By Mark Roderick, CrowdFunding Beat Guest Contributor, I don’t know much about videos or marketing, but I know a lot about legal documents. In a series of posts I’m going to suggest improvements to some of the legal documents used in Crowdfunding. Most of the time, I’ll suggest actual language a portal or issuer can cut and paste – after talking with a lawyer, of course.
By and large, the legal documents you see on Crowdfunding websites were pulled from other deals. For example, the Operating Agreement you see on a real estate Crowdfunding website is usually the same document the lawyer used for pre-Crowdfunding deals. And in many respects that’s okay because legal documents are pretty agnostic as to industry.
But in other respects it’s not okay. Sometimes you have to tailor the legal document to the industry.
An example is the section of the Operating Agreement that talks about an investor’s right to information. The provision from one well-known site says that the records of the company “. . . shall be available at the Company’s principal office for inspection and copying by any Member at any and all reasonable times during normal business hours at such Member’s expense.” Another says “A Member and the Member’s authorized representative shall, upon reasonable request and for purposes related to the interest of that Member, have reasonable access to, and may inspect and copy, during normal business hours all books, records and other materials pertaining to the Company or its activities.”
No! These provisions were typical in the pre-Crowdfunding world, but they don’t work with Crowdfunding.
You might have 218 investors in a Crowdfunding deal. You have to limit the right of investors to come to your office to inspect the books, and you have to limit what they can see. Under the Delaware limited liability company statute, if you don’t provide otherwise, your investors have the right to see basically everything, including a list of all the other investors. With one or two unscrupulous or irrational investors, that’s a recipe for losing sleep.
We want to:
Be fair to investors and provide all the information they need
Avoid spending an inordinate amount of management time dealing with bad apples
Protect your confidential information
Avoid dealing with 218 investors each asking for the same information
Give you discretion to protect your business and the interests of your investors
For an example of actual legal language that does just that while, I believe, fully complying with the Delaware Limited Liability Company Act, click here.
Questions? Contact Mark Roderick at Flaster/Greenberg PC.