The new Reg A+ gives startups the option of raising up to $50M from anyone for the first time, including from their customers. Historically, private companies and startups were only able to raise funding from accredited investors and VC firms.
In order to conduct a mini-IPO, companies must go through an SEC registration process which can take a few months. Because of the time and cost commitment, founders should be cautious before fully committing to a Reg A+ offering.
Luckily, companies are permitted to test the waters, polling their customers (and the general public if they choose) at no cost, prior to committing to a mini-IPO. This provision effectively acts as a free call option on a mini-IPO for companies.
Creating the Option
By holding a testing the waters campaign, a company effectively creates an option to hold a mini-IPO at a later date. During a testing the waters campaign, potential investors give "indications of interest." These indications of interest signal the total amount that potential investors would be interested in investing if the company decided to do a full-blown Reg A+ offering. For example, WayBetter, the producer of DietBet, recently tested the waters on SeedInvest and garnered over $10M in indicated interest from over 3,000 people during the campaign's first few days. This process cost them nothing and enabled the company to confirm that there was substantial investment interest from their users.
Exercising the Option
Once a testing the waters campaign has concluded, an issuer can use indications of interest to gauge the potential outcome of a Reg A+ offering. If a testing the waters campaign generates a significant amount of indicated interest, a startup may then decide that a Reg A+ offering is an appropriate avenue for raising funds and proceed with a mini-IPO. If not, the company can simply decide to take a more traditional fundraising approach.
A testing the waters campaign can also increase customer engagement by giving users a sense of involvement in helping the company make an important decision. Reg A+ is an opportunity to reward your customers and invite them to share in your financial success, a success they played a key role in creating. By inviting your customers to test the waters and offering them the potential opportunity to take a stake in your company, you stand to energize your user base and encourage them to become brand evangelists.
Although there are no upfront fees associated with conducting a testing the waters campaign, founders should work with a reputable broker-dealer platform to ensure they comply with Regulation A+ regulations. Although testing the waters is free, doing the process yourself can be rather costly. Sending the wrong messages to potential investors or not including proper disclosures could effectively eliminate your ability to proceed with a mini-IPO. In summary, find a regulated platform to work with and do your homework on them ahead of time.
By testing the waters, companies can effectively create a free call option on a Reg A+ offering. This enables the company to gauge the public's interest in order to make an informed decision on whether to proceed with a mini-IPO.