Investing in start-up and early stage businesses can be very rewarding, but investing in those businesses involves a number of risks. To invest in businesses through truCrowd, you need to understand the following five important risks:
1. Risk of Loss of Investment
Most startup businesses fail and therefore investing in these businesses may involve significant risk and it is likely you may lose all, or part, of your investment. You should only invest an amount that you are willing to lose and should build a diversified portfolio to spread risk. If a business you invest in fails, neither the company – nor truCrowd – will pay you back your investment.
2. Risk of Lack of Liquidity
Liquidity is the ease with which you can sell your securities after you have purchased them. Buying securities in businesses pitching through truCrowd cannot be sold easily as they are unlikely to be listed on a secondary trading market, NASDAQ, AMEX, or the New York Stock Exchange. Even successful companies rarely list securities on such an exchange. In addition, if you purchase B Investment Shares, these are non-voting shares and may not be attractive to potential buyers. Without a public market to find a buyer for securities it may be more difficult to sell them. Investment in crowdfunding assets should be viewed as a long term and illiquid investment. Current rules state you must generally keep any purchased securities at least twelve months from the acquisition date.
3. Risk of Rarity of Dividends
Dividends are payments made by a business to its shareholders from the company’s profits. Most of the companies seeking financing via equity crowdfunding are startups or early stage companies, and these companies will rarely pay dividends to their investors. Profits are typically reinvested into the business to fuel growth and build shareholder value. Businesses have no obligation to pay shareholder dividends.
4. Risk of Possibility of Dilution
Any investment made through equity crowdfunding may be subject to dilution in the future. Dilution occurs when a company issues more shares. Dilution affects every existing shareholder who does not buy any of the new shares being issued. As a result, an existing shareholder’s proportionate shareholding of the company is reduced, or ‘diluted’. This has an effect on a number of things, including voting, dividends and value. Some businesses who pitch through equity crowdfunding offer Seed Shares, which may include pre-emption rights that protect an investor from dilution. In this situation the business must give shareholders with Seed Shares the opportunity to buy additional shares during a subsequent fundraising round so that they can maintain or preserve their shareholding. Please research the pitch and the Articles of the company to see if the shares you are buying will have these pre-emption rights.
5. Risk of the Need for Investment Diversification
Diversification consists of spreading your money across multiple investments to lessen your investment risk. Unfortunately, while diversifying is a crucial part of investing, it will not reduce every type of risk. You should only invest a portion of your available investment funds through truCrowd and balance your truCrowd investment with safer, more liquid investments. Please note that diversification does not assure a profit or provide a guarantee against investment loss.
6. Risks Associated with Common and Preferred Shares
There is no assurance that the Issuer will have any assets to pay dividends, currently or accrued, to common or preferred shareholders. In the event of a liquidation, common and preferred shareholders can lose their entire investment. Shareholders are subject to share price fluctuations and declines.
7. Risks Associated with Corporate Bond
There is no assurance that the Issuer will have any assets to pay bond holders in the event of a liquidation and in that event, the bond holders can lose their entire investment. Interest payments are not guaranteed.
8. Risks Associated with Corporate Debenture
There is no assurance that the Issuer will have any revenue to pay the revenue participation rights holders. Also in the event of a liquidation the revenue participation rights holders can lose their entire investment
10. Risks Associated with SAFE (Simple Agreement For Future Equity)
- The most important thing to realize about SAFEs is that you are not getting an equity stake in return. SAFEs are not common stock.
- SAFEs may only convert to equity if certain triggering events occur.
- Depending on its terms, a SAFE may not be triggered.
- Keep in mind other possible provisions of the SAFE. i. Conversion terms.
- SAFEs were designed for a specific type of startup.
- There is nothing standard or simple about a SAFE. Various terms from the triggering events to the conversion price are subject to different treatment by different companies offering SAFEs. Despite its name, a SAFE may not be “simple” or “safe”.
ii. Repurchase rights.
iii. Dissolution rights.
iv. Voting rights.
SAFE holders may lose their entire investment. Please click here to read the SEC’s Investor Bulletin: Be Cautious of SAFEs in Crowdfunding
11. Risks Associated with SAFE + REV (Simple Agreement For Future Equity and Revenue Participation Rights)
See both sets of risks associated with Revenue Participation (#9) and Simple Agreement for Future Equity (#10) do apply.