Equity crowdfunding has witnessed enormous expansion in recent years owing to its removal of traditional barriers to investment. Compliance costs, investor accreditation and, perhaps most significantly of all, huge due diligence fees traditionally associated with financing transactions have been jettisoned in favour of more democratic means. Nonetheless, due diligence (DD) remains an essential consideration of any investor, from retail types to more experienced VCs, and should not be underestimated when engaging in equity crowdfunding. Invesdor has the requisite industry insights and experience to take you behind the necessities of due diligence for first-time or new investors in equity crowdfunded projects.
Investors typically seek two guarantees before proceeding with their injection of capital – performed due diligence and profits. Equity crowdfunding does away with these guarantees, and naysayers initially signalled the alarm in relation to this diversion from traditional investment tropes. Yet maintaining a high quality of investment is vital to the health of the industry – media is quick to point out where a crowdfunded venture fails, such as Rebus, the claims management company that recently raised £800,000 in the UK. While detractors of the crowdfunding industry paint a broad picture that associates platforms with an ‘open season’ attitude towards whom they decide to raise funds for, this is far from the case.
Regulated platforms do legal DD, investors do business DD
Regulated platforms carry the onus of legal due diligence, assessing companies’ structure, documentation and backgrounds to ensure any investment is legally sound. It ensures the investor is protected from legal issues or poor investment structures. This leaves, then, simply the business due diligence aspect – assessment of the market and overall attractiveness of the investment – to each investor.
There is an assumption investors work from, that equity crowdfunding platforms promote companies of a certain calibre, that are viable and legitimate. This is true, but more robust assessment is required on the investor’s behalf, owing to the inherent risks associated with early-stage investment. Regulations worldwide have encouraged light-form prospectuses from companies – it is essential these are studied by prospective investors.
Many platforms now mitigate risk by offering pre-screened deals and alignments between interested parties. This alignment between regulations designed to protect investors and pre-screened opportunities helps to eliminate risk and protect the investor. It’s perhaps for this reason there is not as much ‘platform fraud’ as the industry initially feared – there are so many hoops to jump through for prospective companies, and the existence of an intermediary is a deterrent for blue collar fraud.
Do your homework before you invest
The marketing materials provided in the lead up to a raise should also be carefully examined by the investor. Verifying the statements contained as accurate and representative is an easy way of determining the true and fair view offered by the company. So too is the more grassroots approach of contacting current consumers or investors to attest to their satisfaction with the management. Obviously, by the time the deal goes live, there is an extreme measure of transparency that immediately makes any kind of fraud or misconduct visible to the financial audience and the world. While this is another deterrent for fraudsters, it still pays to assess the prospectus of a company using an equity crowdfunding platform with an independent advisor, to ensure the image being depicted is an accurate one.
Ultimately, the preliminary checks you would undertake to uncover basic information about an interested company should all be employed before you invest on an equity crowdfunding platform – financial statements, corporate registry check, marketing checks. Consider the other investors in the platform and question how much faith and encouragement you place in their investment expertise and network. By heeding the above tips you will be more assured when investing in equity crowdfunded projects.
If you found this content useful, consider signing up to our newsletter for more tips and tricks on investing.
Richard Andrée Wiltens is a commentator within the fintech sector, who has written for an array of international investment platforms. His career has spanned from investment banking to financial technology firms, backed by an education in economics and finance.