Equity crowdfunding to mainstreet will result in a new challenge for private companies, namely effective shareholder relations. Admittedly, crowdfunded privately held companies will not bear the same continuous disclosure burden as is imposed on publicly traded corporations. However, a larger constituent of arm’s length investors will inevitably make greater demands for information on management than was otherwise the case with such closely-held companies. So as part of the crowdfunding preparations, management would be wise to consider how to effectively communicate with an onslaught of new investors.
In that regard, some lessons can be learned from the public company arena. Public companies are advised to create a continuous disclosure policy that dictates how investor communications will be effected and what approval levels are required. In private companies, that degree of sophistication may not be necessary but a discussion and an understanding amongst senior management at the very least is required. To that extent the understanding should at a minimum identify a single manager whose task will include shareholder communications. That manager should seek advice or conduct research regarding the disclosure requirements in the jurisdiction of incorporation. Each state, province or country has different requirements.
Generally speaking the financial disclosure is the most important, so most often the designated manager will either be the CFO or will work closely with the company’s accountants to ensure that the financial disclosure meets Generally Accepted Accounting Practices and that delivery to shareholders occurs in a timely fashion. While most private companies are only obliged to release financial information on an annual basis, certain companies may wish to be more pro-active and implement a quarterly release that also includes a short management discussion and analysis (“MD&A”). The MD&A serves a dual function of keeping shareholders informed and forcing management to assess quarterly what circumstances have played a part in shaping the success or failure of each operational quarter. This can be helpful in making sure the company corrects course frequently.
A crowdfunded private company may also seek to implement a secure section on its website where shareholders are able to login to stay abreast of corporate developments. The responsible manager would keep the site current and provide information that would be relevant to company shareholders. This approach avoids the necessity to push hard copy information out to shareholders.
Being proactive will also help the company in any ensuing round of financing.