Title III Crowdfunding
Startwise Educational Material
www.startwise.com
1
www.startwise.com
@startwiseinc
Educational Material: Summary
1. Regulation Crowdfunding Rules……………………………………………………….3
2. Types of Business Investments………………………………………………………..5
3. Investment Limits……………………………………………..…………………………5
4. Calculating your Net Worth…………………………………………………………..…7
5. How to Assess an Investment Opportunity………………………………………..….9
6. Risks of Investing………………………………………………………………………10
7. Understanding Investment Returns…………………………………………………..16
8. Managing your Investment Portfolio………………………………………….…..…..17
9. Investing in Companies……………………………………………………………..…18
10. Sources of Funding……………………………………………………………..…….21
11. Raising Money for a Business………………………………………….……………22
12. Promoting Crowdfunding Campaign………………………..………………………26
13. Investor Relations…………………………………………….……………………….27
14. Company Disclosures and Reporting…………………………………………..…..29
www.startwise.com
2
1. Regulation Crowdfunding Rules
Crowdfunding is a relatively new and evolving method of using the Internet to raise
capital to support businesses. An entity or individual raising funds through
crowdfunding typically seek small individual contributions from a large number of
people. Individuals interested in the crowdfunding campaign – members of the
“crowd” – may share information about the project, cause, idea or business with each
other and use the information to decide whether to fund the campaign based on the
collective “wisdom of the crowd.” The Jumpstart Our Business Startups Act (the
“JOBS Act”), enacted on April 5, 2012, establishes a regulatory structure for startups
and small businesses to raise capital through securities offerings using the Internet
through crowdfunding.
The Title III of the JOBS Act was approved on October 30, 2015, allowing the US
everyday citizens and legal residents to invest in companies over the internet using
regulated crowdfunding. Private companies were previously allowed to solicit only
accredited investors - those with a net worth of at least $1 million, excluding the value
of their homes, or annual income of more than $200,000. These rules went into power
on May 16, 2016.
The JOBS Act is intended to help provide startups and small businesses with capital by
making relatively low dollar offerings of securities and investments less costly. Congress
included a number of provisions intended to protect investors who engage in these
transactions, including investment limits, required disclosures by issuers, and a
requirement to use regulated intermediaries.
Offerings under the new legislation can be made either via existing broker-dealers, or
via a new class of regulated registrants called “funding portals.” These portals have to
provide enough information for investors to make an educated investment decision as
well as to conduct background checks on issuers, their executives, and their officers to
reduce fraud risk. They also must make issuer’s information available on their platforms
for at least 21 days before securities can be sold, and enable conversations “among
the crowd” about each offering in addition to having the option of a question-andanswer section.
www.startwise.com
3
The registered offerings are not feasible for raising smaller amounts of capital, as is
done in a typical crowdfunding transaction, because of the costs of conducting a
registered offering and the resulting ongoing reporting obligations under the Securities
Exchange Act of 1934 (“Exchange Act”) that may arise as a result of the offering.
Title III of the JOBS Act (“Title III”) added new Securities Act Section 4(a)(6), which
provides an exemption from the registration requirements of Securities Act Section
5 for certain crowdfunding transactions. To qualify for the exemption under Section 4(a)
(6), crowdfunding transactions by an issuer must meet specific requirements, including
the following:
• the amount raised must not exceed $1,070,000 in a 12-month period;
• individual investments in all crowdfunding issuers in a 12-month period are limited to:
- the greater of $2,200 or 5% of the lesser of annual income or net worth, if annual
income or net worth of the investor is less than $107,000, or
- 10% of annual income or net worth (not to exceed an amount sold of $107,000), if
both annual income and net worth of the investor is $107,000 or more;
All transactions must be conducted through an intermediary that either is registered
as a broker-dealer or is registered as a new type of entity called a “funding portal”.
In addition, Title III:
• adds Securities Act Section 4A, which requires, among other things, that issuers and
intermediaries that facilitate transactions between issuers and investors in reliance
on Section 4(a)(6) provide certain information to investors and potential investors,
take other actions and provide notices and other information to the Commission;
• adds Securities Act Section 4A, which requires, among other things, that issuers and
intermediaries that facilitate transactions between issuers and investors in reliance
on Section 4(a)(6) provide certain information to investors and potential investors,
take other actions and provide notices and other information to the Commission;
• adds Exchange Act Section 3(h), which requires the Commission to adopt rules to
exempt, either conditionally or unconditionally, “funding portals” from having to
register as a broker-dealer pursuant to Exchange Act Section 15(a)(1);
• mandates that the Commission establish disqualification provisions under which an
issuer would not be able to avail itself of the Section 4(a)(6) exemption if the issuer
or an intermediary was subject to a disqualifying event; and
• adds Exchange Act Section 12(g)(6), which requires the Commission to adopt rules
to exempt from the registration requirements of Section 12(g), either conditionally
or unconditionally, securities acquired pursuant to an offering made in reliance on
Section 4(a)(6).
www.startwise.com
4
Before making an investment decision, all investors are recommended to read SEC’s
“Bulletin on Regulation Crowdfunding for Investors”.
For more information, please check the Startwise Blog and other Educational Materials.
2. Revenue Sharing Investments
Revenue-based financing is a hybrid that combines features from venture capital
funding and bank loans. Payments to the investors are based on the company's ability
to generate revenue. This debt repayment method has a time limit or a return cap once reached, the debt is repaid. Revenue-based financing investors don't own shares
or sit on the board of the company they fund.
