How can primary issuers streamline the capital raising process while maintaining traditional investor protections.
After the passage of the JOBS Act in 2012 and the introduction of funding portals into the securities marketplace, private securities issuers flocked to take advantage of the new rules in hope of finding a cost-effective and streamlined way to access a broad range of investors. They were right— “crowdfunding” proved to be popular and became a recognized way for early-stage companies to raise capital.
Over the past ten years the regulatory changes adopted through the JOBS Act have created an entire ecosystem around “crowdfunding” type offerings. Specifically, the issuers of fractionalized securities representing interests in alternative assets such as artwork or baseball cards avail themselves of the offering structures made possible by the JOBS Act, and the marketplace has seen the emergence of brand names in the space—i.e., Masterwork and Collectable. The maturation of the crowdfunding ecosystem also pertains to investors. The lure of access to new a new asset class is not enough on its own, and today’s crowdfunding investors are demanding robust and sophisticated user experiences with the same investor protections as traditional markets.
An issuer’s choice of technology partner can have a significant impact on the success of any capital raise. While funding portals will remain popular because of their ability to control costs, many have failed to evolve to deliver value beyond the execution of a single point-of-sale transaction. In today’s landscape a poor and/or disjointed investor experience could drive them to look elsewhere and undermine any capital raise.
What are the traditional costs associated with a capital raise?
Some of the most common costs associated with a capital raise are due diligence fees, book-running fees, and placement agent fees. Prior to the JOBS Act, these costs were prohibitively high for many small issuers wanting to raise capital because it was only possible to access investor communities through traditional methods such as employing an investment bank or placement agent. While these sales costs are not avoidable, funding portals have been able to price their services in a way that makes capital raising economically viable for small issuers. However, funding portals are not able to deliver certain intangibles investment banks can deliver such as a curated investor community, and a network of advisors able to showcase an offering to potential investors. While the lower costs of funding portals are appealing, issuers that have not cultivated their own investor community may fail to achieve their capital raising target.
How can a firm optimize the capital raising process?
Private securities issuers should be excited about the potential of raising capital through digital means. Funding portals have shown the power of crowdfunding, and the issuers that can use these platforms to deliver a robust investing experience are positioned to be successful. Unfortunately for most issuers, funding portals do not provide the same level of strategic guidance on the offerings they support when compared to investment banks and issuers face a minefield of decisions concerning their capital raise, some of the most critical of which are:
Choosing the appropriate offering structure: The right offering structure depends on various factors such as the stage of the company, the amount of capital needed, and what type of investor the issuer is looking to attract. Each Reg A+, Reg CF and Reg D have advantages and disadvantages, depending on the needs and goals of the company.
Taking advantage of technology: Issuers need to consider the robustness of a funding portal’s tech stack. Specifically, the manner in which investors can access information about the offering, review and sign the offering documents, and pay for the offering are key aspects of the investor experience that, if clunky, can easily cause an investor to become disinterested or disengaged. Moreover, the most robust platforms will have ways for issuers to cultivate a community of investors through embedded engagement tools and data rich environments.
A secondary market: Offering a private secondary market can attract investors to its potential liquidity and enables them to monetize their investment earlier than they would otherwise. The benefits of potential early liquidity may allow issuers to garner higher valuations and diminish illiquidity discounts. Certain funding portals are also registered as alternative trading systems and offer trading experiences similar to traditional securities markets.
Crowdfunding has shown its staying power and has clear advantages compared to conducting an offering through traditional investment banks. The novelty and newness of crowdfunding has all but disappeared pushing issuers to meet demands from investors that did not exist ten years ago. Issuers that partner with platforms that create simplified and streamlined experiences while offering robust functionality to showcase offerings and interact with investors are positioned for success.
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