I read an article in WIRED the other day about the LaFerrari, the world’s most coveted supercar, and one particular sentence stuck out. As writer Jordan Golson plainly stated, “When it comes to this car, you don’t choose Ferrari. Ferrari chooses you.” Well, ladies and gentlemen, the same philosophy may very well apply to Reg A+.
Since Reg A+ became effective in the United States last year, we’ve seen all types of private companies takes shots on goal, with a few notable success stories and, naturally, a far greater number of failures. There is no doubt that the Elio Motors Reg A+ campaign, which raised $17 million from 6,500 people on StartEngine, made it look easy. Although Reg A+ is faster and less expensive than a traditional IPO, it is unfortunately not easy, and more importantly, not a fit for all businesses.
Top Three Criteria
CrowdfundX recently conducted an analysis of closed or active Reg A+ campaigns to determine what traits successful issuers have in common. Based on our research (which will surely evolve over time), the data indicates that SME issuers with the following quantitative characteristics are more likely to succeed with Reg A+ offerings:
- Capital Raised to Date: $3M+
- Annual Revenue/Pre-Sales: $2M+
- # of Customers/Emails: 5K+
- # Authentic Social Followers: 10K+
- # of Employees: 10+
- # of Physical Locations 1+
- Marketing Budget $150K+
The top three criteria – Capital Raised to Date, Annual Revenue/Pre-Sales, and # Customers – are weighted higher than all other factors in our qualification model. Keep in mind that this is not a scientific black-or-white formula, but rather a general guideline to assist prospective issuers in their decision-making process when evaluating Reg A+.
Other General Trends
Understandable to Lay Investors: Additionally, it’s helpful to have a product that consumers love and easily understand. For example, consumers understand automobiles, video games, and real estate; however, they have a more difficult time understanding and evaluating B2B software, biotechnology, stem cell research, or licensing schemes to patent portfolios. Although it’s not impossible to do a Reg A+ offering in these latter products, until Wall Street analysts begin regularly evaluating and providing recommendations on these securities, the issuer may have a more difficult time to convey esoteric technical information to the lay investor.
Maturity and Proof of Concept: If Kickstarter/Indiegogo are grade school, and Regulation CF is high school, then Regulation A+ is college (and an IPO would be graduate school). We often field calls from potential issuers who want to utilize Regulation A+ for a yet-to-be-invented product or yet-to-be-formed business, but it’s hard to do so when the issuer doesn’t yet have a foundation.
Of course, there are always exceptions to this rule. Some issuers, although brand new or young, may have a significant following or have a demonstrated track record of successful businesses—especially in real estate. Others may have moonshot ideas that excite and intrigue lay investors—think Hyperloop. Everyone has heard of it at this point; it takes an incredible amount of capital to prove and implement the technology, but it’s too just too cool a concept to stay on the sidelines.
Let’s apply the model above to some prospective issuers evaluating whether a Reg A+ offering fits their business:
- Issuer A: Product company, raised $1 million from 3K+ backers in highly successful Kickstarter campaign plus another $8 million from private and institutional investors; 50K Facebook fans and 30 employees. Analysis: Bullseye fit. See: Virtuix on SeedInvest.
- Issuer B: Biotech company, raised $5 million, currently in Phase I Clinical Trials, pre-revenue, no social media footprint, five employees, limited marketing budget. Analysis: Not a fit.
- Issuer C: Entertainment company, raised $1 million, pre-revenue, limited social footprint, three employees; CEO desires to be first $50 million campaign. Analysis: Not a fit; delusions of grandeur.
- Issuer D: Real estate investment company, $100 million in portfolio properties, had recent success with $1.5 million 506(c) with little effort; 20 employees, but no email list or social footprint; CEO desires $20 million campaign at 1% cost of capital. Analysis: Likely to be highly disappointed; the company should instead focus on building an online audience first and set a lower goal.
- Issuer E: New real estate investment company, $100 million+ track record, five employees; CEO has been a real estate instructor and influencer for a number of years with a loyal student following and email list of 25,000+ subscribers. Analysis: Although an exception to the general rule, likely a fit.
A few other takeaways worth noting: Issuers with higher priced products will generally outperform those with inexpensive products. Why? Because consumers tend to have a stronger affinity towards brands with more exclusive products (think $550 Apple iPhone vs. $15 Logitech mouse), and pride of product ownership translates well to pride of company ownership. And again, there are exceptions (see: BrewDog on BankRoll Ventures). There are also “cheats” or “unfair advantages,” such as an issuer with a substantial marketing budget, which could offset the lack of a built-in audience if used wisely before a Reg A+ offer.
Regulation A+ is still in its infancy, and no formulaic algorithm can predict an offering’s likelihood of success, however, successful offerings do share several common traits. And even if Regulation A+ isn’t for you, don’t despair—there are other options out there.
Darren Marble is the CEO of CrowdfundX, a pioneering crowdfunding agency serving corporations and entrepreneurs across a wide mix of industries and geographies. The company helps clients to effectively architect and execute strategic equity and rewards-based crowdfunding campaigns that build brand equity and drive growth. Notably, under Darren’s leadership, CrowdfundX designed, produced and marketed the Reg A+ equity crowdfunding campaign for Elio Motors, which raised just under $17 million from 6,200+ investors. Elio subsequently listed on the OTC Markets OTCQX under the symbol “ELIO,” making it the first company in the United States to have completed a Reg A+ equity crowdfunding offer and list shares on a public exchange. At present, CrowdfundX is currently managing more than a dozen Reg A+ equity crowdfunding campaigns. Darren was recently elected to the Board of Directors with the Crowdfunding Professional Association (CfPA) and is a Co-Founder of the Crowd Invest Summit.
Amy Wan, Esq., CIPP/US is a Partner with CrowdfundingLawyers.net where she practices crowdfunding and syndication law. Formerly, she was General Counsel at Patch of Land, a real estate marketplace lending platform. While there, Amy pioneered the industry’s first payment dependent note that is secured pursuant to an indenture trustee and designed to be bankruptcy remote, and advised the company on its Series A funding round. In recognition her work at Patch, she was named as a Finalist for the Corporate Counsel of the Year Award 2015 by LA Business Journal. Amy also brings extensive experience in legal innovation and rethinking the delivery of legal services. She is the founder and co-organized of Legal Hackers LA, and was named one of the ten women to watch in legal technology by the American Bar Association Journal in 2014.