3. Investment Limits
Title III of the JOBS Act establishes the following investor limitations:
• Both accredited investors and non-accredited investors may invest in Title III
crowdfunding offerings (subject to maximum based on their income and net worth);
www.startwise.com
5
•
Over a 12-month period (on rolling basis), an individual can invest in the aggregate
across all crowdfunding offerings up to:
- If either their annual income or net worth is less than $107,000, than the greater of
$2,200 or 5% of the lesser of their annual income or net worth.
- If both their annual income and net worth are equal to or more than $107,000,
investors are allowed to invest up to 10 percent of the lesser of their annual income
or net worth.
During the 12-month period, the aggregate amount of securities sold to an individual
investor through all crowdfunding offerings may not exceed $107,000.
Securities purchased in a crowdfunding transaction generally cannot be resold for a
period of one year, unless the securities are transferred: (1) to the issuer of the
securities; (2) to an “accredited investor”; (3) as part of an offering registered with the
Commission; or (4) to a member of the family of the purchaser or the equivalent, to a
trust controlled by the purchaser, to a trust created for the benefit of a member of the
family of the purchaser or the equivalent, or in connection with the death or divorce of
the purchaser or other similar circumstance. Holders of these securities would not
count towards the threshold that requires a company to register its securities under
Exchange Act Section 12(g) if the company is current in its annual reporting
obligations, retains the services of a registered transfer agent and has less than $25
million in total assets as of the end of its most recently completed fiscal year. In
addition, all transactions relying on the new rules would be required to take place
through an SEC-registered intermediary, either a broker-dealer or a funding portal.
To invest in securities offered under Regulation Crowdfunding on Startwise, you need
to create an investor account and click on the “Invest” button available on the listing
page of the company in which you wish to invest. You will be asked to confirm that you
have reviewed these educational materials and understand the risks of startup investing
as disclosed on the profile page as well as in the Startwise Educational Materials. Once
you acknowledge the materials, you will be redirected to our investment flow to
complete your investment. Upon confirming the investment, your investment amount
will be transferred and held in a secured escrow account at a third-party agent.
Investors are allowed to cancel their investment at any time up to 48 hours prior to
the deadline identified in the issuer’s offering materials. In the event the target offering
amount is reached prior to the offering deadline, all investors that have confirmed their
investment by completing the investment flow on Startwise will be notified five
business days prior to the new closing date, which is meant to give investors adequate
time to cancel their investment.
www.startwise.com
6
Furthermore, in the case that the Issuer has a material change in their offering (e.g.,
terms are updated, company operation have materially changed), each investor will
receive notice of the material change and will be required to reconfirm his or her
investment commitment within five business days of the receipt of the notice. If the
investor does not confirm their investment, the investment will be automatically
canceled and the funds committed will be returned to the investor.
SEC rules also require that Title III platforms provide channels for investors to discuss
investment opportunities listed on the platform. Without the platform itself vetting
projects, this public vetting process is critical. In this manner, the wisdom of the crowd
guides investments on a Title III platform for non-accredited investors.
4. Calculating your Net Worth
Calculating your net worth FINRA: http://www.finra.org/investors/know-your-net-worth
Net worth is the total assets minus total outside liabilities of an individual. Put another
way, net worth is any asset owned minus any debt owed. Calculating your net worth
can be a useful tool to gauge your financial health and your financial progress over
time.
Step 1, you need to decide if you want to calculate net worth individually (you) or
jointly (you and your spouse/partner).
Step 2, you need to list all your assets. The list below will help you classify everything in
just a few seconds:
Assets
www.startwise.com
7
▶ Cash and cash equivalents
Determine the amount of cash and cash equivalents that you have, including:
•
•
•
Certificates of deposit
Checking and savings accounts
Money market accounts
•
•
Physical cash
Treasury bills
▶ Investments
Determine the current market value of your investments, including:
•
•
•
•
•
Annuities
Bonds
Life insurance cash value
Mutual funds
Pensions
•
•
•
Retirement plans: IRA, 401(k), 403(b),
etc.
Stocks
Other investments
▶ Real and personal property
Determine the current market value of your real and personal property. Real property
includes land and anything that is permanently attached to the land, such as a house.
Personal property is everything else.
•
•
•
•
Boats
Collectibles – antiques, art, coins, etc.
Household furnishings
Jewelry
•
•
•
•
Primary residence
Rental properties
Vacation or second home
Vehicles
Step 3, add cash/cash equivalents, investments, and real/personal property.
The sum represents your total assets.
Step 4, you need to list all your liabilities. Here is the list to help you:
Liabilities
▶ Secured liabilities
Determine the amount of your secured liabilities, including:
•
•
Automobile loan(s)
Home equity loan
www.startwise.com
•
•
Margin loans
Mortgage
8
•
•
Rental real estate mortgage
Second mortgage
•
Vacation/second home mortgage
▶ Unsecured Liabilities
Determine the amount of your unsecured liabilities, including:
•
•
•
Credit card debt
Medical bills
Personal loans
•
•
•
Student loans
Taxes due
Other debt and outstanding bills
Step 5, add secured liabilities and unsecured liabilities.
The sum represents your total liabilities.
Step 6, subtract your total liabilities from your total assets. The difference is your net
worth.
