What is due diligence
Due diligence is the legal term for kicking the tires before you make an investment. We do due diligence all the time in our lives – checking prices and reviews online to make sure we get the best deals, talking to our children’s friends to be sure they aren’t bad influences, etc. Due diligence in investing is like that, checking that the company exists, the managers are who they say they are, and that the company is operating the way it says it is.
Why is due diligence necessary?
Unfortunately, where there is money, there is fraud. We see that in the highest levels of finance, and in donations that are not used appropriately. Even if there is no fraud and everyone has good intentions, sometimes things are forgotten in the midst of being so busy, e.g. the entrepreneur is so busy marketing his new invention that he forgets to file a patent, or the brother-in-law inventor forgets to transfer the patent to the name of the company – so if there is a falling out down the line, the company doesn’t own the valuable patent and you the shareholder will lose money.
Corporations may be people, but they are also complicated! Especially with start-ups, when everyone is busy and on a budget, it’s easy to forget that the company is a separate legal person and needs to pay its own taxes, keep its money separate from the founder’s personal money, etc. Best to get all that checked out before putting any of your own money in.
Who should do the due diligence?
You can hire an attorney to do the due diligence for you, but that can get expensive. The best way is to pool resources with other crowdfunding investors who are interested in the same company. That’s where CrowdCheck comes in. If there is a company you are interested in investing in, ask the company or the portal it is listed on if the company has been checked by CrowdCheck. We specialize in due diligence for start-ups seeking crowdfunding, so we can do it efficiently at the best price. The best part is, the portal or the company bears the cost of due diligence, so it’s free to the investor, you just have to ask!
How is due diligence done?
At CrowdCheck, we have developed a system specially for start-ups to make the process as easy as possible. We talk to the founder/CEO, ask a bunch of questions and review documents as required by the CROWDFUND Act, and also follow up on what the company tells us. We also conduct follow-up checks every few months, to see if the company is using the money the way it said it would.
Where can I find the due diligence results?
On our website at www.CrowdCheck.com! Every company we check will have our check mark next to it, and you can also view all the due diligence results. We will also explain why each step is necessary and what you should be looking for in our Investor Education section.
Sounds great! When will this be available?
Crowdfunding is not permitted until the SEC adopts crowdfunding rules and registers crowdfunding portals. That means we can’t show you the due diligence we’ve done on companies until that time. However, companies can start the due diligence process ahead of time so that they are ready to go once the SEC permits it. Under the CROWDFUND Act, investors have 21 days to review the due diligence material before making an investment. So if you are an entrepreneur interested in crowdfunding, now is the time to get prepared! Contact us and we will walk you through the process. If you’re an investor, keep updated by signing up for our email list here.