Crowdcheck is one of the foundational firms that entered the securities crowdfunding sector, supporting issuers and platforms that enable online capital formation. Crowdcheck is probably the top legal services firm preparing Reg A+ documents for issuers, which the Securities and Exchange Commission must qualify for a firm to raise money using the exemption. Crowdcheck also works with issuers on other exemptions, including Reg CF. Founded by Sara Hanks, a well-known OG in the crowdfunding world, she explains on the company site:
“CrowdCheck offers protection against potential fraud and helps investors make good investment decisions. CrowdCheck does the “due diligence” that lets investors (Grandmas included) see the results of this due diligence in an easy-to-understand report. CrowdCheck walks the entrepreneur through the complicated disclosure process so that they know they meet legal requirements and compliance.”
Several weeks ago, CI learned that Hanks was transitioning to a different stage in her life, selling the firm that she founded. While she will remain engaged with Crowdcheck, the company has been sold to serial entrepreneur Nicole Loftus, who is now CEO. CI reached out to Hanks for some inside information on the transition and her plans for the future. Our discussion is shared below.
Can you provide some perspective on Crowdcheck’s growth since its founding?
Sara Hanks: We started operations in 2013 when Rule 506(c) [Reg D] went into effect. At first, we were purely providing diligence reports on companies raising under Reg D, and then we expanded our products as Reg CF went into effect.
We added products and services as we went along, such as EDGAR filings and Bad Actor Reports. We’ve completed around 750 diligence reports on crowdfunding companies and over 12,000 Bad Actor Reports.
Revenues have grown steadily, with a bit of a spurt over the pandemic. We don’t share revenue numbers, but I can say our revenues are comfortably above a certain social media platform that recently went public, although the sale price was somewhat less than that company’s multi-billion dollar valuation! We have 22 employees, some of whom also work for our sister law firm, CrowdCheck Law.
Having sold Crowdcheck, how active will you remain with the organization?
Sara Hanks: I will always be available to the CrowdCheck team and our clients for advice, information, and encouragement. I’ll be around for the tricky legal issues and the institutional knowledge that comes with being a crowdfunding OG, and I will still be keeping in touch with regulators.
Importantly, I am still a partner at CrowdCheck Law. But the hard work of management is now someone else’s problem!
One of the things I realized in the early days of CrowdCheck was that if you hadn’t hired someone to do a specific thing, then that thing was the CEO’s problem. Dealing with an infestation of citronella ants, for example.
How does it feel to exit a company that you founded, which took years in the making?
Sara Hanks: It’s bittersweet. This transition needed to happen for the company’s good because there were so many areas I wanted the company to expand into but didn’t have the resources or the time for. You can expect all sorts of new developments from CrowdCheck now. And I can spend more time with my husband, who retired a few years ago. But CrowdCheck will always be my baby.
You were engaged in online capital formation at the very beginning. What are some things you initially expected to occur that did not take place?
Sara Hanks: The growth we expected in the early days just didn’t occur, especially in Reg CF. I think there are still a lot of private companies out there who don’t know that an online offering is an option for them. And, of course, the other part of the equation is the money.
The thing about money is that it’s the rich people who have it, and they aren’t investing it in crowdfunding. I have a few theories about that. As an industry, I think we need to reach out to investment advisers to include early-stage companies in a balanced portfolio. Getting high-net-worth people to invest would also be easier if diversified funds were permitted to use Reg A or Reg CF, as was suggested in the SEC’s Concept Release back in 2019. And sane valuations would help the industry overall. You aren’t going to get sophisticated investors to invest large amounts unless there’s a reasonable possibility of a profitable exit.
What is your opinion on the development of the crowdfunding industry? What is working well? And what needs to be improved?
Sara Hanks: Let’s start with those valuations.
The SEC, in general, takes the view that the markets can decide pricing, although we are seeing FINRA weighing in a bit more on this issue. But the industry has to police itself. If you go out with crazy valuations, that makes it less likely that your offering will succeed and also makes the entire industry look seedy. I know some people think that SAFEs are the way to address that, but in my experience, retail investors don’t understand SAFEs, and the terms of the SAFEs can vary widely.
And to sound like the broken record and wet blanket that I am on this topic, compliance must improve.
Companies must keep their investors informed by filing the annual Form CF [C-AR]. Even if the SEC doesn’t enforce this requirement, companies have a moral obligation to provide the updates they promised to the people they took money from! We also need to improve compliance with the original Form C filing requirements, especially in the discussion of financial condition and the explanation of how all the classes of securities a company may have issued affect each other.
From a regulatory perspective, what else do you think needs to be updated or changed?
Sara Hanks: I’d really like to see the SEC permit crypto issuers to use Reg A. That would require a little bit of interpretation of the Reg A rules, but I think it’s doable without rulemaking or legislation.
I think we need to make it easier for investors to diversify by permitting funds into this space.
Allowing platforms to raise funds on their own platform would be great, but I’m less hopeful about that since it would require a bit of statutory interpretation.
And while in general I am in favor of the requirement to produce reviewed or audited financials, which I know is not a popular opinion, there are clearly some cases where an audit or review adds nothing to the investor’s understanding, such as very recently-formed entities.
For securities crowdfunding to scale further, what do platforms need to do? Offer more features? Better technology? Partnerships?
Sara Hanks: I think a number of them are going to have to merge. It’s hard to see how the industry can sustain that many platforms.
From a technology point of view we need to have a process whereby companies can “graduate” from online capital formation to the listed world without causing chaos. That means brokers accepting Reg CF and Reg A securities into their custody arrangements so that investors can “DWAC” their shares as soon as portfolio companies get listed. We’ve seen several problems with clearance and settlement in general in those circumstances. A partnership between one of the tech-savvy established brokers and a CF platform would make a great deal of sense.
(As for consolidation) it’s inevitable. Not just among platforms but with respect to many of the other services required for online offerings.
What is next for you? Will you remain active in the sector? Will you pursue another startup?
Sara Hanks: I’ll remain active in the online capital formation world through my relationship with CrowdCheck and CrowdCheck Law. I’ll still be around for the tricky legal questions and, as ever, will weigh in with my opinion, whether wanted or not! I still have a couple of advisory relationships, but in general, once the transition is complete, I will be “mostly retired,” skiing and hiking with my husband.
I will be spending more time in my native Northern England, where we have a house in the country. Close to our house are the mountains of the Lake District. My next challenge is “Wainwright bagging”. This means climbing all 214 Lake District peaks.
