Early-stage investing is not for the risk-averse or the impatient. Most startups will fail, and a few will bounce along, probably never generating an outsized return for investors. But like professional investors who take a diversified approach, a single investment out of many can drive significant capital gains. Online capital formation, or securities crowdfunding, has brought this opportunity to the masses – opening up an asset class previously reserved for the very rich.
As part of the investment crowdfunding process, issuers sell their company’s vision and the possibility of generating a return for an investor. It is up to the individual to determine whether or not the company’s mission is viable – and perhaps could be successful. This requires individual due diligence in reviewing the product/service, market opportunity, and, perhaps most importantly, the people running the firm.
At the same time, platforms listing the securities offering have the responsibility not to list bogus offerings. Risk is OK – and vital for a market economy to operate, creating prosperity and driving economic growth. Fraud is very bad.
While different platforms handle due diligence differently, Seedrs, part of the largest investment crowdfunding company in the world, has recently distributed an email highlighting what they do to approve a securities offering for investment. Seedrs highlighted the five steps they take before a securities sale is open to investors:
- Verification of the campaign
- General legal due diligence
- Intellectual property
- Share capital structure
- Current financial position.
Every securities offering on Seedrs is reviewed by their investment team, and missing information must be provided while anything deemed misleading is removed.
The identity of all directors of the company is verified via an outside firm that runs a database check to validate their identity as best they can.
Any securities offering a minimum funding target must provide sufficient capital to fund the business for at least 6 months
While past financial performance is encouraged, Seedrs does not “generally” allow an issuer to share financial projects.
Seedrs also enables potential investors to communicate directly with the issuers staff in a transparent discussion forum.
If you are interested, Seedrs has posted a document with more information on the due diligence they pursue (something CI believes all platforms should do).
None of this precludes an individual from doing their own research, asking questions and inevitably making a determination as to whether, or not, they see a path to success for the company. And then, they must evaluate whether the security offered makes sense. A good company does not necessarily equal a good investment opportunity.
In the end, all investments hold risk. Early stage is some of the riskiest but can also be some of the most rewarding. And Seedrs and other platforms are providing access to this interesting asset class – something that was not easily available not that long ago.