In March 2021, the SEC updated Regulation Crowdfunding (Reg CF) to permit “Testing the Waters” (TTW). Essentially, testing the waters allows startups to collect interest, or “reservations”, from potential investors, to gauge demand for their offering. This is done prior to filing any official paperwork with the SEC, which allows the issuer to potentially change deal terms or abort the raise entirely to save on legal and financial costs if there isn’t sufficient investor interest.
So, have TTW offerings lived up to their promise and been a successful way to gauge investor interest? We’ll be diving deep into that question today, as well as answering some of the most frequently asked questions that we receive about TTW campaigns.
For an in-depth overview of what testing the waters is, what’s permitted (and what isn’t), and more about specific TTW rules and regulations, check out our past TTW article here.
Number of Testing the Waters Campaigns Since 2020
Since KingsCrowd started tracking TTW raises in September 2020, there have been 79 tracked TTW raises (Reg CF and Reg A). Of those, 45 raised roughly $25,000 or more while testing the waters (note: TTW offerings don’t always publicly list the total amount reserved).
The above chart shows that the amount of capital reserved during a successful TTW campaign has ranged from $25,000 (we don’t track below that for TTW, as we’ll discuss below) to over than $1.5 million. Nearly 40% of all TTW offerings achieved reservations of $750k or more. The top five TTW offerings since 2020 have been:
|Issuer Name||Amount Reserved||Date Range||Launched Live Offering?|
|Realm Metaverse||$75,000,000||Jan 2022 – Dec 2022||No|
|Arrived||$9,172,390||May 2023 – Present||Still TTW|
|StartEngine||$8,162,603||Mar 2021 – Apr 2021||Yes – raised $29.3M|
|Boxabl||$4,108,161||May 2023 – Present||Still TTW|
|Hempitecture||$3,735,028||May 2021 – Feb 2022||Yes – raised $4.6M|
As seen with Realm Metaverse (and many others), just because a company is able to collect reservations during TTW doesn’t mean that all those reservations will convert into real investment dollars. Often, investors may reserve one amount, but then either market conditions or personal circumstances change, and so the same investor may only invest a fraction (or none) of their initial reservation amount. In the case of Realm, they decided never to launch a formal Reg A offering.
So how much capital from a TTW’s reservations converts into real investment dollars?
Testing the Waters Amounts Raised Over Time
Because TTW was now permitted under Reg CF in early 2021, there were a flurry issuers that capitalized on the ability to collect interest before filing with the SEC (side note: testing the waters was already permitted under Reg A prior to 2021).
The below chart plots the final percentage of capital raised vs. the amount raised under TTW before filing their SEC offering documents. For example, if a company collected $100k in reservations during its TTW phase, then went live and ended up closing their campaign with $200k in total capital raised, then they would appear as 200%. On the other hand, if a company that had $100k reserved during TTW but only managed to raise $80k in their actual Reg CF campaign (which does happen, as we’ll discuss), then they would appear as 80% on this chart.
We can see that companies in the 2020-2021 timeframe were frequently raising 3X-8X the total capital that they gathered in reservations while testing the waters. Thus, a founder could have relatively high confidence that if they secured a certain amount in their TTW phase, they could expect to finish their actual raise with more than that amount.
However, it’s readily apparent that this trend has seen the percentage of final capital raised vs. TTW amount declining over the past two years.
There are likely several reasons for this. For example, the 2020-2021 era was a period of rapidly increasing monthly growth in equity crowdfunding investments, while 2022 saw that trend reverse into decline.
Furthermore, testing the waters for Reg CF was still somewhat new in early 2021. Both issuers and the platforms that facilitate testing the waters were just starting to figure it out (note: it’s not required that a company uses a funding portal or broker dealer while testing the waters, while it is required for the actual Reg CF raise). Thus, the bar to use testing the waters was perhaps a bit higher than today, meaning that relatively fewer companies were using it to start, and those who were may have put in more effort and had a deeper understanding of the nuances of raising capital online.
The Current State of Testing the Waters Raises (Q4-2023)
Despite the apparent decay in the total amount of capital raised since 2021, the prior chart also gives the impression that fewer companies are now testing the waters – or at least, that fewer companies are launching live offerings after testing the waters.
In reality, there are likely far more TTW raises today than back in 2021. The difference is that the large majority of active TTW raises have less than $10k in reservations – with many having $0 reserved.
