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Due Diligence Standards. Your Guide to Crowdfunding Success

by EUROCROWD on 21.02.2024

If you are a crowdfunding platform, an entrepreneur, or an investor, then you should look these series of articles on the European Crowdfunding Regulation (ECSPR).
The ECSPR is a game-changer. It harmonizes rules across the EU, creating a level playing field for crowdfunding services. In these notes, we break down the jargon, demystify legal intricacies, and provide practical insights.
Today we are going to talk about due diligence. This is a critical topic because since the ECSPR approval, platforms are required to follow certain rules to ensure the safety of their investors and project owners.
Compliance isn't optional; it's crucial. Be empowered with knowledge with EUROCROWD.

Due diligence standards for crowdfunding platforms

The due diligence requirements are clearly stated in Article 5 of the ECSPR.
This article explicitly states that a crowdfunding service provider must conduct at least a minimum level of due diligence with respect to project owners who propose their projects to be funded through the crowdfunding platform of the crowdfunding service provider.
Right now, we might need to know what due diligence means.
We could define due diligence, in plain words, essentially as "doing your homework" before making an important decision. It's the process that platforms should go through to investigate and verify information about project owners before being accepted in their platforms.
Due diligence is often done to reduce risk and make informed decisions, not only in the crowdfunding space, but in any legal space.

So that all the public can understand it, here are some key points about due diligence that everyone needs to consider on a daily basis:

  • Applies to different situations: It's commonly used in business, finance, and law, but it also applies to personal decisions like buying a house or hiring a contractor.
  • Involves investigation: You gather information through various means, such as reviewing documents, conducting interviews, and inspecting assets.
  • Aims to assess risk: By understanding the potential upsides and downsides, you can make a more informed decision about whether to proceed.
  • Tailored to the context: The specific steps involved in due diligence will vary depending on the situation and the level of risk involved.

Specifically for crowdfunding and ECSPR platforms, the minimum level of due diligence includes obtaining all of the following evidence:

  • Platforms must ensure that the project owner has no criminal record for breaches of national commercial law, insolvency law, financial services law, anti-money laundering law, fraud law or professional liability obligations.
    For example, a small business that was convicted of violating anti-money laundering laws because it received a large cash payment from a customer in the past, dealt with significant amounts of cash and avoided paper trails. Any project of this small company should be accepted by the platform.
  • Platforms must ensure that the promoter is not established in a non-cooperative jurisdiction as recognized by the relevant Union policy or in a high risk third country as defined in Article 9(2) of Directive (EU) 2015/849.
    For example, a project owner established in Afghanistan, Barbados or Burkina Faso (three countries are considered high risk third countries).

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