Things to know about investing in crowdfunding offerings:
Investing in early-stage businesses is very risky. Most early-stage businesses fail. You should only invest an amount you can afford to lose completely without changing your lifestyle.
You will not be able to sell, trade, or transfer ownership of your investment for the 12 months following the investment. Even after 12 months, you may not be able to find anyone to buy your share of a company.
Crowdfunding law limits how much you can invest per year. These limits are based on your income and net worth. Nobody can invest more
You can cancel your investment up to 48 hours before the deal deadline. After that, your investment will be final, and you will not be able to get your money back.
Do your own research. Read the documents provided by each company you plan on investing in. Get independent legal, accounting, financial advice. If you have any questions or need more information, ask the company.
Crowdfunding investing is highly speculative and every investment may result in a loss.
By investing small amounts across multiple companies, you can reduce your risk compared to a large investment in a single company.
Some of the key risks to know before you invest in startups:
Investing in startups and other private companies is highly speculative and could result in the complete loss of the investment. In addition, you will not be able to resell securities acquired through Crowdfunding for a period of one year, subject to certain limited exceptions, including sales back to the issuer, to accredited investors, to family members under certain circumstances (i.e. death or divorce). However, even after the restricted period, there is no guarantee that there will be a market for the securities.
Crowdfunding investments are highly risky and speculative. You should do your own research and scrutinize all disclosed risk factors before making an investment decision. The following are some of the key risks applicable to our offerings:
Speculative. Investments in startups and early-stage ventures are speculative and these enterprises often fail. 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 prepared to lose your entire investment.
Illiquidity. Your ability to resell your investment in the first year will be restricted with narrow exceptions. You may need to hold your investment for an indefinite period of time. Unlike investing in companies listed on a stock exchange where you can quickly and easily trade securities, you may have to locate an interested private buyer when you do seek to resell your crowdfunded investment.
Cancellation restrictions. Once you make an investment in a crowdfunding offering, you can cancel the investment at any time and for any reason up to 48 hours before the offering deadline.
Valuation and capitalization. Unlike listed companies that are valued publicly through market-driven stock prices, the valuation of private companies, especially startups, is difficult. You risk overpaying for the equity stake you receive. The class of equity being sold via a crowdfunding offering may have fewer rights than other equity classes issued by a company.
Limited disclosure. The company must disclose information about itself, its business plan, the offering, and its anticipated use of proceeds, among other things. An 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 regarding its business annually, including financial statements.
Investment in personnel. An early-stage investment is also an investment in the founding entrepreneur(s) and/or management of the company. Being able to execute on the business plan is often an important factor determining whether the business will be viable and successful. You should also be aware that a portion of your investment may fund the compensation of the company’s employees, including its management. You should carefully review any disclosure regarding the company’s use of proceeds.
Possibility of fraud. As with other investments, there is no guarantee that crowdfunding investments will be immune from fraud.
Lack of professional guidance. Many successful companies partially attribute their 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.
- You cannot sell your shares at any time as you would be able to do if you held shares in a publicly traded company. In fact, you are restricted from reselling your shares during the first year post closing of the offering, unless the shares are transferred:
- to the company that issued the securities
- to an accredited investor;
- to a family member;
- in connection with your death, divorce, or other similar circumstance;
- to a trust controlled by you or a trust created for the benefit of a family member (defined as a child, sibling or parent of you or your spouse); or
- are part of a later offering registered with the SEC.
There may be no market for the shares after the initial 12 month restricted period.
It is important that you only invest capital with the expectation of holding your investment for an indefinite period of time, and with the real risk of a total loss of your investment in mind. Only invest an amount you can afford to lose without changing your lifestyle
+ Learn About Investment Limitations:
Prior to the JOBS Act, investing in startups and new ventures was only available to certain high net worth (accredited) investors. The JOBS Act introduced Crowdfunding which allows companies to raise up to $1 million in a 12-month period from both accredited and non-accredited investors. However, because of the risks associated with investing in startups and private companies, the SEC limits the amount an individual can invest in such offerings. The SEC’s Office of Investor Education and Advocacy published “Investor Bulletin: Crowdfunding for Investors” which offers the following guidance on your investment limitations.
Investor Bulletin: Crowdfunding for Investors (Feb. 16, 2016)
- generally refers to a financing method in which money is raised through soliciting relatively small individual investments or contributions from a large number of people. Over the last few years, crowdfunding websites in the United States have proven a popular way by which to solicit charitable donations and to raise funds for artistic endeavors like films and music recordings.
Under recently adopted rules, the general public will have the opportunity to participate in the early capital raising activities of start-up and early-stage companies and businesses. Starting May 16, 2016, companies can use crowdfunding to offer and sell securities to the investing public.
Can I make a crowdfunding investment?
Anyone can invest in a crowdfunding securities offering. Because of the risks involved with this type of investing, however, you are limited in how much you can invest during any 12-month period in these transactions. The limitation on how much you can invest depends on your net worth and annual income.
If either your annual income or your net worth is less than $100,000, then during any 12-month period, you can invest up to the greater of either $2,000 or 5% of the lesser of your annual income or net worth.
If both your annual income and your net worth are equal to or more than $100,000, then during any 12-month period, you can invest up to 10% of annual income or net worth, whichever is lesser, but not to exceed $100,000.
