Recent developments in equity crowdfunding have caused much excitement.
However, once the initial celebration subsided the equity crowdfunding community got back to work and saw there would be plenty to still be done, and it would be pricey.
Depending on whose estimate you use the cost of an equity raise can range between $25,000 – $100,000 or more, with much of that cost allotted to professionals to ensure legal requirements are satisfied. Even then, companies considering a raise are often not aware of the legal protections they require within those filings. This leaves them vulnerable to costly legal action in the future, an important fact some entrepreneurs do not properly consider in their rush to market.
Considering how many alt-fi companies have seized on an area ripe for disruption, it is not surprising someone has seen opportunity in providing a comprehensive yet inexpensive solution for companies wishing to raise capital.
With the legal implications, it is comforting to know this solution was developed by two people well-versed in both crowdfunding and capital formation.
Georgia Quinn and Doug Ellenoff, securities attorneys at New York-based Ellenoff, Grossman and Schole have launched iDisclose, a web-based application allowing entrepreneurs to produce institutional-grade private placement memorandums (PPMs) at a fraction of their normal cost.
“I am surprised no one had done this before,” Ms. Quinn admitted when we recently spoke.
In describing iDisclose, Ms. Quinn stressed it is not a template. The uniqueness of each capital raise requires a more participatory solution, she said.
iDisclose takes the entrepreneur down a path dictated by how they respond to each of a series of questions. Your response to the first question will affect the next series of questions you are asked.
The questions were written by a team of securities attorneys, Ms. Quinn said.
The end result is a nice package of institutional-grade documents which clearly communicate all aspects of disclosure at 20 percent of the normal cost and an even smaller percentage of the normal time it takes to prepare such documents, Ms. Quinn said.
Ms. Quinn said not only does iDisclose bring the protection of proper PPMs at an affordable price, it could also attract new investors.
“Many investors will not consider an investment without proper PPMs in place. iDisclose makes it easier for investors by facilitating their ability to make an investment decision.”
iDisclose can also help lawyers lower their cost of attracting new clients. More companies will be able to afford to create PPM’s, and lawyers can save the more cumbersome elements involved in the traditional PPM development process.
“No one went to law school so they can draft documents all day.”
In some ways iDisclose is like Turbo Tax, Ms. Quinn said. Users are told what they will need at the beginning so they do not waste time looking for information during the process. It also comes with a completion bar, navigation panel check marks and basic definitions which pop up over uncommon words.
Because the PPM development requires knowledge of all different areas of the business, the team included a collaboration feature enabling team members to e-mail each other for assistance.
One of the most challenging aspects of developing iDisclose was providing the proper sample documents a user will need, Ms. Quinn said. The precise development of each section depends on which stage of development the company is currently in and which ones they are likely to see in the future.
“The sample texts reflect the various situations each company can be in at the different stages,” Ms. Quinn explained. “They can compare different ones side by side.
iDisclose also had to be very specific when developing the risk factor section of the document, which Ms. Quinn referred to as the document’s insurance policy.
“This looks at what may happen in the future,” Ms. Quinn said. “We provide very specific and tailored risk factors so they cannot be sued by investors or SEC action.”
Because some risk factors vary by industry, Ms. Quinn said the team had to develop a lengthy list. The user can modify that list to make sure they are specific to their situation. They can drag and drop them in order of importance and SEC requirement.
This becomes even more important with equity crowdfunding because companies are dealing with unknown investors who may challenge any conceivable aspect of the company or its raise process, whether if be for self-serving reasons or something completely innocent, Ms. Quinn said. The protection the risk factor section provides is vital.
In the future Ms. Quinn expects iDisclose to develop white label solutions for other firms. That will assist firms that have less direct SEC experience than the iDisclose team. They can still be involved in the process without experiencing the drudgery that can be involved, she added.
iDisclose is also a living document and is updated quarterly to reflect current developments.
There are so many areas about iDisclose which excite Ms. Quinn but the biggest is its equalizing potential.
“It costs the same for IBM to raise $800 million as it does for a pizza shop to raise $50,000.”