Crowdfunding bad actors provide opportunity for industry to step up
Like many in the nascent equity crowdfunding industry, Oscar Jofre, president and CEO of KoreConX, takes a macro view of its health and what needs to be done to ensure it fulfills the potential many believe it has.
That ethos is reflected in the design of KoreConX, which helps companies properly raise equity capital and reduce risk through proper information management and stakeholder communication. Legal fees are reduced and equity crowdfunding portals have a simpler time screening deals because of the logical information flow.
The service is free for companies raising equity capital.
KoreConX has added partners who provide services that increase a company’s ability to effectively manage their equity crowdfunding raise.
CrowdCheck provides due diligence in a simple report that helps both investors and listing companies. The report provides investors with the information they need to make an investment decision. Companies undertaking a raise increase their legitimacy through clear information disclosure.
iDisclose is a platform which guides companies through the creation of institutional quality documents. Built by attorneys well-versed in the capital raise process, iDisclose can save companies 80 percent on legal bills.
Early IQ provides tools to help companies conduct background checks as part of the due diligence process.
AlgoValue is an online valuation and cap table analysis platform. It is employed as a tool to help valuate stage and mature companies and their equity securities. Future event simulation, tax reporting, and compliance tools are also available.
Marketwired is a news distribution and social communications service.
It is not surprising KoreConX was able to line up such a high quality list of partners, as Mr. Jofre maintains a regular presence at crowdfunding-related conferences where those key relationships are fostered. That includes events in Europe and Asia. (Mr. Jofre had just returned from an industry event in Singapore.)
Equity crowdfunding advocates in other parts of the world eagerly await Title III implementation, as they mistakenly assume they are allowed to crowdfund under its provisions, too. That is not the case Mr. Jofre explained, as involvement is strictly limited to American investors in American companies at this point.
“Still it is interesting to see how the rest of the world approaches equity crowdfunding,” Mr. Jofre said.” In places like Thailand, Indonesia, Malaysia and Singapore, they just seem to get it. Asia seems to have the entrepreneurial spirit inside them right from birth.”
Stop us if you have heard this before, but Mr. Jofre said Asian regulators faced a challenge because incumbent entities opposed equity crowdfunding legislation. Indonesia and Thailand have passed rules, while Singapore is in the middle of the process.
“The real message is in China,” Mr. Jofre explained. “For the first time, 50 to 100 million accredited investors are allowed to invest outside the country for the first time.”
Hence the desire of other Asian countries to enact equity crowdfunding legislation.
Whether it be Asia or the United States, such an influx of new capital cannot be properly absorbed without normal institutional involvement, Mr. Jofre insisted. That is process that cannot be rushed.
“It’s not going to happen overnight, but the pieces are starting to come together.”
“It is not going to happen at all unless the process is seamless — otherwise it will not work.”
Mr. Jofre has more than a decade of experience in compliance, governance and transparency. His partner Jason Futko has a background in global finance, due diligence, and governance.
“I heard them and I got rejuvenated,” Mr. Jofre recalled.
“A new market was coming and it needed governance, so I set out to build the technology to help companies navigate the process.”
The work of developing the technology to help companies raise equity capital while meeting regulatory requirements and properly communicating with shareholders, took many months.
KoreConX’s debut shortly after the Title III announcement was quite the stroke of good luck, Mr. Jofre admitted. Regardless of the timing, its services are sorely needed, and it is Mr. Jofre’s goal for his company to help accelerate the equity crowdfunding industry and the process of capital formation for individual companies.
“This is about streamlining the process for portals,” Mr. Jofre said. “They are turning down 90 percent of issuers.”
Good companies are well-organized as they go through the capital formation process, Mr. Jofre explained. Because of his compliance background, establishing the part of KoreConX was quite simple.
It also helps to prioritize transparency at every step of your development, Mr. Jofre advised.
“In our world companies know if they to do it its good business.”
