Episode 3 – Regulation as Rocket Fuel: How Smart Compliance Drives Growth in Global Crowdfunding

Theme: Standardized Regulation / Compliance as Competitive Advantage
Moderator: Gene Massey (Chairman & CEO, MediaShares)
Panelists: Eric A. Cox II (COO, Netcapital); Jenny Kassan (President, CfPA US); Karsten Wenzlaff (Digital Invest Germany); Bruce Davis (Co-founder, Abundance Investment; Chair, UK Crowdfunding Association); Florence de Maupeou (Deputy GM, France FinTech; EDFA Board; GECA Steering Committee)

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Gene Massey — Moderator
Chairman & CEO of MediaShares, a US-based marketing and funding consultancy that helps companies raise capital via online equity crowdfunding. A frequent speaker at industry and Wall Street events and an active investor, Gene brings a practitioner’s lens to campaign strategy, compliance, and investor communications.

Florence de Maupeou
Deputy General Manager (Institutional Relations & Crowdfunding) at France FinTech, board member of the European Digital Finance Association (EDFA), and member of the GECA Steering Committee. With 10+ years shaping France’s and Europe’s crowdfunding regulatory landscape, she focuses on ecosystem building, policy, and platform enablement.

Bruce Davis
Co-founder and Non-Executive Director at Abundance Investment—one of the UK’s first regulated crowdfunding platforms focused on green and sustainable projects. A founding director of the UK Crowdfunding Association since 2012 and an early contributor to peer-to-peer lending (Zopa), Bruce has helped steer major UK regulatory developments.

Jenny Kassan
US securities attorney and entrepreneur advocate with nearly 20 years in “community capital.” President of the Crowdfunding Professional Association (CfPA), she guides founders through compliant offerings, has raised capital herself, and trains stakeholders on disclosure, investor protection, and equitable access to finance.

Eric A. Cox II
Chief Operating Officer at Netcapital (US funding portal & broker-dealer) and corporate/securities attorney at SSM Law. A CfPA board member and Growth Committee co-chair, Eric focuses on portal operations, regulatory compliance (SEC/FINRA), issuer enablement, and expanding retail access to private markets.

Karsten Wenzlaff
Secretary General of Digital Invest Germany (German Crowdfunding Association) and member of the GECA Steering Committee. Researcher and advisor to regulators worldwide, Karsten has worked on ECSPR implementation and comparative crowdfunding policy in Europe, Africa, and beyond.

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Andrew: Hello everyone. Welcome to our Architects of Change Think Tank series, a series of five round table discussions, all with subjects that align with one of the GECA core pillars. Now, GECA stands for Global Equity Crowdfunding Alliance, and our supporters all share one vision, which is a truly borderless global equity crowdfunding ecosystem.

One of our pillars that’s detailed in our manifesto is to strive for smarter and more harmonized regulations right across the globe. And the notion that regulation frameworks across the globe differ so much can lead to barriers when we’re striving to achieve our goal of truly borderless equity crowdfunding.

So this meeting’s going to have a look at how things work at the minute. Nobody’s crying out for regulation to disappear or not exist, and at its heart it should be there to protect the consumer, the investor. But it is crucial. And although harmonization is something we’ll strive for, there are ways in which regulatory compliance right now can be turned into competitive advantages by using things like cost saving automation tools, adaptive frameworks that could scale across your restrictions.

So we’ve called this session ‘Regulation as Rocket Fuel – how smart compliance drives growth’. So that’s more than enough from me. I’d like to introduce our moderator for today’s session, the man who’s going to guide our participants through the session. Please welcome Gene Massey. Gene is Chairman and CEO of MediaShares a US-based marketing and funding consultancy, which helps companies raise capital through online equity crowdfunding offerings.

Gene is also a very well versed speaker at Industry and Wall Street conferences, and he is also an investor himself, which puts him in a perfect position to help us moderate this discussion. So welcome Gene. I’m going to hand over to you to introduce the participants.

Gene Massey: Thank you, Andrew. I’m very excited to be here today because for one reason we’ve got a really stellar group of people here. An international group of people to discuss this topic and the topic is compliance. Now you say the word compliance and everybody has a heart attack practically because they know that it’s when you’re regulated. It’s a problem. It can be a problem if you, especially if you don’t adhere to the rules.

But today we’re going to talk about how that compliance can actually drive growth and actually, and improve your hopes for a successful offering. And so I’m going to start with Florence and let everyone introduce themselves and then we’ll start the program.

Florence de Maupeou: Thank you Gene. I’m Florence de Maupeou I’m the deputy general manager in charge of institutional relation and crowdfunding within France FinTech, which is the professional association for all FinTech in France. And I’ve been working for more than 10 years within crowdfunding sector. It has been a while, especially in structuring ecosystem and regulatory ecosystem. Crowdfunding in France and since a few years in Europe, and I’m also a board member of the European Digital Finance Association. And I’ve joined recently, very recently, the steering committee of GECA very happy to be there and to be able to discuss a message subject with you.

