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!
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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.