Those principles are universal, Mr. Jofre said, so other than language, there are few governance differences smart companies based elsewhere need to consider.
“Those who are going to survive are those who will do well. They are assuming they’re regulated.”
Bad actors emerge
There will inevitably be some bad actors, and shortly before our conversation the SEC provided a perfect example.
On Oct. 28, the SEC announced a halt of Ascenergy’s crowdfunding raise wile also obtaining a freeze over the company’s assets and those of CEO Joseph Gabaldon.
“On Oct. 13, 2015, the Securities and Exchange Commission filed a civil action against defendants Las Vegas-based Ascenergy LLC and its CEO … for offering fraudulent oil and gas investments,” an SEC release said. “At the Commission’s request, the U.S. District Court for the District of Nevada has entered a temporary restraining order halting the offering, as well as an order freezing the defendants’ assets and the assets of relief defendants Alanah Energy, LLC and Pyckl LLC.”
SEC documents allege the defendants engaged in a deceptive scheme on both the company’s own site and several other crowdfunding sites to attract investors willing to purchase overriding royalty interests in undeveloped oil and gas wells. Ascenergy had raise roughly $5 million when the SEC took action, with $1.2 million mostly spent, save for a few thousand dollars, on unrelated expenses.
The complaint asserts most of the money departed in the form of payments to companies owned by or associated with Mr. Gabaldon. The remaining $3.8 million, which has since been recovered, went to Pyckl LLC, a San Jose-based company with no discernible energy industry connection.
“The Commission contends that Ascenergy has also made multiple, material misrepresentations about the company and the nature of the offering,” the announcement states. “Ascenergy allegedly falsely holds itself out as a credible energy company, and it presents the investment as a novel and extremely low-risk opportunity that will essentially guarantee investors outsized returns. The Commission’s complaint alleges that, in reality, Ascenergy is, at best, offering a high-risk investment in undeveloped and unproven conventional oil and gas wells.”
If the listing was on a site like OfferBoard or CircleUp and due diligence been completed through CrowdCheck and EarlyIQ, investors would have a much greater degree of protection, Mr. Jofre added.
Mr. Jofre sees the Ascenergy sanction not as a black eye for the equity crowdfunding industry and fodder for the naysayers, but as an opportunity for responsible industry actors to reinforce the steps they take and to state why they are indeed so important.
For portal operators, it means clearly stating your FINRA license on your main page. Conduct vigilant due diligence and insist companies bring on independent third party verification companies. Issue monthly or quarterly reports, and use record management tools to both simplify and increase the quality of your record keeping.
“You and the good people on your team are the first line of defense for investors, companies, and the industry as a whole,” Mr. Jofre wrote in the blog post. “Keeping to the highest standards of due diligence, and ensuring the companies you work with stay compliant and communicate with their shareholders is essential.”
“See this as an opportunity to better your portal.”
For companies, good intentions are not enough, Mr. Jofre advised. Keep proving your good faith. Make sure everyone in the company is fully engaged and provide regular reports to stakeholders.
As it is still in its early stages, equity crowdfunding and its advocates have to be prepared to address the naysayers and to counter the arguments they bring up.
One is the necessity of having to communicate with hundreds of shareholders. Forget for a moment that tools exist to help manage that process and that many small shareholders likely do not expect the same level of communication as so accredited investors parting with much larger sums. Many still raise the issue, including crowdfunding players who want nothing to do with Title III.
“Some say serving 500 shareholders is a nightmare,” Mr. Jofre said. “That is like saying having 500 customers is a nightmare.”
“Shareholders not just shareholders, they are ambassadors. They want to fall in love with your company. Communicate with them on a regular basis.”
As our conversation neared its close I asked Mr. Jofre to predict what the next big development in the industry will be.
It is already starting, he responded. Big players like Google, PayPal, Apple and Microsoft are mobilizing in Washington to put forth their vision of the next generation of finance.
Th industry is simply too big for them not to, Mr. Jofre said.