Due Diligence for Crowdfunding: How Do You Vet a Crowdfunding Portal?

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1 Due Diligence Problems

Due Diligence for Crowdfunding

You understand what due diligence means: check enough of the facts to make sure you're not getting scammed.

But how does due diligence work with crowdfunding? How do you determine whether or not the portal is really a Ponzi scheme, willing to take your money and run?

And how do you check out the investments themselves, without using up all the profit on expensive appraisals?

1 There are 2 types of crowdfunding portals


There are 2 types of crowdfunding portals: Donation Crowdfunding, and Equity/Debt for a profit.

Although there are rules that have been proposed for regulating the industry, such as requiring registry with the SEC and FINRA, these have not yet been finalized.

Some companies that have chosen to voluntarily register with FINRA; this would seem to indicate a higher level of trustworthiness.

TIP:

You can check whether

or not a portal is

registered with FINRA

here.

2 Does the portal utilize 506(c) or 506(b)?


These two designations differ significantly.

506 (c) allows crowdfunding companies to raise funds through a private placement offering, and to advertise. This is something that wasn't possible previously without full SEC filing such as an IPO.

506(c) issuers are not allowed to rely on self-accreditation. By law, brokers are not allowed to sell to you unless you make over $200,000 a year in income or have over $1 million in liquid net worth.

506(c) issuers must have a way to verify this (some use Veri-tax); 506(b) issuers have the investor signs documents that “self-certify."

3 Research the portal.


Google the owners, former employees -basically find anything and everything you can find on them.

You also want to make sure they are well-funded, for example, with venture capital backing, since that means they have some accountability.

Also, make sure they work with a broker-dealer. Although there are very few portals that can do this, it's still the best choice if you want to choose a reputable company.

4 Research their fees.


Find out what the portal charges.

Sometimes these are easy to find. Often, however, companies make it difficult to find out all the various fees they have. You might have to call them.

You might choose to veto a portal just because of the steepness of their fees.

One portal, for example, charges a 2.25% annual fee. Practically that can eat up as much as 30% of a cash-on-cash return.

5 Find out how the deal is structured.


Determining exactly how the deal is structured lowers the risk. If there is a middle-man, for example, the risk is higher.

Does the portal allow you to invest directly with the developer? Or do they creat an LLC, and then invest into the project.

Each of these makes a difference.

5 You'll still need to do regular due

diligence.


Even though these are crowdfunding portals, the essentials of vetting commercial income properties still hold true.

That means that you'll need to check out proforma, the location, the market conditions, figure out the expected occupancy, etc.

Cash on cash returns are the best measurement of profitabiliity. IRR is a good bonus for the future, but not one that should determine whether or not you do the deal.

It's icing on the cake: it's a future outcome that you can't really guess.

6 Crowdfunding portals may make things

easier - but don't be a lazy investor.


Crowdfunding is ideal a way that investors of all types can get into investment.

It's a great way of leveling out the playing field and putting more into the hands of individual investors.

However, it only goes so far. Crowdfunding owners don't have crystal balls that can predict or guarentee the success of a particular project.

Be responsible, and think of them as the name implies: as a "portal" their job is to facilitate access between you and developers. They give you access - a "door" so to speak- but you still have to get through the door on your own two feet.

Questions?

HOW TO DECIDE WHETHER OR NOT A COMMERCIAL PROPERTY IS PROFITABLE

Still not sure what's best for you?

Westwood Net Lease Advisors have extensive experience with investing in commercial income properties. Our specialty is triple net properties, which offer stable returns with well-known companies like AutoZone, Burger King, and Family Dollar.

These types of investments are safe, reliable, and don't require management.

Contact an experienced real estate broker at Westwood NetLease Advisors. You'll get a free 3o minute consultation, and solid advice on how to get started investing in your income property.

Call us to schedule your free consultation at 314-757-1031, or send an email to: [email protected]

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Due Diligence for Crowdfunding: How Do You Vet a Crowdfunding Portal?