Investment Crowdfunding Explained
Crowdfund Mainstreet is all about bringing a new type of investor to the table. Until recently, investing in private businesses was mostly limited to wealthy, or “accredited,” investors. This put a lot of pressure on small businesses and startups in particular to either “bootstrap it” (self-finance) or woo a very small group of professional investors with promises of rapid growth. Title III of the JOBS (Jumpstart Our Business Startups) Act went into effect in May of 2016, creating new rules which allow companies to raise capital from anyone through crowdfunding. Now regular people—not just wealthy or professional investors—can more easily invest in the small businesses they want to see prosper.
Investment Crowdfunding allows for crowdfunded investment, which is different from more common types of crowdfunding in which supporters earn perks or rewards in exchange for funding a business. With Investment Crowdfunding, you can actually invest – i.e. purchase securities from a company which have the potential to yield a financial return. You should note, however, that investing in startups is inherently risky, and it is therefore unwise to invest more money than you are prepared to lose.
Due to the risks of securities-based crowdfunding, the SEC places limits on how much individuals can invest under Investment Crowdfunding on a yearly basis. Your investment limit will depend upon your net income and net worth, as described below.
This guide provides a basic explanation of investment crowdfunding and will help you decide if this type of investing is right for you. The SEC and FINRA (Financial Industry Regulatory Authority) both feature some useful materials on their respective sites.
Figuring out how much you can invest
The maximum amount you can invest in Investment Crowdfunded campaigns per year (your investment limit) will depend upon your net worth and annual income.
If you are an accredited investor, you are not limited in the amount you can invest in an Investment Crowdfunding offering.
Basically, the SEC divides other (non-accredited) investors into two brackets: those whose net worth and annual income are equal to or exceed $107,000 and everybody else.
If your net worth and annual income each equal or exceed $107,000, you will be able to invest a maximum of 10% of either your annual income or net worth—whichever is larger. However, no one who is not an accredited investor is allowed to invest more than $107,000 per year.
For everyone else, the limit is 5% of annual income or net worth—again, whichever is greater. However, no one has a limit of less than $2,200, regardless of the size of their net worth or annual income.
If you have a spouse, then the two of you may jointly calculate your annual income or net worth to determine your investment limit. To do this take the total of both your annual incomes and the total of all the assets held between you (including assets that are not jointly held). If you calculate your investment limit using this method, you and your spouse will be held to the same investment limit as an individual of equal income or net worth.
Calculating net worth
To figure out your net worth, simply add up all of your assets and subtract all of your liabilities. For the purposes of Investment Crowdfunding, you may not count your primary residence as an asset. Likewise, any home loans or mortgages will not count as liabilities unless they are for more than your home’s market value. In this case, only the portion of the mortgage that exceeds the value of your home will contribute to your liability total.
When it comes to small business (including early-stage) investment, the risks are manifold. You should be aware that there is a definite possibility that you will lose the whole of your investment. Listed below are some of the key risks to keep in mind when viewing offerings on Crowdfund Mainstreet. However, specific offerings will carry additional, unique risks, and it is essential to carefully review the terms and risks of any offering before purchasing securities.
Offerings are inherently speculative
For any small business—especially a new one—to succeed, a lot of things need to go right. There is no guarantee that the company you are investing in will survive. If it fails, you will likely lose your whole investment. As a rule, you should not make an investment if losing all principle will materially impact your financial situation.
You may not be able to resell your investment
Within the first year of making your investment, your ability to resell your securities is extremely limited. Even beyond this one-year period, it is highly unlikely that you will find a buyer for the securities if you want to sell them. Unlike investments in companies listed on the stock exchange, there is no public market for securities purchased under Investment Crowdfunding, nor is it certain that such a market will ever exist. You should also note that some of the companies that sell securities under Investment Crowdfunding could have restrictions in their investor agreements or other legal documents that limit your ability to sell the securities.
