Important Update to Investors:
The SEC temporary COVID 19-Relief program for Crowdfunding is in effect, which provides an option for companies issuing securities access to funds sooner. As an investor, it is important to understand how the changes impact both the commitment and cancellation period for investments.
While you can access the SEC's statement here, we have also provided information below in relevant sections. Not all companies raising capital take advantage of the Relief-program. A company raising under the temporary rules must disclose it on the SEC filing.
Security of the crowdfunding portal or platform: In recent years, hackers have displayed an alarming ability to break into seemingly impregnable data repositories of leading retailers and companies and steal credit card details and other valuable client information. A similar risk exists for crowdfunding portals and platforms, which are vulnerable to attacks from hackers and cyber-criminals. The prospect of possible credit card or identity theft from a crowdfunding portal is a risk that needs to be taken into consideration.
Lower-quality investments may be the norm: The question arises whether a company would only use equity crowdfunding as a last resort. For example, if a company is unable to attract funding from conventional start-up funding sources like angel investors and venture capitalists, perhaps then it would turn to equity crowdfunding. If that is indeed the case, then equity crowdfunded businesses are likely to be more mediocre investment opportunities with limited growth potential.Reference: Investopedia, Invest through Equity Crowdfunding: Risks and Rewards (FB), Elvis Picardo, Updated Jun 25, 2019.
Company-Specific Risks
LACK OF PROFESSIONAL MANAGEMENT
Most small, local companies are managed by their founders. Very often the founder of a company is very strong in one area – for example, she might be an extremely effective salesperson or a terrific engineer – but lacks experience or skills in other critical areas. It might be a long time before (1) a startup can afford to hire professional management, and (2) the founder recognizes the need for professional management. In the meantime, the company and its investors could suffer.
LACK OF ACCESS TO CAPITAL
Smaller companies may have very limited access to capital. Frequently these companies cannot qualify for bank loans, leaving the company to live off the credit card debt incurred by the founder.
LIMITED PRODUCTS AND SERVICES
Most small, local businesses sell only one or two products or services, making them vulnerable to changes in technology and/or customer preferences.
LACK OF ACCOUNTING CONTROLS
Larger companies typically have in place strict accounting controls to prevent theft and embezzlement. Smaller companies typically lack these controls, exposing themselves to additional risk.
LACK OF TECHNOLOGY
Most small, local businesses cannot afford the technology that a larger business would use to create efficiencies and cost savings.
CASH FLOW SHORTFALLS
Many smaller businesses experience frequent shortfalls in cash flow. If a business doesn’t have enough money to meet payroll, it might not make payments on obligations to its investors, either.
COMPETITION
Smaller companies are likely to be very vulnerable to competition, whether in the form of another small, local business opening across the street or a national chain.
Investor-specific Considerations
As an investor, you need to consider whether investing in a security offered and sold under Regulation Crowdfunding is appropriate for your personal situation; those considerations may include, but are not limited to:- Financial considerations- can you afford this investment right now?- Expertise - do you invest in a domain you understand?- Degree of risk - is the potential risk involved in losing the investment in line with your risk tolerance?
Restrictions on Cancelling and Selling Your Securities Acquired in Crowdfunding
Cancellation
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 a deadline, an investment commitment may not be canceled except as provided below. For Issuers relying on the SEC COVID 19 Relief Program the following rule applies:For any reason for 48 hours from the time of the investor’s investment commitment (or such later period as the issuer may designate). After such a 48-hour period, an investment commitment may not be canceled unless there is a material change to the offering.
Reselling
The law prohibits you from selling your securities for 12 months after you acquire them, (except in certain very limited circumstances). Securities purchased under Title III may not be transferred or sold during the first year of ownership unless they are transferred or sold:Back to the issuing company.
To an accredited investor, as defined by the SECAs part of an offering registered by the SECTo a member of your family, as defined by the SECTo a trust you control or to a trust created for the benefit of a member of your family.
As a result of your death or divorce. For the purposes of Title III, the SEC defines a “family member” as a child, stepchild, grandchild, parent, stepparent, grandparent, spouse or spousal equivalent, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law, including adoptive relationships.Further, beyond the initial 12-month period of restriction, there may be no market for the securities.
