Investor Education Provided by Merging Traffic Portal
What is Crowdfunding?
Crowdfunding is the process of raising money to fund what is typically a business venture or project through many investors or donors using an online platform. As well as funding entrepreneurs, Crowdfunding Platforms also raise funds for a range of creative and charitable campaigns.
Under crowdfunding rules, all U.S.-based investors now have the opportunity to participate in the capital raising activities of start-up and early-stage private companies. Businesses based in the U.S. that meet certain criteria are able to offer securities to individuals through online funding ‘portals’.
Crowdfunding offers investors the opportunity to fund a business in return for an ownership share in the company, typically in common or preferred stock. Merging Traffic Portal LLC (“Merging Traffic Portal") is a SEC registered funding portal offering access to these investments.
Investing itself has been around for years but has tended to be the preserve of ‘angel’ investors and venture capitalists. More recently, high net worth accredited investors have been able to participate in crowdfunding investing through online funding portals.
The aggregate amount of securities sold to all investors by an issuer in reliance on crowdfunding during the 12-month period preceding the date of such offer or sale, including the securities offered in such transaction, shall not exceed $5,000,000.
All persons investing in crowdfunded securities offerings must comply with limitations based on the investor’s net worth and annual income. Due to the risks involved with this type of investing, U.S. regulatory authorities have set specific limits for these transactions in any 12-month period.
Do I have to invest through an online platform?
A person can invest in crowdfunded offerings only through an online platform. These platforms include funding portal websites and mobile apps, as well as broker-dealer portals. Companies may not offer crowdfunded securities to investors directly. Investors must use a registered broker-dealer or registered funding portal.
Acting in its capacity as a registered funding portal, Merging Traffic Portal facilitates the matching of private companies seeking to raise capital with persons seeking to make crowdfunding investments. Merging Traffic Portal does not provide investment advice or recommendations to individuals.
Please consult with an investment advisor regarding your overall investment goals and risk parameters to determine how crowdfunding investing may fit into your overall investment strategy.
What is the Investor Education Requirement?
Funding Portals must provide potential investors with educational information in compliance with regulatory requirements. The investor education requirement is intended to facilitate a better understanding of the general features and risks to which an Investor is exposed when making a crowdfunding investment online via a crowdfunding portal.
Consultation with a professional investment advisor before making any investment is a prudent step for persons planning to make an investment in a company via a crowdfunding portal.
What are the Crowdfunding Investment Limitations?
Limitations on the amount an investor may invest in a crowdfunding offering only applies to investors who are not accredited (within the meaning of 17 Code of Federal Regulation Section 230.501).
For purchasers who are not accredited, if either your annual income or your net worth is less than $107,000, then during any 12-month period, you can invest up to the greater of either $2,200 or 5% of the greater of your annual income or net worth.
If both your annual income and your net worth are equal to or more than $107,000, then during any 12-month period, you can invest up to 10% of annual income or net worth, whichever is greater, but not to exceed $107,000.
Calculating net worth involves adding up all your assets and subtracting all your liabilities. The resulting sum is your net worth.
For purposes of determining eligibility in crowdfunding offerings, the value of your primary residence is not included in your net worth calculation.
Please note: Any mortgage or other loan on your home does not count as a liability up to the fair market value of your home. If the loan is for more than the fair market value of your home (i.e., if your mortgage exceeds your home’s likely resale price), then the loan amount that is over the fair market value counts as a liability under the net worth test.
Further, any increase in the loan amount in the 60 days prior to your purchase of the securities (even if the loan amount doesn’t exceed the value of the residence) will count as a liability as well. The reason for this is to prevent net worth from being artificially inflated through converting home equity into cash or other assets.
A person’s annual income and net worth may be calculated jointly with that person's spouse or spousal equivalent; however, when such a joint calculation is used, the aggregate investment of the investor spouses may not exceed the limit that would apply to an individual investor at that income or net worth level.
Questions regarding specific crowdfunding eligibility should be directed to a qualified professional.
What are some of the primary risk considerations of investments in crowdfunding investments?
A person considering a crowdfunding offering via a Crowdfunding Platform should be aware that crowdfunding investments may involve very high risks.
Investors should thoroughly research any offering before making an investment decision. Investors should read and fully understand the information about the company and the risks that are disclosed before making any investment. The risk factors involved with crowdfunding investing include, but are not limited to:
Potential Loss of Investment
Due to the fact that many new businesses fail, crowdfunding investments are highly speculative. Unlike an investment in a mature business where there is a track record of revenue and income, the success of a startup or early-stage venture often relies on the development of a new product or service that may or may not find a market. You should be able to afford and be prepared to lose your entire investment. Therefore, a person should not invest more money in crowdfunding investments than he, she or it can afford to lose or without adversely impacting the investor’s standard of living and their associated savings plan as well as their investment plan for retirement.
Lack of Liquidity and Marketability
An Investor cannot resell the crowdfunded investment for the first year from the date of purchase unless the securities are transferred (1) to the Issuer; or (2) to an accredited investor as defined in Rule 501 of Regulation D promulgated by the Securities and Exchange Commission; or (3) as part of an offering registered with the Securities and Exchange Commission; or (4) pursuant to certain intra-family transfers such as (a) to a member of the investor’s family, (b) indirect transfers such as to a trust controlled by the investor or for the benefit of the Investor’s family or (c) in connection with the divorce or death of the investor. Furthermore, the securities purchased are not likely to be listed on a stock exchange where an Investor can quickly and easily trade the securities. Therefore, an Investor may have to locate an interested buyer when they seek to resell their crowdfunded investment. Consequently, any investment an Investor makes through a Crowdfunding Platform will likely be highly illiquid.
