Well, I already blogged about the zombies of the crowdfunding world, so let’s look at the vampires too. Those exploitive professionals and semi-professionals who seize on small companies desperate for capital and do nothing but suck the lifeblood from them, in terms of money, time and management focus, and deliver nothing.
We are in the process of creating a “prohibited providers” list for one of our platform clients. Two other clients independently have each dubbed their own similar list the “creeps list.” OTC Markets publishes its prohibited service providers list, which is an admirable public service to everyone in this market.
Who goes on a “creeps list”?
- Brokers who take a huge upfront diligence fee without any real intention of marketing the deal. Now, we know that brokers have overhead, and that however optimistic they may be about a company’s prospects, investors may not be interested. And if there’s no investor interest, they may be out of pocket for the diligence and marketing work they do. But we’ve seen brokers take the money and do little or no diligence, fully intending to pocket the diligence fee.
- “Advisers.” One of these characters went on our list two years ago, after telling one of our platform clients “I’m not the company’s lawyer but I have a legal background” and telling them to do something that was clearly illegal. We were chuffed to see him turn up very recently in a 10b-5 fraud case brought by the SEC. There are a lot of crowdfunding advisers out there who do nothing but get companies into trouble.
- “Funders.” See the “zombie” blog post for details of what these guys do. They essentially buy securities from OTC-quoted companies knowing they can resell immediately in a risk-free transaction and they are acting as statutory underwriters without disclosing it.
- Lawyers. There are the guys who participated in the Tier 1 zombie scam, who knew or should have known they were setting the issuer up for a violation. And from the early days of crowdfunding, there are the guys who touted themselves as “crowdfunding lawyers” despite not having a securities law background. Luckily most of the latter have gone away, but the fact that lawyers still seem willing to participate in the Tier 1 scam is disturbing.
- Online noncomplying platforms. We could certainly do with some guidance as to when an online tech platform, or a finder, is acting as a broker. But any platform that transacts Reg CF offerings without being a broker or registered funding portal is not only breaking the law itself but is also dragging the companies listed on it into a violation of the law and making it more difficult to raise funds in the future. And there’s at least one out there doing just that.
We’d be happy to coordinate our creeps list with any legit service providers, and to hear about anyone who should be added to it. Self-policing of this marketplace is the best protection we can provide for investors and issuers alike.