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Sunday, 15 March 2015

Asymmetric Information

ECF platforms, like the UK's Crowdcube, provide potential investors with snapshots of the pitch's last period of trading and the next 3 years.

This information is crucial in helping people make informed decisions. The sites claim that where possible this information is thoroughly vetted.

So what if there was proof that the given information was not simply incorrect but had been manipulated to make the company's position look better than in reality it was?

There would be no way for even the most diligent person to check this out, without breaking into the company's offices to look over their management accounts.Filing of accounts is only required within 9 months of the year end date. The norm on ECF platforms is to pitch before the most recent accounts are due, so the details given in the 'prior period' have to be taken as read.

Without giving away any names or too much detail, we have records that show this has happened on more than one occasion. Here is one example.

This company was incorporated in July 2012 and would therefore not have to file its YR1 accounts until April 2014. When this pitch was live, Winter 2013/14, the filed accounts were not available. They were filed a few months after the pitch successfully completed. These filed accounts covered a period between July 2012 (incorporation) and October 2013 (YE). These dates are important because the company's pitch took place after the year end date of October 2013 - meaning they would have known the real situation. The pitch's 'previous' period ran to July 2013. So the filed accounts included the whole of this ''previous'' period.

The pitch's ''previous'' period showed a loss of several hundred thousand pounds. The filed accounts show the loss was in fact several hundred thousand pounds plus another hundred thousand.

On the Balance Sheet, the filed shareholders funds figure was out by a factor of 50% - to the bad.

The share capital figure shown on the balance sheet of the pitch was three times larger than the one recorded in the filed accounts. So in effect the company declared that in the period Oct 12 to July 13 it had new shareholder funds of X. The filed accounts show this to be a third of X.

This asymmetry seems hard to justify. Why for example did the pitch have different dates on its projections to the filing dates at Companies House? Even if the discrepancies in the P&L can be explained by the time lag, the balance sheet discrepancies cannot. The purpose of the projections in this pitch seems to have been to mislead rather than aid the investor.Mislead in order to obtain funding perhaps?

We will have to wait for the new accounts to be filed in a few months time to know the whole truth. If, as in this case, the company could have provided its filed accounts early, then this misinformation or misunderstanding could be avoided. Perhaps the ECF platforms should consider this as a prerequisite for launching a pitch? Otherwise what is stop this sort of practice becoming commonplace?

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