White Label or Platform – Which Is Right for Your Reg. A+?
Today, the benefits of equity crowdfunding are clear.
Traditionally, to get capital you would find a VC, institutional investor, or go raise money through angels and accredited investors. It’s a time consuming process that can take hundreds of hours and sometimes leave you out to dry with nothing. Or, maybe you do get a term sheet – and hopefully the terms are favorable – but when the timing is bad that term sheet can be pulled right out from underneath you.
By contrast, equity crowdfunding has changed this narrative in a big way. How? Well, you can raise up to $5M per year under Reg. CF or up to $75M per year under Reg. A+. You stay in control – for instance, by issuing non-voting common shares. And you manage the entire fundraising process one investor at a time – after all, it’s often easier to get lots of small and medium checks than one giant check.
Despite all of equity crowdfunding’s upsides, though, Reg. A+ in particular has not necessarily been successful for many entrepreneurs. Why? It all comes down to choices. Say you decide to raise $10M using a Reg. A+. Now you have two options: hire a broker-dealer platform to organize and run your offering; or, go the DIY route. Let’s unpack both and see which might be best for you.
Option 1: Hire a broker-dealer platform, like StartEngine
The more standard, and in my view fruitful, choice is to hire a broker-dealer platform, such as StartEngine, SeedInvest or Republic, to name a few. These platforms offer a full range of services for companies raising under Reg. A+. So what do you get? Here’s what’s typically part of the full-service offering:
- Structuring of the deal and the type of securities to be offered
- Sourcing the escrow service, transfer agent, legal team, and CPAs
- Ensuring SEC compliance, reviewing past filings, and making updates if needed
- Preparing a marketing and launch plan for the offering – this can sometimes include a test-the-waters campaign to build interest as well
Broker-dealer platforms often also come with regulatory advantages – notably, they can generally offer in all 50 states and manage state filings as well as any state-specific requirements. (It’s important to note, though, that every broker-dealer may be different).
The most important aspect of a platform is the quality of their investor community. In my experience, average investor acquisition costs hover right around $2,000. So the number of repeat investors a broker-dealer platform brings can make a huge difference in the success of your offering. Additionally, as investors place their orders, the platform will check each one against Treasury regulation requirements (aka your customer and anti money-laundering checks).
Some of the largest raises to date have been conducted with broker-dealer platforms. And the comfort of knowing all regulations are met, as well as the boost to momentum from a dedicated investor community, are huge advantages. For these services, a company will often pay around 3.5%, plus some equity compensation. Sometimes investors pay fees as well, though in the case of StartEngine, escrow fees are included.
Option 2: Do It Yourself
Though it’s called a DIY offering, in practice it’s often in name only. Generally, a company will look for a white-label platform that can help with presenting the offering and the mechanics for accepting investments as a service. This saves the need to write all of the website and back-end code to receive investments into an escrow account. Most businesses will also hire a low-cost broker-dealer to handle the clearing of investments, such as KYC/AML, on their behalf.
The costs for these off-the-shelf solutions vary. In my experience, though, the white-label gets around $10 per investor, and the accommodating broker-dealer gets about 1% plus $50k in fixed fees. Don’t forget – escrow may be another 1.5% depending on the vendors and banks selected. So all in, your costs can be up to 4.5% or more depending on the size of your raise. However, the main disadvantage is the hefty cost to acquire new investors. Remember the $2,000 average? That means unless you already have a highly engaged community, advertising will likely not work on its own.
The right solution? A combination of the two.
I’ve found that broker-dealer platforms, like StartEngine, can typically offer 50% of the investors a company needs; the other half is acquired through the business’s own efforts. So, why not start with a platform, like ours, to get to your goal? Then, down the road hire a separate white-label and broker-dealer to build on the raise. Now, some may argue that it’s best to simply engage your own community via a white-label first, then switch to a platform (in other words, turn the process around). But you have to remember the key is momentum. At StartEngine, we’ve learned that investors look for early signs of a hot raise – so if you get a slow start, you could be dead in the water.
Raising capital is hard. Equity crowdfunding can make it a lot easier, but only if you pick the right partner. My advice? Do your homework, and go with a high-reputation team to mitigate the risks of a low-performing offer.