Once an individual makes an investment commitment for a crowdfunding offering, the ability to cancel the investment commitment is limited.
An investor may cancel an investment commitment for any reason until 48 hours prior to the deadline identified in the issuer’s offering materials. During the 48 hours prior to such deadline, an investment commitment may not be cancelled except as related to a material change to the terms of the offering that may be made by the issuer.
The issuer may make changes and cancellations to the offering in certain circumstances, including the following:
- If an issuer makes a material change to the terms of an offering or to other information provided by the issuer, the funding portal will send an electronic notice (“notice of the material change”) to any investor who has made an investment commitment and that the investor’s investment commitment will be cancelled unless the investor reconfirms his or her investment commitment via the funding portal within five (5) business days of receipt of the electronic notice.
- If an issuer reaches the target offering amount prior to the deadline identified in its offering materials, the issuer may close the offering to new investment commitments on a date earlier than the deadline identified in its offering materials.
- If an issuer does not complete an offering by the deadline identified in the offering materials, the investor must be returned their funds within (5) business days of that deadline date.”
Valuation and Capitalization
Crowdfunding investment will typically be the purchase of an equity stake in a startup. Unlike listed companies that are valued publicly through market-driven stock prices, the valuation of private companies, especially startups, is difficult to determine and the investor may risk overpaying for the equity stake received. In addition, there may be additional classes of equity with rights that are superior to the class of equity being sold through any given crowdfunding offering.
Regulations stipulate that the Issuer must disclose information about the company, its business plan, the offering, and its anticipated use of proceeds, among other things. A start-up or early-stage company may be able to provide only limited information about its business plan and operations because it does not have fully developed operations or a long history to provide more disclosure. The company is also only obligated to file information annually regarding its business, including financial statements. A publicly listed company, in contrast, is required to file annual and quarterly reports and promptly disclose certain events—continuing disclosure that an investor can use to evaluate the status of that investment. In contrast, an investor may have only limited continuing disclosure about the Crowdfunding investment.
Investment in Personnel
A start-up or early-stage investment is also an investment in the entrepreneur or management of the company. Being able to execute on the business plan is often considered an important factor in whether the business is viable and successful. An investor should also be aware that a portion of the investment may fund the compensation of the company’s employees, including its management. The investor should carefully review any disclosure regarding the company’s use of proceeds.
Possibility of Fraud
In light of the relative ease with which early-stage companies anticipate raising funds through Crowdfunding, it may be the case that certain opportunities turn out to be money-losing fraudulent schemes. As with other investments, there is no guarantee that Crowdfunding investments will be immune from fraud.
Lack of Professional Guidance
Companies may partially attribute any early success to the guidance of professional early-stage investors (e.g., angel investors and venture capital firms). These investors often negotiate for seats on the company’s board of directors and play an important role through their resources, contacts and experience in assisting early-stage companies in executing on their business plans. An early-stage company primarily financed through crowdfunding may not have the benefit of such professional investors.
Tiered financial disclosure
The minimum level of financial disclosure required by the Issuer depends on the amount of money being raised or raised by the Issuer in the prior 12 months:
- $107,000 or less – financial statements and specific line items from income tax returns, both of which are certified by the principal executive officer of the company.
- $107,000.01 to $535,000 – financial statements reviewed by an independent public accountant and the accountant’s review report.
- More than $535,000.00 – if first time crowdfunding and offering does not exceed $1.07 million, then financial statements reviewed by an independent public accountant and the accountant’s review report, otherwise financial statements audited by an independent public accountant and the accountant’s audit report.
<NOTE> An audit provides a level of scrutiny by the accountant that is higher than a review.
Issuer Annual Reporting and Discontinuance of Annual Reporting
Issuers are generally required file annual reports via Form C-AR with the SEC and post them on its own website within 120 days after the end of the fiscal year. The annual report will generally include:
- Some of the same information that is disclosed on Form C (i.e., the original offering document);
- Current financial statements certified by the principal executive officer; and
- Certain current disclosures about the issuer’s financial condition.
- The issuer permitted to discontinue filing annual reports at the date that one of the following occurs:
- The date the issuer filed, since its most recent sale of securities pursuant to this part, at least one annual report pursuant to this section and has fewer than 300 holders of record;
- The issuer has filed, since its most recent sale of securities pursuant to this part, the annual reports required pursuant to this section for at least the three most recent years and has total assets that do not exceed $10,000,000;
- The date the issuer or someone else buys all of the securities issued under Title III offerings;
- The date the issuer registers its securities and is required to file reports under the Securities Exchange Act of 1934; or
- The issuer liquidates or dissolves its business in accordance with state law.
The issuer must file Form C-TR with the SEC if the issuer terminates annual reporting. As you can see, if the issuer discontinues annual reporting you will no longer have annually updated financial information or disclosure information about the issuer or the Title III securities that you own.