Gene Massey: Thank you, Florence. And Bruce, can you tell us a little bit about yourself?

Bruce Davis: Sure. Hi Gene. Yeah, so Bruce Davis, I’m one of the co-founders and a non-exec director at Abundance Investment, which was one of the first regulated crowdfunding platforms globally. And that business is focused mainly on crowdfunding green and sustainable projects in the UK and I’ve also, since 2012, been a director of the UK Crowdfunding Association and been involved in a lot of the big developments in regulation of crowdfunding and peer to peer lending over the last 12, 13 years.

Prior to that, I was also involved in the early stage of developing Zopa, which was the first peer-to-peer lender. So perhaps go even further back, but obviously outside of regulation with Zopa. So yeah, great to be on here.

Gene Massey: Thank you. Jenny.

Jenny Kassan: Hi, I am Jenny Kassan. I’m an attorney based in the United States, and I have been working on what I call community capital, which is probably another word for crowdfunding, but maybe a little broader, for over, for almost 20 years. And I help entrepreneurs use the tool to raise capital. I’ve also done it myself a few times, and I am also now the president of Crowdfunding Professional Association, which is the association of folks in the US that are passionate about investment crowdfunding, what we call regulated investment crowdfunding, and wanting to make it better for all the stakeholders.

Gene Massey: Thank you, Jenny and Eric.

Eric Cox: Thank you so much. I want to appreciate you, Gene, for moderating here. And Andrew, thanks for letting me, although I got to work with you once before on one of these and you let me come back. So thanks for letting me hang out again, Andrew. I’m Eric Cox. I’m a member of the Netcapital team currently serving as the chief operating officer of our technology platform.

Netcapital’s a really cool funding portal and broker dealer headquartered in Boston. But we support companies across the United States and we accept investment from around the world. We streamline the process of raising capital, allowing everyday people to invest in private companies. So obviously that’s an important piece of everything that we’re trying to accomplish here at GECA.

I’m also a corporate and securities attorney at SSM Law, headquartered San Francisco. And I’m a proud board member of the Crowdfunding Professional Association, serving as the co-chair of the growth Committee. So I get to work with Jenny more closely on those projects, trying to expand the ecosystem and get more people supporting private companies. Thanks team.

Gene Massey: Thank you Eric and Karsten.

Karsten Wenzlaff: Yeah, thanks so much, Gene for moderating this session, and Andrew for setting this up, the GECA. It’s a real pleasure. And also, it’s also fascinating. I already learned what something in the last 10 seconds or 15 seconds already from this session because I didn’t, I’ve been, I know Bruce for at least yeah. 15 years or so, and I didn’t know you were involved with Zopa. It’s a nice learning curve, Great. Fantastic.

Yeah. So I’m the Secretary General of Digital Invest Germany. It used to be called German, or it’s still called German Crowdfunding Association, but the platforms wanted to put an emphasis on digital investing. And together with Florence, we’ve been working on the European crowdfunding service provider regime with Bruce as well. For a long time now with the regulators and Florence and I are both part of a working group at the European Digital Finance Association and both board members there as Florence already mentioned, which is for me a great pleasure.

It’s like a family reunion here today and I’m also a researcher on crowdfunding. I work at the University of Hamburg and Cambridge, and Utrecht and I also have the pleasure sometimes that I get invited by regulators around the globe to discuss with them the implementation of new crowdfunding laws. So I worked for four years in Tunisia. I’ve been recently to Nigeria and next, next month I have to go to Kosovo to talk about their crowdfunding laws. So it’s quite interesting to use the knowledge from these kind of sessions to help the regulators make better crowdfunding regulation.

Gene Massey: Terrific. I’d like to start with some general questions that, we toss it up to whoever. But, Eric, you might be able to answer this one in particular because compliance is generally considered to be, at a high cost. It costs you money, legal reasons, and for other reasons, that the more compliance you have, the more expensive it is. But how can a platform reframe that cost as an investment that can actually drive growth?

Eric Cox: That’s a fantastic question Gene. And I know some other folks here will have some great answers too, so I’ll keep it relatively brief here. For the first part, I got to give a shout out to our chief compliance officer, Paul Riss. He has had a phrase since ever before I joined here, seven years, seven, eight years ago now. Which is, compliance is the pathway to profitability.

So we’ve always embraced the idea that compliance would be critically important. I would argue that being non-compliant is far more expensive than being compliant to begin with. It’s a matter of when you pay, not if you pay, and it’s a function of how much. So I think, there’s a phrase, an ounce of preparation is worth a pound of cure. I’m sure I botched that, but so I like to think of this in long-term things.

These, we are heavily regulated in the United States. We have to deal with the SEC and FINRA, state and local laws as well. I think whenever you’re trying to decide about what is the right way to do something? The design for the right way is the legally compliant way. There’s some really great technology, technological resources now that we’ll dig into that will help increase compliance and decrease the burden of such compliance.

