One of the biggest challenges facing issuers in the private capital markets is disclosures. Presenting the enough of the right information for investors to make an informed decision is incredibly important … and can be expensive. Technology products that can reduce the time and cost without compromising quality can be very important. Here’s an example of a R.A.B.B.I.T. doing just that.
iDisclose is an interactive solution to create customized legal documents, in collaboration with your own attorney, that are required for equity crowdfunding offerings in the U.S. It meets the requirements of the 685-pages of Securities and Exchange Commission (SEC) regulations enacting equity crowdfunding. It is the TurboTax of offering documents – entrepreneurs enter their own data, can collaborate with others, and send the documents (including a risk factor report) to their attorney for finalization. The 2 co-founders bring significant experience in global securities law and legal technology. Early traction has been achieved with law firms and issuers. Risks to the business model include the legal industry’s aversion to technology and the speed of the growth of this market over the next 24 months. We think this is an interesting example of technology solving one of the often cited pain points in online finance: cost-effective disclosure and compliance at scale.
The Problem iDisclose is Solving?
The cost and need of legal documents is expensive, onerous and can deter issuers (a.k.a entrepreneurs). Risks to issuers and investors are increased without appropriate legal disclosure. This may open the door to unintended consequences and potential lawsuits. The private placement markets is over $1T / year, and issuers need quality documents regardless of the size of their offering. By introducing interactive technology to the equation, iDisclose, in collaboration with the issuer’s own attorney, delivers funding documents with proper information at a fraction of the cost, which provides protections for the investor, issuer and intermediary. This could be as basic as a Risk Factor Report, or a full PPM offering document.
Why is This Product Necessary?
While Private Placement Memorandums (PPM) have been considered best practices in the private markets, the introduction of Regulation Crowdfunding on May 16th, will mandate the use of more robust offering documents. Entrepreneurs (issuers) don’t fully know what they need to disclose to investors and iDisclose creates offering documents, in collaboration with the issuer’s attorney, in an efficient and lower cost manner.
How Does it Work?
iDisclose is like TurboTax for Private Placements. Offering documents are customized depending on how questions about the company, industry and the type of securities are answered. Depending on the type of offering and risk factors, the issuer may be asked up to 400 questions. Issuers answer the questions to the best of their abilities and an approximate 50 page draft PPM is produced. Unlike TurboTax that operates independent of a CPA firm, iDisclose partners with law firms – either an entrepreneur’s own attorney, or an iDisclose-affiliated attorney. iDisclose produces a comprehensive draft PPM (estimated to be ~80% complete), that a law firm reviews and finalizes. By partnering with law firms, iDisclose can obtain the detailed information about the intricacies of a company’s operations from the entrepreneur, which can reduce costs by up to 60%. iDisclose frees up attorney time to focus on high value tasks related to mitigation of risk factors and document finalization. For attorneys, it may create new revenue streams and or reduce staffing costs.
Who are the founders?
iDisclose was co-founded by Georgia Quinn & Douglas Ellenoff. Quinn considers herself “a combination of super legal geek and small business advocate with a passion for technology.” Her prior experience practicing securities law at one of the largest law firms in the world uncovered some of the inefficiencies in legal practice. Following that, she worked at a legal tech firm that engaged her thinking about new ways technology could be applied to the legal industry. Ellenoff is well respected legal thought leader on crowdfunding. He is a founding partner of a New York law firm, with over 20 years of experience in public and private securities and alternative financial products.
What about Early traction/User experiences?
iDisclose, while only recently in general release, has paying clients including an athletic shoe manufacturer, real estate sponsors and crowdfunding platforms. User feedback has remarked on an easy to utilize UX that simplifies complex issues. iDisclose has their first repeat customer who used iDisclose for three different transactions. They have lawyers using their white label version of the application to reduce the time and cost of their services. This aligns the technology WITH attorneys who can use iDisclose to increase revenue, add services for SME clients and reduce costs of paralegal time in document preparation.
What are the risks?
Conventional wisdom is that attorney’s dislike using technology. iDisclose will need to carefully target its marketing efforts in order to not waste resources on firms/attorneys that are not trying to reduce staffing costs or increase productivity/revenue. Another unknown is the number of equity crowdfunding offerings over the next 12-24 months that will be good targets for iDisclose. They will need staying power to survive the market ramp and to compete on features and price with new entrants.
Our Perspective on iDisclose?
- In every country we work in, creating disclosure that is both fulsome and scalable is a significant challenge for industry and regulators. As we have said in interviews and presentations globally, technology will be created that addresses these challenges in efficient ways.
- iDisclose is an early example of how technology can enable entrepreneurs to more easily comply with significant SEC requirements while protecting investors.
- Competitors like RocketLawyer and LegalZoom offer documentation, they are not as customized or collaborative with an issuer’s own attorney. At this time, iDisclose is the only collaborative economy company providing this level of customization for Form C crowdfunding.
- Full disclosure is in the issuer’s best interests and the global market seeks a solution that meets this need.
If you are you an innovative company in the debt or equity crowdfunding space that we don’t know about yet? Let us hear from you right now!