Subject: File No. S7-09-13
From: David M Freedman
Affiliation: Editorial Advisor, The Value Examiner magazine (NACVA)

January 16, 2014

I want to comment from the investors point of view on the financial disclosure requirements of the proposed crowdfunding rules, Section 4A(b)(1)(D). My premise is that these requirements—especially the need for audited financial statements—would constrict deal flow without adding significant benefit for investors.

I am a fairly sophisticated investor (age 64). I have also worked as a financial and legal journalist since 1978. In the last few years, as a co-founder and contributing writer for Accredited Investor Markets (, Ive written and edited articles about venture capital and angel investing, including equity crowdfunding. I am also coauthoring a book about Title III equity crowdfunding for investors, to be published by Wiley Sons in 2014. I am also on the editorial staff of The Value Examiner, published by the National Association of Certified Valuators and Analysts ( Please see my professional profile at

Financial Disclosure
The proposed financial disclosure requirements state that:

(a) Issuers offering between $100,000 and $500,000 in a year must file financial statements reviewed by a CPA and
(b) Issuers offering more than $500,000 must file audited financial statements.

As an investor, I do not believe that audited financial statements would give me significantly more confidence in an issuer than financial statements reviewed by a CPA. The reason is that, first and foremost, when evaluating a startup or early-stage company, I just dont pay that much attention to financial statements in the first place, beyond basic revenue-related figures, production or acquisition costs, and margins. The financial statements of startups and early-stage companies, which are often contrived for the sole purpose of raising capital, dont help me evaluate those companies chances for success as reliably as several other factors, including: the quality of the management team the uniqueness, innovativeness, and competitive advantage of their product or service the potential size of their market and the valuation and price of equity shares they are offering.

If the companys management team, competitive advantage, potential margins, and market are attractive, then bad financials might not deter me from considering an investment in this company, if management is willing and able to improve their financial reporting methods and fiscal discipline.

Therefore, I think producing an audited financial statement is a waste of time. From the issuers point of view it is probably a financial burden as well (even for companies raising up to $1 million), and therefore may constrict the deal flow to which I have access as an investor.

For issuers raising between $100,000 to $500,000, they may be so new and small that financial statements are not significantly meaningful (from an investors point of view). Therefore, having a CPAs certification may be meaningless in many cases.

Non-accredited Investor Markets
Finally, most investors in Title III equity crowdfunding will be unsophisticated and, for better or worse, will not know how to read financial statements, and wont bother to learn. Many if not most of them will be attracted to a deal by its story, the founders, the potential size of the market, and the price of equity shares. They will not bother to read the financial statements whether they are certified, audited, or none of the above, because the financial statements are meaningless to those investors. Likewise they will have no basis for intelligently estimating the issuers fair valuation. Either they will want a piece of this company (because it appeals on an emotional level) and they think the price is more or less fair, or they will not want a piece (because they dont have an emotional attraction to it). And neither the financial statements nor the valuation will be a significant factor in that decision. This is the reality of the Title III crowdfunding marketplace. Some might say its a grim reality, but others say its a glorious, democratic revolution in private capital markets. I believe the truth is somewhere in the middle—there will be many losers and a few winners, as is the case in all of creation—and I strongly believe the crowd of non-accredited investors will figure it all out without the help of audited financial statements. The Founding Fathers trusted the people to make good decisions I urge you to do the same.

Thank you for your consideration.

David M. Freedman
Financial Legal Journalist
1866 Sheridan Road, Suite 307
Highland Park, IL 60035