Example:
Let’s consider a couple that has the following assets: primary residence valued at
$250,000, an investment portfolio with a market value of $100,000 and automobiles
and other assets valued at $25,000. The couple’s liabilities are an outstanding
mortgage balance of $100,000 and a car loan of $10,000. The assets ($250,000 +
$100,000 + $25,000) minus the liabilities ($100,000 + $10,000) means that the couple’s
net worth is $265,000.
5. How to Assess an Investment Opportunity
Assessing a startup investment is all about doing the proper due diligence to be able
to make an informed investment decision. Each investor must conduct their own
independent review of the offering documents and perform their own independent
due diligence. Common factors that are reviewed by seasoned investors include:
www.startwise.com
9
•
•
•
•
•
•
•
Product
Management team backgrounds
Differentiation and defensibility
Business model
Distribution
Customers
Market size
•
•
•
•
•
•
•
Competitive landscape
Historical financial performance
Financial projections
Unit economics
Capitalization table
Use of proceeds
Legal
Usually, investors are looking for a scalable idea, committed and skillful team, good
market positioning, potential for fast profitability, and momentum. If you choose to
take the process to the next step, you need to know how to read the Term of the
offering.
Deal terms provide a simplified summary of the key terms of the investment
agreement. Investment terms for the revenue sharing model contain information
relating to:
•
•
Minimum Amount of investment the
company is looking to raise
Maximum Amount of investment the
company is looking to raise
•
•
Fixed percentage of the quarterly
revenue to be paid to investors
Return multiple on the investment
On Startwise, the deal terms that are presented on the offering pages are final terms
and are not generally negotiated or changed once a funding round has begun.
6. Risks of investing
It is not possible to identify or describe all of the risks that the Investors will confront,
and Investors must be prepared to lose part or all of their investment in the company.
www.startwise.com
10
The company’s prospects must be considered in light of the risks, expenses and
difficulties frequently encountered by companies in the company’s stage of
development.
Risk of Revenue Sharing Securities. Revenue-based funding is a type of an unsecured
debt. Since the repayment is tied to the company's revenue, there is a risk of not
getting any returns at all or not getting the returns in the projected timeframe, because
the company's revenue streams depend on multiple internal and external factors that
might be out of the company's control. This type of security doesn't provide investor
with voting rights and is a general obligation between the company and the Investor.
This type of security doesn't grant the Investor any ownership in the company and
therefore does not provide a higher repayment in case of company acquisition. Under
certain circumstances (see Section 14 below) an issuer may cease to publish annual
reports and, therefore, an investor may not continually have current financial
information about the issuer. Following completion of an offering conducted through
the intermediary, there may or may not be any ongoing relationship between the issuer
and intermediary. This information below sets out the risks that investors need to
consider when making an investment in a company on Startwise. Investing in startups is
very risky, highly speculative, and investments should not be made by anyone who
cannot afford to risk part of or the entire investment. In making comparisons with other
investments, a prospective Investor should consider that the success of any investment
depends upon many factors, including opportunity, general economic conditions, and
the experience of management. There is no representation that all or any possible
factors necessary for success are present in the company. Each prospective Investor
must conduct his or her own due-diligence and analysis in order to make an investment
decision.
StartUp Company; Limited Operating History. Accordingly, the company may be
considered a startup or development phase business and, consequently, may have
limited financial (profit and/or loss) history, operating history or revenues on which to
base a prediction that the company will be successful. Such company must, therefore,
be considered promotional, in its formative and development stage and a high risk,
speculative investment. Potential Investors should be aware of the difficulties normally
encountered by a new enterprise, many of which are beyond the company’s control.
Investment in a start-up company is inherently subject to many risks, and investors
should be prepared to withstand the complete loss of their investments. The company’s
prospects must be considered in light of the risks, expenses and difficulties frequently
encountered by companies in their early stage of development, particularly companies
using an untested marketing strategy. Such risks include, but are not limited to,
www.startwise.com
11
possible inability to respond promptly to changes in a rapidly evolving and
unpredictable business environment and the risk of inability to manage growth.
Business Strategy. The company may modify and/or “pivot” its business plans and
strategies as management pursues strategies that it believes to be in the best interest
of the company. All information and materials provided to the Investors must be
considered as illustrative examples of the planning efforts made to date, which may be
subject to change in the future and about which no representations or warranties have
been made by the company or anyone associated with it.
Lack of Experience of Management as a Group. There is no assurance that
management and key personnel have adequate skills to enable the company to earn
income or make profits on its operations or investments. Investors should consider the
credentials and experience of management and the effect thereof on the company’s
prospects.
Dependence on Management and Key Personnel. The business of the company will
be greatly dependent upon the participation of its Officers and Directors and other key
personnel. The company will need to hire additional management and key personnel
as the company grows in order to properly manage the company. There are no
assurances that the qualified personnel can be hired and, if hired, can be retained.
Market Uncertainty. Although the company believes that there will be a market for
what it offers, there can be no assurance that a profitable market will exist or continue
to exist or that it will grow. Potential Investors must consider that, even if markets exist
or arise, there is no assurance that the company will be able to reach a profitable level
of operations selling to such markets.
Economic Downturns. Financial difficulties of the end users/customers to which the
company expects to sell its services may adversely affect the company’s revenues, costs
and collections. If the general economy is performing poorly, then the collectability of
receivables may be adversely affected, causing an increase in aged receivables and/or
a reduced collection rate. Company profits could be adversely affected if the company
is forced to write off uncollected accounts. In addition, economic downturns could
adversely affect the fiscal health of key customers/clients or impair their ability to
continue to operate during a recession, which would decrease the company’s revenues
unless the company is able to replace any lost business.