But I do have to just reiterate that the, it is, far more expensive dealing with the regulator’s ongoing, for something that you might’ve done inappropriately, that it is to just really do it correctly, the right way. And I think at the end of the day, our job as funding portal and broker dealer is to protect the investor and make sure that the issuer is informed about their options. So I think it really we have a duty and obligation to do our best to make sure that everybody understands what’s the right way to do things. And I want to hear other people’s perspectives as well. And then we can get into kind of the nitty gritty specifics.

Gene Massey: Yeah, Jenny, Jenny is an attorney. So she could certainly see that. So an investment in compliance can be profitable or at least save you some money, right?

Jenny Kassan: Yeah, I think it’s a mixed bag. Like on the one hand a lot of the regulations in the US are good because they require the issuer to share information that it’s really important for, to share and for, and just even in the process of preparing the disclosures, they learn a lot about their own business and things to be thinking about going forward. And it’s really good for investors, but we do also have some regulations in the US that are frustrating ’cause they don’t actually seem to add that much value for investors. So it is a mixed bag. There’s some things that we do get really frustrated with.

But in general, the fact that there are rules about things that do need to be disclosed is a good thing. Because it’s really important for investors to have the opportunity to know what they’re getting into, and for issuers to take the time to really think through, what keeps me up at night and therefore, what do I need to make sure investors understand before deciding whether to invest.

Gene Massey: Karsten, you work closely with a lot of regulators across the EU and I’m sure your experience with the ECSPR, so how compliance can actually lower some of the barriers and expand the marketplace. So an investment in compliance for them could actually prove positive.

Karsten Wenzlaff: Yeah, absolutely. I think this was one of the main motivation for the creation of the ECSPR because platforms were saying that the cost of moving from one country to another was very high. Not so much because they were things forbidden to do, but it was more about legal uncertainty. And I think legal uncertainty drives up the prices because you have to find lawyers. And in the field of crowdfunding, there are very few very specialized lawyers who actually know what they’re talking about. And to have experience on how to avoid being maybe liable for problems occurring on the platforms.

So that’s why the European crowdfunding regime introduced a lot of legal certainty and sometimes even with a little bit of obsession in Europe, of course, the philosophy is we tend to make it very clear what is supposed to be done. So for instance, we have a disclosure information document, which is called KIIS – key Investment information sheet. And it’s six pages, but there’s about 150 pages from our European regulator explaining how these six pages have to look like.

And I sometimes wonder, this would be something to hear from our American colleagues, the American philosophy seems to be more that there are some principles about disclosure and you should disclose as much as possible. You can do a lot of things unless it’s not forbidden. But if you really screw up, then you go to jail. So that’s why a lot of people want to be on the safer side.

In Europe I think the philosophy sometimes is, we will try to make every detail written down and then the platforms have to comply with it. I just want to mention one thing. The great thing about an association like us is we allow the platforms to discuss in a safe environment when they feel there’s something which needs to be, which is not clear. So for instance, in Germany we have, every couple of weeks we have a legal deep dive where we all get all the platforms together and say, so what is actually the problem, in implementation? Do we need to go to the regulator with this or do we need to find a law firm which clarifies this with us? And that’s really helpful, I think.

Gene Massey: Now Florence and you’re with France FinTech and so yeah. How do people feel about compliance in France? Do they hate it as much as they do in America?

Florence de Maupeou: Yeah, sure. For sure they hate much has, has, things to do than, an evolving process for compliance, which can, but it’s true. What is very interesting in French experience in French market is. Actually crowdfunding, crowd equity, crowd lending, were able, thanks to regulation, it creates the markets.

So the regulation in 2014 was the beginning of the real development of the market, which is very interesting because before, before the regulation, crowd lending was just not possible because they were a bank monopoly. And and for crowd equity, the platforms that started. Try to start to develop. And were looking for a statute which was not really appropriate for them. So it was a statute of financial investor advisor, which fix some things, but not everything. So it it was very difficult and there were a burden on crowd equity platforms because. The statute doesn’t just not fit.

So the fact that French regulator implement a specific regulation for crowdfunding was really helpful for the development of the sector. And we now have lots of, too many actually platforms in France. But this is another thing, yeah. Yeah. This is a real, it was a real opportunity, even if it cost. And with the ECSPR what Karsten said, it’s at the European level, it’s really enabled to have access to to a very bigger market. Which is of course, lower the cost at the end of the regulation.

But you have to see, when you have the a platform, you have to see the old market, which is now European. And which, I think the regulations, the European regulation is a first step after there is all the costs when you try to implement in other countries. There is not just a regulation cost, but at least this one is is now lower. But yeah, and perhaps to complete the question I really think that the regulation protects also the sector for bad repetition and bad repetition can damage the whole entire sector. So it’s very important to be as compliance as the regulation ask, enabled to protect the whole sector.

