Last updated: Apr 9, 2021 8:10 PM
Investor Educational Materials
This Investor Education section is intended to provide you with important information about investing through our Funding Portal. Before investing, you should carefully review and understand this information. If you don’t understand something or have a question, please contact us via email at email@example.com.
This section is intended to help explain:
- What we do, and how we do it.
- The process for buying securities through our Funding Portal
- The limitations on the amounts you may invest and how to potentially increase them.
- Your right to cancel your investment commitment.
- The circumstances in which the Startup (also called the "Issuer," which is a company raising money on our Funding Portal) may cancel your investment commitment.
- The risks associated with investing in the securities sold through our Funding Portal
- The kinds of securities that may be offered on our Funding Portal and some of the risks associated with each type.
- Restrictions on your right to sell securities you purchase on our Funding Portal
- The information Startups are required to disclose to you, and when and how often you can expect such information.
- Our relationship with the Startups on our website, including information about the compensation we will receive from them.
We expect to update this material from time to time and will email you when we do.
What should you consider first?
Investing in the companies that will be offered on our site is very different than investing in the public stock market. The companies on our site are likely to be new Startups and growth companies, having a core team of entrepreneurs and limited or no revenue or profits.
So you might ask, why take the risk?
Even with the above caveats, and in view of other risks listed in the “Risks of Investing” section, investing in Startups and growth companies on our site provides an opportunity for you to potentially diversify your portfolio and to invest in businesses you are familiar with and care about. We believe others may desire to invest in new and innovative ideas and industries. Many investors may want to invest in support of local businesses.
There’s no guarantee that Startups and growth companies will succeed in executing their intended plans and achieve expected outcomes.
With that said, what we believe doesn’t matter. The first thing for you to consider, before you go further, is whether it is appropriate for you to invest in any of these companies based on your own personal and financial situation. Among the questions you should consider asking yourself included:
- Can I afford to lose all the money I invest?
- How will I feel if I lose all or part of the money I invest?
- Do I understand the company I am thinking about investing in? Does its product or service make sense to me? Would I be a customer? Am I personally familiar with that market or industry?
- Do I understand the business the company is conducting? Do I understand how the company can make money?
- Do I understand the type of investment I’m buying?
- Do I trust the Founders and leadership of the company?
- Do I understand the investment web forms and documents required to invest?
- Do I feel comfortable making this decision myself? If not, have I consulted with a financial advisor or an experienced colleague or family member?
Only if you can truthfully answer “Yes” to all those questions should you consider investing.
Here are useful definitions for terms and phrases that are used throughout our Investor Education.
Accredited Investor: Generally, an investor with a net worth of $1 million or more (excluding primary residence) who has earned $200,000 or more for the last two years with a reasonable expectation for that income level to continue. Other criteria includes asset size, governance status or professional experience as defined by the SEC. Review the complete definition under §230.501 of the Securities Act of 1933, which is found here: https://www.ecfr.gov/cgi-bin/retrieveECFR?gp=&SID=8edfd12967d69c024485029d968ee737&r=SECTION&n=17y126.96.36.199.188.8.131.52
Crowdfunding Intermediary: A funding portal or broker-dealer that is registered with the SEC and FINRA and authorized to facilitate crowdfunding transactions. Activities are governed by the U.S. Jobs Act of 2012, Title III (“Regulation Crowdfunding”).
Discount: If an offering’s investment terms include the conversion of a current investment into future equity (for example with Convertible Debit or a Simple Agreement for Future Equity, commonly referred to as a SAFE), the Startup may include a discount to further reward early Investors. If and when the investment converts to equity, the Investor’s shares would be based on the company valuation discounted by the promised amount, making one’s investment more valuable.
Family Member: This includes 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 of the purchaser, and includes adoptive relationships. The term “spousal equivalent” means a cohabitant occupying a relationship generally equivalent to that of a spouse.
FINRA: The Financial Industry Regulatory Authority .
Funding Portal: A term used to describe websites allowed to offer and sell securities under Title III. Fundify Portal, LLC (“Fundify Portal”) is an SEC registered Funding Portal and member of FINRA.
Intermediary: A funding portal or broker-dealer that is registered with the U.S. SEC and FINRA and authorized to facilitate crowdfunding transactions. Activities are governed by the U.S. Jobs Act Title III.
IPO: Initial Public Offering – when a company’s stock becomes available for purchase on a public stock exchange.
Issuer: A company, which we often refer to as a Startup, trying to raise money from Investors on our site by selling equity.
Marketplace: The section of our website where we list campaign offerings and supporting material.
