One of the reasons equity crowdfunding is so accessible is its relative affordability. Investments on Republic start at just $10—and $100 on other funding platforms—making ECF an affordable way to invest.
But we’re not just talking about investing! With the cost of a Reg CF raise significantly less than launching an IPO, equity crowdfunding also provides a more affordable way for companies to sell their shares.
However, affordable certainly doesn’t mean free. In this week’s edition of the Arora Blog, we’re talking about the costs associated with equity crowdfunding campaigns, and things you need to make room for in your budget.
Over the course of our time in the equity crowdfunding industry, we’ve worked with our fair share of visionary founders intent on selling their shares to the crowd in exchange for capital. And while equity crowdfunding sounds like a cheap way for growth-stage companies to secure that capital (and it can be!), many founders are blissfully unaware that there are some real costs to raising money.
Don’t get us wrong—there’s a lot to love about the financial aspect of Regulation Crowdfunding:
- Shares sold don’t count as company debt as there is no guarantee of repayment for investors
- It’s much easier to get a “yes!” from an investor when the investment amount is small
- Successful rounds act as social proof, making it easier to secure VC or angel investments in the future
- Investors become loyal customers and brand ambassadors to help ensure the success of their investment
And with costs of launching an IPO starting at around $750,000 or more, Regulation Crowdfunding is still arguably the most affordable way for companies to sell shares.
But your campaign shouldn’t be a place to cut corners just to save a few dollars; as with anything else, you’ll have to spend money to make money. Before making the decision to launch a campaign, it’s important to create an estimated campaign budget.
How much to budget for each of these categories will vastly differ for every company’s unique situation. Being aware of potential costs before you’re expected to pay them will help you decide if equity crowdfunding is right for your company.
Pre-Launch Costs
Filing Your Form C: $0 – $5,000
Using the SEC’s EDGAR filing system, it is free to file the Form C, but the costs of preparing your form vary greatly depending on your funding platform’s protocols.
Ex. 1: Republic issuers can use iDisclose to complete their Form C for $1,500. However, Republic requires all companies raising on their platform to have their Form C reviewed by an attorney. This ensures all disclosures are accurate and SEC-compliant—but also increases the cost.
Ex. 2: Wefunder provides a free digital form generator to their issuers, which drafts the Form C based on information provided by the founder. However, in order to use the generator, founders must release Wefunder of any and all liability if the SEC rejects the form for any reason, or if false statements are inadvertently made. Having this digitally-generated form reviewed by an attorney is optional, but recommended.
Opening Your Escrow Account: $1,500 +/-
Though funding platforms generally do not charge any up-front fees or commissions, issuers will be required to open an escrow account where investments will be held until the close of the campaign.
This is another cost that can be highly variable based on your funding platform: some charge a one-time fee (around $1,500) while others charge a smaller up-front fee and a monthly retainer for maintenance.
“Bad Actor Check” Fees: $45 – $100 per person
The SEC legally requires “bad actors” to be disqualified from selling shares on any FINRA-governed funding platform. Any person on the issuing company’s executive team, board of directors, or anyone who owns more than 20% of the company is subject to these laws and will be background checked accordingly, generally by a third party.
Accounting Fees: $0 – $7,500 or higher
Depending on the amount your company is raising—and whether this is your first equity crowdfunding campaign or not—these costs can differ significantly.
The SEC requires certain financial statements and review procedures based on the maximum amount you want to raise:
- Up to $250,000: Financials must only be reviewed by the principal executive officer.
- $250,001-$534,999: Financials must be reviewed by a public accountant independent of your company.
- $535,000-$1,070,000: If it’s your first Reg CF offering, financials must be reviewed by an independent CPA.
If it’s not your first Reg CF offering, financials must be audited by an independent CPA.
- More than $1,070,000: All financials must be audited by a public accountant independent of your startup.
Legal Fees: $0-$20,000 or higher
The legal cost of launching a campaign depends on how much work you’re willing to do yourself vs. how much work you’re planning to delegate to your attorney.
Typical equity crowdfunding legal services can include:
- Preparation or review of Form C
- A legal compliance review of all marketing materials
- Preparing subscription documents for the offering
- Drafting any necessary ancillary agreements and documents, including board and shareholder consents
- Communication with all investors and stakeholders
- Post-closing assistance with record retention
It is possible to significantly reduce your legal costs by DIYing some of your legal representation, for example preparing your own materials and only having an attorney review them for compliance. And, of course, if you already have your own in-house legal representation, this cost can be removed from your budget.
Optional Costs:
Creative Services: $1,500-$7,500
While this is not absolutely necessary, many founders make the choice to have their campaign professionally strategized, designed, and managed by a crowdfunding marketing team.
As with everything else, the more work you do on your own campaign, the more money you can save on creative services—as long as you’re prepared to invest the time and effort in your own campaign management (which is a significant investment!).
