Note: This is the fourth installment from Rick Bentley, founder & CEO of Cloudastructure. This series is particularly focused on providing advice and insights to founders. You can start at Part 1 here. In this post, he breaks down his experience with running a Regulation A round.
$35 million. We’ve raised about $35 million in our Regulation A (Reg A) round so far, and it’s still coming in.
In my last update we were $200,000 into our second Regulation Crowdfunding (Reg CF) round on Wefunder. We were on track for something likely around $500,000 when the lockdowns hit in March 2020. We ended softer than expected, at around $300,000.
And we took the pandemic as a moment to do a slight pivot. We were already recognizing faces with computer vision, and turns out it’s not too hard to detect mask wearers from non-mask wearers. We can get images from thermal cameras and find the inside of the eye sockets, by the tear ducts, and measure relative temperature between people to try to spot the outliers who might have a fever. We can tell when people are and aren’t six feet apart.
Winston Churchill is attributed with saying, “Never let a good crisis go to waste,” so we made the most out of the lockdowns that interrupted our last round.
So then what? We had to do a Reg A. At the time, $50 million was the max amount a company could raise via Reg A in a year (it’s $75 million now). We heard from the wise that having warrant coverage can make your deal more interesting to investors. We settled on $0.50/share, did a reverse split to make the numbers work, and offered a “unit” for $1 that included two shares (nominally at $0.50 each) and a warrant to buy a third share for $0.75.
The way that math works is if we sell $28.5 million in units now, there are $21.5 million in exercisable options out there, so we have “offered” a total of $50 million. And we hit the $28.5 million pretty fast. We have more than that in “commitment,” but not all of those get through the entire investment process.
So we filed a PQA (Post Qualification Amendment) with the SEC to beg them to raise our limit from $50 million to the new $75 million limit to help meet investor demand. That worked. We subsequently raised our unit price from $1.00 to $1.20 — and now to $2.00.
Okay, so how did we do it? How can you do it too? Let’s go over everything you need.
First, it’s not enough to just launch a Reg A and expect people to show up. You need people to care. You need a viral video and great marketing like Boxabl. You need to push and push and push, round after round like Knightscope did. You need some kind of third party validation like we got from an investment newsletter. Whatever it is you do to get people who might want to invest in you aware of your deal, this is the crux of your success.
Eyeballs don’t cut it. I worked on another Reg CF deal that had a Netflix special behind it. We were getting more than 250,000 unique visitors per day to the site where we were hosting a Reg CF. But we raised only a few grand in the first month, not enough even for a first close. The problem was the people showing up weren’t investors — they were Netflix viewers. You need to drive investors to your deal page.
Second, you need a large string of service providers to make things work. Specifically for a Reg A, you need:
1. Reg A experienced lawyers. You might say, “Oh, I use Big Famous Law Firm, they’re the best!” Probably not. We use Wilson Sonsini Goodrich and Rosati (WSGR), a famous top tier Silicon Valley law firm, for our corporate law. They don’t have much Reg A experience, so we used a much smaller and little known firm named Crowdcheck for our Reg A. They do more Reg A deals than any other firm I know of. WSGR is perfectly fine with this arrangement. Your lawyers should be too.
2. The broker dealer. Unless you want to register in most of the 50 states, you can’t offer your deal in all 50 states. That registration process could take months in many of those states. You need a “broker dealer of convenience” who is already licensed everywhere. We use Dalmore Group, and they have been flexible and helpful from the start.
3. Transfer agent. Once you sell the stock, you need a transfer agent who keeps the official record of who owns what and how much. Doing a warrant deal as part of your offering? Then you’ll need a warrant agent as well. The options are of various levels of technical sophistication. Some just ask you to email them a CSV file as their API, some have actual REST-based APIs, some run on paper. I think this space is reasonably commoditized. We used Vstock, great guys, they can help you out. They have a CSV API, but in full disclosure, we are looking around at more sophisticated options, too.
4. Platform. So, you need a website that describes your deal, has all the disclaimers, deal terms, etc. Then, when someone goes to invest, there needs to be an accredited investor check. If they are non-accredited, there are certain income/worth limitations under which the investor can invest. There are all kinds of federal regulations that must be complied with, like KYC (Know Your Customer, a banking regulation) and AML (Anti Money Laundering). Some people might want to invest using their 401k, do you plan to support that? Going to take crypto payments? You get the idea. This is hard, and you need a platform that does all the things.
Some platforms are just the platform, like Dealmaker (that we used) and KoreConX (heard good things about them). Some come with an investment community like Republic and StartEngine. If you can drive traffic to your own deal, it’s fine to use just a platform. If you want a boost, use one that comes with a community.
We started out on Prime Trust (aka Fund America) before we moved to Dealmaker. Prime Trust crashed under load, terribly and repeatedly — they literally cost us millions of dollars in lost investment. I have heard they are getting out of the business. I would avoid them if they stay in.
5. Support. This one isn’t legally required, but just as critical. Think you can take 1,000 calls this week? You can’t. You can launch without a third party support entity, but if you’re going to be raising millions of dollars, you can’t do this yourself long term. Also, you’ll want a company that is used to talking to retail investors, where the agents understand the needs of the callers — not just anyone who can answer the phone and walk through a script. We use Hybrid Financial.They’re expensive, but worth it.
The cost of putting a Reg A raise together is about $100,000. So, if you have $10,000 in the bank, you probably can’t pull it off. If you have $1 million, it might be worth a shot. I try to pay it forward with other entrepreneurs, so hit me up if you have any questions.
Wall Street has Morningstar, S&P, and Bloomberg
The equity crowdfunding market has KingsCrowd.
About: Rick Bentley
Founded Televoke Inc, in 1998, raised several rounds of venture capital, including an oversubscribed up-round the summer after the .com crash. Merged Jan 2003 with Telcontar Inc., merged entity renamed deCarta Inc. Bought by Uber March 2015.