Investment Portals: One-size Fits All Crowdfunding Offering Terms Will Not Work
Some would-be equity-based crowdfunding portals intend to permit listing companies do only a single form of offering. Whether that is common stock, preferred, debt or what have you, this strategy is not likely to work in the real world for issuing companies. Crowdfunding investment portals will need to permit issuing companies to be much more innovative in structuring offerings than a “one-size fits all” approach if the portals intend to be remotely relevant.
Last month I attended a Q&A with the group from the SEC charged with writing the regulations for internet portals operating equity-based crowdfunding platforms. I was extremely impressed by David Blass, Chief Counsel, S.E.C. Trading and Markets Division, and his team members who are charged with drafting these regulations. I was less impressed by the questions that came from the audience. One such attendee represented a would-be investment portal and asked Mr. Blass several leading questions suggesting that the SEC should, by regulation, require a certain structure of the investment for crowdfunding investments. The attendee had a very specific notion of what that form would be. Mr. Blass, speaking for himself and not the SEC, politely disagreed. Mr. Blass consistently provided the same answer to different forms of the same “question.” Specifically, he noted that the SEC should not be concerned with the many forms that the structure of an offering can take. He stated that the SEC should be focused on making sure that the structure chosen is adequately and properly disclosed to those to whom the offering is made. In other words, if issuing companies make the structure complex, they better find a way to adequately describe what people are getting and how it works.
Not only is Mr. Blass’ position entirely sensical, the crowdfunding exemption needs this flexibility to be relevant in the world of corporate finance. The reality is that corporate finance is extremely complex and is dependent upon the specific business, the nature of the business model, the stage of the business, the level of technical and other risks and the nature of the use of proceeds. In some situations, common stock will make sense. In other situations, the risk might be a debt risk with an equity kicker. In still other businesses, a project finance structure may be more appropriate. If portals do not understand these different circumstances, they will quickly find themselves irrelevant amongst their peers in the industry. Further, if investment portals require listing companies to use a single form of offering, very few companies will use that platform. Portals have a strong interest in having paternalistic instincts toward investors. Portals need to be comfortable that the form of an offering listed on their site is properly disclosed. It is not going to be simple. Portals should understand that in advance–the SEC is not going to be able to dumb this down to a “one-size fits all” mandate.