Start-ups, early stage and emerging growth private companies do not usually pay dividends. Profits, if any, are typically re-invested into the business to fuel growth, fund capital expenditures and build enterprise value. Companies typically have no obligation to pay equity shareholders dividends and may not disclose that intention. This means that if an investment is made in a private company through a crowdfunding platform, even if the company is successful the crowdfunding investor is unlikely to see any return of capital or return on capital until there is a liquidity event for the issuing company. As already mentioned, even for a successful business this is unlikely to occur for a number of years from the time the initial investment is made.
The offerings presented on the funding portal are subject to the risks of the industries in which the issuer of the offering operates. For instance, technology companies are subject to the risk that their technologies and products becoming obsolete. Further, their technologies could become disrupted by other companies entering their market with new or lower priced products. These risks could create a lower demand for their products or services, which could negatively impact the company’s profitability.
Any investment made through a crowdfunding platform is likely to be subject to dilution. This means that if the company raises additional equity capital at a later date, it will issue new common or preferred shares in the company to the new investors, and the percentage of the issuing company that the investor previously owned the investor's corresponding voting rights will be reduced. These new shares, often effected through a preferred stock offering, may also have certain preferential rights to dividends, sale proceeds and other matters, and the exercise of these rights may work to the previous investor’s disadvantage. Dilution can also occur as a result of the grant of options (or similar rights to acquire shares) to employees of the issuing company and or to service providers and other parties connected closely with the management of the company.
Agency and Control
An agency relationship arises whenever one party delegates decision-making authority or control over resources to another party. This will likely be the case for persons making a crowdfunding investment. While agency and control relationships often work well, problems may arise if management and or members of the company’s Board of Directors make decisions that are not in the best interests of the company’s shareholders or members.
Voting rights, privileges and restrictions can vary considerably with different classes of equity securities.
Investing in start-ups and early stage private companies should ideally be done as part of a diversified portfolio strategy. This means that an investor in crowdfunding should invest in a manner that is suitable to the person’s financial situation and investment strategy. Risk tolerance, return objectives and financial constraints should be an integral part of the process of determining if investments in private companies are suitable for you. However, please remember that diversification cannot ensure a profit or protect again loss of your investment.
What are the distinctions of being a crowdfunding investor?
Being a crowdfunding investor is different than being a shareholder in a publicly listed company. For example, a crowdfunding investor cannot sell the shares at any time, in contrast to investors holding shares in a publicly listed company. In fact, crowdfunding Investors are restricted from reselling their shares for the first year, unless the shares are transferred: to the company that issued the securities; to an accredited investor; to a family member; in connection with death or divorce or other similar circumstance; to a trust controlled by the investor or a trust created for the benefit of a family member; or as part of an offering registered with the SEC.
Another difference from being a shareholder of a publicly listed company is the amount of information you would receive about your investment. Publicly listed companies generally are required to disclose information about their performances at least on a quarterly and annual basis and on a regular basis about material events that affect the company. In contrast, crowdfunding companies are only required to disclose annually their results of operations and financial statements.
Can the rewards really make the risk worthwhile?
Provided that an investor take steps to fully understand the company and the risks involved, investing in crowdfunding may potentially prove rewarding and passively involve that investor in promising new businesses as a crowdfunding investor. However, Investors should be prepared for the associated risks, including the potential of losing the principal invested and the lack of a ready secondary market. Besides the potential financial returns, there are other possible benefits to investing in crowdfunding. These potential benefits include helping to fund new ideas, innovation, as well as the next generation of successful American business creating jobs and engaging with some fascinating entrepreneurs and potentially likeminded Investors.
Are there steps that can be taken to potentially help reduce the investment risks?
There are a number of steps a person can take to potentially help reduce the risks involved in crowdfunding investing. These include involving a qualified investment advisor in the investment planning process. Additionally, an investor should fully understand all the terms, conditions and risks detailed within the respective offering document as well as adequately research the industry in which the company operates, its competitors, its addressable market, prospects for success and perform extensive due diligence on the company.
What are some of the ways that an investor may conduct due diligence on a company prior to making a crowdfunding investment?
It is important that an investor take the time to fully understand each investment he, she, or it may make via a crowdfunding platform. A company that offers securities through a crowdfunding platform must comply with specific disclosures and ongoing reporting requirements as mandated by the SEC.
The Form C that the issuer files with the SEC as a requirement to offer securities using the crowdfunding exemption via a crowdfunding portal is available as a download in several places including the SEC EDGAR data repository, the issuing company and the funding portal websites. The Form C filing will contain information on the issuing company. This mandated SEC filing includes required disclosures about the company, its business plan, financial condition, the securities being offered to Investors and other essential information which the Investor should carefully read, review and understand, including:
- Company’s (Issuer) name, legal status, mailing and email address
- Names of Directors and Officers, as well as each person holding a beneficial interest of 20% of more of the shares of the Issuer
- A description of the business of the Issuer and the anticipated business plan
- A description of the financial condition of the Issuer
- A description of the stated purpose and intended use of proceeds from the offering
- The target offering amount, the deadline to reach the target and regular updates about the progress of the offering
- The price to the public of the securities or the method for determining the price
- A description of the ownership and capital structure of the Issuer, including:
- Terms of the securities being offered
- Each other class of securities
- Number of shares offered and outstanding
- Voting rights
- Any limitation to voting rights
- Summary of differences between offered securities and other classes
- The risks to purchasers
- Minority interest
- Corporate actions
- Additional issuances
- Share repurchases
- Sale of Issuer or assets
- Transactions with related parties
- Description on the restrictions on transfer of ownership
- How the securities being offered are being valued currently and may be valued in the future, including during subsequent corporate actions
- Additional disclosures
- Registered Intermediary name, SEC File Number and CRD#
- Compensation paid to the Registered Intermediary for conducting the offering, including the amount of any referral or other fees associated with the offering
- Certain legends in the offering statement, including the risks of investing in a crowdfunding transaction and required reporting
- Current number of employees
- Risk factors
- Prior exempt offerings, in any
- Related party transactions, limited to those occurring since the beginning of the Issuer’s last fiscal year, and only those that cumulatively exceed 5% of the aggregate capital raised during the preceding 12 months
- Issuer to disclose the location on its website where investors can find the issuer’s annual report and the date by which the Report will be available
- Disclosure to include any material information necessary in order to make the statements made, in light of circumstances under which they were made, not misleading
- An Issuer must disclose whether it or any of its predecessors previously failed to comply with the ongoing reporting requirements of Regulation Crowdfunding
It is typically very difficult to forecast financial performance accurately for early stage private companies, and actual performance will often differ from the forecasts as disclosed in the company’s Form C filing. However, such forecasts can give a good indication of what the company perceives and represents its potential could be.
