|Accredited Investor: natural persons (individuals) are accredited investors if their income exceeds $200,000 in each of the two most recent years (or $300,000 in joint income with a person’s spouse) and they reasonably expect to reach the same income level in the current year. Natural persons (individuals) are also accredited investors if their net worth exceeds $1 milion (individually or jointly with a spouse), excluding the value of their primary residence. Certain enumerated entities with over $5 milion in assets qualify as accredited investors, while others, including regulated entities such as banks and registered investment companies, are not subject to the assets test.|
|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.
Angel Investors: An angel investor is an individual 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.
|Agreement: the contract that Entrepreneur will have to sign and enter into with the crowdfunding platform if the Pitch is successful, during the Pitch Wrap-Up, being either a Securities Agreement if the Entrepreneur is an Equity Entrepreneur or a Presale Agreement if the Entrepreneur is a Presale Entrepreneur.|
|Application: the series of forms and additional information that Entrepreneurs must provide for or the crowdfunding platform’s approval in order for Entrepreneur to launch a Pitch on the or the crowdfunding platform’s, including: (1) the Form C as filed with the SEC through its online EDGAR system, (2) the Pitch pages with the Disclosure and Offering Material, and the (3) Representations, Warranties, and Covenants.|
|Bad Actor Questionnaire(s): a series of questions required by the Title III Rules for each of Entrepreneur’s Covered Persons, which includes the Entrepreneur himself/herself/itself.|
|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.|
|Bid: a Member’s offer to purchase unregistered securities as an investment in an Equity Model Pitch, or to purchase Presale products in a Presale Model Pitch, of a Pitch’s Entrepreneur. Or, to place an investment offer on a Pitch.|
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.
|Cap: the maximum goal amount to be raised for any given Pitch, as designated by the Entrepreneur at the outset of that Pitch.|
|“Cash-on-cash return”: measures the annual return made on a property, in relation to the down payment.|
|For example, a rental property that costs $100,000 in full might be purchased with a 10% cash down payment of $10,000. Cash-on-cash measures the annual income made from the rental property (say, for example, $150,000 in income from rent receipts in a given year) over the initial investment (in this case $10,000).
Cap table: Short for the “Capitalization Table”, a cap table is a detailed list of exactly how much stock each entity or 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 stock holders 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.
|Certificate of Purchase: Some platforms send a certificate to an Investor after the successful payment processing of his/her/its Bid upon the closing of a successful Pitch as proof of purchase for his/her/its presold products, or acquired securities, as the case may be.|
|Covered Persons: (as defined by the SEC) includes: The issuer (Equity Entrepreneur), including his/her/its predecessors and affiliated issuers directors, officers, general partners, and managing members of the issuer (Equity Entrepreneur) beneficial owners of 20% or more of the issuer’s (Equity Entrepreneur’s) outstanding voting equity securities, calculated on the basis of voting power promoters connected to the issuer in any capacity at time of sale; and persons compensated for soliciting investors, including their directors, general partners, officers or managing members of any such solicitor|
|Compound Interest:This is the addition of interest to the principal sum of a loan or deposit. In other words, it is interest on interest.|
|Crowdfunding: Crowdfunding is a method of raising money through the collective effort of friends, family and the general public, often through the internet.|
|Disclosure and Offering Material: information and documentation disclosed by Entrepreneur pertaining to Entrepreneur’s business and Pitch which, if the Pitch is approved by the crowdfunding platform, will be published on Entrepreneur’s Pitch Page for potential investors to evaluate when deciding whether or not to invest.