Securities purchased in a crowdfunding transaction generally cannot be resold for a period of one year, unless the securities are transferred:
- To the issuer of the securities;
- To an “accredited investor”;
- As part of an offering registered with the Commission; or
- 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 circumstances.
Successor in Interest
Completed investments (loans or shares of stock) are assets that will pass upon your death via your estate plan or by operation of state law (where you reside) if you have no estate plan. If you make an investment in your individual name and you want to transfer it to your revocable living trust, you should consult with your estate planning attorney about assigning the investment to your trust. If you invest using a self-directed IRA (or 401k), the investment will pass to your designated beneficiary or beneficiaries.
Companies issuing securities on Crowdfund Mainstreet are required to disclose general information about themselves, their business plan, their offering, and their intended use of proceeds—among other things. That said, companies in the early stages of fleshing out their business plan or polishing their operations won’t be able to include as many details in their disclosures due to limited historical data.
Furthermore, companies raising capital through Investment Crowdfunding are not required to file reports about their business, including financial statements, as frequently as publicly listed companies. Rather than receiving updates every quarter, you can expect new information to come in on an annual basis. Under some circumstances, companies will only be required to file one annual report. If this happens, you may have no right to additional information.
Following completion of an offering conducted on our site, we may or may not have an ongoing relationship with the company.
Limitations on Your Right to Cancel Your Investment
Once you make an investment through Crowdfund Mainstreet, you will have until 48 hours prior to the deadline identified in the issuer’s offering materials, to change your mind and retract your investment.
If, at any time the company chooses to make material changes to their offering or discloses new information, we will notify you of the changes or new information and give you five business days from receipt of the notification to reconfirm your investment.
Making self-directed investment decisions outside of a professionally managed portfolio can be both empowering and intimidating. More and more investors are demanding that their advisors consider the overall impact of their investments, but advisors who are able to do this competently are still pretty rare. That is why so many investors are interested in making direct investments using Investment Crowdfunding. Of course, without the help of a professional advisor, it is up to you to weigh all the factors that are important to you in making an investment decision. Crowdfund Mainstreet is prohibited from giving you any investment advice. Before making any investment decisions, you may want to consider consulting a professional.
Competing Investor Interests
Because crowdfunded companies will often have a multitude of investors, you should not expect that they will consider your particular interests when making important business decisions. While they will probably consider their investors’ interests as a whole, it is possible that companies will make decisions which please some investors and hurt others.
Risks Associated with the Various Types of Investments that May be Offered on Our Site
Equity is a type of security that gives the investor an ownership interest in the company. Equity can come in the form of shares of stock as well as LLC memberships or units. Equity offerings can come with voting rights, but often they do not. Equity investments may fluctuate in value, and such fluctuations may result in the loss of some or all principal invested.
When you buy equity securities, the company is required to set a price on the equity which is often a completely arbitrary price that may have absolutely no relationship whatsoever to the actual current or future value of the company.
If you are purchasing equity in a small business, you should be aware that unlike companies with publicly listed stock, valuing private companies is extremely difficult. When purchasing equity securities on our platform, you risk overpaying for the equity.
Risk of Dilution
When you buy equity in a company, there is often no guarantee that your share in the company will not be diluted by future sales of equity. Also, the company may issue equity stakes in the future with greater rights than the equity you purchased in the company’s Investment Crowdfunding campaign.
No Repayment Obligation
Generally speaking, there is no requirement that an equity investment ever be paid back. Be sure that you completely understand the terms of an equity investment before investing. Ask yourself, what would have to happen for me to get my original investment back and what would have to happen for me to make any additional return beyond the original investment.
Debt is an amount of money that is borrowed under the condition that it be paid back at a later date with interest.
Debt investments are subject to default, and therefore, investors may lose their entire investment.
There is no guarantee that investors will receive any scheduled interest payments.
