The SEC adopted amendments to Regulation A (now known as Regulation A+) on March 25, 2015, under the “Jumpstart Our Business Startups” Act (JOBS act). Reg A+ allows small businesses to raise capital from investors through its exemption from registration provisions. Reg A+ is divided into two tiers: Tier 1 allows securities offerings of up to $20 million in 12 months and Tier 2 up to $50 million in 12 months. We would like to analyze the difference between hosting a Reg A+ offering on a third-party crowdfunding platform vs the company’s website.
Reg A+ Offering: Third-party Platform vs. Company Website
An issuer can offer Reg A+ securities on their website or a third-party platform. A third-party platform is a crowdfunding website that lists multiple companies’ Reg A+ offerings on their site. The idea of raising capital through these platforms may seem enticing, but from what experts say, there are high risks involved, and every company should be vigilant in their analysis.
Below is a list of reasons why experts have discouraged the use of third-party crowdfunding platforms for Reg A+ offerings when compared to using corporate websites.
1. Distribution partners are eliminated:
The power of mixing in multiple underwriters into your Reg A+ offering can go a long way for small companies that are looking to expand into multiple investor networks. Doing this on a third-party crowdfunding platform is not possible, as they require exclusivity. By hosting the offering on your website through EquityTrack’s Cloudraise® platform, you can add unlimited distribution partners.
2. Lack of automation and synchronization with transfer agent:
Automate the investment process for your offering by allowing investors to click on an invest now button which will guide them through a subscription questionnaire, payment, escrow and automatic share issuance through a direct connection to the transfer agent. This allows executives to focus on their investors without having to worry about any of the back office paperwork or logistics.
3. Brand value is diluted:
When a third-party platform is representing your company, your brand can get washed out into the background with hundreds of other companies listed on their site. Also, platforms must design their marketing plans carefully to ensure they are in sync with the guidelines laid out by the SEC, or the company may find itself forced to return investors’ money and be burdened by unnecessary legal bills. People have been talking about their experience on how they responded to third party platform “urgent” investment calls and found it all to be a fraud. So, you want to be careful about this.
4. Enhancing the investor experience:
Another issue is data and security. It is effortless to steal investor’s data in today’s super-fast technological era that will harm the issuer’s credibility. While you can still control breaches and exercise safety measures on your website, data is very vulnerable at third-party platforms.
5. Legal liability for the crowdfunding campaign:
The legal obligations and liability page of third-party platforms should be the very first warning for you to opt-out. These platforms either do not or take the minimal liability of the company’s crowdfunding campaign. So, if anything went wrong, the issuer will have no one to ask questions to but will be answerable to all their investors.
6. Pay a high percentage of your offering proceeds to a Third-party platform:
Companies often blow through offering proceeds quickly and can take for granted the effort and investment it takes to undertake a successful Reg A+ offering. The 6-10% in savings of hosting the offering on your website without the use of a third-party platform can make all of the difference for the next product innovation or marketing campaign.
7. Little control on user experience:
Looks do matter. Third-party platforms come with a limited scope of presentation to display the company’s offering. You may want to express more, but you usually get restricted, which is not the case with hosting on your website.
8. Competition makes it difficult:
Third-party platforms allow multiple companies to host their offerings on their website. This means your company is competing with others when selling its investment opportunity to investors. This means less opportunity to lure investors that would have interest in your offering.