the video from their initial Reg A offering:

That guy is Robert J. O’Neill, a highly decorated retired Navy SEAL who also just happens to be the guy who shot and killed Osama Bin Laden. He is one of many veterans who own this military tribute brewery. While many people recognize him, not everyone does, so the first words out of his mouth are “I’m Robert J. O’Neill, former Navy SEAL Team 6 operator, and I shot a famous guy.” Even if you didn’t hear the audio, you have seen (a) the company’s logo and branding, (b) American flags and (c) guns and ammo. If this kind of imagery is not appealing to a viewer, that viewer is not likely to invest in Armed Forces Brewing Company. But for people who are fans of the U.S. military and veterans, this opening shot and tiny bit of dialogue have sucked you in and kept you watching. This is what the beginning of an effective video needs to do.

Remember the graphic that started the BrewDog video I showed you earlier — the one that said Equity For Punks: Propaganda Outreach? Right after that graphic, the video cuts to BrewDog’s founders. 

They are shot from a very low angle and they have NYC lights behind them. It’s visually strange, but grabs your attention. And it fits their company. Here are your founders — this is who we are! And when you see the full video a little further down in this article, you will hear the passion in their voices as they tell you how excited they are to bring their global success to America!

Problem and Solution

There is a widely held belief that every pitch deck, every video and every other thing done to attract investors must identify a problem, then explain why this company has the magical solution!

I’m not one to argue with things that work, and I agree that this makes sense in many cases — particularly when you have a new product or service that people may not understand. If you have to explain that a problem exists because people do not inherently know about it, then a “problem and solution” section of your video is probably a good idea. In fact, you may want to lead with it.

But if your company is entering a flourishing and crowded market that already exists, forcing a “problem and solution” into a video may just be a waste of time. Leave it in your deck or on your offering page. For example, my client BrewDog is a craft brewery behemoth that is a true unicorn — with an enterprise valuation of more than $1B. They have successfully run many equity crowdfunding offerings around the world, and have raised hundreds of millions of dollars from hundreds of thousands of crowdfunding investors worldwide. When they used Reg A to fund their first U.S. brewery, they were already a successful and profitable brand all over Europe, but had almost no footprint or visibility in America. They simply believed that they had a better product, a better approach and better everything than craft brewers in America.

There wasn’t a “problem” with the craft brewing industry in the U.S. they were trying to take their share of. They didn’t offer a “solution” to a problem. They just needed to educate people about who they were, what they bring to the table and their overseas success. So their crowdfunding launch video (click on the photo below to watch the video) did not have (or need) a “problem and solution” section.

This video launched one of the first Reg A offerings in the U.S. and drove thousands of people who had never heard of BrewDog to invest millions in the company to launch their U.S. operations. One of the reasons I love this video so much is that it really sends a message about what BrewDog is all about. You see the two founders and you know their personalities right away (bet on the jockey not the horse). It is high energy and you hear about their success overseas (get people excited as soon as possible). It is professional looking and has great video and sound (see below for good video and sound). It asks for an investment (see below for don’t forget the ask). You see that they like to “stick it to the man” by dropping “fat cats” all over Wall Street. While this approach may not appeal to everyone, and probably not to many traditional stock market investors at the time, it was an incredibly effective video to introduce a company to a new market for that company, and it worked.

What I like about it most is that I made an Alfred Hitchcockian cameo in the video. Yes, that’s me — the extremely handsome movie star everyone is staring at before he is unceremoniously smacked down by a parachuting fat cat. If there were credits in the video, I would have been listed as “Dude in suit on Wall Street pummeled by falling feline.”

Talk About Your Business — But Don’t Make It All About Numbers

In the world of public companies traded on NASDAQ or the NYSE, it’s all about the numbers. Revenues, profitability, PE ratios and a million other stats that analysts spew out to analyze how a company is performing. Public company management often spend more time worrying about their stock price than anything else. Numbers are important. But don’t make the mistake of thinking that most Reg A or Reg CF offerings should be treated anything like public companies when it comes to talking about business numbers in an equity crowdfunding video.

Hit a few main numbers and statistics in your video, but if you include more than 2–3, you are going to lose your audience. Watching a crowdfunding video is nothing like watching a stock market analyst talking about a publicly traded company on CNBC. If your video drones on and on about numbers and stats, I can assure you many people will stop paying attention. It’s hard to entertain and keep people engaged when you are droning on and on about one number after another.