What are follow-on or new funding rounds?
It is anticipated that due to the startup phase that most companies will be in while presenting offerings on crowdfunding platforms, most companies that raise money on a crowdfunding platform will likely need to raise further funding in future. If an existing investor does not participate in follow-on or new funding rounds that occur at a time in the future then his, her, or its percentage ownership of the company will be reduced.
To learn more about crowdfunding, see the recently adopted SEC rules, specifically, 17 Code of Federal Regulations, Sections 227.100 through 227.504.
For information about Investment Advisors see Investment Adviser Public Disclosure (IAPD) website, visit adviserinfo.sec.gov.
For information on how to search for company documents in the SEC’s EDGAR database, see Using EDGAR - Researching Public Companies.
For another resource for using EDGAR, see Researching Public Companies Through EDGAR: A Guide for Investors.
For more information about accredited investors, see 17 Code of Federal Regulations, Section 230.501.
For additional investor educational information, see the SEC’s website for individual investors, Investor.gov.
For information on private placements in general, see https://www.finra.org/investors/alerts/private-placements-risks
Summary of risk considerations and individual investor affirmations
Persons that sign on to Merging Traffic Portal’s crowdfunding portal must acknowledge that they have read and understand the Merging Traffic Portal Investor Education information before they are given permission to gain access to the securities offered for investment consideration. In addition, persons that request access to view and potentially participate in an offering of securities via the Merging Traffic Portal crowdfunding portal must complete a questionnaire. The questionnaire is intended to affirm the investor’s understanding of certain risks and representations, including:
a. An affirmation that the loss of an entire investment is possible.
b. An affirmation that bearing such a loss would be within the risk tolerance of the investor’s overall investment portfolio.
c. An affirmation that the investor is qualified to determine that crowdfunding is a suitable investment for him, her or it that the investor has been advised to that effect by his, her or its investment advisor.
d. An affirmation of the risk associated with the illiquidity of crowdfunding investments (the restrictions on opportunities to buy or sell ownership interests in crowdfunding companies).
e. An affirmation that the risk of having limited voting power as a result of the small dollar amount invested and the potential dilution of crowdfunding ownership.
Investing via Merging Traffic Portal's platform
Please note: In consideration of the breadth and depth of information required to make informed decisions regarding the securities offered via Merging Traffic Portal’s platform, investors are encouraged to consult with an investment advisor.
Every investor registered on this site is required to read and review this investor education section. In addition to the previous overview and risk consideration sections, each registered Investor must acknowledge and affirm the following 8 criteria for participation:
1. You have reviewed the process for the offer, purchase and issuance of security through Merging Traffic Portal's platform
2. You are aware of the types of securities offered on Merging Traffic Portal’s platform and associated security-specific risks:
3. You are aware of the restrictions on the resale of securities offered through the Merging Traffic Portal’s Crowdfunding Platform.
4. You have been informed of the type of information which an issuer must disclose and separately must report on an annual basis and the possibility that the issuer’s obligation to file annual reports may terminate in the future.
5. You are aware of the limits of the investable amount on this and similar registered portals, specifically;
- No Investor in a 12-month period may purchase crowdfunded securities that, in aggregate, from all Issuers, exceed the greater of $2,200 or 5% of the greater of Annual Income or Net Worth, as applicable, if either the annual income or net worth of the investor is less than $107,000.
- If both annual income and new worth exceed $107,000, the limit is 10% of the lesser of annual income or net worth, as applicable, not to exceed a maximum aggregate amount of $107,000.
6. You are aware of the circumstances where the issuer can cancel an offering and on an investor’s right to cancel an order up to 48 hours prior to a scheduled closing.
7. Following the completion of an offering there may or may not be any ongoing relationship between an issuer and Merging Traffic Portal.
8. You are able to assume the risks associated with crowdfunding investing, including:
a. An understanding that the loss of entire investment is possible
b. That bearing such a loss would be within the risk parameters of your overall investment portfolio
c. An understanding of the level of risk typically applicable to investments in startups
d. An appreciation of the level of risk generally applicable to emerging businesses and small issuers
e. An understanding the risk of illiquidity
f. Your acknowledgement that investing in start-up companies may or may not be appropriate for a given investor
Please Note: Merging Traffic Portal will maintain current versions of all educational materials and make revised materials available to all investors prior to accepting any additional investment commitments or effecting further transactions of securities offered through its platform.
