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Due Diligence in a Title III Universe

microscopeTitle III of the JOBS Act – which is in effect as of today – is designed to open up private equity crowdfunding investments to non-accredited investors and to give startups another source for potential funding. Today is just the beginning of Title III, but you’ll soon see established equity crowdfunding platforms like MicroVentures adding Title III investment opportunities to their offerings, and you’ll see new platforms cropping up that offer nothing but Title III fundraises.

The important thing to remember is that, Title III or otherwise, not all investment opportunities are created equal. That’s where due diligence comes in.

Due diligence is the process of reviewing a proposed investment opportunity – and the people who are offering it – before any transactions take place. Investing in private equity is inherently risky, but due diligence can help provide investors with a baseline understanding of the company. It can also help identify companies that clearly aren’t ready for the fundraising process.

But due diligence can mean different things in different contexts, because different crowdfunding regulations have different due diligence requirements, as do different equity crowdfunding platforms. A registered broker-dealer like MicroVentures, for example, already has in place a process for conducting due diligence. Our evaluation encompasses the company’s product or service offering, business model, intellectual property, product roadmap, leadership team, addressable market, competitive landscape, regulatory environment, user traction, historical and projected financials, and more.

Platforms raising solely under Title III may have a bit more flexibility when it comes to vetting startups for potential fundraising. But at MicroVentures, we feel that due diligence is even more important in the face of Title III, given that audit requirements under Title III are more relaxed at the lower levels of financing, and given that Title III will inspire many investors to make private equity investment decisions for the first time.

Time will tell how Title III shapes the equity crowdfunding landscape. But while some crowdfunding platforms may be tempted to list every opportunity they come across in an attempt to give investors lots of options to choose from, MicroVentures will continue to be selective about the companies we present to our investor base, using due diligence as our guide.