Unlike a standard loan, under certain circumstances, the outstanding balance of a convertible loan may be converted into equity rather than being paid back. The terms of convertible notes vary a great deal. Be sure that you understand what events would trigger a conversion of your loan into equity and that such a conversion is not guaranteed. Also note that even if that event occurs and your loan is converted to equity, owning equity does not guarantee that you will ever get your original investment back, much less make a return on your investment. Be sure to understand what happens if the note does not convert into equity. Are you treated like a regular lender with the right to be repaid? If not, what happens to your investment at that point?
Before making a decision to invest in a company issuing securities on Crowdfund Mainstreet, you must consider whether an investment in an Investment Crowdfunding offering is appropriate for you.
The key to minimizing your risk will be gathering as much information as you can about companies by reading the disclosures included the offerings you are interested in. It pays to be extremely thorough when conducting your research since the more you know about a company, its founders, and its mission, the better equipped you’ll be to assess each investment. Below are some tips to help you get started. Of course, you should always consider your own particular situation when deciding how to assess investments on this or any other Investment Crowdfunding platform.
Given the high level of risk involved in small business investing, most investors choose to make such ventures only a part of their portfolio. The limits imposed by Investment Crowdfunding are designed to give issuers access to capital while minimizing an investor’s exposure to the risks associated with crowdfunding offerings.
Ask the Crowd
We encourage you to participate in discussions about an offering that you are interested in on the platform. There are limitations on the communications about an offering that can happen outside the platform, so the best place to ask questions and communicate with other potential investors is on the platform. We encourage potential investors to use the platform to discuss offerings and ask questions of companies. Individuals representing companies are required to identify themselves as ‘promoters’ so you will know that such individuals are not disinterested parties.
Scrutinize the Offering Terms
Pay very close attention to the terms of each offering you are interested in and be sure to learn what rights will come with your investment. Companies offering securities on Crowdfund Mainstreet are permitted to offer either debt or equity securities. Regardless of whether you are investing in equity or debt, keep in mind that the terms can vary greatly. It is essential to understand what you are getting for your investment, how the Company plans to pay you, what your rights are, etc. Crowdfund Mainstreet believes that each company is in the best position to create an offering that makes sense for their needs and the needs of their investors. Don’t be surprised if you see some innovation in the offerings themselves. And if there is anything about the terms that you don’t understand, be sure to use the discussion section of the offering page to ask questions and/or seek professional advice.
Consider Your Own Motives for Investing
Investment Crowdfunding isn’t for everyone. Ask yourself if you’re willing to tolerate the risks inherent to this kind of investing. The more aware you are of your motives for investing, the easier it will be for you to consider the tradeoffs involved in each investment decision. Every investment has a multitude of potential impacts on you, your financial situation, and the world in general. Be sure to consider all of these potential impacts before making an investment.
Glossary of Terms
An accredited investor is someone who meets income and net worth standards set by Securities Regulations. Individuals or couples whose net worth exceeds $1,000,000 excluding their primary residence are accredited investors. Individuals who had an income in excess of $200,000 in each of the two most recent years (or joint income with their spouse in excess of $300,000 in each of the those years) and who has a reasonable expectation of reaching the same income level in the current year is also an accredited investor. Entities can be accredited investors as well. For a full definition, see Code of Federal Regulations.
Dilution occurs when the percentage of company stock owned by an investor is lowered by the issuance of new equity securities by the company.
If you do any research on Investment Crowdfunding or startup investing, you’ll probably come across this term. In short, a SAFE (Simple Agreement for Future Equity) is a promise to grant equity to an investor if certain triggering events occur. If a trigger event does occur, the investor will receive equity at a preferential rate. If one does not occur, the SAFE will be worth nothing. Crowdfund Mainstreet does not allow the use of SAFEs on its platform due to the high level of risk to investors as well as uncertainty regarding the tax treatment of SAFEs.
What are some of the other names for Investment Crowdfunding?
