- Is the platform licensed? Securities regulators have a responsibility to protect investors and they do this by vetting platforms, the individuals behind them and the business model. They also ensure that platforms have the right compliance procedures in place. If a platform is not licensed or if the platform is a "division" of an existing licensed entity (meaning they have not gone through the regulatory scrutiny to obtain a license), it should raise a big red-flag for investors.
- What materials are available for you to make decisions on an investment? Investors should have access to sufficient information to make a decision on an investment. This generally should include: i) an understanding of the business model, ii) financial statements or projections, iii) investment terms and structure, iv) liquidity strategy, and v) disclosure of fees, risks and conflicts of interest.
- Does the management team of the platform have the right experience? Private investments are typically not structured as simple common stocks or bonds. There can be many complexities with the structure of an investment, the securities being offered and the valuations. Investors should be looking for a platform with a management team that has experience in analyzing, structuring and executed complex transactions.
- What happens after you make an investment? Since there are no regular reporting requirements for most private investment opportunities, many issuers tend to provide updates on the business or material changes only when it presents the issuer in a positive light. Investors should be wary of platforms that do not provide regular reporting on their investment opportunities because most individual investors will have very little influence when it comes to reporting.
- Who is investing alongside you? As an individual investor, you will generally have no power on the structuring and valuation of an investment opportunity and the management of that investment. Platforms that offer the opportunity to invest alongside sophisticated professional investors who structure, value and manage an investment will provide individual investors with a greater sense of comfort and peace-of-mind.
Crowdfunding has provided investors with greater access to the private investment market. With greater access and opportunity, comes greater risk. Before selecting a crowdfunding platform, investors should look into how they mitigate risk, as highlighted above.