Crowdfunding – How Communications Will Provide the Keys to Capital
Reports that U.S. Securities and Exchange Commission (SEC) Chairman Mary Schapiro will be leaving her post next week have raised questions as to the fate of a number of high-profile issues currently on the Commission’s docket. Chief among them is the concern that long-awaited crowdfunding regulations tied to the JOBS Act – rules that would allow companies to raise capital via share offerings primarily marketed to small investors online – may be delayed.
Few doubt that whomever President Obama chooses to succeed Chairman Schapiro will face a lengthy and contentious Senate confirmation process. And when the SEC does finally get around to its mandate to publish crowdfunding rules, the process will only be half completed, as the Financial Industry Regulatory Authority (FINRA) must then publish its own guidance before online equity portals can open for business.
The news isn’t all bad though, as the small businesses eagerly awaiting this new capital formation opportunity do have a few reasons to be optimistic. The first is that SEC Commissioner Elise Walter, the President’s likely choice to succeed Chairman Schapiro until the post must be permanently filled by December 2013, has thus far embraced crowdfunding rules – so long as they strike an appropriate balance between the needs for improved access to capital and adequate investor protection.
The second is that any rulemaking delay, while perhaps frustrating, does afford the companies looking to capitalize on crowdfunding the chance to make a number of preparations essential to success.
First, potential crowdfunders need to begin building the communities of support they will be soliciting now – before they make their pitches. Jeffrey Koeppel, an attorney with the law firm of Elias, Matz, Tiernan & Herrick LLP who maintains the widely-read blog Crowd Funding News, believes that following the rule of “know them before you need them” is of the utmost importance.
“When you look at the most successful crowdfunding efforts to date,” says Mr. Koeppel, “nearly all of them leveraged long-standing connections and relationships that were formed well in advance of the solicitation. If you haven’t already built a strong social network online or off, your chances of success are going to be pretty slim.”
Second, companies need to establish just what their value propositions will be – beyond mere dollars and cents. “Look at the groups who started the crowdfunding phenomenon,” says Mr. Koeppel. “They are political campaigns, issue advocates, citizens journalists, artists, and others who are linked by the theme that they believe what are doing has a great deal of societal value. My guess is that crowdfunders in the equity markets are going to have to play on those same themes – whether they be passion for the project, allegiance to a cause, or identification with the owners and what they are trying to achieve.”
Simply put, when the return on investment is morally strong as well as monetarily sound, companies establish the emotional connections that ultimately inspire investor buy-in in crowdfunding circles. As such, companies need to prepare messages that speak to the heart, as well as the pocketbook.
Third, and perhaps most important, crowdfunders need to carefully plan the ways in which they will leverage social media – as shareholders themselves will play a significant role in communicating the value and virtues of the investment. “Because protecting investors against fraud and other malfeasance is going to be an SEC priority, issuers are likely going to be tightly regulated as to what they are permitted to say,” says Mr. Koeppel. But the same rules likely won’t apply to investors or other voices not directly affiliated with the company. Look at the conversations taking place on Yahoo Finance or other financial-related bulletin boards. They can have a significant impact on stock valuations and the SEC doesn’t regulate them at all. I think the same will be true when it comes to equity crowdfunding – and companies will have to be prepared to deal with both positive and negative commentary.”
What this means is that inspiring and influencing social media conversations around a particular offering is going to play a major role in their success – especially when one considers that the Internet is where these offerings will be made available in the first place. Crowdfunding is an exercise where the messengers matter just as much as the message itself. When companies encourage investors to speak for them, they provide themselves the levels of credibility, third-party validation, and viral allure imperative to social media success.
In the context of all that companies need to do before they wade into the crowdfunding waters, a delay in the rules’ promulgation may not be all that bad a thing. Preparation will be paramount, and those that take advantage of the extra time allotted to build a receptive audience, fine-tune their messages, and formulate a strong social strategy are those that will be best positioned to capitalize on what promises to be a crowded marketplace.
Kathleen Wailes is a Senior Vice President at LEVICK and Chair of the firm’s Financial Communications Practice. She is also a contributing author to LEVICK Daily.