Due Diligence

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sign-14089_640Ok, this is the boring stuff right? Well sort of when you are going to invest in anything you want to make sure you are giving your money to trustworthy source. In case of the stock market SEC regulations are supposed to make sure that the companies are following fair and ethical practices in regards to their investors. You can also safely assume that any company listed on a major stock exchange has gone through a significant amount of due diligence by the government bodies overseeing the exchanges. Of course there are crooks and thieves but it is usually much easier to find them when they are a publicly traded company. Just Google the company and you will find tons of information. The same goes for the stock broker or online broker or bank you are dealing with to execute your trades your money is basically safe except for the inherent investment risk. Your due diligence therefore usually boils down to reading about the company’s business model and their future prospects for profit.
In the crowdfunding industry everything changes. Since this is a totally unregulated and rather new industry it is ripe for scammers and thieves. Therefore there are two added levels of due diligence that need to be done. First you must of course select and work with highly respected platforms, they are storing your information and processing your funding. Make sure you trust them and do your research! You can read reviews from investors here (link) or you can read our in depth reviews (link) about some of our favorite platforms.
In addition to performing due diligence on the platform, we also suggest performing due diligence on the actual sponsor, this means the actual company who the money will go to in the end. Make sure you find out about their management, other projects they have worked on or successfully financed and completed. In many cases the platforms will claim they have done all this work for you and all of their offers have been vetted, but in other cases you may not be able to rely on them for this work. Therefore make sure you do some level of due diligence here as well. The best way to mitigate some of these risks especially when you are first starting to invest in crowdfunded projects is to make sure to diversify not only across asset classes and projects but across platforms as well. Pick 2-3 platforms and invest across them by picking one or two projects in each.
Of course the last level of due diligence exists as well you have to review the underlying investment. Does the business model make sense? Is there a market for the product? Did you find out about the real estate market in this area? Will rents increase or decrease? These are the type of questions you must ask yourself, be a little more sophisticated than just looking at returns, you can read more about how to evaluate a good real estate investment here (link article).