If you are going to use numbers and stats, consider adding graphics to illustrate. There is a reason people say a picture is worth a thousand words. People will remember a graphic with a number at a far greater percentage that a number than is merely spoken. For example, take a look at this video from another client of mine that recently completed a successful Reg CF offering, Wunderground Coffee.

Look at how Wunderground’s Reg CF video illustrated a key number/stat to show their growth.

This is one of my favorite crowdfunding videos because (a) it worked (b) it told a lot of important stories about the company in a short time (c) it showed off the amaxing founder Jody Hall and her team of very successful entrepreneurs with multiple exits and a history with an industry giant (d) explained why mushroom coffee is delicious and healthy and a new growing industry and (e) had lots and lots of “food porn” shots of their amazing coffee.

Don’t Forget “The Ask”

Crowdfunding Video 101 — Ask your viewers to invest. Ask more than once if you want. Definitely ask at the very end — in the perfect world a viewer of the video watches the video then goes straight to the INVEST button on the same webpage and pulls the trigger. Reminding the viewer of this is important and a necessity for any equity crowdfunding video.

Don’t be subtle. Ask for an investment. Ask for money. I’ve had clients try to be clever and not want to mention their video is about getting people to invest. This misguided desire to be subtle and not ask directly for an investment reminds me of how some people run ads for an equity crowdfunding offering. They run an ad about something sexy, something interesting, something to drive a click on the ad — but never mention the ad is driving the person who click to an investment opportunity. This is almost always a mistake, and gets a click from someone who then finds out they are being asked to invest. People do not like being deceived. It’s a waste of ad money driving clicks from people who then get surprised, and not in a good way, that you are asking them for money to grow your company. If you are running ads and not telling people you are seeking an investment, you’re wasting your money and their time. Same thing with your video. If you suck them in, keep them excited and never tell them you are asking them to invest, you just wasted an opportunity.

Last, But Not Least — Good Sound and Video Quality Matter

Don’t get me wrong — you do not have to get Martin Scorsese to direct your equity crowdfunding video or use a Hollywood crew of 50 people to shoot a 2 minute video. I’ve seen great equity crowdfunding video that were shot on an iPhone and edited in iMovie. But even those paid attention to two important details: great video and good sound quality.

Great video means having good lighting and keeping everything in focus. Good sound quality usually means having an external microphone especially if you are using an iPhone. Nothing is` more unprofessional than a poorly lit video where the person talking isn’t using a mic, and it sounds like they are in a tin can or the Lincoln Tunnel.

The point is you are asking people to invest in your company. People want to invest in a company that will be successful. If you can’t invest a few bucks to make a great video when it is often the first and only impression a potential investor will have of your company, then you’re not projecting success to the audience that matters. If people think you can’t even make a decent video that looks and sounds good, why should they trust you with a much more difficult task of building and growing an entire company?

A few final words…

There is no cookie cutter, one-size-fits-all approach to an equity crowdfunding video. In fact, one video used to launch a Reg A offering that sold out and was oversubscribed, pretty much broke most of the rules above. Watch this equity crowdfunding launch video for Armed Forces Brewing Company  —  a military tribute brewery that pledges to employ 70% if their national workforce from veterans and their family members. The video is funny, silly, goofy and a parody of a lot of things. Some people loved it and shared it and it was seen by a huge number of people, Some people didn’t like it at all because it was too campy, but they remembered it. It features a famous person — retired Navy SEAL Robert J. O’Neill who shot and killed Osama Bin Laden, playing an over-the-top cartoon version of himself shooting and blowing things up.

Humor in an equity crowdfunding video is a big risk, and although this one paid off, it’s not always easy to do the right way. Armed Forces Brewing Company had a strategy from the beginning that they were going to market their company using humor and it worked for them at the beginning, and still works today as they are in a second Reg A offering as I publish this. Watch another of their promotional videos used during their Reg A offering.

Again, they break all the video rules, but it worked for Armed Forces Brewing Company. They oversubscribed their first Reg A offering and are on their way to doing the same in their second Reg A offering.

The point here is that every company is different and your equity crowdfunding video should reflect your company’s ethos, mission and character. Compare the BrewDog video above to the Wunderground video above. Two very effective videos, but completely different style, tone, and direction.

One thing I cannot overemphasize — get help from professionals when you create your equity crowdfunding video. The professionals may be your marketing team, your social media team, outside videographers or others. But this is an area where guidance, both technical (video, audio, music, graphics) and in the overall writing and presentation is invaluable.