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.
|EDGAR: Electronic Data Gathering Analysis and Retrieval system for electronic filings with the SEC|
|Entrepreneur: issuers of Equity Models Pitches, individuals, and businesses who launch a Pitch on a crowdfunding Platform. (See also “Equity Entrepreneur” and “Presale Entrepreneur”)|
|Equity A stock, membership unit or any other security representing an ownership interest.|
|Equity Entrepreneur: an issuer/Entrepreneur of an Equity Model Pitch, that is subject to the Title III Rules because securities are being offered.|
|Equity Investors: a Bidder of an Equity Model Pitch who is subject to the Title III Rules and whose payment for his/her/its Bid has been successfully processed upon the closing of a successful Pitch.|
|Equity Models: any one of the three Pitch offering model options available on crowdfunding Platform that is subject to the Title III Rules, which consists of the Ownership Model, Venture Model, and Royalty Model.
Equity-Based Crowdfunding: Equity-based crowdfunding involves an investor receiving a portion of the company in return for his or her investment. Essentially, the investor will become a shareholder in the company and be able to vote on decisions to be made. Furthermore, the investor may be able to sell his or her share, 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 your reason for writing the plan.
Exit strategy: the means by which an investor “cashes out” of an investment and earns the return on investment that they are seeking in making the investment in the first place. Typical exit strategies include IPO, acquisition and buyout. Also known as a “harvest strategy” or “liquidity event”.
|FINRA: Financial Industry Regulatory Authority, the registered national securities association with which the platforms whose portfolio companies are shown on our website are registered as a funding portal. An independent, not-for-profit organization authorized by Congress to protect America’s investors by making sure the securities industry operates fairly and honestly.|
|Form C: the form required pursuant to Regulation CF under Title III containing initial disclosures for an offering that Entrepreneurs must file with the SEC through its “EDGAR” system in order to launch a Pitch on a funding portal.|
|Form C-A: any amended Form C filed with the SEC. An amendment to a Form C offering statement is required for changes, additions, or updates that are material, and in those required instances, all outstanding bids (or investment commitments) must be reconfirmed within 5 business days by the investor or the investor’s bid will be considered canceled.|
|Funding Portal: A term used to describe Internet sites that are allowed to offer and sell securities under Title III of the JOBS Act, also know as Regulation Crowdfunding. Funding Portals act as crowdfunding intermediaries. Small Change is a Funding Portal.|
|Funding Portal Fee: the fee due by Entrepreneur to the crowdfunding portal for hosting a successful Pitch on its Platform, usually equal to 5% of the gross amount raised, which will be disbursed directly to the crowdfunding portal from the Pitch’s escrow account. For Equity Pitches, in lieu of a cash disbursement, the crowdfunding portals, in their sole discretion, may elect to accept the Funding Portal Fee in the equivalent value in securities of the same class being offered by the Entrepreneur on the Platform.|
|Guaranteed Bid: one of the first five hundred (500) Bids placed on a Pitch that is protected from being Outbid if the Pitch has a Bid War and that Minimum Bid will therefore never be increased.|
|Interest Rate:: An interest rate tells a borrower how much it costs to borrow money from a lender. It is usually expressed as a percentage of the principal. When the borrower is a low-risk party, they will usually be charged a low interest rate; if the borrower is considered high risk, the interest rate that they are charged will be higher.|
|Internal Rate of Return (IRR): The Internal Rate of Return (IRR) is a way to measure the profitability of an investment. IRR is expressed as an interest rate that makes the “net present value” – a measurement of profitability that’s calculated by subtracting the present values of cash outflows from present values of cash inflows – to zero. The bigger the IRR, the better. There is no guarantee that any of the projects offered will produce a positive IRR.|
|Investor: a Bidder whose payment for his/her/its Bid has been successfully processed upon the closing of a successful Pitch. (See also “Equity Investor”)|
|Issuer: A company trying to raise money from investors on our site, by selling its securities.|
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 individuals to make investments in small companies without being accredited investors. The company is allowed to receive up to $1 million over any 12-month period. Investors may not purchase more than $2,000 in securities or a certain percentage of his or her annual income or net worth as long as it is under $100,000 during a 12-month period.
