Who’s Responsible for Crowdfunding Due Diligence?
By CHRIS ORR for Investors Business Daily
In my last blog post, we discussed the rise of private equity investing and how it's been facilitated by the growing number of crowdfunding platform websites. Since crowdfunding is fast becoming a valuable tool for our PENSCO clients, we're kicking off a series of blog posts addressing the topic — starting today, with a look at one of our favorite subjects: due diligence.
At PENSCO, we encourage our clients to conduct careful due diligence on any potential investment in order to guard against investment fraud and other issues. Each type of alternative asset has its own unique set of due diligence considerations, and investing in private placements through crowdfunding is no exception.
It's easy to think that when you use a crowdfunding platform, the due diligence has already been done for you. Most equity crowdfunding platforms advertise how discerning they are when it comes to accepting project applicants, some boasting acceptance rates as low as 1%. Of course, it's encouraging to hear that a platform's crowdfunding projects have been thoroughly vetted — but that doesn't let you off the hook for doing your own due diligence.
It's important to understand that, regardless of how carefully crowdfunding projects are selected, due diligence does not begin and end with the crowdfunding platform. Quite the contrary — it actually adds another layer of diligence. If you want to trust the quality of projects on a given platform, it's important to assess the selection process. You should therefore evaluate both the investment and the platform itself.
As far as platform due diligence is concerned, the process continues to evolve. The SEC has proposed but not yet implemented " Regulation Crowdfunding," which would subject platforms to more stringent reporting and disclosure requirements, most of which are designed to protect investors from issuer fraud.
But even if these regulations should go into effect, the fact remains that the due diligence responsibility sits squarely on the shoulders of the investor. Crowdfunding can be a great tool for identifying exciting new opportunities, but taking time to determine whether the investment meets one's risk and return profile is paramount.