Competition. In general, the market in which the company will compete is expected to
be competitive. In general, the company’s potential competitors may have longer
www.startwise.com
12
operating histories, greater brand recognition and significantly greater financial,
marketing and other resources than the company and that their superiority to the
company in these areas will likely continue into the future. Barriers to entry for new
competitors of the company may be low, and current and new competitors may launch
competitive services at a relatively low cost.
Technological Change May Adversely Affect the Company’s Business. The
company’s ability to remain competitive may depend in part upon its ability to develop
new and enhanced services and to introduce these services in a timely and costeffective manner. In addition, service introductions or enhancements by the company’s
competitors or the use of other technologies could cause a decline in revenue for the
company’s existing services. There can be no assurances that the company shall be
successful in selecting, developing, and marketing new services or in enhancing its
existing services.
Significant Growth May Place a Strain on Resources; Managing Growth. The
anticipated growth could place a significant strain on the company’s management, and
operational and financial resources. Effective management of the anticipated growth
shall require expanding the company’s management and financial controls, hiring
additional appropriate personnel as required, and developing additional expertise
through experienced management personnel. However, there can be no assurances
that these or other measures implemented by the company shall effectively increase
the company’s capabilities to manage such anticipated growth or to do so in a timely
and cost-effective manner.
Limited Spreading of Risks; No Current Diversification of Services. The ability of the
company to diversify or expand its activities is might be limited. Due to the
comparatively small capitalization and the budget of the company and its reliance on a
single service for success, there will be less spreading of risks than may occur in some
other organizations.
Intellectual Property Protection; No Protection of Proprietary Rights; Potential
Costs of Enforcement. The company’s ability to compete effectively with other
companies could depend, in part, on its ability to maintain the proprietary nature of its
intellectual property. The company’s success may also depend, in part, on its ability to
obtain and/or enforce intellectual property protection for these assets in the United
States and other countries. The company has no patents or other formal intellectual
property protections through trademark registrations, patents or otherwise, but may
pursue such protection in the future. The defense and prosecution of intellectual
property suits may be both costly and time consuming even if the outcome is favorable
www.startwise.com
13
to the company. An adverse outcome could subject the company to significant
liabilities to third parties, require disputed rights to be licensed from third parties or
require the company to cease selling all or some of its products. There can be no
assurances that confidentiality agreements entered into by the company’s employees
and consultants, advisors and collaborators, if any, will provide meaningful protection
for the company’s trade secrets, know-how or other proprietary information in the
event of any unauthorized use or disclosure of such trade secrets, know-how or other
proprietary information.
Dependence on Offering Proceeds; Immediate Need for Capital to Continue in
Business. The company has little, if any, working capital and, accordingly, has an
immediate need for the proceeds in order to pursue its business activities. Although
the company believes that the anticipated net proceeds will enable the company to
continue to pursue developing its business, its cost estimates for operation may be
inaccurate and/or the net proceeds of the offering may provide insufficient working
capital.
Need to Raise Future Rounds of Additional Capital or Financing to Continue in
Operation. In order to effectively execute its business plan and pursue its business
activities, the company may need to raise additional capital in future investment rounds
or other financings, which may include debt and/or equity and/or leasing transactions
(“Future Rounds”) or otherwise obtain financing. If the company cannot or does not
raise Future Rounds or obtain other financing needed, then it is likely that the company
will be forced to discontinue its operations, and the company likely will fail. In such
case, the Investors will likely lose their entire investments. There can be no assurance
that Future Rounds or any additional financing or capital will be available, and the
company cannot at this time accurately forecast the amount that will be needed,
obtainable or obtained in Future Rounds. Even if the company raises Future Rounds
and/or additional financing or capital is available through loans or other facilities, the
company will depend substantially upon the availability of cash flow from operations to
stay in business. There is no assurance that the company can generate cash flow when
needed. In the event that the company’s operations do not generate necessary cash
flow and/or the company cannot obtain additional funds if and when needed through
other means, the company may be forced to limit, curtail or cease its activities with a
consequent loss to Investors.
Risk of System Failure; Absence of Redundant Facilities; Capacity Constraints. The
company may rely on the internet and certain software to operate and manage its
business and clients/customers. Accordingly, its business will be dependent on the
efficient and uninterrupted operation of computer hardware systems and the internet.
www.startwise.com
14
The company’s systems and operations will be vulnerable to damage or interruption
from fire, flood, power loss, telecommunications failure, break-ins, earthquake and
similar events.
No Voting Rights. Minority stake investors or investors using non-equity based funding
mechanisms might not be entitled to any voting right and might not have any say in
the company's executive decision-making process.
The circumstances in which an investment commitment may be cancelled by the
issuer:
• In the event than an issuer makes a material change to the terms of an offering or to
the information provided by the issuer, investors need to re-confirm their
investment in light of the new information. The confirmation must be
received within five business days of the investor’s receipt of the notice of the
material change or else the investment commitment must be cancelled.
• If an issuer does not raise the target funds by the deadline it established, the
investors get a notice of the cancellation of the investment commitment within five
business days, direct the refund of investor funds, and prevent investors from
committing any additional funds to the offering.
• The Issuer may cancel the offering, in that case the investors must be notified and
their investment commitments cancelled.