Process for offering, sale and issuance of securities
All crowdfunding transactions must be facilitated through a Registered Intermediary such as Merging Traffic Portal, a platform for U.S. investors operating under SEC and FINRA guidelines. The following 10 steps describe the process of making an investment through the Merging Traffic Portal:
1. You will register as an investor, providing Merging Traffic Portal with contact information, your occupation and the name of your primary financial institution (bank or broker-dealer).
2. You will create an account after reading and acknowledging investor disclosure information.
3. You will be required to submit an Investor Questionnaire affirming your understanding of the risks and process of investing through Merging Traffic Portal’s platform. You should commit ample time to reading and understanding the investor education section prior to reviewing current investment opportunities listed on this site.
4. After completing the investor education materials, you will affirm that you have read and understand the required investment disclosures, including information on representations, warranties and indemnifications.
5. After establishing your account and completing the Investor education questionnaire, you will then be able to invest available offerings on Merging Traffic Portal’s platform. For each currently available offering, you will be able to access the company’s description and business plan, including the following information:
a. Total funds the company is seeking to raise
b. Total number of shares or other equity offered
c. Estimated valuation of outstanding shares after offering
d. Closing date of the offering
e. Shares or other equity sold to date
f. Registered Investors
g. Participating Investors
You will have an opportunity to post messages and discuss the company’s business strategy in an online community of potential investors before placing an order.
6. To place an order, you will first determine your maximum allowable amount. You will provide certain financial information and your year-to-date equity crowdfunding investments. After your maximum investable amount is established, you will enter the actual number of shares or other equity that you wish to purchase.
7. You will finalize an order by contacting a third party provider to submit payment.
8. You will receive order information subject to final sale. It will be your responsibility to cancel an order (if appropriate) no later than 48 hours prior to the designated closing date. You will receive final order confirmation from Merging Traffic Portal on the closing date.
9. You will have continuing access to discussion boards and alerts on topics such as new investor education content.
10. If an issuer does not complete an offering on a specified date, each investor will receive notification of the cancellation within 5 business days. The notification must disclose the reason for the cancellation and the refund amount that the Investor is expected to receive.
11. Securities issued in a transaction via a crowdfunding platform may not be transferred during a one-year period beginning when the securities were issued, unless the securities are transferred to the issuer of the securities, to an accredited investor, as part of a public offering, or to a family member of the purchaser. This would include a trust controlled by the purchaser, a trust created for the benefit of a member of the family of the purchaser, or in connection with the death or divorce of a purchaser.
EDUCATIONAL MATERIAL DISCLAIMER
This educational material has been prepared in accordance with requirements under SEC Rule 302 (17 Code of Federal Regulation Section 227.302). No regulatory body has endorsed or approved these educational materials. This educational material is for informational purposes only and does not constitute an offer, solicitation or endorsement of any specific investment product or financial strategy. Specific investment terms are for illustration purposes only and may not reflect the actual terms of an investment product available for purchase via the Merging Traffic Portal’s platform.
This educational material may not contain a complete discussion of investment terms or risks and you should only rely on the information contained in relevant offering documentation prior to purchasing an investment product. Any investments or strategies referenced herein do not take into account the investment objectives, financial situation or particular needs of any specific person. Suitability of these securities must be independently determined for each investor. Merging Traffic Portal explicitly disclaims any responsibility for product suitability.
Any investment security sold may be worth more or less than the original amount invested. Depending upon the specific investment product, investment risks include, but are not limited to, interest rate risk, credit risk, call risk and liquidity risk. Additionally, the product(s) discussed herein are not FDIC insured, may lose value, and are not bank guaranteed. Investors should carefully review and understand the Offering documents and consult with their financial and tax advisors prior to investing in any investment product(s). Past performance is not indicative of future results.
Investment securities described herein may not be offered for sale in any state or jurisdiction in which such an offer, solicitation or sale would be unlawful or prohibited by the specific offering documentation.
© 2021 Merging Traffic Portal LLC. All rights reserved. This material is strictly for specified recipients only and may not be reproduced, distributed or forwarded in any manner without written permission.
Glossary of Crowdfunding Terms
Accredited Investors: There are two ways in which an individual can be an accredited investor. One of the following must be true in order for an individual to be an accredited investor.
• First, an accredited investor must have at least $1 million in net worth at the time of investment. This worth can be measured jointly with a spouse as well. Calculating net worth involves adding up all your assets and subtracting all your liabilities. The resulting sum is your net worth.
• For purposes of determining eligibility in crowdfunding offerings, the value of your primary residence is not included in your net worth calculation.
• Please note: Any mortgage or other loan on your home does not count as a liability up to the fair market value of your home. If the loan is for more than the fair market value of your home (i.e., if your mortgage exceeds your home’s likely resale price), then the loan amount that is over the fair market value counts as a liability under the net worth test.
• Further, any increase in the loan amount in the 60 days prior to your purchase of the securities (even if the loan amount doesn’t exceed the value of the residence) will count as a liability as well. The reason for this is to prevent net worth from being artificially inflated through converting home equity into cash or other assets.
• Second, an accredited investor must have an income of more than $200,000 in each of the 2 previous fiscal years.
• However, if the income is joint with a spouse (or spouse equivalent), the previous yearly income must be more than $300,000.
