Test the Waters for a Reg CF Offering
Before you file your Form C, you are only allowed to promote a potential Reg CF offering in one way: a process allowed under Securities Rule Act 206, called “testing the waters”. This will allow you to decide if the expense of proceeding with the crowdfunding process is to your benefit by measuring interest from investors.
It is also possible to test-the-waters prior to deciding which exemption you will use (Reg A+, Reg CF, or Reg D) under Securities Act Rule 241, but if you do, you will be subject to state “blue sky” laws and ensure you remain in compliance with individual state laws.
What is the difference between test-the-waters and a live offering?
Under a test-the-waters communication, no securities may be purchased, but you can gauge public interest through a general solicitation, as well as collect information from interested parties. Most crowdfunding platforms offer a specific page for Testing the Waters where you can talk about your company, mission, team, and other details.
It can be very difficult in some cases for an investor to discern the difference between a live offering statement and a test-the-waters statement. In order to limit confusion from potential investors, test-the-water communications are required to include certain disclosure statements and must follow all applicable rules and filing requirements for offering-related communications included with a Form C.
After filing your Form C, any test-the-waters communications must cease immediately.
Who can use test-the-waters?
Companies hoping to make a Reg A+, Reg D, or Reg CF offering can all use test-the-waters communications, but different rules apply as far as what, how, and to whom information can be communicated.
Did you know? Testing the Waters communications are not required to happen on a crowdfunding platform– they can also be verbal or written statements. They can even take place in emails or social media posts!
Benefits of a Test-The-Waters Phase
Taking advantage of test-the-waters provision can be a valuable tool to companies considering opening a Reg CF offering.
Measure Interest
Launching a Reg CF offering can be an expensive process– in addition to filing fees, intermediaries will also take a percentage of any proceeds you make.
By allowing investors to hear about your potential offering before filing a Form C, you can estimate the potential interest in your funding round and get input to shape decisions and make the final offering terms more attractive to investors before you launch.
Build Excitement
Crowdfunding platforms like WeFunder, Republic, and StartEngine all offer Test-the-Waters pages that can be converted to a campaign page once you have officially filed your Form C and launched your offering.
Having a page on these platforms ahead of launch provides a URL that interested parties can share on social media to spread the word about your potential offering.
Create a Mailing List
A Test-the-Waters page often includes a space where investors can join a mailing list to get updates about the upcoming offering or reserve a spot to be able to purchase shares if or when they become available.
These “reservations” can be converted into valuable investors when your campaign launches if they decide the terms are favorable and follow through on investing in your company.
Do I need to include test-the-waters communications in my Form C?
Yes; any public communications made prior to filing a Form C, including a testing-the-waters phase, must be included when you file your Form C with the Securities Exchange Commission. You must include specific disclosures with any communications and you cannot discuss specific terms in these communications– you should instead direct people to your intermediary or funding portal page for information on the terms being considered.
Required Disclosures
“No money or other consideration is being solicited, and if sent in response, will not be accepted.”
The reasoning behind this disclosure should be clear to anyone familiar with the laws surrounding Reg CF offerings.
Testing the waters” happens prior to filing a Form C, so terms might not yet be finalized, and your company is legally not able to sell any securities until a Form C has been filed and approved by the Securities Exchange Commission.
“No offer to purchase securities can be accepted. No part of the purchase price can be received until the offering statement is filed and only through an intermediary’s platform.”
Reg CF offerings can only be launched on funding portals and platforms that have been approved by FINRA (Financial Industry Regulatory Authority), and only after a Form C filing has been approved. This ensures that both the company and potential investors are protected and regulations are followed.
“Any indication of interest is a non-binding agreement and is not an obligation or commitment to invest.”
Potential investors who have ‘reserved’ a spot or requested to be notified when an offering launches will be emailed with instructions on how to continue their purchase of securities if they are still interested and find the terms agreeable.
If a potential investor with a reservation decides that the final offering terms, once declared, are not to their liking, they can choose not to invest without any obligation.