Before the JOBS Act, companies in the private capital market had very few options to raise the capital they needed to grow. Many sought venture capital, which has an unfortunately low success rate. On average, fewer than 6.5% of small businesses succeed with this funding route. In contrast, 60% of companies using RegCF have enjoyed success using the JOBS Act exemption, which offers issuers a way to crowdfund and get their mission across to more investors. Still, 40% of the companies turning to RegCF are unable to find success. So what goes wrong?
There are several reasons why companies fail at RegCF offerings, but the most common reason is a lack of commitment. This can manifest itself in a few different ways, failure to comply with regulations, a failure to budget appropriately, or failure to market appropriately. Let’s take a closer look at each of these reasons.
Complying with Regulations
One of the most important aspects of a RegCF offering is compliance with SEC regulations. These regulations are designed to protect investors and ensure that companies are providing accurate information about their business and the risks involved in investing. Cutting corners is not a solution to save time and money; failing to comply can jeopardize the raise altogether. Failing to comply with regulatory requirements can result in harsh consequences if undergoing an audit or raise the risk of being sued by an investor. Compliance requires a wholehearted commitment to the regulations from day one to protect the company in the long term and raise the likelihood of a successful raise.
Budgeting Appropriately
Another critical aspect of a RegCF offering is budgeting appropriately for the costs associated with the offering. These costs can include legal fees, accounting fees, and marketing expenses. Without a proper budget, companies may find themselves unable to cover all the necessary expenses and being forced to cut corners to make ends meet. Creating an appropriate budget helps to ensure that there is an adequate amount of funding to market the offering, engage with the right professionals, and adhere to regulatory requirements without making sacrifices.
Marketing the Offering
Without investors, a RegCF raise cannot be successful. This requires issuers to market their offering in a way that attracts the most appropriate investors. For RegCF, companies can take advantage of affinity marketing to bring in potential investors that align with the company’s values and mission. This can do more than creating shareholders, it can build brand ambassadors who are equally as passionate about what you’re building.
How to Avoid These Pitfalls
The best way to avoid these pitfalls is to commit to the process from start to finish. This means being willing to invest the time and resources necessary, complying with regulations, budgeting appropriately for the offering, and assembling a team of experienced professionals. While this cannot guarantee success, it gives companies a significant advantage over those who are not committed to the capital raising process. By being willing to invest the time and resources necessary, companies can increase their chances of success and avoid the pitfalls that have led to the failure of other RegCF offerings.