Attorney Laura Anthony Hosts LawCast; Regulation A+ and the Legal Aspects of Testing the Waters

Attorney Laura Anthony Hosts LawCast; Regulation A+ and the Legal Aspects of Testing the Waters- In addition to the legal aspects of testing the waters, a company needs to consider the practical business aspects as well, including whether they should test the waters at all. I’ve engaged in quite a bit of healthy discussion on the topic, and read just as much.

Testing the waters can be helpful in determining whether proceeding with a Regulation A+ offering is the right course for a company. A Regulation A+ offering is not inexpensive. A company needs to complete an audit, incur legal fees and incur direct and indirect marketing and offering expenses. In addition to the direct offering expenses, management will need to focus an inordinate amount of time on the offering itself, which time will detract from business operations.

Testing the waters can also help to build up investor interest and excitement for an offering prior to its actual launch or “going live”. Moreover, testing the waters may have the secondary effect of increasing product sales, customer acquisition and brand awareness.

Keep in mind that a successful test-the-waters process does not ensure a successful offering. Far less than 50% of potential investors that indicate interest in an offering actually follow through with an investment. That figure may actually be much lower. Several sources put the conversion from a test-the-waters indication of interest to an actual investment 3- 5%.

Also, an ill-prepared or poorly executed test-the-waters campaign may prove extremely detrimental to what may otherwise have been a successful offering process. I have seen some companies attempt to test the waters without any legal or other guidance whatsoever, through social media or their own websites. These campaigns generally are not only unsuccessful but present a poor public image. In this case, a company may need to pull all offering plans for a “cooling-off period” before launching again with better guidance.
As with all public offering documents filed with the SEC, a company must also consider the public availability of test-the-waters materials, and education for competitors, including knowledge of the offering itself. If a company does not want a competitor to learn of their business and offering plans that company may be better suited filing a confidential registration statement or sticking with private offerings.

Once a company determines to proceed with testing the waters, preparation is key. A company and its advisors need to prepare materials that are not only creatively compelling from a general marketing standpoint but that are also compelling to a reasonably sophisticated investor. That requires researching recent deal flow from the same and similar industry groups, as well as knowing what deal parameters have been successful and what have not and understanding the constantly changing investor appetite.

A company must also consider who it is directing its campaign towards. A different approach may be used when soliciting a long-standing customer or fan base with prior knowledge of a business, than for a list of broker-dealer clients that have never heard of the company before.

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