Ascenergy, according to its campaigns an oil and gas company, had been soliciting funds through sites like Crowdfunder, Fundable, EquityNet, Angel.co (AngelList) and its own website since 2013, according to an interview with its founder published in May of 2015. What should be noted is that none of these portals are operated by FINRA broker dealers.
The company raised $5 million from 90 investors. By the time proceedings began, the company had spent very little of the $1.2 million they’d gone through on anything to do with mining. They grossly misled their investors, and are now paying the price with their reputations and pocketbook.
But what seems like bad news for the equity crowdfunding industry actually isn’t –not really, anyway. Instead, it’s a striking reminder of how important all those best practices the industry has built in really are.
Why This isn’t Such a Serious Blow
The JOBS Act empowered the SEC to govern equity crowdfunding without stifling it, and the one-two punch of Title III’s passage and this fraud case prove how effective the SEC can be. It’s effective monitoring and governing for industry growth in action. After all, you can’t expect to grow a garden without pruning a few weeds.
I don’t think KoreConX will be alone in wanting to thank the SEC for taking prompt action. This is why we, and I hope, the bulk of the industry support organizations like CFIRA and FINRA. The role they play in protecting investors, companies, and portals, and ensuring high standards is essential.
How we can Better the Industry Sector
What Investors Can Learn:
Be picky with the portal you use, and the companies you choose.
that are run by
have strict regulatory requirements they adhere to, and spend weeks leading up to listing a company investigating it in depth. Portals such as
and many others have exhaustive due diligence processes that are there for a reason.
Do your homework. There are never any guarantees, and regardless of where you found an opportunity, you should go into it with your eyes open.
If you do decide to invest through something like Angel List or Crowdfunded, remember that these sites aren’t required to do due diligence on the opportunities listed on them. Take responsibility for your choice, and make sure you do your own. Ask them to provide you an independent due diligence report from firms such as CrowdCheck the leader in providing due diligence reports to the leading portals in the US.
Make sure the company has a reporting requirement that provides you at minimum a quarterly report on finances, business on the company
What Companies Can Learn:
Don’t Mess with the SEC - You may be acting in good faith, but you need to prove it to the best of your ability, and then keep proving it. Remember that the SEC is attuned to what you’re doing. Even your social media profiles are monitored, and yes, there are rules you need to be aware of there, too.
Due Diligence is Essential - Not only is due diligence necessary for portal operators and investors, but for companies as well. Disregarding it can sink your reputation, your bank account, and your company. Companies like
produce due diligence reports that can help keep your company safe.
Stay Engaged - Have everyone in your company fully engaged: management, advisors, board directors, shareholders, customers, and staff. Let them know what you’re doing so if they’re contacted by the equity portal during due diligence it’s not a surprise to them
Regular Reporting - Be prepared to provide monthly or quarterly reporting to your new shareholders to update on your progress and finances to instill confidence and trust
Manage Records - Manage your corporate records and shareholders utilizing 21st century technology so you don’t fall back to the 20th century.
is a free all-in-one solution to help companies manage their corporate records and shareholders to reduce risk.
What Portal Operators Can Learn:
Make it prominent on your websites of your FINRA broker dealer license, be transparent a.) Talk to the partners, customers b.) Talk to the advisors and board directors c.) Talk to all key management
Increase your questions in due diligence
Make it mandatory that companies bring third party independent due diligence reports from
Require the companies to provide monthly or quarterly reports to the shareholders and the portal to make sure all is on track
Highly recommend to the companies to use tools to manage their corporate records and shareholders to insure the company is complying with reporting, tools such as
You and the good people on your team are the first line of defense for investors, companies, and the industry as a whole. 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. This case provides great insight into how funds have been used. Use it yourself to take a proactive position in making sure future issuers stick to a budgetary plan.
By enhancing what we already have, we can catch the weeds sooner, and make sure we protect the crowd for a flourishing industry sector.
We need a complete seamless integrated ecosystem to build trust and to help everyone in the equity crowdfunding sector prosper, ensuring no weeds sprout.