Equity Crowdfunding Campaign Costs – It Takes Money to Raise Money
The accessibility and low minimum investments of equity crowdfunding is one of its most attractive features. On MicroVentures, for example, investments can start from as little as $100 as well as on other platforms, making it an affordable way for individuals to invest. That said, equity crowdfunding campaign costs may price some companies out in the cold. Although it is cheaper than launching an IPO, it is not free. In this article we discuss the costs that come with equity crowdfunding campaigns and things that need to be considered when budgeting for it.
Every company has its unique situation, which determines how much to budget for each category of costs. It is essential to be aware of these costs and create an estimated campaign budget before making the decision to launch a campaign. When accounting for crowdfunding marketing costs, always aim for more money than you think you need. We’ll discuss this in detail below.
Pre-Launch Equity Crowdfunding Campaign Costs
Collectively, this is the money that must be spent before an offering can be made to the public. There are various equity crowdfunding campaign costs that a company must consider before heading down that road These costs can be categorized as pre-launch costs, accounting fees, legal fees, and optional costs. Pre-launch costs include filing the Form C, which could cost up to $5,000, opening an escrow account, which costs around $1,500 or more, and the bad actor check fees, which range from $45-$100 per person. Accounting fees range from $0 to $7,500 or higher, while legal fees range from $0 to $20,000 or more. It is also possible to DIY some of the legal representation, which could reduce the cost.
Then there the required creative services necessary to add overall attraction to the deal, and the cost ranges from $1,500 to $7,500. That being said, don’t skimp on vivid, sharp imagery and an engaging pitch video. Bland pictures and/or videos can drive away potential investors through boredom alone.
Equity crowdfunding offers several advantages, such as shares sold not counting as company debt, making it easier to get small investments, acting as social proof, making it easier to secure VC or angel investments or even a shot at IPO in the future, and having investors who can become loyal customers and brand ambassadors. While equity crowdfunding is affordable, companies should not cut corners when launching a campaign to save money. Instead, they should be aware of equity crowdfunding campaign costs associated with the offering to determine if equity crowdfunding is right for them.
Equity Crowdfunding Campaign Costs During the Campaign
Mid-campaign costs for an equity crowdfunding campaign include public relations and marketing fees and funding platform commissions, among others.
Marketing fees typically range from $5,000 to $50,000 and cover the costs of promoting your campaign across various channels, such as social media, email, influencer outreach, press releases, and public relations. Ad spend and ads management are significant expenses, and a minimum ad spend budget of $10,000 is recommended.
Too many crowdfunding campaigns fail because of an undersized promotion budget. Over the past ten years I’ve spoken to hundreds of entrepreneurs and startups about promoting their Kickstarter/StartEngine/Indigogo/WeFunder/Netcapital/etc campaign who told me they don’t have the money, they’re broke, the advertising budget is spent, etc. I silently shake my head at the shame of yet another dead campaign. I tell them that if they don’t kick it up a couple of notches with their marketing activity they are facing certain failure in reaching their funding goal. Most folks think I’m kidding, lying and/or exaggerating.
Whether they took me seriously or not, everybody should’ve done their own homework to verify the veracity of everything they were told. If they had, it’s possible they could’ve found a way to fund some kind of promotional activity. That’s what real entrepreneurs do; they find a way. The coward quits. The coward sits on the sidelines as a helpless spectator and watches their campaign – and their vision – die. The coward has no business crowdfunding or even trying to run a business let alone start one. The coward is doing everybody – coward included – a favor by “playing it safe” and getting a job. They’re better off pursuing paychecks instead of profits.
To the wimpy crowdfunder who is too afraid to put his or her own money where their mouth is but will happily let the advertising agency take all the risk by working on spec – go pound sand. On spec means the marketing agency or PR firm is expected to work for the client with zero dollars up front and only to be paid some time later if and only if the client is satisfied, whatever the fuck that might or could mean.
I used to reject this with “Sorry, but we operate under standard industry practices which call for the client to pay up front for public relations services.” That often led to the “brilliant” comeback from Wimpy, “If you were so certain of your company’s abilities why not take my offer? You can’t lose, right?”
Great. [ sigh ] He HAD to call my firm’s reputation into question thus requiring me to waste more time defending said reputation as honor demands. I got my answer down to a science that shut down the conversation every time; “Capabilities and performance have nothing to do with it, Simply speaking, Seinfeld failed at crowdfunding. Sony failed at crowdfunding. You might fail too and it would have nothing to do with my firm. Read the case studies.” After a short, stunned silence the conversation moves on.
Which low-grade moron first thought this was a good idea (it isn’t) and/or a shrewd negotiating tactic (it ain’t)?! This stupid proposition is dead on arrival for three more solid reasons:
- It’s illegal with equity crowdfunding as per the SEC. Don’t argue. Don’t split hairs on semantics. It is. Seriously.
- Even if it were legal, any such contract is essentially nonenforceable on a broke startup. Personal guarantee by a founder secured by real estate? Haha yeah, sure.
- Nobody in the communications industry (public relations, marketing, etc.) does this. Not anybody. Not ever. Never. Neither do lawyers nor accountants.
Why do I call them wimpy? As a homage to my friend and colleague Professor Irwin Stein, esquire on what I consider to be his magnum opus.
Funding platforms charge a commission, usually between 3% and 12% of the total amount raised, as your admission price to use their platform, their resources and so on. Some platforms also require equity shares in the company. Blue sky filing fees, which vary depending on the number of states where securities are sold, can range from $1,000 to $7,500 or more. Shareholder services and ongoing reporting requirements are other expenses to consider.
Expenses After Closing
If the campaign is successful, ongoing expenses include shareholder services, annual reporting requirements, and potential penalties for non-compliance with SEC guidelines. The costs of ongoing reporting can be substantial, but they can be reduced by using the EDGAR system to file documents electronically.
Tips for Saving Money
To stretch your marketing budget, you can consider leveraging your own social capital or using micro-influencers who have a smaller following but a higher engagement rate. Community outreach is another effective way to spread the word about your raise, such as attending trade shows, publishing press releases in local newspapers, and tapping into your personal network by sending emails to encourage sharing.