The circumstances in which an investment commitment may be cancelled by the
intermediary:
The intermediary can deny access to its platform if the intermediary has a reasonable
basis for believing that an issuer, or any of its officers, directors (or any person
occupying a similar status or performing a similar function), or any 20 Percent Beneficial
Owner is subject to a disqualification under Rule 503 of Regulation Crowdfunding or
the issuer or offering presents the potential for fraud or otherwise raises concerns
regarding investor protection.
www.startwise.com
15
7. Understanding Investment Returns
If you are looking to start investing in private companies, you need to understand what
happens after you have made an investment and how to manage your portfolio.
Following completion of an offering conducted through the intermediary, there may or
may not be any ongoing relationship between the issuer and intermediary.
What Happens After You Invest?
Depending on the range of factors such as the performance of the business, the terms
of your investment, the terms of any subsequent rounds of financing, and the terms of
any liquidity event the are a few possible outcomes for your investment which include:
• Total loss of capital invested
• Recovery of some principle but with some losses
• Return of capital
• Return of capital with a small profit
• Significant investment return above the capital invested
Some useful terms you want to know:
Return On Investment.
ROI - a performance measure used to evaluate the efficiency of an investment or to
compare the efficiency of a number of different investments. ROI measures the amount
of return on an investment relative to the investment’s cost. To calculate ROI, the
benefit (or return) of an investment is divided by the cost of the investment, and the
result is expressed as a percentage or a ratio. Small business investments typically take
at least five to ten years to show a return, so you should only invest capital that you are
able to have remain invested for a long time frame.
Loss Of Capital.
The majority of startup investments result in the total or near total loss of the principal
invested in the startup. You should monitor the companies that you have invested in
and request updates so that you know when to consider an investment as a total loss.
These losses may be tax deductible - you might need to consult with a tax advisor to
learn more.
www.startwise.com
16
Acquisition.
The returns which investors receive in an acquisition generally depend upon the
structure and terms of the acquisition agreements and they type of security which
those investor’s hold. Typically, investors holding debt instruments in an acquired
company will either be paid in full as part of the transaction, or the acquiring entity may
elect to assume such debt instrument and continue to make payments in accordance
with the terms of the debt instrument. Notwithstanding the foregoing, there can be no
assurance that any acquisition or similar transaction will occur with respect to a
company. Secondary Sale.
In certain circumstances you may be able to sell your securities to a third-party. These
types of sales may be limited by the terms of your investment, transfer restrictions
under the Securities laws, and/or a lack of willing purchasers. In the future, secondary
markets may emerge to facilitate these transactions but at this time, due to the limited
number of secondary markets and all investments in private companies should be
considered as illiquid.
8. Managing Your Investment Portfolio
When investing in businesses, most investors follow their own investment strategy that
is formed based on their knowledge, experience and expertise as well as personal
values. Here are some tips on setting an investment strategy:
• Industry - which one do you believe has the potential for growth or to particular
companies based on their management team, technology, or track record.
• Stage of company
• Market sector
• Geography
• Business models
• Investment size
• Number of investments
www.startwise.com
17
When investing, it is important to account for risk. Since the majority of startups fail and
those that do provide a return to their investors may take five to ten years to do so,
investors who invest in startups usually take the following precautions:
• Asset allocation: Do not allocate more than 5-10% of your overall portfolio into
alternative assets, including startup investment opportunities.
• Diversification: Build a diversified portfolio of startup investments (diversification
does not assure a profit nor does it necessarily hedge against or guarantee against
investment loss).
• Investment horizon: Do not invest any capital if you do not feel comfortable having
it unavailable for a period of time.
• General risk factors: Investors should also bear in mind the general risks inherent in
the asset class.
Becoming a strategic investor is a great opportunity to contribute more than just
money, if the investors are willing to share their experience and expertise or opening
up their network of contacts.
It is important to monitor your portfolio. Companies that you have invested in should
provide regular business updates (some of these updates may be a legal requirement
of the investment documents): information about the progress of the company,
information about developments in the industry and any business challenges. The
updates may also include requests for advice, assistance or strategic introductions.
9. Investing In Companies
The basic steps of the investing process in private companies:
www.startwise.com
18
Due diligence - you need to review key documents, research the company and team.
Some things to pay attention to are idea scalability, market positioning, financial status
of the company, revenue model, exit potential, etc.
Depending on the investment mechanism, you will have some legal paperwork such as
verification of your identity and investor limits before making an investment into a
private company.
To make an investment, you will normally sign an investment agreement that sets out
the terms of the investment. In some transactions, the documents will be held in
escrow until certain conditions are met.
Transfer the funds to the escrow bank account. Your funds may be transferred into an
escrow account held by a third-party for safe-keeping until the funds are released to
the company once certain conditions are met. Once the conditions of the escrow are
met the documents and/or funds will be released to the company.
Investing On Startwise
Startwise.com is an online funding platform which facilitates revenue sharing
investments under the regulated Crowdfunding rules. The main steps in the investment
process on Startwise include:
1. Click “Invest”
After you have completed your due diligence of the company and the offering, click
the “invest” button on the company’s profile page. This will start the investment
process during which you will choose the amount of investment and provide additional
information. We facilitate the signing of the agreement between you and the company.
Your information will then be pre-populated into the company’s offering documents,
which you can sign electronically through the platform.
2. Funds
After signing the agreement, your funds will automatically be transferred and placed
into an escrow account. The funds will remain in escrow until they are released to the
company that you are investing in or returned back to you.
