Transparency In Equity Crowdfunding

A window with rain on it is hard to see through

Who is responsible for transparency in equity crowdfunding? asks a piece in Thursday's CityAM.

We're shocked. You might as well ask: who is responsible for information?

A variety of people in the business - entrepreneurs, platforms, investors - are responsible for collecting information and publishing it. Everybody is responsible for filtering information and evaluating it. And transparency describes a market in which deals are done between people who all have access to the best quality information.

If you asked "Who is responsible for the lack of transparency in equity crowdfunding? " that would be a question we could understand; an invitation to look for the flaws in the market, and iron them out.

That means we're very sympathetic to this CityAM article by Claire Madden. Claire is managing partner at Connection Capital. Her firm has skin in the game. Here's her advice, with which we agree. 

take more responsibility, and disclose more clearly

"What’s required, in my view, is a much greater emphasis on transparency and disclosure. Platforms need to take more responsibility for the information given by investee businesses, and they need to disclose more clearly what due diligence has been done. In addition, there needs to be an end to any “smoke and mirrors”, whereby investments appear more attractive to (and in demand from) the crowdfunding community than they really are – for instance, by presenting a deal as almost fully funded when most of the capital has come from other, non-crowdfunded sources.

"Unfortunately, the competitive landscape makes it hard for crowdfunding platforms to raise standards. Dominated by just a handful of major players, existing business models leave little room to increase the focus on transparency and more detailed due diligence without significantly raising costs."

Only a week or two ago, the loan crowdfunding community, under their trade body thePeer-to-Peer Finance Association (P2PFA), actually said they wanted tighter regulation of their peer group. The P2PFA already has a voluntary code of practice, and the members believe that if it was statutory, it would create greater clarity for investors and would make it easier for the industry to grow.

We'd welcome a similar interest from the equity crowdfunding platforms. Specifically, we'd like to see platforms develop standards for what information is disclosed by fims seeking investment, both before and after a raise, what information is disclosed by platforms, and what due diligence is done by platforms, and what is left to thers.

We would also like to see better practice for platforms publishing information about firms, including acting as a repository, or 'knowledge hub', for intelligence gathered by investors. And we'd like to see a duty on investors who discover information, to share it with other investors.

Crowdfunding shouldn't be a 'dog-eat-dog' market, or 'devil take the hindmost".  The ambition of the industry is to allow small investors to participate, and if investment is well organised, the cost of due diligence can be reduced, and its quality improved - for the good of all.