You may hear it referred to as “Equity Crowdfunding”, “Regulation Crowdfunding” or “Title III Investment Crowdfunding” . This type of crowdfunding is the sole focus of Crowdfund Mainstreet. Some other platforms host companies raising money using different exemptions made available under the JOBS Act, but all Companies raising capital on our platform are using the Title III Investment Crowdfunding exemption.
How is Investment Crowdfunding different from Rewards/Donation Crowdfunding?
When you give money to a campaign with no expectation of a financial return you are participating in Rewards/Donation Crowdfunding. Examples you may have heard of that offer this kind of crowdfunding are Kickstarter, Indigogo or GoFundMe. By contrast, Investment Crowdfunding participants are entering into an investment contract with the Company in question. All companies featured on Crowdfund Mainstreet are seeking investments, not donations.
What kind of personal information do I have to provide in order to make an investment?
Can my company invest?
Yes, companies can invest. Note, however, that the individuals associated with the company (officers/directors & owners of 20% or more) will need to provide personal information (including Social Security Numbers) to comply with the Patriot Act and anti-money laundering laws. In addition, if you invest using a company or a trust, you will be required to provide the entity formation documentation including documents that establish you, the “associated person” as having authority to make the investment.
When will I receive a signed copy of the investment agreement?
You will receive a signed copy of the investment agreement when a successful campaign closes. Since you have until 48 hours prior to the close of the campaign to cancel your investment, the final agreement is not prepared until that time. You will have the option to review the agreement during the investment process.
How much can Companies raise?
Companies can raise up to $5M per year (12 months) under Title III.
What regulatory filings are companies required to file?
All Companies are required to file Form C with the Securities and Exchange Commission.
Under Title III, there are no state level filings required with the following exception: the state where the Company has its principal place of business and the state where more than 50% of investment comes from can require a notice filing and a fee.
How can I communicate with a Company that I am interested in?
Communication between companies and potential investors should take place on the Crowdfund Mainstreet website since companies are very limited in what they can say about their offering outside of the platform.
Can a Company Cancel My Investment Commitment?
An issuer on our platform may decide to terminate an offering at any time. An offering may also be cancelled if the target raise is not reached. If this occurs, you are entitled to a full refund. Within five business days following the cancellation of the offering, we will
- Send you a notification of the cancellation, disclosing the reason for the cancellation, and the refund amount that you are expected to receive.
- Direct the refund of your funds. Please also note that a company may choose not to accept your investment for any reason.
How are the companies featured on Crowdfund Mainstreet selected?
We bring decades of experiencing serving the legal and capital raising needs of small businesses from the offline world to Crowdfund Mainstreet and use the same criteria we have always relied on to evaluate them:
- Founders We look at the experience of the founders and the teams they build.
- Financing Strategy We allow Companies to craft their offerings using any permitted legal strategy they choose.
- Impact/Industry Analysis We ask Companies to assess and share their vision of the impact or change they want to have—with regard to an industry, a global, social or environmental problem, or their own community. We ask that companies include this information in their campaign pages for potential investors to see and discuss.
- Only US based companies can raise money using an Investment Crowdfunding platform.
I am not in the U.S. Can I invest?
Regulation Crowdfunding does not prohibit non-U.S. investors from investing in offerings made under this law. However, if a business offers an investment opportunity to and/or accepts an investment from a resident of another country, it is possible that this would be in violation of that country’s investor protection or other laws. Therefore, non-U.S. investors may only invest in offerings on this site if both the company making the offering and the investor have completed due diligence to ensure that the investment is compliant with all applicable non-U.S. laws.
What payment methods are accepted?
Acceptable payment methods for investors are ACH (electronic check) or wire transfer. If a company chooses to do so, it may accept Bitcoin or Ethereum currencies.
When do companies receive investment funds?
All Companies raising money on Crowdfund Mainstreet will be required to set a minimum amount of capital that must be raised for its campaign to be successful. Each Company must reach its minimum by the end of the campaign in order to receive the funds at the close of the campaign.