3. Confirmation
Once the fundraising round closes, you will receive confirmation of success and
counter-signed legal agreements. In the case of an unsuccessful round or if you
canceled investment, the proposed transaction will be cancelled and the escrow agent
will return the funds from the escrow back into your bank account.
www.startwise.com
19
Companies are required to reach a minimum funding target to have a successful
fundraising campaign. That means that investments are not finalized until the company
raises enough money to meet its funding target and completes all other closing
conditions. Once the funding target has been met, the money is released to the
company and investors will receive the confirmation of their investment in the
applicable security. If the minimum funding target is not met, subscription amounts are
returned to investors by the escrow agent. Startwise does not take custody of investor
funds at any point during the investment process.
Startwise checks the following information about companies:
• Legal and Confirmatory Due Diligence
• Organization of the company
• Corporate structure and ownership
• Disclosure information and terms of the offering
Note: Startwise is not a broker dealer and is not providing advice. Investors are
expected to perform their own due diligence on each opportunity.
General Considerations
Notwithstanding the foregoing, these investments are illiquid, risky and speculative and
you may lose your entire investment. The foregoing verification process does not
guarantee that any company will be successful or that you will receive a positive return
on your investment. Each company review is tailored to the nature of the company, so
the mentioned review process is not the exact process for every issuer. Completing the
verification process does not guarantee that the company has no outstanding issues or
that problems will not arise in the future. While the foregoing process is designed to
identify material issues, there is no guarantee that there will not be errors, omissions, or
oversights in the process.
For additional information about investing please consult the SEC website about
investing basics.
www.startwise.com
20
10. Sources Of Funding
Starting and growing a business requires capital. Here are some sources of capital that
entrepreneurs use to fund their companies.
Bootstrapping - most entrepreneurs get initial funding for their businesses using
savings accounts and zero interest credit cards to leveraging other personal assets. In
turn, this will make potential investors more comfortable knowing you have skin in the
game.
Friends and Family - friends and family can provide either equity or debt funding and
might be more flexible on the repayment. To avoid friends and family feeling like
“fools” you might want to structure this type of funding as a high interest loan for a
specific period of time.
Accelerators and Incubators - while focusing on accelerating startups and providing
resources and connections, these organizations might also provide funding. Usually,
they use equity or convertible note approach and have standard terms for all
participants for the program.
Crowdfunding - online platforms that allow individuals and businesses to raise money
from multiple backers. There are enough platforms out there to find a mechanism that
is best for you, including debt, equity or rewards-based donations.
Small business loans - there are numerous organizations that lend to small businesses.
Most lenders will want the loan to be secured by assets of some type, will require credit
score and will set an interest rate. The Small Business Administration (SBA) has many
programs that can help small businesses get access to capital.
Banks – traditionally banks make small business loans. They typically require a track
record, a guarantee on the loan while many of them require the business to be
profitable or have positive cash flows.
Economic Development Programs - the state, county and municipal economic
development offices have an interest in helping businesses succeed to boost local and
regional economies. Depending on the location and the type of business, these
agencies might offer financial resources, including loans and grants.
www.startwise.com
21
Partners - finding a partner that could become a source of funding. Strategic partners
can benefit from supporting the business and therefore would be willing to align
resources.
Hedge funds, endowment funds, and family offices - one of the focuses is funding
small businesses. These lenders often are willing to make longer-term loans and might
be interested in impactful businesses.
Angel investors - these people are accredited and are looking to invest in promising
businesses. The increasing number of angels are successful entrepreneurs. Today they
are forming investment groups to spread risk and to pool research.
Venture capital - these firms provide funding on different stages and might focus on
specific industries. They are typically looking to make relatively large investments and
take a significant share of the company. On the upside, VC do follow up investments
and some provide support and resources as well as a validation point.
Crowd Investing - the emerging mechanism of raising money from anyone - including
accredited and non-accredited investors - using an online portal. This mechanism
allows companies to tap into a bigger pool of funds and build a support group around
the business.
11. Raising Money For A Business
When raising funds for growing a business, it is important to consider multiple factors
and prepare the right documents. First of all, you need to estimate how much you
need to raise based on the expenses you need to cover and the duration. Given the
target fundraising amount, you can now estimate the options - is it possible to get a
low interest loan for that sum or do you need to look for investors.
www.startwise.com
22
Regardless of which mechanism you choose to raise money, you need to know who is
your target investor - who is interested in backing companies in this industry, stage, and
traction. It will also save you time if you talk to people who are potentially investing.
All investors will do due-diligence on the company, team and the product/service,
here are some things they are looking for:
•
•
•
believable market size
competition as a validation
clear market target
•
•
•
detailed customer acquisition plan
business model
use of the funds
Securing funding almost always requires a formal business plan. It should not be longer
than 20-40 pages. It should include:
•
•
•
•
summary of the current strategy
key metrics
milestones
executive summary
•
•
•
a marketing plan
a management team description
financials (income, cashflow and
balance sheet projections)
Funding Via Startwise
Startwise.com is a funding portal under the Title III of the JOBS Act which enables
private companies to raise funds from the crowd using revenue sharing mechanism. It
means, that businesses can raise money without offering stock but rather through
selling future revenues. In return for funding, the company is obligated to pay the
investors back every quarter a fixed percent of the company’s quarterly revenue until
investors receive the return multiple on their investment.
For example:
• Company A is raising $100,000
• Company A sets the deal terms:
• Quarterly revenue percent 5%
• Return multiple 1.4x
• Company A is obligated to pay its investors 5% of its revenues every quarter until it
pays $150,000 ($100,000 * 1.4) to investors.
