Navigating regulatory hurdles, preparing offering documents, and figuring out how to efficiently process transactions are all difficult parts of raising capital, but none of those things matter if you don't have any investors. While some experienced issuers have a stable of reliable investors, many issuers, especially new ones, may need to grow their investor pool to successfully complete their raise. If you find yourself in this situation, here are a few steps you can take to expand your reach:
Market to Friends and Family First
The first place to start is to market your offering to people you know. That can include friends and family or existing limited partners. Often, it is most difficult to find that first investor. But tapping into your personal network can be beneficial, since trust is already established. Once you have demonstrated credibility within your own network, you can begin to attract outside investors.
Partner with a Wholesaler
One way to expand your reach when selling securities is to work with a distribution firm or broker-dealer. A brokerage firm builds relationships around successful transactions and investments with their clients. Their primary interest is going to be to retain that level of trust. To establish credibility with a firm, you will likely need to do at least one of the following three things:
- Establish investor interest within your own network
- Demonstrate a history of attractive returns
- Show you can pass the due diligence that a broker-dealer requires.
It is also important to find a firm that has experience in working on transactions like yours. As an issuer, if you were to sell your business, you would likely seek an advisor who has sold firms like yours in the past. They understand your business and know the buyers in the industry, increasing the likelihood of getting you the best price. Similarly, a wholesaling firm familiar with your type of raise can help you structure and market your securities offering. They may even have a rolodex of investors in mind that are looking for those types of transactions.
Provide Incentive-based Compensation
It's important to be cognizant of investor wants and needs when you are trying to grow your investor base. Aligned incentives are important. Having lower fees and higher preferred or waterfall returns can help incentivize investors to join you. This is especially true when positioning your offering to fee-only RIAs, who work as a fiduciary for their investor clients.
Representatives who help sell your offering will need to be properly incentivized as well. Often, transactions in real estate and other asset backed offerings include sales commission to compensate those that have a roster of clients or potential investors already built out. This agency model has worked well for those compensated on transactions, not necessarily in an ongoing advisory role. It is important to note that any representative receiving transaction-based compensation will need to be registered with a broker-dealer. Otherwise, you risk serious sanctions from the SEC.
You may want to affiliate with a Broker-Dealer or RIA to engage registered representatives and compensate those raising capital via sharing in the management fees or through commissions. For instance, WealthForge has registered representatives that raise capital for their respective issuer sponsors and earn commissions on those securities sales. Striking the right balance of fees, expenses, and incentives is an important consideration. If you are including selling commissions in your offering, you may want to consider having a second share class with no commissions. Alternatively, you could use the commissions to purchase additional shares for the investor clients of fee only RIA's, who can not accept commissions as compensation but would like the absence of this commission to be credited to the investor.
Take Advantage of General Solicitation
Depending on what exemption you chose for your raise (i.e. Reg D 506c or Reg A+), you may be able to take advantage of general solicitation. If you are pursuing retail investors, having a budget for marketing can help increase awareness of your offering and generate extra subscriptions.
Here are some general solicitation strategies to consider:
- Emails to targeted lists of potential investors
- Webinars educating viewers about the offering
- Soliciting existing customers (especially for consumer products)
- Listing on sector-specific crowdfunding portals
- Promoting via social media and digital advertisements
- Traditional radio and print advertisements
If you need a little extra to reach your raise goal, general solicitation may enable you to expand your investor base. While some member firms won't work on 506c offerings, more and more are open to this newer exemption.
Attend Industry Insider Events
Even with the ease of online connections, there is still value in roadshows and face-to-face interactions. Investing in a private offering is very dependent on trust and relationships. One of the most effective ways to foster those relationships is meeting in person. But, travel and one-on-one meetings can be expensive. Consider scheduling activities in a few key cities or attending industry events targeted to your potential investor audience. For example, if you’re raising money for a hotel, go to a hospitality conference.
While investors will have to make up their own mind whether or not they will invest in your offering, these steps will help you maximize awareness of your offering, potentially allowing you to raise capital more quickly.
A poorly constructed offering document can lead to
investor harm and even legal trouble for issuers.
Disclaimer: WealthForge provides this information to our clients and other friends for educational purposes only. It should not be construed or relied upon as legal advice. Private security transactions involve a high degree of risk and are not suitable for all investors. They are illiquid, may have a long hold period, and may result in the loss of invested principal.