Your equity crowdfunding video can make or break your Reg A or Reg CF offering. Don’t make the mistake of glossing over this incredibly important part of a successful online capital raise.

This article is not and should not be considered legal advice. Yes, I am a securities lawyer but no, you did not hire me to provide you with legal advice. In all cases, consult with your own lawyer as every legal situation is unique and do not rely on my educational and informative article as legal advice.

Reg A and Reg CF: Funding Portals and Broker Dealers and Online Investment Websites, Oh My!

Part Four of a Six Part Series Comparing Regulation A and Regulation Crowdfunding

See Part One Here, Part Two Here, and Part Three Here.

Once again, my AI image generator does its best to illustrate the title of this article. I’m fairly sure funding portals and broker-dealers are not really fighting to the death in an ancient Roman arena, and even if they are – the funding portal would probably have two swords like the broker-dealer, and not try to “gladiate” with one sword and one sword handle. And what the hell is a “funding poltal” anyway?

The two equity crowdfunding provisions of the JOBS Act, Regulation A and Regulation Crowdfunding (Reg CF) are very similar laws but also very different. While both opened the door to new capital formation for private companies — particularly allowing anyone to invest in these companies and not just wealthy people — the way these securities offerings are actually executed is very different and subject to hundreds of pages of SEC rules. One of the biggest differences is where a company may hold these offerings online. That is the subject of this new article in my series breaking down the similarities and differences of the two groundbreaking equity crowdfunding laws.

Can I hold the offering on my own website?

For Reg A — yes you can. For Reg CF, no you cannot.

Regulation A does not specify where the securities offering that can raise up to $75M may reside online. As a result, a company may hold the offering on their own website if they want. Or, they may host it on a website they do not own. Or, they could hold the offering on both at the same time. Reg A gives a company plenty of choices when it comes to where the offering is found online.

Not so with Reg CF. With Reg CF, your company may raise up to $5M but it must only reside online on an “intermediary” website. This means either a broker-dealer owned website, or a new entity that came into existence with Regulation Crowdfunding called a funding portal. A funding portal is a FINRA and SEC regulated entity that may only host Reg CF offerings. A funding portal is much like a mini-broker dealer — but with significant restrictions as to what it can do to help market your offering. You cannot hold a Reg A or any other kind of securities offering on a funding portal… they are exclusively for Reg CF offerings.

Why would I host a Reg A offering on my own website?

Let’s talk about Reg A where you can host the offering on your own website. If your company already has a large engaged customer base, social media audience, fan base or other large group of people who love what you do, then holding a Reg A offering on your own website is often a great idea. Or, if you have a large marketing budget to send huge numbers of people to your offering page, why not send them to your own website rather than somewhere else? You will still need software to process the investments, and in most cases you will need a broker-dealer behind the scenes to make the offering legal and compliant in some of the 50 states. But hosting the offering on your own website brings about many advantages.

First, you have complete control of the design and content on your own site. This keeps your branding consistent and the look and feel of your Reg A offering can be the same as the look and feel you already established for your company.

Second, you control the traffic. You are directing potential investors to come to your site, and not to a third party site. Think of it this way — a majority of the people your company drives to the Reg A offering page will not invest. They may watch your video and read about your company, but statistics show that only a small percentage will actually pull the trigger and become investors. On the other hand, every one of those non-investors now knows more about your company and your brand. They may well become customers, clients, social media followers, and fans. They can buy your product online or use your services perhaps, even if they don’t invest. If they were sent to a third party site and decided to not invest, they would then need to leave that site, find your company site, and then make a buying decision to have the same potnetial economic effect as if you just sent them to your site to begin with.

Third, you control the data. This is the most important one, and the fact that many third-party sites that host offerings do not tell you. When you host the offering on your own site, you have access to all of the data from the traffic you send there. When you are on someone else’s site, you may not have access to any of that data.

The most obvious benefit to this for experienced e-commerce folks is the ability to re-market to traffic. Through the use of pixels, Google Tag Manager, cookies and other well-known marketing methods, someone who came to your website may be remarketed to — but if they are sent to someone else’s site you may not have complete control over this. Think about how you look at that new pair of shoes online, and then for the next week all you see are those shoes in your social media feed, in ads alongside websites you visit, and even in emails. That could be your company reminding someone who is a hot or warm lead — they were interested enough to visit your Reg A offering page once — to take a second look and to get them over the investment finish line. Or, even if they do not invest, they can be marketed to as customers of your products and services.

