Equity crowdfunding has been around forever but as long as the crowd meant family, friends and some "educated" investors, no one minded because there was nothing disruptive about it.
If you read up on the state of equity crowdfunding in North America, public opinions, expert speculations, prognostics, forecasts, you would probably run and hide. A record of pessimism has swooshed the continent. And public opinion along with it. "It can't work, the public isn't educated enough"; "They'll make the wrong decisions"; "It will open the door to fraudsters who will abuse mom and pop investors"; "There is no way to prove the issuing company is a viable, only after the fact". The list goes on.
The gatekeepers are making it challenging for the public to learn about this new model objectively. Hearing only finance people, for instance, talk about equity crowdfunding is excluding everyone else and this is NOT what crowdfunding is set out to accomplish in our day and age.
As we're busy debating over fraud and due diligence, the oldest equity crowdfunding platform, ASSOB, is busy raising millions of Australian dollars for local businesses. This is not the first time I'm referring to ASSOB (and it won't be the last) because they figured it out. Countless VC celebrities have interviewed CEO, Paul Niederer, and commended him on his model. Yet, we're still questioning its benefits. Mr. Niederer says that, since its launch in 2008, there is no fraud from raises on the platform because of its many check points such as:
•Rigorous governing practices, due diligence on founder, owners, IP
•Entrance costs: the company has to pay an upfront cost to ASSOB
•Directors of the company take liability
•Transparency: the company must accept to disclose strategic information to potential investors (offer document) in order to instil confidence
Transparency is a notion that not everyone is comfortable with. As I outlined in this video-interview, it is one of the pillars of crowdfunding. VCs are concerned with too much disclosure, that it may reveal the company's strategy and competitive advantage. Entrepreneurs are more tolerant as they'll provide the information needed to convince the investor. Gil Michel-Garcia, securities lawyer and CEO of Wafu, the first Canadian company to have successfully crowdfunded in the U.S., has this to say on the need for more transparency:
DY: Is there such a thing as too much disclosure when soliciting capital from potential investors?
GM: The level of disclosure is normally governed by a threshold of materiality. Therefore, companies need to disclose all facts that are material to the decision of whether to invest in the company or not. With respect to have financial disclosure, generally of at least 3 years financial statements, preferably audited if the offering is larger (< $500k in the U.S.). Also, if your last annual financial statements are more than 6 months old, you need to present comparative interim non-audited internal financial statements.
DY: If start-ups have little too disclose in terms of financials because of their short lifecycle, why should larger businesses hold the burden of disclosing much more?
GM: Smaller tech start-ups raise money primarily on their technology and their comparatives in terms of web or advertising traffic or members, rather than financial statements. If early-stage start-up's don't have historical financial statements, then investors need to take that into consideration [Early stage startups are risky and you may not see the color of money for some time or perhaps never.]. If older companies do have financial statements then they need to provide them.
So there you have it. Whether the business is seeking donations or shares, the principle of transparency remains. You must put yourself in the client's shoes, i.e. the potential investors. What would they want to know about your company that will allow them to make a decision? And if they don't know what to ask because they lack the knowledge, there are organizations today that are up and running and acting as advisors. Regardless, equity crowdfunding is part emotional part rational. Investors want to be able to drop by the business, communicate with the owners, not just look at indexes. And it's a well-know fact at ASSOB: "Equity is built on hope, maybe in 3-5 years, you'll retrieve value".
In that premise, human beings have to take the responsibility of the decisions they make.
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