The rule amendments to the Reg CF have been filed in the Federal Register, which makes the effective date March 15, 2021!
Previously amended Reg CF details include:
Increase the cap from $1.07M to $5M
Ability to run “Test The Waters” or a pre-launch campaign
Increased accredited investor investment limits
Issuers can report Reg CF investors as one investor on their cap tables
Again, this is a HUGE announcement and big win for the industry, as many are arguing this is one of the first big steps to expand investment opportunities and improve access to capital in private markets.
My team and I are very excited to see March 15th, 2021 as the official date for these new changes. We’ve been waiting for momentum like this for a long period of time since $1.07M is just too low for these ventures.
A few weeks ago, Gordon Einstein was on our podcast, “Test.Optimize.Scale” and said that $1.07M does not work for his legal clients. He made the comparison to taking $1.07M and trying to buy a beachfront house in Los Angeles—it’s just not enough. In other words, a million dollars does not suffice for the type of resources that are needed to compete within an industry and take on market share. To add to Gordon’s perspective, many Reg CF campaigns don’t take into account fundamental marketing practices because of how quick their campaign is due to the raise limit and the potential low return on marketing spend.
An increase in the raise cap and the ability to run a “Test The Waters” campaign, will dramatically change marketing best practices for Reg CF campaigns. Here are the marketing strategies I believe will take center stage once the new equity crowdfunding SEC regulations are the norm.
1. Marketing Audiences Will Shift to More Accredited Investors
Historically, Reg CF investors were capped at a maximum of $107K across all of their Reg CF investments for the year.
WIth the new regulations, accredited investors are no longer capped allowing start-ups and marketing campaigns to go after larger investors to participate at larger levels on the campaign.
Allowing accredited investors to have a bigger stake in the venture is a huge deal, especially for pre-launch campaigns since it allows issuers to promote their campaign to large investors before their financial audit is complete.
In addition, the new regulations allow issuers to list all their investors from a Reg CF on their cap table as one investor, which makes the investment opportunity more attractive to accredited investors that are concerned with dilution.
What You Need to Do: Consider Accredited Investors as the main audience during your campaign, and create content, ads, and messaging that appeals to accredited investors such as showcasing market opportunity, promoting your pitch deck online, partnerships, and revenue channels.
2. Marketing Will Be Largely Focused on “Test The Waters” or Pre-Launch
In rewards-based crowdfunding (like a Kickstarter campaign) it all came down to the pre-launch, to allow issuers to hit a third or more of the total funding within the first 24 hours so they would be on a clear path to the cap.
Equity crowdfunding is now on equal footing with the new regulations.
Prior to the new regulations, it was against compliance if issuers mentioned they were holding a Reg CF campaign. Issuers could allude to “something big is coming” in their messaging, but any direct reference to the campaign could ruin your efforts.
With the “Test The Waters” regulation, that will no longer be the case. Now issuers will be able to gauge their audience’s response, build up an email list of interested investors, and even place investment reservations. Thus, issuers will largely focus on building a massive audience to hit a large majority of their raise in the first week and month of their campaign.
What You Need to Do: Invest in the pre-launch of your campaign, and set goals to grow an audience of 10,000 prospective investors, and get 200 of them to complete their reservation the first day the raise is live.
3. Facebook Marketing Will Still Play A Major Role As Reg CF Campaigns Increase Their Spend
Facebook advertising (which includes Instagram) will not go anywhere and will be even more important to scale marketing efforts.
Our Reg CF clients start at around $5K to $25K advertising spends per month and scale up further on Facebook to hit above the $1.07M mark. Now that the new Reg CF cap is $5M, I expect similar Reg a+ type Facebook advertising budgets of $100k+ per month, as Facebook is still the best channel to reach large audiences cost-effectively. For example, a Reg CF campaign can be on a path to hit $1.07M then move their advertising budget up to $100K a month to produce a million or more per month until they hit $5M.
What You Need to Do: Create an advertising budget while taking into consideration the amount needed to scale to $5M.
4. Exploring New Networking Channels Will Be Vital for CEOs
As accredited investors and groups become more involved in equity crowdfunding, it’ll be vital for CEO’s to proactively make connections with these investors.
Gary V likes to say if you’re the first one on a platform, you’re going to get a lot of attention. So if you’re the “first” to these upcoming communities, you’re going to garner a lot of eyeballs and overall awareness from potential investors.
What You Need to Do: Explore new networking opportunities, and find a way to get invited to the Clubhouse app.
5. Social Sharing Will Become More Necessary to Hit $5M
Social sharing is vital to spread brand awareness and grow your following in any equity crowdfunding campaign, and it’s going to become even more important with the new $5M cap.
Strategies like influencer marketing will become even more important for campaigns to receive endorsements, reach new audiences, and create content around their influencers. I plan on more campaigns utilizing this strategy, and I believe everyone else does too.
Like influencer marketing, peer-to-peer social sharing will also be more relevant. If you look at the marketing funnel, impressions from paid or organic sources produce clicks at the top of the funnel, then that traffic converts on an offering page at the bottom of the funnel. However, if we hone into deeper stages beyond converting, such as advocacy, peer-to-peer marketing becomes paramount, as converted investors that promote the campaign by word-of-mouth is the best marketing you can create for the campaign.
What You Need to Do: Create an influencer outreach strategy to create online endorsements for your campaign. Encourage all your investors to share your raise page, and like your raise video on social media.
The New SEC Equity Crowdfunding Regulations Will Stimulate Growth Across The Entire Industry
Four years ago, the average equity crowdfunding raise amount was $75K.
These days it's $500K, and with these new SEC equity crowdfunding regulations, the number will continue to go up until it hits the millions.
As a result, I anticipate a big boom in our industry, starting with more issuers looking to raise $5M knowing that on average they can raise somewhere in the millions. From there, more portals will appear to host these issuers, from there more lawyers more financial auditors, and more marketing agencies will offer services to support issuers and portals.
All with the same goal—to produce more investors.
The more investors in the marketplace, the more effective deals will be, the higher average investments will be, and the faster rounds will close, which will attract more issuers to the equity crowdfunding space and start the whole cycle over again.
The new changes are making investment opportunities more accessible to the general public, and facilitate capital formation in a time where businesses need it most.
We hope these changes encourage you to find ways to adopt investment crowdfunding into your life, whether it’s from the investor side or becoming an issuer.
If you have any questions about the new SEC equity crowdfunding regulations, please let me know. My team and I are happy to share all we know with you.