By Barry James, June 2, 2014, A huge amount of time and energy is being consumed on both sides of the Atlantic – but especially in the USA – working out what the rules for Crowdfunding should be – especially for ‘disclosures’.
I took part in a great discussion with Steve Cinelli and Jonathan Frutkin yesterday (thanks to Sydney Armani and CrowdFundBeat) and Steve asked a very interesting questions: What should the role of the platform be in providing for ‘disclosure’?
What should the role of the Platform be?
It’s very interesting – and instructive – to contrast two approaches and thought processes here. Firstly the traditional approach based around ‘disclosure’ from a ‘closed box’ or hostile environment’ compared with the transparent, ‘open by default’ environment which underpins all forms of Crowdfunding.
Is this all fluff and hype or is there real substance to this difference? To find out let’s use one of Einstein’s famous ‘thought experiments’ to follow through two scenarios.
First is comanyA about to float on a stock exchange. They meet with their lawyers and one of the main items on the agenda is ‘disclosures’ – and the legal duties that will be placed on them during the process and afterwards. They are entering a world where information is power and inside information – or it’s abuse at any rate – can get you in deep trouble or even put in jail. Much thought will be devoted in the coming weeks and months to deciding what is the right (ie the reasonable minimum) level of disclosure. The acid test, before a judge, will be were you legally obliged to disclose. What did the law and the documents say.
Contrast this with CompanyC who are launching an equity crowdfund. The first thing the team will be told is that they are expected to be visible – as themselves – and to be open and honest about their venture and it’s plans. Not only that but that they’re expected to do so in an environment where anyone – any member of the crowd – can ask any question at any point. Not only ask the question – but also expect it to be answered openly and in a timely manner.
Now lets assume that the company in question has some skeletons in the cupboard. What are the mental processes here? Well firstly if they’re Crowdfunding the smart thing to do will to not walk away but RUN! FAST! This is not an environment at all suited to those who are not in a position and prepared to display openness and integrity. CompanyA however may choose to look to their lawyers, make sure they’re smart enough and see how best to figure out a way forward that puts them only in the best light.
It’s also worth thinking about the process. For CompanyA disclosure is very formalised and flows through very discrete ‘pipes’ – up and down to CompanyA but not across.
Levelling Up & Levelling Down
For CompanyC it flows in any and all directions. So if I happen to be an expert – or just know something about the venture or the founders – and ask a searching question soon EVERYONE will know both the question AND the answer. Whereas with CompanyA information and intelligence is levelled-down in each case to the thoughts and questions I as a potential investor can ask through the formal channels and the answers that I (and no one else) gets – with CompanyC I get the benefit of every expert, all the experience and every pair of eyeballs looking at this crowdfund. Information is levelled up. I get the benefit of all the other participants – or at least those moved to ask questions.
Company animals that can survive in secenario A will quickly drown in this new environment.
This is very powerful. In the old model I had to be extremely smart and experienced ALL ON MY OWN to avoid being taken to the cleaners by a sharp operator willing to work the system to the maximum extent of the law – or beyond it.
In the new scenario you would have to be extremely brave if not completely fool-hardy to even try it on. Which is the best explanation we have as to why it happens so infrequently and why when it does it’s almost always found out straight away. Plus no one has to lose a penny for the attempt to be exposed.
This is massively more efficient. Instead of clever lawyers backing sharp (or worse) business people working in a dry-as-dust legal environment that tries to plug every available hole to stop malfeasance of every sort you just shine a great big light on what’s happening and let everyone comment, openly ask their questions and each decide whether that’s something they want a part of.
Could it be more different?
So – in light of this: What should the role of the platform be in providing for ‘disclosure’. It should be to Expect, Encourage and Insist on Transparency – and to facilitate an on-going open relationship between the venture and it’s investors.
This is many many orders of magnitude more effective and efficient than a reversion to a system of full or partial disclosures. It works so much better.
Barry E James is the Founder & CEO at The Crowd Data Center & The Crowdfunding Centre, Founder/ Director of The Social Foundation
(C) Copyright Barry E James June 2014