DD & AML/KYC - What Does it All Mean?

Equitise employs a thorough approach when deciding to conduct an equity crowdfund for a company. The core component of this is our rigorous due diligence and AML/KYC (Anti-Money Laundering / Know Your Customer) processes. In fact only about 10% of the companies that we speak to go on to raise capital on our platform as we ensure we only promote high quality and highly vetted deals to our investors. Due diligence is a process of screening prospective companies in a number of respects. This can include anything from financial history, financial forecasts, key team members and the products themselves. Not a bad gig when you’re looking into a brewery.

ASIC and the Australian government have prescribed certain minimum levels of due diligence checks that Crowd-Source Funding (CSF) intermediaries are required to perform. These checks are largely technical in nature and determine whether a company is ‘eligible’ to engage in CSF. There aren’t, however, any requirements around company strength, performance or potential return to investors; these factors are up to the intermediary to evaluate. To satisfy ASIC, intermediaries must check details such as the company’s principal place of business, company structure as well as gross revenue and asset figures. 

While these checks are an important baseline, at Equitise, we set ourselves a higher benchmark. Our fundraising team go beyond the minimum standards, deep diving into all aspects of the company until we are completely satisfied from a high level overview to the granular details. This additional research can extend the due diligence process by weeks to even months, however, it’s important to us that we only put offers up that we think have the best chance at succeeding commercially. We understand that not everyone has the time or knowledge to perform their own extensive due diligence checks. Our focus is on quality rather than quantity of deals to best assist our investors in their decision making.

The Equitise due diligence process is a layered progression of screening, with the eventual goal of establishing comfort around all material parts of a business. This generally takes a number of weeks, beginning with an initial overview of a pitch deck or information memorandum. We assess the viability of the business itself, competition in the market as well as market potential, and many other high-level indicators of quality.

If our Analysts are happy with this overview, we go on to meet and speak to company founders and key team members. If relevant, we organise product and technology demonstrations. We ensure that the people with the largest roles in a company have respectable backgrounds, good track records and are committed to the long run. This reflects one component of our AML/KYC checks. We use a reputable identity verification portal to check all directors and non-executive directors, all shareholders with more than 25% interest in the company and all senior managers. 

We then dig into historical performance, looking at any relevant traction statistics such as revenues, costs and customers. We delve into financial statements focusing on different aspects such as outstanding liabilities that may compromise the company down the track and scrutinise any potential red flag within the company itself. We analyse forecasts and ensure they are reasonable and achievable. We even verify key contracts and company agreements that may be material to performance. We ensure valuations are reasonable and take into account the profile of existing shareholders and past capital raises. It’s important to reach a valuation that is fair for both the business and for the investors. We want to help companies grow while also providing good deals with strong potential returns to our investors. 

If at any point during these checks our Analysts find any significant red flags that can’t be resolved, we will reject the prospective company. If we are satisfied, then the offer is discussed in our Investment Committee meeting where our highly experienced team ask the hard questions and assess whether it’s the right fit for equity crowdfunding. Beyond the fundamentals, Equitise also assess the potential strategic value-add of the “why” a company wants to raise capital with this mechanism. Equity crowdfunding has a proven ability to increase engagement from stakeholders to build a community around a business, increasing market awareness and driving product sales. Ultimately, we want to improve the commercial prospects of the business and deliver value to the bottom line (not just raise capital).

Over the years we’ve seen a trend which helps us gauge the offers that will be interesting enough for the crowd to get behind. These factors include but are not limited to: a product/service that is clearly solving a need or improving the status quo, B2C companies over B2B companies and proven traction which has resulted in a loyal following in the form of a database or on social media. However there are always outliers which is why we meet with a range of different companies. Ultimately, we want to help as many companies as possible to access the capital they need to grow and scale, we also have a duty to our investors to ensure quality across all our deals. We also offer aftermarket support when needed to assist and advise business, creating a long term relationship between Equitise and our portfolio companies.

Our emphasis on quality and rigorous due diligence is reflected in the numbers. Of the thousands of companies that we’ve screened, only 20 have gone on to conduct Australian CSF offers since the regulations passed in late 2017. We have an 81% success rate across our CSF, wholesale and IPO deals, with 87% in the last calendar year as we learn valuable lessons and refine and improve our processes. 12 of our non-IPO deals have also experienced up rounds (where an unlisted company increases its share price during a new capital raise) in that short amount of time, with an average valuation gain of 109%. We take pride in the fact that the capital we’ve deployed in recent years is worth significantly more now.  

Despite our due diligence processes, CSF is still an investment and therefore there is risk involved. We recommend that prospective investors conduct their own due diligence, with  information included in the offer documents on the offer page, and only invest what they can afford. Use any industry specific insight you might have, consider whether you agree with the company’s forecasts or ask yourself if you’d buy the product or use the service. As illiquid assets have a low correlation to public equity markets, equity crowdfunding can provide a good form of diversification with exposure to a higher risk asset class. We also encourage investors to reach out through the platform’s Q&A found within the offer page, to ask any questions they might have. These will be answered by company founders themselves and can help provide additional clarity on key areas. 

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