Equity crowdfunding is increasingly gaining momentum as a “better way” to access capital. Entrepreneurs consider the mechanism as a way to give fans and followers an opportunity to invest — regardless if they’re accredited or not.
More often than not, these entrepreneurs are equipped with lawyers and a team of expert advisors hired to support them. As for investors, that’s usually not the case. In most circumstances, investors are left on their own and this can lead to making poor investment decisions.
In fact, the US Securities Exchange Commission (SEC) recently sent out an alert to warn investors of misrepresentations about them approving crowdfunding offerings. In the alert, the SEC wrote that when a company files an offering on their EDGAR database, it doesn’t mean they’ve validated or approved it. They went on to highlight that they do not “evaluate the merits of any offering nor does it determine if any securities offered are ‘good’ investments.”
Along with the word “approval,” sometimes “due diligence” and “vetted” can turn out to be misrepresentations. In a general context, due diligence refers to researching and confirming facts, and vetted refers to moving forward with a decision based on these findings. When applied to offerings, investors should know how crowdfunding platforms conduct due diligence and how they’re vetting listed offerings. But it’s not often that equity crowdfunding platforms voluntarily provide this information.
On Equifund, we believe that providing a “better way” to access capital should be synonymous with conducting due diligence and vetting offerings. This is why we maintain a standard of practicing both at the same level as major banks, venture capital firms and other financial institutions. While some of these practices are proprietary information, we think it’s essential that investors have access to information that we can share. Below, are just a few examples of how we conduct due diligence and vett listed offerings:
Conduct a series of in-depth interviews
When a company submits an inquiry to Equifund to host their offering, we first ask them whether or not they have intentions to go public. Going public is an important factor in our listing decision because we want to ensure that our users have a chance to realize an exit, and not be trapped in an illiquid investment. If the company answers yes, we conduct an extensive interview process that consists of hundreds of questions about their competitive environment, opportunity, addressable market, defensibility, operational history, and more. We require the company to provide data to confirm the information they provide. And when applicable, we’ll go on to interview customers, vendors and early investors.
Review business plan, valuations and financials
If the company passes the first stage of due diligence, we review their business plan, financials and intended use of proceeds. This is because we want to ensure that they have a sustainable business model and a path to going public. We will identify whether or not the company has provided clear and critical information that’s important to investors. We also identify whether or not the company’s valuation number is reasonable and aligns with the results from our internal estimations. Often, we use multiple valuation methodologies to create a blended average, such as the First Chicago Method with the Balanced Scorecard Method or Berkus Method. We also hire independent financial professionals to review and verify the company’s financial claims.
Run background checks on management
If the company meets our business and financial standards, we run background checks on management, officers and shareholders who own over 20% of the company. This is done to ensure no principles have been subject to securities-related sanctions or convicted of certain other crimes that would prohibit them from participating in public offerings. If they’re clear from any law violations, we get to know management and their employees on a more personal level. There are certain things that we look for in management and their team, such as how well they can plan and execute their version, how well they can identify and solve problems, and how well they work together. This allows us to better gauge the likelihood of success, which provides better insights than what any business plan can provide.
Simply put, Equifund is an investor-first platform. We strive to ensure that our users can invest in opportunities where “due diligence” and “vetted” actually mean something, and that their investment has a path to realizing an exit. While these practices aren’t standardized across the industry, we believe they are crucial to helping our users achieve success.