The second most important benefit, and one somewhat related to the retargeting I mentioned above, is the ability to market to “abandons” or those who not only got to your offering page, but started to invest then dropped out for some reason. In my experience from being involved with a lot of Reg A and Reg CF offerings, at least 25% of people who start the investment process typically abandon the investment for one reason or another. If you are hosting the offering on your own site with software giving you transparency — you now have the ability to directly market to those folks who abandoned. Email marketing, text messages, phone calls — you know who these people are and you have their email address and phone number. Closing these hot leads can means hundreds of thousands of dollars, or even millions of dollars, in many cases. But if you are on someone else’s website, and they do not provide you with information about who abandoned the investment application, you left a lot of people who were interested in vesting and a lot of their money sitting on the table.

Should I use a funding portal for my Reg CF offering, or a broker-dealer?

Given that you have no choice with Reg CF and must hold the offering on someone else’s website, you have a choice to make. Do you want to hold it on a funding portal alongside dozens of other companies trying to raise capital from the same audience, or do you want to use a specialized broker-dealer that sets up a webpage they control for you that looks as much as possible like your company website?

This is a complicated question with no one-size-fits-all answer. But you have to pick one or the other because Reg CF requires you to only have the offering hosted in one place — unlike Reg A where you could have the offering simultaneously hosted in several places.

Let’s look at the factors that help determine whether your Reg CF offering is better off on a funding portal or a broker-dealer website.

Fees

Look at the fees charged by funding portals and broker-dealers in detail. As a general rule, broker-dealers will charge lower fees than a funding portal — but that is not always the case when you factor in all fees.

The “success fee” meaning the percentage of every dollar you raise that is paid to the funding portal or broker-dealer can range dramatically. Some funding portals charge upwards of 7% for this fee, while some broker-dealers charge far less. Some funding portals also charge an equity fee, where they get paid an additional fee of your company’s equity based on how much money you raise. Broker-dealers may also charge this equity fee for Reg CF.

That fee is only a piece of the puzzle to consider. The other three fees to be aware of are (a) any up-front fees (b) payment processing fees and (c) escrow fees.

Many funding portals and broker dealers charge up-front fees — even though they may defer those until your first closing. These fees can cover due diligence, setting up offering pages, and much more. It is not unusual to see this fee in the $5,000+ range. Make sure you factor this fee in when making a decision.

Payment processing fees are a whole different world, and can be very difficult to understand in some cases. When someone invests using a credit card, debit card or an ACH bank-to-bank transfer, there are companies in the middle of that process that charge to move the money around — these are the payment processors. Credit card fees can be 4% or more, which means, as a company, you are really only getting 96% of what you raise if you have to pay this processing fee. Keep in mind, you may be able to pass that fee along to investors — but how many of us cannot stand seeing that we as consumers are paying an extra charge when we buy concert tickets for example. You will lose some investors when they get to check out in the investment process and see that their $500 investment is really a $520 investment to get $500 worth of stock.

Make sure you get detailed payment processing fees from the funding portal or broker-dealer, including what fees you are charged if someone cancels their investment or attempts a chargeback. When you add up payment processing and the funding portal success fee, you are often at 10% or more of every dollar you raise going to pay for these services. Factor all of this in to your final decision as to where to host the Reg CF offering, and whether to pass some of those fees along to investors.

Escrow fees are the last piece of the puzzle. Reg CF offerings require a “qualified third party” — typically an escrow account — to hold funds from investors until they are disbursed to your company when you hold a closing. These escrow accounts come with additional fees — and those fees need to be factored into your hosting decision. Opening the escrow account alone can be a $1000+ charge, and breaking escrow to hold a closing typically also has a fee associated with it. Wiring your funds to you also has a fee attached. These fees can add up, especially if you hold multiple closings during your offering.

Data Transparency

I mentioned this earlier but this is something you absolutely need to know before you go with either a funding portal or a broker-dealer. Ask them what data you get from the investors you are sending to their website using your marketing dollars. Ask them if you get this data in real time through a dashboard. Most importantly, ask them what data you get when someone starts to invest, but abandons the process.

As I publish this article, major players in the funding portal industry still refuse to share any abandon data with companies using their services. So that 25%+ of people you paid to send to the funding portal who abandon the investment process — you will never even know they existed because some funding portals will not share any of that data with you — and they make some specious claims as to why they cannot share data with you that you have every right to possess. Sure, the funding portals know who those people are. The funding portal has their contact information. You paid for that investor to go to the funding portal and you do not even get the benefit of trying to close that investor. But you can be assured that those people you paid for are being marketed to by the funding portal for other companies raising capital on their site. At this time, you have a far better chance at transparency of this data with a broker dealer like Cultivate Capital (whose parent company I own part of, for full transparency) that specializes in Reg A and Reg CF offerings, and who gives you access to all of the available data rather than hiding it from you like some funding portals will do.

