Appropriateness of Investing in Crowdfunding

Is investing in crowdfunding for everyone?

The possibility of investing in unique assets can sometimes overshadow the most important question when making an investment: “Is this investment right for me?” There are many factors that an investor should consider when determining the appropriateness of an investment in crowdfunding. We love to see investors getting involved with crowdfunding and contributing to companies on the platform, however, we also have each and every investor’s best interest at heart. This means stopping for a minute to discuss considering the appropriateness of investing using Reg CF.

Understanding the Risks

Investing can be lucrative, but it also comes with significant risks. It’s essential to understand these risks before committing funds. Key risks include:

• Illiquidity: Investments on our platform are typically illiquid. There is no market for selling securities after an offering closes, and SEC regulations impose additional resale restrictions.
• Speculative Nature: Crowdfunding terms are often set by the issuer and can be speculative. This means companies establish their own terms and valuations. Thorough research and utilization of all educational resources provided are crucial.
• Potential Loss of Investment: Investments on the platform are high-risk, and not all investments succeed. There’s a risk of losing your entire investment.

We provide educational resources, including blogs, FAQs, additional educational pages, and communication channels with issuers. Utilize these tools to make informed decisions.

Restrictions on the Resale of Securities

Securities offered and sold in reliance on section 4(a)(6) of the Securities Act (15 U.S.C. 77d(a)(6)) come with specific resale restrictions. For one year following the date of purchase, these securities cannot be resold except under certain conditions:

• – Sales to accredited investors
• – Sales to the issuer
• – Sales to family members or their trusts
• – Sales in connection with an offering registered with the SEC

These restrictions are in place to protect investors and maintain market integrity. Understanding these limitations is crucial before investing.

Limitations on Cancelling an Investment Commitment

There are specific limitations on an investor’s right to cancel an investment commitment. Typically, an investment commitment can be cancelled only under certain conditions, such as:

• – The issuer materially changes the offering terms.
• – The issuer fails to reach the target funding goal by the deadline.
• – Investors are able to cancel investments up until 48hr from the offering close dates.

Understanding these limitations and the circumstances under which an investment commitment may be cancelled by the issuer is essential. This ensures that investors are fully aware of their rights and the conditions under which they can change their investment decisions.

Considering the Appropriateness for the Investor

Investors need to carefully consider whether investing in a security offered and sold in reliance on section 4(a)(6) of the Securities Act (15 U.S.C. 77d(a)(6)) is appropriate for them. This involves assessing personal financial situations, investment goals, and risk tolerance. Not every investment is suitable for every investor, and it’s important to evaluate if this type of high-risk investment aligns with individual financial plans.

Ongoing Relationship Between Issuer and Intermediary

Following the completion of an offering conducted through the intermediary, there may or may not be an ongoing relationship between the issuer and the intermediary. Investors should be aware that ongoing communication or support from the intermediary is not guaranteed once the offering concludes.

Availability of Current Financial Information

Under certain circumstances, an issuer may cease to publish annual reports, which means an investor may not continually have current financial information about the issuer. It’s important to consider this possibility and understand that access to ongoing financial updates from the issuer might not be available.

Affordability of Potential Loss

Before investing, consider if you can afford to lose your entire investment. Due to the risks and illiquidity, ensure you can manage without the invested funds. Only invest money that you can afford to lose in exchange for the potential returns.

Offer, Purchase, and Issuance of Securities through the Intermediary

1. Registration and Compliance
   • Intermediary Requirements: The intermediary, typically a funding portal or broker-dealer, must be registered with the Securities and Exchange Commission (SEC) and be a member of the Financial Industry Regulatory Authority (FINRA).
   • Issuer Requirements: The issuer must comply with the disclosure requirements set forth in Regulation Crowdfunding, including providing information on its business, financial condition, and the intended use of proceeds.
2. Disclosure Obligations
   • Form C: Issuers must file Form C with the SEC, which includes offering details, financial statements, and disclosures about the business and the offering.
   • Ongoing Updates: Issuers are required to update the information in Form C through amendments if there are material changes or updates.
3. Offering Process
   • Platform Listing: The offering is listed on the intermediary’s platform where potential investors can review the details.
   • Investor Education: Intermediaries must ensure that investors review educational materials about crowdfunding investments, the process, and associated risks.
   • Communication Channels: The platform must facilitate communication between the issuer and investors to answer questions and provide additional information.
4. Investment Limits
   • Investor Caps: Regulation Crowdfunding imposes investment limits based on the investor’s annual income and net worth to protect against significant financial loss.
   • Verification: Intermediaries are responsible for ensuring that these limits are adhered to by verifying investor information.
5. Transaction Execution
   • Subscription Process: Investors submit their subscription agreements and funding through the intermediary’s platform.
   • Escrow Services: Funds are typically held in escrow until the target offering amount is reached or the offering is closed.
   • Issuance of Securities: Once the offering is successfully funded, the issuer finalizes the issuance of securities to the investors and the funds are transferred to the issuer.

Risks Associated with Purchasing Securities

1. Investment Risk
   • High Failure Rate: Investments in startups and small businesses are inherently risky, with a high likelihood of failure.
   • Illiquidity: Crowdfunded securities are often illiquid, meaning they cannot be easily sold or exchanged for cash.
2. Lack of Information
   • Limited Disclosure: While issuers are required to provide certain information, it may be less comprehensive compared to traditional public offerings.
   • Information Asymmetry: Investors may not have access to all material information about the issuer’s operations and prospects.
3. Valuation and Return Uncertainty
   • Difficult Valuations: Valuing early-stage companies can be challenging and speculative.
   • Uncertain Returns: There is no guarantee of returns, and investors could lose the entire investment amount.
4. Regulatory and Legal Risks
   • Compliance Failures: Issuers or intermediaries failing to comply with regulatory requirements can result in penalties or voided offerings.
   • Fraud: The risk of fraudulent activity, although intermediaries are required to take measures to mitigate this risk.
5. Dilution Risk
   • Future Funding Rounds: Subsequent funding rounds could dilute the ownership percentage of early investors.

Investors should be fully aware of these risks and consider their investment horizon, risk tolerance, and the potential impact on their financial situation before participating in a crowdfunded securities offering. Consulting with a financial advisor is recommended to navigate these investments effectively.

For specific legal or financial advice, always consult with a professional in the field.