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When the SEC comes out with final rules and regulations on Title III (which allows for equity crowdfunding) sometime in 2014, the general public will be able to invest in private companies, something that’s been banned since the Great Depression in 1929. Soon everyone will have the opportunity to invest in startup companies in exchange for securities. While there are certain restrictions on how much the general public can invest in ($2,000 or 5% of your income if you make less than $100,000 / year, or $100,000 or 10% of your income if you make more than $100,000), we’ve come a long way since 1929.
Naysayers claim that this new pool of investors can easily lose money by investing in startup companies without proper due diligence. And yes, while these days it’s easier than ever to create a website and even be incorporated, there are certain measures of due diligence that help investors vet startups.
This is not legal advice*
Myth: Poorly informed investors could easily lose their money betting on companies that haven’t been thoroughly vetted.
Reality: Here are 3 reasons why both budding and seasoned investors can leave their worries about investing in poorly vetted startups behind.
1. We have organizations that perform due diligence & make sure startups aren’t hiding any skeletons in their closets
Full disclosure – we work with Crowdcheck. And we’re not advertising them in any sort of way. Crowdcheck provides preliminary due diligence services to protect investors and provide them with the information to make better educated investment decisions. Some of the things that they work on are:
- Verifying that the company is properly established and in good standing
- Checking whether the company is legally able to issue securities
- Performing background checks on company’s founders & employees, customers & suppliers
- Checking that the company has all the required licenses to conduct business
- Reviewing the company’s plan for the future & how they intend to use the capital they raise
- Confirming the company’s financial condition
- Seeing how investors’ rights can be affected by the rights of other investors & terms of other securities
- Seeing how the company’s plans might affect investors’ “exit” from the investment
- Working with the company to ensure that any material statements are backed up by evidence.
Due diligence is no easy task, and thanks to companies like Crowdcheck, investors can save the time and headache in examining every nook and cranny of the startup they might invest in.
2. Don’t underestimate the power of social media
These days, social media cannot be ignored. Whether it’s through Facebook, Twitter, Pinterest, or whatever new social media sharing app is out there, most of us share some part of our lives on the internet – WHERE EVERYONE CAN SEE. Combine the power of the crowd and the influence of social media, and the public will naturally be a force of vetting power. These days individuals can easily lash out at big corporations via social media, sometimes building viral phenomena and ruining company reputations. In a society where the world is becoming smaller and smaller every day and access to information is just getting easier, the public, whether it be fellow investors or anyone else, will be sure to share information if they find something that wasn’t shared before.
3. Investor community information sharing
Properly vetting startups also entails knowing the size of the potential market and the expected growth rate, assessing trends in the market and how current economic, political and demographic conditions relate. As smart as investors are, we all know that investors aren’t experts in every industry. Investors will therefore naturally invest in the industries they understand and are familiar with. So similar to point #2, investors will be able to communicate and crowdsource information, which may include industry growth rates and trends. There is also the internet where access to information is now easier than ever.
Transparency and information are going to be at the forefront of making a prudent marketplace for all stakeholders involved.
SEE WHAT OTHER MYTHS WE BUST HERE