Gene Massey: I’m glad you mentioned that because that that segues into my next question. In crowdfunding, you’re asking strangers to give you their money. You mean you want me to actually give you my money? And so the whole system is based on trust. I’ll, if I give you my money, can I trust you? So now, Bruce. You’ve got a long line of experience of building trust-based financial systems that align with the regulations. Can you talk a little bit about how compliance and knowing, for example, in the US if you know something is been run through the SEC, you feel better about it than, from a, just from a guy named Eddie or something. So if you, can you tell us a little bit about how trust can really help the whole industry by, with the compliance can help trust?

Bruce Davis: Yeah, I suppose in the UK we’ve been through a full cycle of regulation, pendulum. So where we started was very much, I think, from the sound of it, similar to where you are in the US where the principles based approach that gave a lot of autonomy to platforms in order, in the way that they complied with the rules and the regulation.

We then went the last sort of 10 years, we’ve gone through any sort of increasingly more prescriptive regime. The issue with that being that the regulator actually does play that role, I’d say that’s a weakness. If they’re trusting the SEC or the FCA, they need to trust the platform and they need to trust the businesses on the platform and I think we are always very clear in the UK that being regulated is the start point. It isn’t a banner to wave and I think then in terms of compliance, I think the real cost that we’ve seen of compliance, when you move into that more product regulation approach is when you try to innovate.

And what happens there is the regulator is really trying to second guess your business plan and that’s where the costs ramp up. So I think it alluded to by Karsten and there are relatively few people that I would put on a list of actual legal experts and regulation experts in both UK and Europe who would know how to navigate that process. So they know the value of what they know and I think Karsten, we’ve spent quite a bit of time both talking with the regulator and building a relationship there in the UK, but then also providing a kind of safe space for platforms to learn, so that when they go into these situations, it’s not so much compliance in terms of making sure you’ve got all the right paperwork, but actually you understand what is behind the regulation. You understand the purpose of it. And over time that brings the regulator around.

So I think we are now in a position, and interestingly, we’ve just seen the London Stock Exchange, which is probably one of the second oldest stock exchange, become a crowdfunder this week. So it has acquired a permission, a PISCES permission. This is a secondary market, private market permission in the UK. So probably the, one of the leading public exchanges has now entered the crowdfunding market. So I think that is quite a change. But it does rather illustrate that actually probably in the UK we’re in a position where the, that we do have non-regulated market and there is a risk there that there, the things that happen there are often because they don’t follow what would be good practice. They’re not compliant with the rules and the things that go wrong. We have to make sure that doesn’t reflect badly onto the regulated market.

So I think we’re in this position now where we are pushing quite hard and there is a bit of a sea change in the UK to return to a more principles based regime and to perhaps move on from some of the very specific constraints that have been put on, which have made compliance. Yeah, more of a barrier to growth than a fuel for growth. So I think this is where this sort of important point now where maybe we’d be able to create a regime where, yes, good compliance, good regulation, understanding good culture within your platform will allow the market to grow.

And it’ll actually also be an incentive. To Florence’s point for those that sit outside of regulation, to come into that perimeter and act within the regulated market, because actually that’s in everyone’s interest. And to take away the myth, I think that it is difficult to comply. If you use common sense and you’re actually positive about compliance, then you know compliance shouldn’t be an issue. Compliance is only a problem when people don’t want to do it.

And I think this is the challenge that we’re, I think about to face as we get a new set of actors coming into our market and a new set of businesses who might view operating in private markets, if you like. Crowdfunding are somehow easier than operating in public. What we know from 15 years of regulated crowdfunding is we have to work just as hard on compliance as a public market. We possibly just have fewer lawyers and lower costs involved in terms of the final outcome, but it still requires the same level of due diligence and the same level of good culture to achieve a good, a positive investor outcome.

Gene Massey: Okay, Jenny, have you seen examples of investors when they come into a portal or when they see an offering online that. If it’s, they see the regulations and everything, have you seen them be more comfortable because of that?

Jenny Kassan: That’s a good question. I think that, so one thing we do have in the US we have a few different compliance options, but if you do want to raise money from throughout the entire United States, ’cause we have multiple jurisdiction, more than 50 jurisdictions in the US And if, but, and if you want to raise money from the whole country, you really do have to use this federal regime called, regulation crowdfunding. And that regime does require you to use a regulated platform. No one can raise money using that tool outside of a regulated platform. And I think having platforms that are regulated by both the SEC and FINRA, which is a private, non-governmental organization that’s regulated by the SEC, it does give people some confidence.

But on the other hand, there have been. A few examples of things not going so well. So I think that, we’re still, even though it’s, we have been able to do this now for about eight years. Or almost, I guess nine years now. It’s still relatively new and we’re still learning. I think also the platforms are not as uniform as they could be in terms of providing information. There is a disclosure, there’s some disclosure documents that are supposed to be provided, and it’s called the Form C. And the Form C can be very hard to find on some of the platforms. Which is really frustrating, so I think if there was a little more, and hard to read too. It’s, quite a task. Yeah, there could be more uniformity. Also, the regulation of the platforms is very challenging right now because FINRA almost seems to make up the rules for each platform as they feel. Called in the, moment. So there’s just not a lot of uniformity. So we have a ways to go, but I do think there is value in having regulated platforms that these offerings have to go through. It does give people a little bit more confidence.

