What due diligence really looks like

There’s been a lot of discussion about what due diligence is (and isn’t) in the crowdfunding context. As we get closer to going live on crowdfunding, we thought it might be a good idea to start a series of blog posts that explain what good “due diligence” really looks like, and the things that investors and intermediaries should be looking for when making a crowdfunding investment.

So what is due diligence and how much of it do you have to do? It depends on the circumstances. Don’t you hate it when lawyers say that? But it really does depend. Due diligence is the investigation that a “prudent person” would do in the management of his or her own affairs under the particular circumstances. So if the prudent person is Warren Buffett, and the circumstances are that he’s buying a railroad for a few billion dollars, he’s going to have some high-priced lawyers looking into every aspect of the railroad’s operations for a few months. If the person needing to do the due diligence is the underwriter in the IPO of a tech company, the diligence might be a little less intense.

So for crowdfunding — investing small amounts in small companies over the internet — you’d expect the due diligence process to be less onerous than if you had Warren Buffet investing, and you’d be right. But there are some things that can’t be omitted from due diligence, even for small companies. These include things like making sure the securities being offered are properly issued, because if they aren’t, your investment is totally worthless. Our due diligence series will go through some of these essential elements of due diligence, and explain how you check them out.

Another thing that can’t be omitted? Judgment. There is no substitute for informed human analysis. Anyone doing due diligence must keep the “prudent person” standard in mind and ask how a prudent investor would treat a particular piece of information. It takes human judgment to analyze whether a contract is crucial to a company’s operations. It takes human judgment to assess the relevance of a founder’s employment history. We’ll be talking about that too in our series.

Look out for the CrowdCheck Due Diligence Series, starting soon!

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