Acquisition: An acquisition may occur when a larger company purchases a controlling interest in an early stage company. Acquisition by a larger company is a common goal for startups pursuing equity campaigns.
Add-on services: Assistance an Investor may provide to your company aside from their monetary contribution— for example, making introductions to other investors, helping to assemble a management team or helping to prepare for an Initial Public Offering.
Angel Investors: An angel Investor is a person who makes an early investment in a start-up or company in exchange for debt or equity in said company. Angel Investors can often organize themselves into groups in order to pool investments. This Investor can also be an early advisor to the company as well.
Benchmarks: Performance goals used to measure the success of a company. Many Investors use certain benchmarks – for example, yearly revenue or yearly increase in sales – to decide whether a company merits additional funding.
Buyout: The purchase of either a company or a controlling interest in a company’s shares or business. A buyout is often the long-term goal of startups and other businesses pursuing equity fundraise campaigns.
Board of Directors: A group of people elected to act as representatives of the stockholders in a company. Members of the Board of Directors handle management-related policies and make decisions regarding major company issues, including the hiring/firing of executives, options policies and executive compensations. The Board of Directors should fairly balance the interests of both management and shareholders alike.
Bootstrapping: Bootstrapping involves a founder, or founders, using personal finances to fund a new company. This is often sought after due to the fact that founders will not have to dilute their ownership in a company they are starting. Crowdfunding can be useful to a bootstrapped company as it can provide a platform for communicating and networking between new companies and the individuals working at them.
Cap table: Short for the “Capitalization Table”, a cap table is a detailed list of exactly how much stock each person owns. Think of it like a spreadsheet that simply lists names and percentage ownership stakes, all adding up to 100%.
Common vs. Preferred Stock: There are many “classes” of stock that can be issued in a company, and each class may have its own rights and preferences. Investors often receive Preferred Stock, which may give them preferences such as the ability to get their investment back first, before the rest of the Common Stockholders get their proceeds. Founders and employees are usually left with common stock, which means they’re usually the last people to get paid.
Convertible Note: A Convertible Note is a loan made to a company that can be converted into stock by the choice of the Issuer or holder at certain events. Each note has an interest rate, a maturity date, and may come with the option to convert at a discount at a future round or time.
Crowdfunding Platform: Either a FINRA member approved by the SEC as a funding platform for Regulation CF offerings or a FINRA member broker-dealer offering the same service. In both cases, Investors learn of and invest in Issuers through the Internet.
Dilution: The effect of giving someone else part of the company’s stock is considered “dilution”. It means that you are diluting your equity stake to make room for someone else.
Donation-Based Crowdfunding: This is similar to Reward-Based Crowdfunding. An investor makes a “donation” to a company and receives value in the form of a product in return. Kickstarter uses this model to essentially pre-sell products.
Drag Along Rights: Designed to protect the majority shareholder in a company, drag-along rights enable a majority shareholder to force a minority shareholder to agree to the sale of a company. The majority owner is required to give the minority shareholder the same price, terms and conditions as any other seller, with the goal of eliminating minority owners and securing 100% of the company’s stocks to the buyer.
Due Diligence: The process of investigation and evaluation of the details of a company, which investors complete before they make the final decision whether to invest in that company.
Equity-Based Crowdfunding: Equity-Based Crowdfunding involves an investor receiving a portion of the company in return for the investment. Essentially, the investor will become a shareholder or other equity owner in the company and be able to vote on decisions to be made. Furthermore, the Investor may be able to sell the equity security, or a portion thereof, in the future for the current market value. There are certain risks to Equity-Based Crowdfunding as with any other types of investments.
Executive Summary: A non-technical summary statement at the beginning of a business plan that’s designed to encapsulate the terms of the plan.
Exit Strategy: The means by which an investor “cashes out” of an investment and earns the return on investment that was sought in making the investment in the first place. Typical exit strategies include Initial Public Offerings, acquisitions and buyouts. Also known as a “harvest strategy” or “liquidity event”.
FINRA: The Financial Industry Regulatory Authority is responsible for governing business between brokers, dealers and the investing public.
Follow-on Investment: An additional investment made by an investor who has already invested in a company, typically made once the company is at a later stage of development.
General Solicitation: General solicitation involves publicly promoting an offering through advertising or mass communication such as social media.
Initial Public Offering: Commonly abbreviated as IPO, is the first time that stock in a private company is made available to the public. An Initial Public Offering is a common goal for startups pursuing equity campaigns.
JOBS Act: The Jumpstart Our Business Startups Act (JOBS) was created in order to ease security regulations on small businesses. The JOBS act was signed into law on April 5, 2012.
- JOBS ACT – Title II (Access to Capital for Job Creators): Title II lifts the ban on advertising for regulation D, Rule 506 and Rule 144A offerings. It also lifts the ban on general solicitation.
JOBS ACT – Title III (Crowdfunding): Title III allows persons to make investments in small companies without being accredited investors. The company is allowed to receive up to $5 million over any 12-month period. Investors may not purchase more than $2,200 in securities (for investors with either annual income or net worth less than $107,000) or $107,000 (for investors with annual income and net worth over $107,000), in both cases limited a certain percentage of his or her annual income or net worth.
Regulation D Crowdfunding: Regulation D Crowdfunding is the process of seeking funding, either equity or debt, online done by private companies.
