Crowd Funding
The rise of private equity investing and how it’s been facilitated by the growing number of crowd funding platform websites present a series of complications. The complications present themselves for future investors, mergers or acquisitions, as well as ill defined peril that come from an unsupervised or poorly moderated investment process.
Crowd funding is fast becoming a valuable tool for many. Many frustrated entrepreneurs are seeking funding from the masses as the confederacy of gatekeepers to the treasury of others does not see the wisdom of the entrepreneur. I get it and feel for them. I have been in their place both for myself as well as on behalf of clients. The wisdom, or marked lack of wisdom, as well as some naked predatory forces create a tension for the would-be entrepreneurs leaving them questioning their sanity, the efficacy of seeking private money through a gatekeeper and the lack of balanced investment agreement often crafted by investors.
Conversely I get the wisdom of an investment that has had the benefit of legal and financial advice of seasoned experts. Even if they are not seasoned experts, at least there is some modicum of 3rd party rationality applied to the process.
If I were an investor looking at crowd funded activity I would encourage the conducting of real due diligence on any potential investment in order to guard against investment fraud, and whack-job harebrained schemes. It would be helpful if the investor possessed some familiarity with the business model. Every investment scheme has its own set of parameters, fact patterns and laws that need to be addressed.
Furthermore, it is important to note there has been no due diligence, zero fact checking, by the platform on the people, product or proffer. Yeah, some platforms say – “Oh, we only accept the top 1% of opportunities”. It is encouraging that there is some vetting. What is discouraging is the lack of transparency to the vetting process and outcomes of their work other than, ‘Whoopie – there it is ready for money’.
Thus, the first aspect of due diligence is the background and vetting process of the unlicensed unregulated platform. The very fact that a platform boasts of its vetting process puts the platform in line for full responsibility for the frauds parading through their platforms and the investors losses.
For the platform and the proffer’s management team the investor must consider their experience, history of successes and failures, level of voluntary disclosure, and future prospects such as other VC firms, market, etc…
As crowd funding platforms evolve we will see the immediate successes and failures. Legislation for crowd funding has been passed and regulations have been proposed.
http://www.sec.gov/rules/proposed/2013/33-9470.pdf
But the regulations have not been passed and there has been a cry to greatly reduce the 600 plus pages of regulation as that will kill crowd funding.
Maybe that is the idea of the SEC; thus there is less chance of either a success or a fraud. But I get the paranoia of the regulators. There are many people in the world that just love creating a great story and taking money from people. Only later do the investors understand the story was novel fiction, and a new and novel fraud has left its mark.
But even if the regulations go into effect, due diligence is the responsibility of the investor to either do or have done. Crowd funding is a tool, how it is used will determine if it is a great tool or a heinous tool.
Lastly, assuming a company has been crowd funded and it is becoming successful or even just attractive to more investors. There are significant legacy issues. Questions such as, Who were the investors?, What were the representations made to those investors?, Do the investors reside in a jurisdiction where the offer is by statute a fraud?, What are the costs of remediation of the entities and the opportunity to grow from a crowd funded opportunity to a company seeking financing from main street or Wall Street?
We have already seen a very nice presentation where the manager histories were faked, with very good seasoned biographies on LinkedIn and Facebook. All of the current shareholders were US shell companies. All of the reports and accountant-reviewed statements were faked. We were asked to review the company as the offer was so well done – and it was – that the investor wanted to take down the full offering. In the end the investor ran, the platform was notified and I do not think any one was hurt, but they will be back.
