Equity Crowdfunding and Transparency Go Hand in Hand

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DFY Consulting | Diana Yazidjian | Nov 6, 2013

transparencyEquity 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.

Related:  NCFA Equity Crowdfunding Principles and Response to OSC staff consultation paper 45-710

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 Neiderer, and commended him on his model. Yet, we're still questioning its benefits. Mr. Neiderer 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.

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