Companies are limited to raising $1,070,000 in a rolling 12-month period under the
Regulation Crowdfunding exemption.
In general, the Startwise process includes the following steps:
www.startwise.com
23
1. Application
Companies can apply to fundraise on Startwise.com on the site. All applications are
reviewed by the Startwise Team and are verified on matching the criteria.
2. Compliance Verification
Exemption under the Regulated Crowdfunding requires:
• Offering will not be integrated with other offerings
• Company must use one online intermediary
• Company must be a US entity
• Company cannot be an Investment Company or company relying on an exemption
from the ‘40 Act
• Must have a business plan
• Cannot be public reporting company
• If conducted an offering pursuant to Regulation CF in the past must be compliant
with ongoing reporting requirements
• Cannot be a Bad Actor
The company need to have the right disclosures prepared for filing with the SEC. As
part of Form C, issuers will need to make the following information is documented:
• Name, legal status, address, website
• Directors, officers, background, offices held
• Identity of 20% beneficial holders of voting securities
• Description of the business
• Financial condition
• Target offering amount, maximum amount, deadline
• Description of the securities including prices and how determined
• Use of proceeds
• Risk factors
• Ownership, capitalization, indebtedness
• Offering mechanics
• Related party transactions
In addition to Form C, the financial statements are required based on the amount
offered and sold in reliance on Regulation Crowdfunding within the preceding 12month period:
• For issuers offering $107,000 or less: Financial statements of the issuer and
certain information from the issuer’s federal income tax returns, both certified by the
principal executive officer. If, however, independently audited financial statements
are available, the issuer must provide those financial statements instead, no need to
www.startwise.com
24
include the information on the federal income tax returns or the certification of the
principal executive officer.
• Issuers offering more than $107,000 but not more than $535,000: Financial
statements reviewed by a public accountant that is independent of the issuer. If,
however, independently audited financial statements of the issuer are available, the
issuer must provide those financial statements instead, no need to include the
reviewed financial statements.
• Issuers offering more than $535,000 but not more than $1,070,000:
- For first-time Regulation Crowdfunding issuers: Financial statements reviewed by a
public accountant that is independent of the issuer, unless financial statements of the
issuer are available that have been audited by an independent auditor.
- For issuers that have previously sold securities in reliance on Regulation
Crowdfunding: Financial statements audited by a public accountant that is
independent of the issuer.
3. Fundraising Campaign
The information about the offering and the company should be available for at least 21
days before the sale of securities. All the committed funds from investors are held in an
escrow account. The company has to reach the minimum target amount before the
deadline in order to receive the funds. You are required to provide progress reports on
the offering according to the disclosure requirements - Form C-U must be filed. Once
the amount is reached, the funds are transferred to the company bank account and
revenue sharing agreements with investors go into power.
Startwise.com facilitates the whole process, including document signing and
repayments to investors after funding is complete.
www.startwise.com
25
12. Promoting Crowdfunding Campaign
The Rule 204 of Regulation Crowdfunding allows companies to publish a notice
advertising the terms of an offering in reliance on Section 4(a)(6) so long as the notice
includes no more than:
• a statement that the issuer is conducting an offering
• the name of the intermediary through which the offering is being conducted
• a link directing the investor to the intermediary’s platform
• the terms of the offering
• the amount of securities offered
• the nature of the securities
• the price of the securities
• the closing date of the offering period
• factual information about the legal identity and business location of the issuer,
limited to
- the name of the issuer of the security
- the address
- phone number
- website
- e-mail address of a representative
- a brief description of the business.
What companies can do:
• Promote your financing on social media such as Twitter, Facebook, and LinkedIn
• Send email blasts to relevant email lists about your offering
• Speak about your offering at demo days, pitch events, and public events
• Talk to the press and bloggers about your offering
• Limit advertising materials to broad, non-sensitive, non-controversial statements
• Have each key employee, 20% shareholder, director, and officer, new investor,
broker, solicitor or other “promoter” complete a Bad Actor Questionnaire
What companies CANNOT do:
• Make any untrue statements, misrepresentations or omissions (anti-fraud applies)
regarding the offering
• Include sensitive, confidential or controversial information in public advertisements
The are no limitations on the distribution of the notice so companies should consider
reaching out to customers, personal and professional networks via emails, run events to
allow potential investors to learn more about the business, product and team. Social
www.startwise.com
26
media and online communities can be a great way to reach potential investors among
your followers and spread the word about the campaign.
You can generate interest towards your campaign and business by creating useful and
informative content. It will also show your credibility to potential investors. Content that
is useful for a capital raising campaign may include:
• Blog posts from the CEO about the vision for the company and the history
• Video interviews with key team members about their functions
• Statements from existing investors
• Testimonials from customers
• Endorsements from industry influencers, bloggers, celebrities
• Articles about the company and the round in relevant publications
• Targeted advertising
Startwise Team works pro-actively with companies to help with marketing activities to
promote their funding rounds.
13. Investor Relations
It is important to have an open communication channel to keep your investors
informed. Maintaining long-term relationships with your investors is one of the most
important parts of maximizing the added value that strategic investors can provide to
your business. The communications are best delivered in writing, either through mail or
e-mail.