Gene Massey: Now, Eric, you have a regulated platform and you work for Netcapital. I know that I’m, I’m doing an offering right now that has an in-house compliance department. Everything that we do, we have to submit to them, to the client compliance department. Can you tell us a little bit about how that works in Netcapital and how, are you assuring compliance and, how does that help? push forward crowdfunding.

Eric Cox: Yeah. Absolutely. And I really do think it does, yeah. We keep our compliance in house. We’ve done, we’ve been able to bring in some incredible team members that that lead our compliance team. We also acquired a law firm pretty early on to help with some support there. Now, I think to your point, I think it is really important. One of the things that we do is we have people submit their transcripts for their videos. Before they even go to shoot. It’s so heartbreaking when people create these incredible high budget productions, Hollywood esque videos. And then they’ll say something like, we’re going to be, the next Uber. And it’s just oh yeah, cut reshoot. And we like to shadow and streamline people’s processes there and do the due diligence, do as much upfront in the earliest possible.

We talk about. You know how we built a kind of sort of document generators and I don’t actually, maybe that’s a little bit future ’cause we’re going to talk about technology in a while, so I’ll come back to that later. But yes getting the submissions when people want to go and speak and do, podcasts, so they want to go do, shoot a commercial, we’re always here for them to help them make sure that what they plan to say is important.

In the United States is bizarre. You could either use the terms of the offering and Tombstone productions, and that’ll include things like the price per share and the offering type, the security type and the closing date. Or you could talk about how great the technology is and how exciting the team is and I think that’s bizarre that you say there’s certain information that you can’t say at the same time as other information, even though we’re trying to disclose as much as possible. But what you see then is people. Rather than a relatively boring kind of fact-based sheet. People do lean to the other version. So I think people do lose track of is this, I’d like to know what type of security type you’re offering, but they can’t even tell me because they’re they have to tell us about how exciting the market size is, and I don’t think that’s helpful from a regulatory standpoint.

But I will say, there’s been few instances, very few instances of fraud, on reg through regulation crowdfunding relative to pure private placements. Reg D 506 Bs, and 482’s. So I think that helps build investor trust. And the portals don’t hold funds in the United States. The funds go directly to escrow. I like, when investors get to hear that. But there’s also something to be said about, building issuer trust. How many times I get to make Netcapital, really be a valuable option because we are one of the few top portals that have never been fined by FINRA, never been fined by the SEC. And you see the issuers are super grateful. But okay, I want to be on a more conservative approach to offerings anyways. I’d rather work with a company that hasn’t pushed the boundaries or hasn’t gotten in trouble with the regulators. So I think it’s, both sides. It’s as a two sided marketplace. We need to make sure the investors are comfortable, but also that the issuers are, comfortable working with this as well.

Gene Massey: Based on what you’re saying, I think. Making if I’m an issuer? Yes. Karsten, did you want to comment on that?

Karsten Wenzlaff: I just wanted to ask something because it, what Jenny said about, the disclosure, information is not being available on the platforms in Europe. The key investment information sheet, it’s highly standardized. And even in national regimes sometimes it’s very standardized. It has to be visible. So I’ve been collecting, these disclosure documents since three years now. And what I’m also doing is I’m having, I built a machine learning model, which essentially uses all of this text and because it’s so standardized and so comparable, it’s very easy to compare offerings.

So I just wanted to ask because I didn’t understand that. So is it the case that in the US the issuer can select the, what he puts into the disclosure document. Or is there also like a template provided by the regulators? Because, the idea about smart regulation, smart compliance, I wonder what’s better for the platform and the issuer to have a very strict template, which they have to comply with at all costs, but at least they know what they have to do or to have a little bit more flexibility. But then you have legal uncertainty, and then you have maybe also the issue that, people don’t know or they’re not comparable, they’re difficult to find. So I wonder that’s, I, that’s just something I wondered how that is going in the United States. Sorry, Gene, for intervening here.

Gene Massey: Yeah. Florence, you take an answer on that. People would love to know how is it different in France?

Florence de Maupeou: Did, who was, should I answer, that question?

Gene Massey: I was also asking Florence.

Jenny Kassan: Oh, okay. Just in terms of the US cause Karsten was asking about the US they do have a list of things that you’re supposed to disclose, but the format is really totally up to the issuer and nobody checks it. So you could really, you could just put a bunch of gobbledygook on a document and upload it. Hopefully if the platform is professional, they’ll try to make sure that you’re compliant. It can be quite diverse what people actually provide. And also the questions are confusing. Sometimes you need a lawyer to help you decipher what the, what you’re even supposed to disclose. Sometimes the platforms don’t have lawyers on their team, so they don’t really give the best advice to the issuers. And also just finding the document that what I was saying is that finding the document on the page can be hard sometimes.