Rewards-Based Crowdfunding: Rewards-Based Crowdfunding involves the pre-sale of items that will be created if funding goals are met. This type of funding does not attract investors who are looking for monetary gains, but instead attracts persons who are looking to have new, one-of-a-kind products before anyone else. This means that most projects that are looking for Reward-Based Crowdfunding have a new product that requires initial investment to begin production. This is essentially the model that Kickstarter uses.
Risk: The likelihood of loss or less-than-expected returns, including the possibility of losing some or all of the initial investment. Risk is typically quantified using the historical returns or average returns for a specific investment.
SEC: The United States Securities Exchange Commission is a federal agency that enforces federal securities laws and oversees the securities industry.
Seed Round Funding: Seed Round Funding involves an investor making an early stage investment in a company in return for a share of the company. This can be an investment made by a family member or friend, an Angel Investor, and even through crowdfunding. The capital is typically used to help build traction in order to attract attention from venture capitalists in later stages of fundraising.
Series A Funding: Series A Funding is typically done by a company who is looking to raise significant financial capital. This type of funding is often sought after Angel funding has already finished. A Series A funding round usually involves a venture capital firm making a significant investment in a company in return for a percentage share of it.
Stock Option Pool: When a company takes on an investment, the investor will usually request (or, more accurately, insist) that the company allocate a certain percentage of the company’s shares to a Stock Option Pool for future employees. That pool comes out of the current owner’s portion of the stock, not the Investors. Stock Option Pools will typically range from as little as 5 points of equity to as much as 20 points.
Term Sheet: A non-binding outline of the terms and conditions according to which an investment is to be made—for example, the interest rate of a debt investment, or the valuation for equity. It’s similar to a letter of intent in that it indicates a strong interest to move forward, but it’s not the same as guaranteeing an actual deal gets done.
Valuation: An estimation of what a company is worth at a given point in time. While current owners may set the valuation of the company, until an investor agrees to that valuation, and writes a check based on that valuation, it’s not validated.
- Pre-money valuation is how much the company is worth before the investor puts money into the company. So, if the valuation is set at $2 million, and the Angel investor puts in $500,000, the pre-money valuation is $2 million.
- Post-money valuation is how much the company is worth after the Investor puts money into the company. So if the valuation is set at $2 million, and the Investor puts in $500,000, the post-money valuation is $2.5 million.
Venture Capital: Venture Capital usually involves an investment made by a firm in a small company that is seeking growth. This investment is usually much larger than an Angel Investment and results in the venture capital firm becoming integral in the decision making process of the company.
Vesting: A process by which one “earns” stock over time, much like one earns a salary. The purpose of vesting is to grant stock to people over a fixed period of time so they have an incentive to remain with the company. A typical vesting period for an employee or founder might be 3 – 4 years, which would mean they would earn 25% of their stock each year over a 4 year period. If they leave early, the unvested portion returns back to the company.
Additional Risk Considerations
Every investor (“Investor”) should be aware that an investment in a single company or multiple companies on a Crowdfunding Platform (each, a “Startup”) involves a high degree of risk. There can be no assurance that (i) a Startup’s investment objectives will be achieved, (ii) a Startup will achieve its business plan, or (iii) an Investor will receive a return of any part of the investment. The following considerations, among others, should be carefully evaluated before making an investment in a Startup.
Risk Inherent in Startup Investments; an Investor May, and Frequently Does, Lose All of Its Investment
Investments in Startups involve a high degree of risk. Financial and operating risks confronting Startups are significant. While targeted returns should reflect the perceived level of risk in any investment situation, such returns may never be realized and/or may not be adequate to compensate an Investor for risks taken. Loss of an Investor’s entire investment is possible and can easily occur. Moreover, the timing of any return on investment is highly uncertain.
The Startup market is highly competitive and the percentage of companies that survive and prosper is small. Startup investments often experience unexpected problems in the areas of product development, manufacturing, marketing, financing, and general management, among others, which frequently cannot be solved. In addition, Startups may require substantial amounts of financing, which may not be available through institutional private placements, the public markets or otherwise.
Changing Economic Conditions
The success of any investment activity is determined to some degree by general economic conditions. The availability, unavailability, or hindered operation of external credit markets, equity markets and other economic systems which an individual Startup may depend upon to achieve its objectives may have a significant negative impact on a Startup’s operations and profitability. The stability and sustainability of growth in global economies may be impacted by terrorism, acts of war or a variety of other unpredictable events. There can be no assurance that such markets and economic systems will be available or will be available as anticipated or needed for an investment in a Startup to be successful. Changing economic conditions could potentially, and frequently do, adversely impact the valuation of portfolio holdings.
Future and Past Performance
The past performance of a Startup or its management is not predictive of a Startup’s future results. There can be no assurance that targeted results will be achieved. Loss of principal is possible, and even likely, on any given investment.
Difficulty in Valuing Startup Investments
It is enormously difficult to determine objective values for any Startup. In addition to the difficulty of determining the magnitude of the risks applicable to a given Startup and the likelihood that a given Startup’s business will be a success, there generally will be no readily available market for a Startup’s equity securities, and hence, an Investor’s investments will be difficult to value.
A significant portion of an Investor’s investments will represent minority stakes in privately held companies. As is the case with minority holdings in general, such minority stakes will have neither the control characteristics of majority stakes nor the valuation premiums accorded majority or controlling stakes. Investors will be reliant on the existing management and board of directors of such companies, which may include representatives of other financial investors with whom the Investor is not affiliated and whose interests may conflict with the interests of the Investor.
