“iDisclose” – Breaking Today’s Archaic Securities Disclosure Process

idisclose-robotThe process of drafting a full-blown “Private Placement Memorandum” (or similar securities disclosure document) has always been a very time consuming, and frankly overly expensive, process for several reasons. The primary reason is of course that the legal industry has traditionally been extremely slow to leverage new forms of informational technology. Another main reason is that the current drafting process relies more heavily on the attorney than it really should (something that, as an attorney, you will almost NEVER hear me say). By redesigning the process to correct both of these issues, iDisclose (the brain-child of Georgia Quinn of Ellenoff, Grossman & Schole) has created a win-win situation for both the attorney and the client.

One of the most difficult issues securities attorneys like myself face, and one that often results in significant legal expense to the client, is simply trying to pull company information from the client’s head and put it in the form of a meaningful disclosure document. iDisclose however, turns the process on its head by giving the client a more substantial role in the disclosure drafting process. In doing so, not only is the legal cost to the client significantly reduced, but the quality and specificity of the disclosure information received by investors is substantially improved.

If you have gone through the process of writing a full-blown “Private Placement Memorandum” on behalf of a client (or having one written for you) you know that it typically works like this. First the client finds an attorney, tells them a little about the deal, and asks for an estimate to prepare the necessary disclosure documents. The attorney gives the client a broad range estimate (typically anywhere between $15-$35k) and, if they are smart, the lawyer will always add a caveat to the effect that the estimate primarily depends on how much information the client will be providing/drafting on their own (e.g. descriptions of the business process, business risks, financial statements, etc.). The client then engages the attorney and  provides the attorney only with as much company/business information as the attorney directly asks for. The attorney is then left with the daunting task of drafting a document that, at its essence, is a description of the client’s business and the risks associated with investing in that business. This often results in significant information gathering time being expended by the attorney, multiple drafts of the documents, additional back-and forth follow up discussions with the client, etc., all “on the clock” if you know what I mean. This is not to say it is the attorneys fault because most of the time it is not. The problem is the attorney is often tasked with trying to “disclose” information about the client’s business, most of which the client is in a MUCH better position than the attorney to know and describe. See the problem here? Only in the legal industry could this process even be considered logical. If we try the same situation with another industry the disconnect will be even easier to see. Try to stick with me for a second.

Let’s say that I am in the mood for some really good Paella (if you don’t know what that is, please stop reading, leave your house immediately, and find some… it’s delicious). Paella requires a somewhat complicated recipe and, since I don’t feel like trying it on my own, I decide to go to my favorite restaurant where I know the Chef. Now the restaurant does not have Paella on the menu but the Chef is willing to try to make it for me. He asks me for the ingredients and I tell him, it has seafood and rice but that’s all I know. He tells me don’t worry about it, he will figure it out. He goes back in the kitchen, looks up the recipe himself, sends his assistant out to buy additional ingredients, and cooks my Paella. 3 hrs., and several baskets of bread, later I have Paella. I am a little annoyed about the 3 hr. wait but I eat my Paella and I thank the Chef. Now when the bill comes and its $100, I lose my mind and start yelling at the Chef. He tries to explain to me that he had to do a lot of work to find the recipe, get the ingredients etc. that’s why it costs more. From my perspective however, I am paying $100 for Paella which is insane. We settle at $70 and both walk away annoyed (though I have leftovers so I’m probable still a little happy).

Now let’s take the same example except this time I bring the Chef the recipe and a bag full of the ingredients he needs. The Chef goes in the kitchen and in an hour or so I have my Paella. Even better than the fact that I didn’t have to wait 3 hrs. to eat as in the first example is the fact that bill is now only $20. Why? Because all the Chef had to do was what the Chef is good at; preparing the food. He didn’t have to come up with a recipe, dig for ingredients and waste tons of his time. I gave him everything he needed to prepare the dish and he was able to do it efficiently and in a cost effective manner.