Material Change: A change to the company or offering terms that would be considered important by a potential Investor. Some examples may include a change in company strategy, key contracts, leadership roles, investment terms among many others.
Platform: Another word we use to refer to our site.
Offering: Also referred to as a funding campaign, these are the terms and conditions under which a Startup offers equity in their company in exchange for investment commitments. A Startup may issue future offerings in order to raise more funds.
Reg CF: An abbreviated reference to Regulation Crowdfunding or Title III of the JOBS Act that gives companies the option of raising capital from the public who are 18 years of age or older rather than only from accredited and institutional investors.
Reg CF Campaign: When a private company raises funds from the general public through an online intermediary in accordance with Title III of the JOBS Act.
Secondary Market: A market that enables individuals to buy and sell securities from other Investors. Refer to the risk section below that details liquidity risk and the potential lack of a secondary market to sell securities.
Security: A share of stock, a promissory note, a bond or any other instrument offered by an Issuer on fundify.com.
Site: Our Internet site located at fundify.com.
Title III: Title III of the JOBS Act of 2012, which allows “Regulation Crowdfunding.” Title III took effect in 2016.
Triggering Event: An event defined in the offering terms where promised future equity converts to shares of the company. Examples of triggering events include a company securing additional equity funding from a Venture Capital or institutional investment firm, going public (commonly called an “IPO”), being acquired by another company or merging with another company (also called “exits”). Triggering events may also include additional funding rounds as specified in an offering’s investment terms.
Valuation: The valuation of a company is basically the amount that company leaders believe the company is worth at that moment in time. Institutional investors or venture capital firms most often determine the valuation as a function of their negotiations to invest. In Reg CF, valuation is important as related to the valuation cap, if any.
Valuation Cap: If offered, this is intended to reward Investors who take the risk of making an investment at an early stage. This sets the maximum company valuation at which your investment will be converted into common stock equity if and when a trigger event occurs. Even if the value of the Startup grows beyond that cap, your investment is converted at the valuation identified as the cap. The intent is to make your investment more valuable.
Venture Capitalist (VC): An Investor or investment firm that provides funds to a company in exchange for equity.
What We Do
We are a “Funding Portal.” We are registered with the SEC and with FINRA to act as an intermediary in Securities that are offered and sold under Title III.
While similar, being a funding portal isn’t the same as being a registered “broker-dealer.” We are not a registered broker-dealer. We do not recommend investments in specific Startups.
Think of us as a Marketplace, bringing together Startups seeking funding and interested Investors. When you invest, you are not investing in Fundify or in any entity affiliated with us. You are investing in a third-party business that has chosen to raise money using our Marketplace.
As a Funding Portal “intermediary” (as defined by FINRA), or Marketplace, we do not guarantee any particular outcomes and are not responsible for what happens to your investment – all investments are undertaken at your own risk. We also do not guarantee the accuracy of the information you receive from Issuers. Our role is to facilitate investments and help ensure that transactions between Investors and Issuers meet legal requirements.
More Specifically, We:
- Select which Startups (“Issuers”) to offer in our Marketplace, by among other things:
- Arranging for background checks on the Issuer and its principals, these are referred to in the industry as “Bad Actor” checks, which look for fraud - these are performed by an independent service
- Conducting due diligence to have a reasonable basis for believing the Issuer is complying with all its obligations
- Conducting due diligence to have a reasonable basis for believing the Issuer has established a means to keep accurate records of the holders of its securities
- Advise Issuers about their offerings and help prepare offering documents
- Screen Investors to ensure that they satisfy applicable per-investor limits (see Limits on How Much You May Invest below)
- Provide communication channels between you and the Issuer, and between you and other potential Investors, where you can ask questions and exchange information. You'll find this within each campaign offering on the discussion board.
- Provide search functions or other tools for Investors
- Provide you with educational materials to help you assess the risks of investing in this asset class (that's this section)
- Keep records of Investor communications and materials
What We Don't Do
In accordance with SEC rules, we don't:
- offer any investment advice or recommendations to Investors
- guarantee any specific investment outcome
- talk with Investors about the merits of a specific company or offering
- offer any legal, accounting, finance or investment advice to Startups
Our Relationship with Startups (also known as “Issuers”)
Startups will pay us to be in our Marketplace. They might pay us flat fees, commissions based on the amount of money they raise or in other ways. They might also pay us for specified services we provide to them and reimburse us for expenses we incur on their behalf. For each offering you invest in, we will disclose our compensation.
In some cases, an Issuer might pay us in whole or in part with its own securities, e.g., with its own promissory note. This will always be the same class of security that is being offered to Investors on our Platform. For example, if the Issuer is offering common stock to Investors, only common stock could be used for our compensation in addition to cash payment, if applicable.