|Minimum Bid: a minimum dollar amount a Member may Bid on a given Pitch, as indicated on the relevant Pitch Page.|
|Minority Investor: A “minority investor” means that other parties will have complete voting and managerial control over the company. Investors will typically be “minority” investors of companies on the platform.|
|Non-accredited Investor: A non-accredited investor is an investor who does not meet the Securities and Exchange Commission’s Regulation D accreditation criteria. (See ‘Accredited Investor.’)|
|Non-accredited investors can participate in Regulation A+ and Title III (Regulation Crowdfunding) offerings.|
|Offering documents: Also called an offering memorandum, this it the legal document that states the objectives, risk and terms of an investment.|
|Oversubscription: This occurs when the demand for an offering of securities exceeds the total number of shares issued by the company.|
|Outbid: During a Bid War, the most recently placed Bid at the now-expired Minimum Bid amount may be outbid, replaced, and cancelled by a new Bid placed at the new higher Minimum Bid amount.|
|Ownership Model: the Equity Model Pitch offering option on the crowdfunding Platforms in which an Entrepreneur may sell equity interests in his/her/its company to Investors making them equity owners.|
|Pitch: an Entrepreneur’s offering on the crowdfunding Platform of Entrepreneur’s securities or his/her/its offering of the presale of his/her/its products.|
|Pitch Wrap-Up: the final process of a successful Pitch, which occurs upon its closing and includes: (1) payment processing of Bids and delivery of Certificates of Purchase to Investors, (2) Regulatory Background Checks on the Entrepreneur, (3) execution of the Agreement between Entrepreneur and the crowdfunding platform, (which includes each Bad Actor Questionnaire if the Entrepreneur is an Equity Entrepreneur), (4) the release of the Investor List to Entrepreneur, and (5) disbursement of funds.|
|Preferred Return: This is a minimum return to investors that must be achieved before any other profits are shared.|
|Presale Agreement: the agreement that the Entrepreneur must sign and enter into after the end of a successful Pitch in order to finalize the Pitch and have a legally binding contract in regards to the presales through the crowdfunding Platforms. No funds raised in the Pitch will be disbursed to Entrepreneur unless the Presale Agreement is executed and delivered to the crowdfunding Platform by Entrepreneur.|
|Presale Entrepreneurs: Entrepreneurs of Presale Model Pitches, and are not subject to the Title III Rules.|
|Presale Model: the Pitch offering model designed for the presale of Entrepreneur’s products.|
|Promoter:: A promoter is someone that an issuer employs – an employee, public relations firm or some other type of third party – to promote an offering on our platform. For example, a promoter might talk about the offering in one of our chat rooms.|
|Rate of Return: A rate of return is the gain or loss on an investment over a specified time period, expressed as a percentage of the investment’s cost.|
|Regulation CF / Reg CF / Regulation Crowdfunding: the type of equity crowdfunding adopted by the SEC to implement the requirements and intention of the Title III Rules.|
|All offers to sell securities in the United States must be registered with the SEC and state regulators or meet an exemption from registration. Regulation D (“Reg D”) refers to three rules – Rules 504, 505, and 506 – that provide registration exemptions. You can find the SEC’s full definition here|
Return: A return is the gain or loss of a security in a particular period, usually quoted as a percentage. The return consists of the income and the capital gains on an investment.
Return on investment: or ROI, is the profit or loss resulting from an investment. It’s typically expressed in terms of a percentage. For example, if an investor makes a $5,000 investment in a company and gains $20,000 when the company is acquired by a larger company, that’s an ROI of 200%.
Rewards-Based Crowdfunding: Reward 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 individuals who are looking to have new, one-of-a-kind products before anyone else. This means that most projects that are looking for reward 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.