Somewhat of a long-winded example but it should illustrate my point. Like the Chef, an attorney preparing a securities disclosure documents needs tons of information about the subject company (i.e. the ingredients) in order to properly prepare the document. Much of this information lies with the client and not with the attorney. The more the attorney needs to dig for that information themselves or try to draw it out of the head of the client, the more time and expense it will take. Getting the client to provide the attorney with all the necessary “ingredients” upfront will make the process significantly more efficient and less costly to the client. This is the basis of the iDisclose model.

iDisclose is a pay to use software application that walks an issuer through a series of VERY
detailed questions concerning the intended offering, the current business and financial status of the company, and other related information. The questions are separated by general topic and underlying subtopics allowing the user to go through the informationidea2 gathering process in a very organized and logical manner (e.g. questions about the offering, current capitalization of the company, etc.). Moreover, having run through the entire process myself, I can tell you first hand that it does great job of leading the user through the process including: summarizing the documents/information the user will need for each section; spelling out exactly the types of information the user should be providing/uploading; giving starting examples of required narrative descriptions; and providing help based hyperlinks and other information. The iDisclose application process will, if completed correctly by the user, result in a very comprehensive draft (and I highly stress DRAFT) disclosure document. This disclosure document is then given (by the user or directly by iDisclose) to the user’s attorney who will help to finalize the document. Once the attorney has the draft disclosure document the attorney should have all of the “ingredients” they need to finalize the document and should thus be able to run through the process in a fraction of the time (and at a fraction of the cost) required under the horribly less efficient current method.

So you may be asking yourself, “if I am an attorney, why in the world would I want to use this or have my client use this? I would be losing money!” There are several reasons why this will result in a win for the attorney as well as the client. First, it puts you at a competitive advantage against similar providers. If you can produce a disclosure document that is the same (and arguably better) then those being produced by your competitors for a fraction of the cost, who do you think clients are going to choose? Second, even if you get a client to accept the higher fee rate, there is ALWAYS due diligence time spent that is inevitably either written off (which is just a loss of money on its own) or which you try to go back to the client for (and risk pissing them off like I was with the $100 check in the above example), neither of which is a pleasant situation to be in. Finally, the disclosure document itself is going to be more accurate. No matter how good the attorney is, the client will always know more about the subject company than the attorney. Hence, why not get the information straight from the horse’s mouth.

Let’s be clear about one thing. iDisclose is not like certain other services whose goal is to remove actual attorneys from the process entirely (*cough*… LegalZoom …*cough*). It is designed to be an information gathering tool to help attorneys and their clients better work together in managing the securities disclosure process. Sure the system is not yet perfect and of course there will be attorneys reluctant to use or recommend such a system to their clients. That being said, this industry is absolutely screaming for a change and iDisclose is the first step to making that change happen. In my opinion, iDisclose is going to do for the private placement industry what “TurboTax” has done for the tax preparation industry.

About Anthony Zeoli

Anthony Zeoli is an experienced transactional attorney with a national practice. Specializing in the areas of securities, commercial finance, real estate and general corporate law, his clients range from individuals and small privately held businesses to multi-million dollar entities. Mr. Zeoli is also an industry-recognized crowdfunding, peer-to-peer (P2P) lending and JOBS Act expert and is currently an active board member and Secretary of the CfPA (Crowdfunding Professional Association) and an active member of CFIRA (Crowdfund Intermediary Regulatory Advocates). Most recently he drafted Illinois House Bill 3420, a bill which provides for an intrastate crowdfunding exemption in Illinois and which was unanimously approved by the Illinois’ house and Senate. Anthony is also currently actively involved with the entrepreneurship program at the University of Illinois at Chicago as both a mentor and a student advisor and is an active advisory board member of the New York Distance Learning Association (NYDLA).
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2 Responses to “iDisclose” – Breaking Today’s Archaic Securities Disclosure Process

  1. I think everything about this article is of an intent to streamline crowdfunding towards becoming a cost effective process and time tolerable industry we can all be proud to work in with realistic smaller minimums.

  2. Obviously I agree 100%, and I find your paella analogy so apt. More lawyers need to be like you and embrace technology. We can make practicing law more efficient and dare I say it, more fun. We can also lower the cost of capital for small business, which is always a good thing. Thanks Tony!

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