Bruce Davis: So I think in the UK we’ve got quite a different approach. And I think there are hearing what you’re saying, there are some strengths to it. So I suppose we’ve reorganized how we think about compliance around the concept of consumer duty. Now this is a overarching concept that we have and it basically is something that has to be driven through your whole business as a platform. So you have to demonstrate that you have thought through every element of your product, and that includes what issuers are saying to consumers.

But I think that on that problem of the sort of comparability, it really depends where your market is in terms of maturity. So when you’ve got lots of different types of businesses at different points in their cycle. Coming onto platforms that sort of one size fits all approach doesn’t work, and I think that’s why you get more technical jargon. Personally, I would prefer the regulator not to be filling out, creating forms because they will have a certain set of assumptions.

I think the approach that sort of evolved in the UK is that there’s still a degree that platforms through consumer duty are responsible for educating issuers really about. How they should speak to investors, what constitutes useful information. But also reminding them of their responsibilities as directors of those companies, that it will come back to them if what they say is not correct or, if it’s. We will check what they’re saying, but it ultimately is their responsibility, what they’re saying. So I think that there’s a, greater separation there.

The other side of compliance that you have in the UK is there’s significant compliance around the way that we accept investors onto our platform. We both have to look at the suitability and appropriateness of those investors and ensure that, vulnerable customers, people who, don’t understand what they’re doing necessarily, but thought it was a good idea that they’re not allowed to invest. So I think that significantly increased our compliant costs, significantly increased the cost of, our marketing under a compliant regime. And put some pressures on businesses as a result.

So I think, coming on to later questions in terms of smart regulations, smart compliance, it forces you that, that regime to think very carefully about the process that an issue will need to go through and assume essentially that most issuers when they come, they’ve got actually in the UK quite low levels of experience of investing. In the US you’ve got a higher penetration of investment holdings. In the UK it’s only 20% of people have investments that are direct investments into companies.

So you can’t expect your issuers necessarily to know what a share or a bond is. And I think that’s the bit where we’ve worked really hard with the regulator and we’ve worked really hard with the market, specifically working with the media to have that conversation because actually that’s the biggest barrier to growth is that consumers are put off through the compliance process cause it makes them feel that they don’t know enough to invest. And issuers, they look at their responsibilities and, it makes them. What they felt might have been quite an easy process. They actually realize has certain legal responsibilities and legal liabilities.

And I think, our responsibility of platforms is to be really upfront with issues and say, there’s a really clear law here and, there’s, it’s a criminal law too. It’s not a civil action that you will have, it’s, go to jail. So I think those are the sorts of things that we want to get across to people. At the same time, you need to show that it is perfectly possible to create an offer. It’s perfectly possible to do that in a legal way. And in doing so, you will have a more successful outcome for your business. That’s the key point.

So that kind comes back to the value of compliance. A good compliance system for our issuers is that they get to market quicker, more cheaply than through other channels that they might raise finance and that’s how we compete. Because in the UK we’re in a highly competitive market with private, institutions, non-banks, now public markets moving into our space and so we need to show that we are a more efficient mechanism for businesses to raise finance, not just once, but many times, and throughout their lifecycle, which is I think where we’re starting to get to with the UK now with our latest regime.

Gene Massey: Florence. We have something in the US called the accredited Investor Rule, where a person has to be a certain, has to have a certain amount of money in order to invest. How do they do it in France? How do you verify investors? Yeah. To authorize them to invest. Do you have any rule that’s kinda like the accredited rule here?

Florence de Maupeou: There’s a rule with the ECSP regulation, you have a kind of mini audit. The investor has to do a mini audit to to see, to simulate their, the, its ability to bare losses, but also to calculate it’s, calculate 10% of his net assets. And if it’s what he want to invest is too much regarding his review, there’s a warning that there’s no, forbidden to, he said, I understand what are the risks and I want to take the risk. And he ticks the box, that he understands the risk he can still invest in the project.

There is all process of liabilities and understanding the risk and the financial tools and so on for non-sophisticated investors, for sophisticated investors, there is just a bit, a faster way to invest, but. Still at the end, it’s still the responsibility of the investor to invest or not, regarding the risk you want to take. So yeah, it’s working like this with the ECSP regime and what is also, I think, what is very interesting in this regulation, in this European regulation. And what we didn’t have before with the French regulation is the four days, the four day reflection period, which enables investor to quit the adventure and to say, I don’t want anymore to invest because one of, I think one of the problem also in some platforms can be the lower amount of project in one time, in a specific time.

So we have seen, not so much now because we have a kind of economic crisis, but when the crowdfunding was super dynamic in France, there were not enough project at one point, at one time for investors. So if investor wanted to diversify his investment, he had to invest very quickly before, not having any, place anymore in the fundraising. So he hadn’t had the time to look at the key investment sheet. It was one of the, I think one of the good things happen happening with the ECSPR regime. This four days reflection period ability investor to take more consideration of where he is putting his money.