Campaign Video: $7,500 – $10,000+
Crowdfunding best practices dictate that each campaign page feature an introductory video about the company, the product, and the raise. In fact, campaigns without videos are 85% more likely to fail.
It is possible to conceptualize and create this video yourself, but unless you have your own in-house video team, a professional videographer familiar with constructing a narrative is a solid investment.
Mid-Campaign Costs
Marketing Fees: $5,000-$50,000
Marketing is arguably the most critical facet to guaranteeing the success of your offering, and is not a place to cut corners. Your marketing budget should be comprehensive and cover the costs of marketing your campaign to a vast variety of channels, including:
- Social media marketing campaigns (Facebook, Instagram, and/or TikTok ads and promotions)
- Email marketing campaigns
- Influencer outreach (this includes coverage by social media influencers and bloggers)
- Press releases
- Public relations
Much of your marketing budget will likely go towards ad spend and ads management. We recommend our clients start with a minimum ad spend budget of $10,000—and that does not include ads management fees.
Costs After Closing
Funding Platform Commission: 3%-12% of total amount raised
There are typically no significant up-front fees or retainers for crowdfunding platforms other than the cost of opening your escrow account. However, every platform charges a commission to cover the usage of the platform’s resources and technology, and some require equity shares in the company.
This fee is paid upon the successful closing of your offering, and most platforms do not charge fees to unsuccessful campaigns.
Blue Sky Filing Fees: $1,000-$7,500 or higher
While there is no overarching state review process or registration requirement for equity crowdfunding, states can (and many do) require notice filings. Therefore, this amount of your budget is going to be extremely variable, and depend on the amount of states your securities are sold in.
Shareholder Services: $500-$10,000 per year
If your campaign is successful, you’ll likely end up with hundreds or even thousands of shareholders. There are a few platforms that use different methods to make your cap table more manageable (Republic has an optional CrowdSafe program, and Wefunder uses Special Purpose Vehicles or SPVs). However, for raises on other platforms, you’ll want to retain a transfer agent or obtain cap table management services.
Ongoing Reporting Requirements: $0-$5,000 per year
According to guidelines from the SEC, any company that sells securities in an equity crowdfunding offering is required to provide an annual report (Form C-AR) no later than 120 days after the end of its fiscal year.
Companies must comply with the annual reporting requirement until they reach certain thresholds as laid out on the SEC governing website. Any issuer terminating its annual reporting obligations is required to file notice on Form C-TR reporting that it will no longer provide annual reports pursuant to the requirements of Regulation Crowdfunding.
There are major penalties for failing to comply with these SEC requirements including fines and total bans from any future equity crowdfunding raises on any FINRA-governed broker-dealer.
As with the Form C, these reporting documents can be filed for free electronically through the EDGAR system, but annual preparation fees can make this an expensive process.
Ways to Save Some Money
Marketing is going to be your highest priority and likely your highest cost. Here are some ways you can stretch your marketing budget a little further.
Flex your own social capital
Many companies choose to pay a marketing agency to optimize and professionally target their advertising. In that instance, you’re paying just as much for the management services as you are for the usage of their social network. Crowdfunding marketing agencies build and curate their audience over the course of years to be able to target ads to active investors looking for their next opportunity.
If you choose to forego the cost of a marketing agency and handle your own ads, you’re also going to have to target your own audience. If you already have an active and engaged social media presence, this could be an easy place to save some money.
Use micro-influencers
Chances are if you’re trying to save money, you won’t want to pay $5,000-$10,000 for a single post from a macro-influencer. That’s where the value of micro-influencers comes in.
Micro-influencers are considered those with 10,000-100,000 followers on a single platform. Because they’re trying to grow their follower base, they’re generally much more likely to accept smaller payments per post—or even equity shares in your company.
And even better? Many have a higher engagement rate than those with a larger following, making micro-influencers an excellent money-saving tool.
Put the “community” in community round
Ensuring the success of your equity crowdfunding campaign means doing everything you can to spread the word about your raise. Now is not the time to worry about rejection or feel shy about asking for money.
Yep: we’re talking about community outreach.
Have a local following? Consider going to trade shows or expos with your product or service, and talking face-to-face with potential customers about the benefits of investing.
You could also try publishing a press release in local newspapers. This can be considerably less expensive than press releases on major websites or larger papers.
Finally, it wouldn’t be called “community outreach” if we didn’t talk about leveraging your personal community: your network. Hiring a copywriter to write a set of emails discussing your raise could pay dividends if you send it to your and your team’s network and encourage your recipients to share.
Ready to Get Started?
Crowdfunding can be extremely expensive, not only monetarily but in time, energy, and creative resources. Don’t have those on hand? We do—and when you’re ready to launch your equity crowdfunding campaign, we’re here to help you smash your raise goal.
Apply to become an Arora Partner and join hundreds of satisfied clients for whom we’ve raised more than $125,000,000.