Let’s briefly look at the currently active TTW raises on two platforms, Wefunder and Republic, as of October 2023:.
|Platform||Active TTW Offerings||Active Filed Offerings||Percentage of TTW to Total Offerings|
One can quickly see that both Wefunder and Republic have a significant percentage – between ~30-40% of their overall available deal flow – currently in the testing the waters phase.
How to Tell if a Campaign is “Testing the Waters”
For users of KingsCrowd, any campaign that is testing the waters will have a clear indication with a “TTW” badge on the company’s raise page.
If you are looking at an offering page on a funding portal, there are a few ways that indicate whether a campaign is only testing the waters:
- The invest buttons may say “Reserve” instead of “Invest”
- There will not be any associated SEC EDGAR filing links or offering circulars
- There must be a disclaimer somewhere on the page – usually in the footer – that says that the issuer is only testing the waters and that no money is being solicited or will be accepted
Does Valuation Correlate with How Successful a TTW Raise Is?
One of the primary reasons to “test the waters”, other than saving on potential legal and financial review costs before necessary, is to gauge investor demand and feedback based on deal terms like valuation.
This chart excludes a few TTW raises that were outliers from this chart (over $100M in valuation), such as the Boxabl TTW raise that was at a $3.36 billion valuation and saw $4.1 million reserved. It also only includes TTW raises that had disclosed valuations at the time of their TTW offering.
Most of the TTW campaigns that we have tracked to date have not changed valuation or other key deal terms when converting from TTW to a live offering; however, that is always a possibility. Investors who make reservations during a TTW offering should always review the final deal terms of the offering when and if it goes live.
How KingsCrowd Tracks Testing the Waters
With dozens (sometimes hundreds) of active TTW campaigns at any time, an astute user of the KingsCrowd platform might then wonder why each and every one of these TTW raises isn’t listed on KingsCrowd.
Because such a large percentage of TTW offerings never collect more than $10k in reservations (many stay at $0), most of those TTW raises will never file and never convert to a live raise.
For that reason, rather than pollute our users’ feeds with raises that will never become an actual raise, we established an internal threshold on TTW raises in order to track them. KingsCrowd will only add a TTW raise to the KingsCrowd platform once they exceed roughly $50k-100k in reservations.
Current Live TTW Raises with Over $100k in Reservations
With that in mind, what are the latest active TTW raises with over $100k in reservations? As of October 2023, the five currently active TTW raises are:
- Myro – $145k since Sept 2023
- Arrived – $9.1M since May 2023
- Boxabl (also a live deal on Dealmaker) – $4.1M
- Hunt a Killer – $145k since Apr 2023
- Sool – $114k since Feb 2023
It’s important to note that there is no guarantee that any of these will convert to a live (filed) raise. You can see that two of them have been collecting reservations for 6-8 months already. Investors will receive an email when (and if) a raise files their Form C or 1-A and are able to invest.
How to Search for TTW Raises on KingsCrowd
For investors who are interested in getting as early as possible and making reservations during testing the waters, they are able to search for TTW raises using our Advanced Company Search table. Simply choose “TTW” under the Reg Type (regulation type), and you can then sort and filter to see any TTW raises that we are tracking:
Wrapping things up, we have shown that there are currently dozens of available testing the waters campaigns. Investors should be aware that issuers are able to change deal terms during testing the waters and before filing any forms with the SEC. So always check to see if the deal terms, such as valuation or interest rates, have changed from when the initial reservation was made – which could be on the order of 6 months or more in some cases.
Furthermore, TTW offerings do not have to use a crowdfunding intermediary (i.e. platform). This means you may see some companies testing the waters on their own websites, social media platforms, and other locations outside of normal investing channels. Investors should be cautious and do research before making reservations outside of normal funding platforms. Always ensure that the issuer launches their live offering on a funding portal or broker dealer platform before investing, which is required under Reg CF.
Lastly, while the relative success of how much a campaign may raise after converting from a TTW to a live raise has been declining since 2021, there are still a number of campaigns that can find great success (such as Tribel – which recently converted from a TTW raise with $2.7M reserved, and has now collected $2.8M in actual investments under Reg CF).
TTW remains a great option for founders and issuers to gauge potential interest before incurring the necessary legal and financial costs of launching a Reg CF campaign. However, the longer a TTW raise remains open, the more circumstances may change for investors who make reservations; so issuers should balance the potential trade-offs of running a TTW campaign vs. collecting actual investment dollars from investors. On the investor side, investors should always reconfirm key deal terms before investing in any deal that launches after running a TTW campaign.