What could possibly go wrong? Using due diligence to make investment decisions

by Amy Short | Jun 21, 2021 | Capital RaisingInvestingMindset

Due diligence, a fancy term for doing reasonable research, is a key component in the process of evaluating any investment opportunity. While there are no set rules for the due diligence process, due diligence is expected to be conducted by investors and can be a wonderful learning experience. It’s common practice for due diligence to include review of issuers’

  • Management Team
  • Financial Projections
  • Product / Service / Technology
  • Market Opportunity
  • Go-to-Market Strategy
  • Competitive Analysis

Although issuers expect potential investors to perform due diligence, the degree to which an issuer is prepared and organized enough to facilitate the process varies widely. Entrepreneurs who are launching or managing businesses and raising money simultaneously are often spread thin with little time to spare. Lucky for investors considering investments through a FINRA approved portal for Regulation Crowdfunding (Reg CF), much of the document collection and anti-fraud verification is already complete!

Among the many benefits of Reg CF raises is the transparency and ease of access to the issuer’s business documents. FINRA approved Reg CF portals like Crowdfund Mainstreet collect the issuer’s pitch deck, executive summary, financial documents, legal documents, term sheet, and projected use of proceeds and post them on the crowdfunding page along with a link to Form C —the Securities and Exchange Commission’s (SEC’s) required disclosure form.  These can all be easily reviewed at any time during the raise. 

Some investors take what is colloquially called the “spray and pray” approach to investing.

What’s more, the SEC relies on Reg CF portals to shoulder anti-fraud responsibilities in the form of background checks and securities enforcement regulatory history checks for each issuer and its officers, directors, and owners of 20% or more of the voting equity in the company. Because the portals have already done the work of document collection and background checks, potential investors in Reg CF raises have a head start in the due diligence process and are able to save time and effort. 

Because Reg CF raises have relatively low minimum investment thresholds, combined with the required checks by the portal, some investors take what is colloquially called the “spray and pray” approach to investing. They make many investments across various opportunities without performing due diligence and hope their investments that have returns do well enough to cover the losses of the other investments and, on the average, they come out on top. While the spray and pray approach is common, I recommend a more empowered approach: performing due diligence to at least a degree that reflects the risk and, even better, teaming up with friends to conduct due diligence together. Not only will you be able to share the workload, everyone will benefit from the diverse perspectives offered by various members of the team.

As the Community Manager for Angels of Main Street, I’ll be coordinating a due diligence team for Traipse: My Local Token, an issuer currently raising funds on the Crowdfund Mainstreet portal. Everyone is welcome to join regardless of interest level in this specific issuer. Everyone has something to offer and due diligence is a team sport.  Join the discussion. 

Note:  You do not need to be an Angels of Main Street member to join this due diligence group.

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