|Royalty Model: The Equity Model Pitch offering option available on the crowdfunding Platform in which an Entrepreneur may offer a return to his/her/its Investors of a pre-determined amount or portion of the sale of each item or service involved in Entrepreneur’s Pitch as outlined in the Disclosure and Offering Material of the Pitch.|
|Sealed Bid Auction: A “sealed-bid auction” refers to a type of auction in which all bidders submit a sealed bid to the auctioneer. This means all submitted bids are hidden to other bidders and no bidder knows the offered amount of other auction participants. After the auctioneer unseals the bids, the highest bidder is usually the winning offer of the bidding process.|
|SEC: the U.S. Securities and Exchange Commission; the authority that governs the Title III Rules.|
|Security: A security is a share of stock, a promissory note, a bond, or any other instrument offered by an issuer on our site.|
|Equity Security: An “equity security” is just like the common stock of a corporation. You become an owner of the company and the value of your interest fluctuates with the fortunes of the company. As an owner, you generally have the right to share in any profit distributions made by the company, and you also share in the appreciation in the value of the company. When a company dissolves, the owners of the equity securities are paid last, after all the creditors.|
|Preferred Equity Security: A “preferred equity security” is just like the preferred stock of a corporation. Typically, the holders of the preferred equity security have a right to receive distributions before the holders of the regular equity securities.|
|Debt Security: A “debt security” is just like a promissory note or bond. You do not become an owner of the company, but instead, you are a creditor.|
|Hybrid Security: “Hybrid securities” have characteristics of both equity securities and debt securities, like a cross between a dog and a horse.|
|Convertible Security: “Convertible securities” start out as one kind of security but can be changed – i.e., converted – into a different kind of security. For example, a company might issue a debt security that can be converted by the holder into common stock at some specified time. Sometimes the conversion is triggered at the option of the holder, sometimes at the option of the company, and other times upon the occurrence of a specified event.|
|Callable Security: Any kind of security can also be a “callable security,” meaning it can be “called,” or redeemed (bought back) by the company.|
|Securities and Exchange Commission (SEC): The Securities and Exchange Commission (“SEC”) is a federal commission created by Congress to regulate the securities markets and protect investors. The mission of the U.S. Securities and Exchange Commission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.|
|Securities Agreement: the Agreement that an Entrepreneur of any of the three Equity Models must sign and enter into after the end of a successful Pitch in order to finalize the Pitch, and have a legally binding contract in regards to the sale of securities through the crowdfunding Platform. No funds raised in the Pitch will be disbursed to Entrepreneur unless the Securities Agreement is executed and delivered to the crowdfunding platform by Entrepreneur.|
|Soft Costs: Soft costs refer to expenses that are necessary to complete a development project, but are not construction costs. These include architectural, engineering, financing and legal fees, as well as other pre- and post- construction expenses.|
|Target: the minimum goal amount to be raised on a Pitch in order for the Pitch to be deemed successful, as designated at the outset of a Pitch by the Entrepreneur.|
|Title III Rules: the U.S. Securities and Exchange Commission’s rules for Regulation Crowdfunding and any associated rules & regulation of the Jumpstart Our Business Startups Act.|
|Unrelated Business Income Tax (UBTI)|
|Unrelated business taxable income (UBTI) is tax on income received from unrelated business activities of an otherwise tax-exempt entity. It’s used to prevent tax-exempt entities from engaging in businesses that are unrelated to their primary purposes.|
|For example, let’s say an investor users his or her Individual Retirement Account (IRA) to open a pizza parlor. The income from the pizza parlor is considered UBTI and is taxable, even though the money is flowing into a tax-advantaged account, the IRA.|
|UBTI is reported on IRS Schedule K-1 and sent to each investor every year. If an investor receives more than $1,000 of UBTI in a year, he or she usually must file additional paperwork with the IRS.|
|Valuation: An estimation of what your company is worth at a given point in time. While you may be the person who sets the valuation of your 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 your company. So if you set your valuation to be $2 million, and the angel investor puts in $500,000, your pre-money valuation is $2 million.
Post-money valuation is how much the company is worth after the angel investor puts money into your company. So if you set your valuation to be $2 million, and the angel investor puts in $500,000, your 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 of the company.
Venture Model: The Equity Model Pitch offering option on the crowdfunding Platform in which an Entrepreneur may sell a portion of his/her/its business venture for a one-time payout to Investors upon completion or sale of the project.