Target Amount. Another factor to keep in mind when choosing a funding portal or broker-dealer involves your “target” amount that Reg CF requires. Every Regulation Crowdfunding offering must set a target amount that must be raised in order to hold a first closing and get your new capital into your company bank account. Most of the bigger funding portals are now requiring that you raise the first $50,000 or more yourself before your company’s Reg CF offering is even shown to the funding portal’s investor base. This makes it difficult for a small company trying to raise capital on a tight budget, as you will not have access to this money to use for marketing the offering or otherwise until that target threshold is met.

Broker-dealers tend to allow you to set your target amount at a lower number to hold your first closing. They tend to not be as restrictive on how often you can hold a closing and get your money after the first closing when the target amount has been met.

What Other Rules Do They Impose? Both funding portals and broker-dealers may impose additional rules to how your offering can be structured. You need to find out up front what those rules are, as they may not fit within how you want your company’s investor base to look. For example, some funding portals will try to push you into using a SAFE, preferred equity, or some other structure that you are may not be comfortable with. A SAFE, in particular, can be confusing to new investors who may love your company already, but do not understand what they receive when they invest in an “agreement for future equity” versus a straightforward “here are your shares of stock in our company!” Ask about these requirements up front before you decide — and remember — when you are going to your customers, fans, social media followers and the like — the more difficult it is for them to understand their potential investment, the more likely they will not invest.

Audiences. This is one area that is very tricky and I can tell you without question based on my experience that many companies get sucked into picking a funding portal because of the number of “investors” on the funding portal. But beware of thinking that a funding portal with a large number of users means your offering will get funded by those people.

Let me use the exact words of one of the biggest funding portals to prove to you that the grand majority of investors in your offering will not come from the huge database of possible investors that the funding portal so highly touts as the reason to pick them.

“Do you have a strong community of friends, supporters, fans, or customers? Remember, about 67% of a typical (Reg CF offering) comes from the founder and team’s community, and the other 33% comes from our community. The first $50,000 comes entirely from your network, so it’s crucial to have the support of your community for a successful… round.”

While this funding portal says 33% comes from their “investors” my experience industry-wide is that it is almost always closer to 5–10% in most cases, and that 90–95% of investors come from the company raising capital and their marketing efforts.

Think about it logically. All of those investors on the funding portal got there because some company raising capital sent them there to invest in that particular company. Let’s say three of those companies whose investors are now part of the funding portal’s database were selling (a) glow-in-the-dark talking condoms (b) a moonshot flying car in the very early stages of development and (c) a cutting edge tech device that made clipping your toenails easier. Your company is a successful pizza restaurant chain that want to raise capital to expand and open new locations. Do you think there is any overlap in interest for your company and the condom, flying car or toenail clipper investors? No, there isn’t.

But once you send thousands of your pizza-loving customers and fans to the funding portal and they invest — the number of investors on the funding portal goes up again! And now your pizza fans and customers who became your investors are now getting marketed to constantly by the funding portal who is trying to sell your investors stock in companies that make glow-in-the-dark talking condoms, flying cars and hi-tech toenail clippers.

Broker-dealers may or may not do the same thing, so this is a question to ask before you make your final decision. But whatever you do, weigh the value of +/- 5–10% of the money you ultimately raise in a Reg CF offering coming from the funding portal’s “millions of investors” versus the 25% or more of investors you sent to the funding portal that abandon the investment process, but the funding portal never gives you any of their data to remarket to.

Making a decision about where to host your Reg A or Reg CF offering is more complicated than most think. It’s easy to get sucked in by the hype of big audiences of possible investors and to think this is a short cut to funding your company. It’s also easy to simply look at fees and to go with the lowest success fee. Consider all of the options, the money, the data, and everything else above before making a decision as to where your investors will see your equity crowdfunding offering.

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Coming next week: Part 5 of the 6 part series: Specific Offering Structures and Liquidity. Also, this article is not and should not be considered legal advice. Yes, I am a securities lawyer but no, you did not hire me to provide you with legal advice. In all cases, consult with your own lawyer as every legal situation is unique and do not rely on my educational and informative article as legal advice.