By Michael Colon
You could almost hear the cheers when President Obama signed the JOBS Act into law in April, 2012. We were coming out of a historic recession when access to capital had dried up, and the JOBS Act promised to ease regulations and make it easier for companies to raise capital. Crowdfunding, while still in its infancy, was touted as the platform that would deliver the promise of the JOBS Act, and after 29 long months the SEC adopted the rules behind Reg A+.
While the JOBS Act started with cheering, Reg A+ has gotten off to a slow start. Since being approved, only one company, Elio Motors, has successfully made it through the entire process. As a result, some have begun to question the viability of Reg A+. There are varying opinions as to why Elio Motors succeeded and others haven’t. In my opinion there are several factors at play, but it starts with companies assuming that everyone will want to invest in their company.
Reg A+ Tier II allows companies to promote their offering and gather indications of interest prior to filing with the SEC. This means everything from emails, letters, and even phone calls to prospective investors. The ability to engage “the crowd” is one of the most powerful provisions of Reg A+. Of course that assumes the company has a network large enough to benefit from the provision. In reality most don’t. Rather than taking the time to build a network organically, they turn to marketing companies to try and create one.
The problem with that plan is that most companies forget that investing is personal. Investment Bankers know this, which is why they spend so much time building relationships. Social and associative marketing, and targeted email campaigns can be effective in making introductions, but that’s merely the first step in establishing a relationship. Early Reg A+ offerings have shown us that if “the crowd” doesn’t truly know your company, they’re not likely to open your email let alone invest.
So how do you build a network big enough to benefit from Reg A+? Start by introducing your company to the right prospective investors. Targeting investors with an interest in your sector is a good start. And while investing is personal, sometimes a local connection can be just as powerful. Subscribing to a service that gives you access to a database of local investors and their investment interests is a must. Mail them letters and tell them what you’re doing as a company. Invite them to open houses where they can meet and get to know you. Put out relevant press releases on a regular basis. Virtual roadshows can be especially effective. A steady flow of information demonstrates transparency, which creates engagement, and eventually leads to trust.
We should still be cheering for the JOBS Act and Reg A+ and not be surprised by the challenges. After all Reg A+ represents the first meaningful change to a set of regulations that were established decades ago. Elio Motors may have been the first, but it will not be the last.
While Reg A+ represents a significant improvement over Reg D, it’s not for everyone. Successfully accessing “the crowd” requires a network, but it also requires a few things that may seem like common sense:
- Build/have an amazing management team. Vision is important, but nothing beats past performance. A young team can be augmented with a strong Chairman and Board of Directors. But, only if they truly have control. Boards of advisors are less valuable because they lack fiduciary insight and control.
- Have a track record, or a unique model/idea. Once again, nothing beats past performance. Pre-revenue companies that are trendy or derivative (ex: Uber for babysitting) probably won’t be as well received as companies that already have traction in the market.
- A business plan, or at a minimum a solid executive summary, and 3-years of financial projections. This is important even if you have an established company. The only thing that beats past performance is a plan that shows how you’re going to continue to perform.
We should still be cheering for the JOBS Act and Reg A+. The original promise still holds true: Entrepreneurs have access to more capital, and individuals can invest like venture capitals.
Mr. Colón is Vice President of Corporate Development for Issuer Direct and leads the company’s Regulation A+ practice. Prior to joining Issuer Direct Mr. Colón was the founder and CEO of SEC Compliance Services, an XBRL service provider. Issuer Direct acquired SEC Compliance Services in 2012. Mr. Colón received his Masters of Business Administration (MBA), and Bachelors of Arts in Management from St. Mary’s College of California.
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