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 Fund’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 its 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. 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.