HomeNewsCrowdfunding bad actors provide opportunity for industry to step up
Crowdfunding bad actors provide opportunity for industry to step up

Crowdfunding bad actors provide opportunity for industry to step up

Last updated 12th Apr 2022

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.

Jason Futko[/caption]

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.

His involvement in equity crowdfunding began after he heard industry pioneers such as Douglas Ellenoff and Dr. Richard Swart speak in the industry’s early years.

“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.”

“This could have been prevented,” Mr. Jofre said.

In a blog post discussing the SEC action, Mr. Jofre said none of the four sites Ascenergy solicited funds through (Crowdfunder, Fundable, EquityNet, or AngelList) were FINRA broker dealers.

“None did their due diligence,” Mr. Jofre stated.

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.

Addressing naysayers

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.

“And when they open it goes global overnight.”

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