Your Investment Crowdfunding Portal is Your Investor Relations Firm?
The JOBS Act and pending regulatory rules will dictate what investment-based crowdfunding portals are required to do as part of the due diligence associated with listing an issuing company on their site. Similarly, those rules will eventually dictate what portals will not be permitted to do (like providing buy-side investment advice to the crowd) in connection with these offerings. In between what is specifically required and what is specifically prohibited there will likely remain a huge ocean when crowdfunding legally begins. Some portals are clearly seeking to position themselves as not only an investment portal for purposes of the hosting of crowdfunding securities offerings, but also as a “one stop” service provider for issuers and, seemingly, the crowd alike. That includes advising issuers on investor relations and communications, financial reporting, accounting and an endless range of contemplated services. The range of services contemplated by the portals also seems to include services for purchasers of crowdfunding securities such as facilitating secondary sales of those securities. It is an understandable goal, for both paternalistic and pure business reasons, for investment portals to consider offering a range of services beyond simply listing crowdfunding issuances but I am not sure that the conflicts and risks have been properly thought through. This is a real mine field.
Many of those involved in the crowdfunding movement feel a paternalistic desire to do whatever possible to make investment crowdfunding “work.” This is a laudable goal. There is also an underlying bias that seems to believe that issuers who use crowdfunding portals will generally lack sophistication and will be in need of many ongoing services in order to comply with regulatory rules as well as the expectations of what could be a huge number of investors. The paternalistic instinct kicks in when investment portals to try to also provide those services. Many people in the industry also see these ancillary services as a source of revenue. I think crowdfunding portals need to be very careful in this area. There are other companies moving to fill the void in these areas (such as Crowdfunding Roadmap) and my instinct is that investment portals would be wise to stay away and let these firms provide those services.
Providing perspective on investor communications, regulatory compliance and similar services after the issuance of securities is fraught with potential conflicts and requires extensive sophistication in matters of corporate finance. The issues are so numerous that they are well beyond the scope of a single blog post. There are not many analogies that I know of but the London Stock Exchange has the interesting concept of a “nominated advisor” or “NOMAD” that relates to AIM companies whereby a private organization accepts a quasi-regulatory ongoing role for issuers. It is not uncommon for the investment bank that represents the issuer in the AIM listing to maintain a continuing role with the company as its NOMAD. The NOMAD has obligations to advise the company on compliance with the AIM listing rules as well as investor matters. This is not unlike some of the roles contemplated by would-be crowdfunding investment portals but some of the multiple roles contemplated by crowdfunding portals would be specifically prohibited even under the NOMAD concept.
Because I was general counsel for several years to several AIM listed companies, I’ve seen the effectiveness and the pros and cons of this concept. Importantly, the NOMAD is subject to an approval process by the London Stock Exchange, specific rules and obligations to the Exchange as well as disciplinary proceedings if they do not properly perform their regulatory responsibilities. Will crowdfunding portals have the internal sophistication and experience identifying these many conflicts and issues? Will they understand the underlying business of the issuer sufficiently to guide them on the relevant disclosure issues? Will the SEC or FINRA require them to have this internal expertise? Will portals expose themselves to liability for information disclosed or not disclosed to investors? Will investment portals be implicitly providing investment advice to the crowd with respect to secondary sales? Will it be permitted or advisable for crowdfunding portals to provide ongoing services to the issuer while attempting to facilitate secondary sales by purchasers? These are just a few of the traps for unwary portals.
In my opinion, the NOMAD system is far from ideal. It is difficult to have any single entity to fill the roles of investment bankers and regulatory watchdog contemplated by the AIM rules. The chinese wall procedures are questionable. Crowdfunding portals are planning on even more varied and conflicting roles than that of the NOMAD. The intention of the JOBS Act is that investment portals will be passive when it comes to the marketing of any particular issuer’s securities. This makes tremendous sense. Does providing investor relations services after the first crowdfunding offering prohibit that portal from hosting a second offering by the same issuer because of the nature of the implicit “advice” they provide in their IR role? Will there be a disciplinary system for crowdfunding portals that act negligently? It will be interesting to see how the various regulatory groups deal with these issues and conflicts. From my perspective, investment portals attempting to be all things to all parties and fighting for every available nickel is a very risky proposition. I welcome the thoughts of others.