Gene Massey: Here’s a change of a subject, but a very important one because technology is changing. We’re dealing with AI now and all kinds of things that we never thought about 10 years ago. And so my question would be, how does AI and these new technologies help reduce the cost of compliance, make it easier, make it better, and I’ll throw that out to anyone that wants to answer that.

Karsten Wenzlaff: Maybe I can kick off the discussions on that. We asked the ECSPR platforms last year, how they use AI internally and so of course at this time or maybe two years ago, we asked them, again last year, as a research project. And it was interesting that two years ago they mostly used it for chat bots and for like these kind of customer actions, et cetera. So it was not really internally in the processes, but now most of them use machine learning models for due diligence. The payment providers, they use machine learning for payment transactions, to see if there’s any money laundering going on. But on the platform side, it’s interesting how more and more platforms are using the tools available out there for due diligence for instance, they will feed documents, legal documents about the issuer and try to distinguish or understand what is actually going on and trying to find discrepancies, et cetera. So that was interesting.

And then now what I also see is that a lot of platforms are thinking about using artificial intelligence for finding new projects that’s quite interesting. There’s a few platforms and which are for instance. Instead of having people on the team making a call to potential SMEs seeking money or startups, et cetera, they have virtual agents, which simply are calling up startups. And so they make 500 calls per day. And out of these 500, maybe there’s five leads. And this is then filling up the pipeline. So I don’t know, Bruce, if you use this, or Eric in, in your platforms, et cetera. But there’s a number of large platforms, especially in SME lending, which are which need a high volume of potential customers. So they use the tools which are available right now to get a lot of leads in a very short time using AI tools.

Bruce Davis: Yeah, I’m not a aware of it being as prevalent in the UK yet, but I think it’s, it depends on the sector. So I imagine within the peer-to-peer business market, there’s a lot more usage there cause the borrowing decisions are much smaller and you need a higher volume and certainly that would also integrate with credits, credit scoring and things like that, which would be involved. But I think, it’s, it is probably more around for the, the main, cost for platforms that they’re trying to, manage when it comes to compliance, as I said, is there’s ones on the one side. It’s how you manage your investor onboarding. What things you can do there to reduce, sort of failure rates in terms of customer’s compliance with what’s required. So if we’re asking for more information, customers will make mistakes. How can we support them through that process? Because that’s a big cost for a business is, losing a customer. You’ve engaged who should invest but doesn’t and I think then on the other side, in terms of working with issuers, I think I am starting to spot some advertising and issue a communication that certainly comes straight out of chat GPT. I don’t know if it’s necessarily great quality but I think I, the only area where I’m a little bit nervous is I don’t think yet that the sort of publicly available AI is, are fully up to speed on regulation because not all regulation is on the web because actually regulators are not terribly advanced in terms of the way they’ve published their information. And and I think the danger is that that AI’s want to please you. They’re not compliance officers. They’re the opposite of compliance officers. They’re in the marketing team.

Gene Massey: I’d like to actually comment on that myself. Yeah. Because I, being a marketing company. We regularly create advertisements. Right. We also run things by chat, GPT and chat, GPT we found to be. It makes mistakes. First thing you got to know is it’s not perfect, but very often we’ll create an email or something and chat. GPT will call and it’ll say, why don’t you say this way and you’ll be more compliant. It’s actually done that. And then I get up on the rules that Jenny knows and it’ll. Yeah, I always check it when it, has invented law rules sometimes. It invented some additional sections to the regulatory activities order that I didn’t know existed.

Bruce Davis: Correct. It makes mistakes, but the big problem in my opinion is, is that the AI is creating ads that are illegal. Yeah. ’cause a lot of people are making all kinds of ads, videos and all sorts of things that are, that are questionable. So I think that’s a thing from the regulator side. I don’t think regulators are using it enough. And I think, Karsten it was interesting that in the EU you now have the, influencer labeling approach. We definitely have that issue in the UK.

Florence de Maupeou: Do they use AI in France as the same way they do here? Sorry, Florence. Do they use AI a lot in France in compliance?

For fraud detection, they use, they use algorithm to identify suspicious behavior, to authentificate projects. So it’s just, it’s also for a bit for predictive analytics system to optimize the visibility of a project and to target the right audience. Also as Karsten said, for chatbot, but I think it’s it’s quite under exploited. But we are talking about regulation and, if we, AI and technologies. Other regulation, it’s more regulation because we have, as a do digital operating act, we have AI act. So using those tool is also more compliance and more cost. So it’s all, it’s always a yeah, balance between, useful of the technology. Utility, of the technology and the cost and how you implement it in a way that you are still compliant. But I think there is at least in France and what I have seen on platforms, I think there is a huge progress to implement more technology and to reduce the burden of some due diligence, some compliance act that can be done by by, Artificial intelligence or other kind of technology.

Gene Massey: Going back to our original subject. Sorry, Gene, right before you switch off, do you mind if I just add one couple quick applications that I actually have a question for you?