Business Updates
Many early-stage companies choose to provide investor updates on either a monthly or
quarterly basis. These periodic updates usually include information about key metrics,
traction, and any business issues that have arisen. This update can include links to new
articles about the business, information about new partners, team members,
www.startwise.com
27
opportunities, etc. You also want to notify investors about any current and upcoming
issues that the company may face, particularly those that relate to fiduciary duty and
organizational impact.
Finance Related Updates
You should always notify your existing investors of a new financing round. Your investor
agreements may also legally require you to do so when future capital rounds take
place. Some investors from previous rounds may also have the legal right to participate
in new rounds of capital raising. Maintaining good records of each investor’s holdings
and contact details is vital for companies that are raising multiple rounds of capital.
When you receive offers to acquire the business, the terms of your investor agreement
may require you to notify the investors of any such offers.
An initial public offering is the offering of shares in your company for sale to the public
and the listing of those shares on a publicly traded stock exchange. An offering of this
type may need to be notified to existing shareholders in advance.
Quarterly and annual reports should include detailed financial information.
Depending on the level of involvement of the investor, phone calls and in person
meetings can be beneficial too. Consider scheduling semi-annual meetings or
brainstorming sessions with investors, either in person or via conference call.
Why is Investor Relations important?
• It forces you to be accountable to yourself and to your investors.
• It encourages ongoing evaluation of your company and business model on a
monthly and/or quarterly basis.
• It helps investor identify potential areas of growth, partnerships, or new business
opportunities.
• A record of strong investor communication and a documented history of the
company’s performance can help attract new investors.
• Investor relations and reporting are important infrastructure components for larger
companies and you should start developing this infrastructure early.
www.startwise.com
28
14. Company Disclosures and Reporting
Under the rules certain companies would not be eligible to use the exemption,
including non-U.S. companies, Exchange Act reporting companies, certain investment
companies, companies that have failed to comply with the annual reporting
requirements under Regulation Crowdfunding during the two years immediately
preceding the filing of the offering statement, and companies that have no specific
business plan or have indicated that their business plan is to engage in a merger or
acquisition with an unidentified company or companies.
Title III of the JOBS Act requires companies that rely on the new rules to conduct a
crowdfunding offering to file certain information with the Commission and provide this
information to investors and the intermediary facilitating the offering, including among
other things, to disclose:
•
•
•
Business name, address and incorporation information;
A description of the business and business plan;
The financial statements requirements are based on the amount offered and sold in
reliance on Regulation Crowdfunding within the preceding 12-month period:
- For issuers offering $107,000 or less: Financial statements of the issuer and certain
information from the issuer’s federal income tax returns, both certified by the
principal executive officer. If, however, independently audited financial statements
are available, the issuer must provide those financial statements instead, no need to
include the information on the federal income tax returns or the certification of the
principal executive officer.
- Issuers offering more than $107,000 but not more than $535,000: Financial
statements reviewed by a public accountant that is independent of the issuer. If,
however, independently audited financial statements of the issuer are available, the
issuer must provide those financial statements instead, no need to include the
reviewed financial statements.
- Issuers offering more than $535,000 but not more than $1,070,000:
For first-time Regulation Crowdfunding issuers: Financial statements reviewed by a
public accountant that is independent of the issuer, unless financial statements of the
issuer are available that have been audited by an independent auditor.
For issuers that have previously sold securities in reliance on Regulation Crowdfunding:
Financial statements audited by a public accountant that is independent of the issuer.
www.startwise.com
29
•
The price to the public of the securities or the method for determining the price,
the target offering amount, the deadline to reach the target offering amount, and
whether the company will accept investments in excess of the target offering
amount;
• The narrative discussion of its financial condition covering, among other things, its
historic results of operations and liquidity and capital resources;
• A company offering more than $535,000 but not more than $1,070,000 of securities
relying on these rules for the first time would be permitted to provide reviewed
rather than audited financial statements, unless financial statements of the company
are available that have been audited by an independent auditor;
• A description of the business and the use of proceeds from the offering;
• Information about officers and directors (including their history with the company,
business experience for the past three years and other information) as well as
owners of 20 percent or more of the company;
• The identity of the Crowdfunding Portal for the offering and compensation being
paid to it;
• Number of current employees;
• Certain related-party transactions;
and other information required by the Form C.
You need to file updates to Form C (designated Form C-U) with information on the the
progress toward reaching the Target Amount. Disclosure must be amended if a
material change or update occurs (designated Form C-A).
You would be required to file with the SEC and post to your website an annual report
within 120 days of the end of each fiscal year (designated Form C-AR). This annual
report would include information similar to the offering statement on Form C, including
the financial statement and narrative disclosures meeting the highest standard
applicable to any of the issuer’s past offerings pursuant to the Crowdfunding
Exemption, but excluding offering-specific information.
In certain circumstances a company may terminate its ongoing reporting requirement
if:
• The company becomes a fully-reporting registrant with the SEC;
• The company has filed at least one annual report, but has fewer than 300
shareholders of record;
• The company has filed at least three annual reports, and has no more than $10
million in assets;
• The company or another party purchases or repurchases all the securities sold in
reliance on Section 4(a)(6); or
www.startwise.com
30
• The company ceases to do business.
You would be required to file a notice of termination of its annual reporting obligation
on Form C-TR.
More information on Regulation Crowdfunding:
• Regulation Crowdfunding
• Bulletin on Regulation Crowdfunding for Investors
• FINRA: Calculating your net worth
• Small Entity Compliance Guide for Issuers
• Form C by the Securities and Exchange Commission
Invest. Share. Repeat
www.startwise.com
31