The following table provides a few examples:
|Joint calculation. You can calculate your annual income or net worth by jointly including your spouse’s income or assets. It is not necessary that property be held jointly. However, if you do calculate your income or assets jointly with your spouse, each of your crowdfunding investments together cannot exceed the limit that would apply to an individual investor at that annual income or net worth level.|
+How do I calculate my net worth?
Calculating net worth involves adding up all your assets and subtracting all your liabilities. The resulting sum is your net worth.
For purposes of crowdfunding, the value of your primary residence is not included in your net worth calculation. In addition, 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 is underwater), 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.
While your individual circumstances will vary, the following table sets forth examples of calculations under the net worth test in order to determine crowdfunding investment limits
+Investing in startups and other private companies is highly speculative and could result in the complete loss of the investment. In addition, you will not be able to resell securities acquired through Crowdfunding for a period of one year, subject to certain limited exceptions, including sales back to the issuer, to accredited investors, to family members under certain circumstances (i.e. death or divorce). However, even after the restricted period, there is no guarantee that there will be a market for the securities.
Equity Crowdfunding is the online offering of a startup or private company’s securities for investment. Title III of the Jumpstart Our Business Startups (JOBS) Act permits anyone to invest in these securities offerings up to certain investment limitations. These crowdfunding investments are made directly through the crowdfunding platforms, which are acting as a registered crowdfunding portal, and investors may participate in these offerings by investing directly through the crowdfunding platforms’ website. Investors who are interested in participating need to carefully consider whether investing in crowdfunding offerings is appropriate for them, meaning that each investor has the risk tolerance to invest in an offering that involves a high level of risk and that the investor can sustain the loss of some or all of his or her investment.
Risks of Investing. Investing in startups and other private companies is highly speculative and should only be done by investors who can bear the complete loss of their investment without any change in their lifestyle. Risks include, but are not limited to an issuer’s: (i) limited operating history, (ii) lack of liquidity or any market for the resale of your investment, (iii) possibility of fraud or misrepresentation, (iv) arbitrary valuation of the company, (v) limited shareholder rights and the possibility of dilution (meaning the reduction in the ownership percentage of a company caused by the issuance of more shares), (vi) inability to generate revenue or raise additional capital to fund operations, and (vii) inability to continue its relationship with the crowdfunding platforms or to publish annual reports where an investor obtains the most current financial information about an issuer. An issuer has ongoing reporting requirements to post an annual report no later than 120 days after the end of the fiscal year along with the financial statements of the issuer certified by the principal executive officer of the issuer to be true and complete in all material respects and a description of the financial condition of the issuer, and if an issuer has available financial statements that have either been reviewed or audited by a public accountant that is independent of the issuer, those financial statements must be provided to investors along with certification by the principal executive officer, and specific disclosures. In some instances, however, an issuer may fail in its obligation to publish annual reports and, therefore, an investor may not continually have current financial information about the issuer.
Investment Limits. Regulation Crowdfunding limits the amount of money you can invest. If either your annual income or your net worth is less than $100,000, then during any 12-month period, you can invest up to the greater of either $2,000 or 5% of the lesser of your annual income or net worth. If both your annual income and your net worth are equal to or more than $100,000, then during any 12-month period, you can invest up to 10% of annual income or net worth, whichever is lesser, but not to exceed $100,000.
Transfer Restrictions. You will not be able to resell securities acquired through Crowdfunding for a period of one year, subject to certain limited exceptions, including sales back to the issuer, to accredited investors, to family members under certain circumstances (i.e. death or divorce). However, even after the restricted period, there is no guarantee that there will be a market for the securities.
Cancellation Rights. You have the right to cancel your investment commitment in an offering at any time until 48 hours prior to the deadline identified in the issuer’s offering materials. After that, your investment will be final.
No Investment Advice or Recommendations. Gold Eagle does not provide any investment advice or recommendations. Our success probability of an offering on the portal is neither a recommendation, solicitation or endorsement of the offering by us. Any decision to invest shall be based solely upon your own evaluation and analysis of the offering and is made at your own risk. You are strongly advised to consult with your investment advisor before making any investment.
Limited Due Diligence. You are responsible for conducting legal, accounting and other due diligence review on the issuer’s and offerings posted on the Portal and to determine whether the investment is suitable for your investment needs.
- Startups are risky investments. Expect to lose your money. Don’t invest more than you’re comfortable losing. Even successful investments will not return your money for years, if at all.
Diversify Spread your investments across multiple companies rather than putting all your money into one company.
Past performance does not predict future success. Just because a founder had success with a prior company, doesn’t mean she will succeed with the current one.
Do your own research. Learn about companies on Equity Bender and through other public sources, including the SEC’s EDGAR database. The information on this site is submitted by its users and is not verified by Equity Bender. We do not and cannot recommend or endorse any company or offering.
Ask questions. Review and participate in the discussion forum for each offering you are interested in.
Review disclosures. Pay close attention to any disclosed dealings between the company and its officers, directors, employees or founders.
Understand that startups change plans constantly. They don’t need your permission to do so. Plans and forecasts are not predictions of the future.
Review the offering terms. Review the terms of each offering carefully, including rights associated with the offered securities. You may not have the same rights as other investors, including voting rights.
Be aware of dilution. As a company raises money, the ownership interest of each past investor will be diluted.
Understand Equity Bender’s role. We are not responsible for your losses or missed opportunities. Please review the Terms of Service.
Invest in companies you love. Invest in a startup because you love their product or service, not just for potential profit or return.