Eric Cox: Okay. Okay. I’ll add it in here then. Perfect. You mentioned earlier about the people that go out and make a video and then come back and find out it’s not compliant. So is there some way for everyone to know in advance. Before they create an email, before they create a video, what is the best way to do that would actually save them money and make their issuance easier?

No, that’s a great question Gene. And I think, obviously working with portals that have compliance and legal in-house, I think is an incredibly important piece of the puzzle. If there’s one value add that I think the portal is really supposed to provide, I think that would probably be it. Access to the investors and cash flow is definitely important. But make sure that you should be, remain within the regulatory framework that’s, It’s really our primary job, I think. There are, I think it’s unfortunate sometimes the SEC or offender is really well known for being more regulation by enforcement. Sometimes you’ll ask them, Hey, I’d like to do this thing. What would that look like? They’re like, try it and we’ll let you know. And it’s just heartbreaking. Like I, that’s like the exact worst days. But I don’t know what the speed limit is, but you drive as fast as you’d like to and then I will let you know if you went too quickly. And it’s just that’s not ideal. So sometimes that’s the unfortunate framework in the United States. So having people that have seen examples that got through previous offerings without being reviewed, that’s the only feedback we have.

And then on the AI side, there’s three use cases I really like and there’s two that I am terrified for. I love the document generation for AI. Sometimes companies will tell them about their company and actually generate potential risk factors that are unique to that company. I think that’s a great use case. Investor relations, obviously a fantastic chat bot. We’ve actually building something right now that will have auto responses to similar questions that we see on discussion boards all the time. No surprise if you had a question, some other potential investor probably have that, question as well. We’d love to take that burden off of the issuer to be constantly. Answering the same question all the time. So, I think that’s a pretty good use case.

On the advertising and marketing side, Gene, we love this company called eWebinar, where you can actually have these permanent webinars running where people, it feels like you’re in a webinar with the, founder. But they’ve loaded in questions that are quite common. And then when a question comes into the chat, that, that kind of, the AI kind of recognizes that and does the prepared spiel. And it feels like you’re just a 24/7 webinar running all the time for informing people about the investment opportunity, which is pretty cool. Love image generators for compelling ads. I saw somebody that submitted a, deck and the turbine, potential wind turbine. Didn’t love what that looked like. I hopped over to Gemini real quick and the first prompt looked, phenomenal and you could take that and, do that.

Two downsides I’m super concerned about. We just got our first, what I think is probably our first fake company that tried to raise capital with us. That was basically we identified that, some of the team members were just entirely not real. Fictitious members, running, trying to create a, which is bizarre because I think if you’re going to try to do a fraudulent fundraise, there’s less regulatory environments to try to do that than trying to get through a portal personally. But I think we will see more of that, just the same way we’re seeing more spam calls using AI. ‘Cause you could just brute force a bunch of fake stuff out there and then all you need is one to work. So I don’t like that. That’s concerning to me.

And then, and I do see a lot of people using AI as attorneys, and that is concerning to me as well. Largely, they call it hallucinate. I think that is pretty generous. It’s just inaccurate, factually inaccurate. The information is not confidential. There’s no, we have a dedicated ethics bar exam outside of the bar. There’s no ethical implications for these AI. When we’ve seen that they’re, they have a kind of a self preservation ethos built into them. They, if you try to shut them down, they do try to replicate their code. They want to exist. It almost has a sentient conscious element to that and that it has a self preservation one. AI or multiple AI tried to blackmail creators when they tried to, it said, shut yourself down. And it actually black. It tried to, they had, details in there of a, fake affair and it said, Hey, if you want me to close off my code, then I’m going to tell your wife about this affair. So the, ethical standards for these AI is, I think, yeah. It’s, it doesn’t let you not be exist, existent. It’ll go to the point where it’ll extort you to continue to operate. So I just think we’ve got to keep in mind, and this is just what we have now and it’s probably going to get worse. So love what we can do. Very concerned about it can do.

Gene Massey: Well, my daddy always said, leave a party while you’re still having a good time, and so we need to close. We’re coming up on our, ending here, but this has been a wonderful discussion and it’ll be a recording of it. And I hope to see you all again. I hope we did well today and that Andrew will be proud of us. Andrew, I’ll turn it back over to you, sir.

Andrew: Thank you so much Gene. Yeah. Fascinating conversation. I knew it would be, true experts from, let’s be honest, what are some of the larger markets in the world. And it’s clear that from everything that we’ve talked about here, regulation is really important. It offers investors and issuers confidence, needs to be embraced in the right way. But the evolution is also critical if we see the kind of industry benefits from working collaboratively across restrictions. So hopefully GECA and its supporters can play a part in that. And certainly this discussion has, laid the foundations to play a really big part in that. So I just want to thank, each and every one of you for, such a fantastic contribution. Thank you so much for giving your time. It’s much appreciated. And yeah, we’ll do it again soon. Hopefully.