Lack of Information for Monitoring and Valuing Startups
The Investor may not be able to obtain all desired information regarding a particular Startup, on a timely basis or at all. It is possible that the Investor or may not be aware on a timely basis of material adverse changes that have occurred with respect to certain of its investments. As a result of these difficulties, as well as other uncertainties, an Investor may not have accurate information about a Startup’s current value.
No Assurance of Additional Capital for Startups
After an Investor has invested in a Startup, continued development and marketing of the Startup’s products or services, or administrative, legal, regulatory or other needs, may require that it obtain additional financing. In particular, technology Startups generally have substantial capital needs that are typically funded over several stages of investment. Such additional financing may not be available on favorable terms, or at all.
Absence of Liquidity and Public Markets
An Investor’s investments will generally be private, illiquid holdings. As such, there will be no public markets for the securities held by the Investor and no readily available liquidity mechanism at any particular time for any of the investments. In addition, an investment will be illiquid, not freely transferrable, and involves a high degree of risk.
Investment in Technologies
The value of an Investor’s interests in Startups may be susceptible to factors affecting the technology industry and/or to greater risk than an investment in a vehicle that invests in a broader range of securities. Some of the many specific risks faced by such Startups include:
• Rapidly changing technologies;
• Products or technologies that may quickly become obsolete;
• Scarcity of management, technical, scientific, research and marketing personnel with appropriate training;
• The possibility of lawsuits related to patents and intellectual property;
• Rapidly changing investor sentiments and preferences with regard to technology sector investments (which are generally perceived as risky); and
• Exposure to government regulation, making these companies susceptible to changes in government policy and delays or failures in securing regulatory approvals.
There are many tax risks relating to investments in Startups are difficult to address and complicated. You should consult your tax advisor for information about the tax consequences of purchasing equity securities of a Startup.
Withholding and Other Taxes
The structure of any investment in a Startup may not be tax efficient for any particular Investor, and no Startup guarantees that any particular tax result will be achieved. In addition, tax reporting requirements may be imposed on Investors under the laws of the jurisdictions in which Investors are liable for taxation. Investors should consult their own professional advisors with respect to the tax consequences to them of an investment in a Startup under the laws of the jurisdictions in which the Investors and/or the Startup are liable for taxation.
Conflicts of Interest; Investment Opportunities
Instances may arise in which the interest of a early phase investor (e.g. a Lead Angel investor) may potentially or actually conflict with the interests of its Investors.
Certain information regarding the Startups will be highly confidential. Competitors may benefit from such information if it is ever made public, and that could result in adverse economic consequences to the Investors.
Forward Looking Statements
The information available to Investors may contain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements can be identified by the fact that they do not relate strictly to historical or current facts. Forward-looking statements often include words such as "anticipates," "estimates," "expects," "projects," "intends," "plans," "believes" and words and terms of similar substance in connection with discussions of future operating or financial performance. Examples of forward-looking statements include, but are not limited to, statements regarding: (i) the adequacy of a Startup’s funding to meet its future needs, (ii) the revenue and expenses expected over the life of the Startup, (iii) the market for a Startup’s goods or services, or (iv) other similar maters.
Each Startup’s forward-looking statements are based on management's current expectations and assumptions regarding the Startup’s business and performance, the economy and other future conditions and forecasts of future events, circumstances and results. As with any projection or forecast, forward-looking statements are inherently susceptible to uncertainty and changes in circumstances. The Startup’s actual results may vary materially from those expressed or implied in its forward-looking statements. Important factors that could cause the Startup’s actual results to differ materially from those in its forward-looking statements include government regulation, economic, strategic, political and social conditions and the following factors:
• Recent and future changes in technology, services and standards;
• Changes in consumer behavior;
• Changes in a Startup’s plans, initiatives and strategies, and consumer acceptance thereof;
• Changes in the plans, initiatives and strategies of the third parties that are necessary or important to the Startup’s success;
• Competitive pressures, including as a result of changes in technology;
• The Startup's ability to deal effectively with economic slowdowns or other economic or market difficulties;
• Increased volatility or decreased liquidity in the capital markets, including any limitation on the Startup’s ability to access the capital markets for debt securities, refinance its outstanding indebtedness or obtain equity, debt or bank financings on acceptable terms;
• The failure to meet earnings expectations;
• The adequacy of the Startup's risk management framework;
• Changes in U.S. Generally Accepted Accounting Principles (“GAAP”) or other applicable accounting policies;
• The impact of terrorist acts, hostilities, natural disasters (including extreme weather) and pandemic viruses;
• A disruption or failure of the Startup's or its vendors' network and information systems or other technology on which the Company's businesses rely;
• Changes in tax, federal communication and other laws and regulations;
• Changes in foreign exchange rates and in the stability and existence of foreign currencies; and
• Other risks and uncertainties which may or may not be specifically discussed in materials provided to Investors.
Any forward-looking statement made by a Startup speaks only as of the date on which it is made. Startups are under no obligation to, and generally expressly disclaim any obligation to, update or alter their forward-looking statements, whether as a result of new information, subsequent events or otherwise.
The foregoing risks do not purport to be a complete explanation of all the risks involved in acquiring equity securities in a Startup. Each Investor is urged to seek its own independent legal and tax advice and read the relevant investment documents before making a determination whether to invest in a Startup.