We will never own any financial interest in Startups listed in our Marketplace, other than securities we receive from them as compensation.
When an offering is complete, we might or might not have an ongoing relationship with the Startup. The Startup may decide to use our Funding Portal to raise money in the future or use services provided by (and pay compensation to) entities affiliated with us.
We will maintain online communications channels called Discussion Boards – chat rooms, basically – where you can communicate with other Investors and with the Issuer. All discussions on the chat rooms will be open to the public, but only Investors who have registered with us are allowed to post. Representatives of the Startup, and anyone engaged in promoting the offering, must clearly identify themselves as such. The chat room is where you can ask questions about investment opportunities that interest you.
Fundify generally isn’t allowed to participate in the chat room, except to establish guidelines, monitor and remove potentially abusive or fraudulent content.
How We Screen and Don't Screen Startups (Issuers)
SEC regulations require us to:
- Have a “reasonable basis” for believing that every Startup on our Platform is eligible to offer its securities on our Platform and is complying with Title III Regulation Crowdfunding rules. We might perform our own due diligence, but the SEC allows us to rely on the representations of the Startup.
- Have a “reasonable basis” for believing that every Issuer on our Platform has established means to accurate records of the holders (owners) of its securities. We might perform our own due diligence, but the SEC allows us to rely on the representations of the Issuer.
- Deny access to the Platform to any Issuer if:
- We have a reasonable basis for believing that an Issuer or any of its officers, directors, or beneficial owner of 20% or more of its outstanding voting securities is subject to disqualification under the rules discussed in the Disqualification of Startups section below. We are not allowed to rely solely on the Issuer’s representations to form this reasonable belief, but must conduct background checks with third parties.
- We have a “reasonable basis” for believing that the Issuer or the offering presents the potential for fraud or otherwise raises concerns about Investor protection, or we can’t effectively assess the risk.
We will comply with all those requirements. But – and this is very important – we are not required to conclude that Startup offerings on our Platform represent good investments for Investors. In fact, we are not even allowed to tell you if we think that one Startup is a better investment than another. You have to make those decisions on your own.
Disqualification of Startups (Issuers)
Equity Crowdfunding under Title III may not be used if the Issuer or certain other people have been the subject of certain disqualifying events during the last 10 years.
The “certain other people” are:
- Any predecessor of the Issuer;
- Any director, officer, general partner, or manager of the Issuer;
- A person owning 20% or more of the Issuer’s voting power;
- Any promoter associated with the Issuer;
- Any person who will be paid for soliciting Investors; and
- Any general partner, director, officer or manager of such a solicitor.
The “certain disqualifying events” include a long list of events, all involving improper actions in the securities business – for example, the conviction of a felony or misdemeanor in connection with the purchase or sale of any security, or the loss of license of a securities broker for misconduct. We will arrange for independent background and “Bad Actor” checks before allowing an Issuer to list on our Platform.
The Kinds of Securities We Will Offer
We may offer the following kinds of securities on our platform:
- SmartSAFE™ – This investment vehicle is an agreement for future equity in the Startup if and when it reaches a triggering event or exit, such as a subsequent funding event (such as Series A by a venture capital firm), acquisition or an IPO.
- Convertible Securities – Some securities, which we call “convertible securities,” start out as one kind of security but can be changed – converted – into a different kind of security. For example, a company might issue a debt security that can be converted by the holder into common stock at some specified time. Sometimes the conversion is triggered at the option of the holder, sometimes at the option of the company, and other times upon the occurrence of a specified event.
- Priced Equity – This type of investment enables Investors to purchase shares of a private company at a set price per share. The price is set by the company that’s raising capital. Over time, the value of the shares purchased may rise and fall depending on the company’s results or future follow-on funding negotiations with institutional Investors or venture capital firms.
- Revenue Sharing – When capital is raised through revenue sharing, Investors share in the company’s profits or losses. The campaign terms specify the amount or percentage of revenue that will be paid to Investors as well as the timeframe in which it will be paid. The terms may also include a maximum amount that Investors are entitled to receive (e.g., a percentage of their original investment) and a due date for repayment of the original investment. If the company does not meet revenue goals, Investors do not receive a return on investment and may lose some or all of the principal.
When you review the opportunities on our site, you'll be able to see what kind of security is being offered in each campaign.
Limits on How Much You May Invest
Title III limits how much you can invest every year – not only in any one company, or through any one Funding Portal, but also in all companies through all Funding Portals. These limits apply only to your investments under Title III (Regulation Crowdfunding), however.
Specifically, the maximum amount you can invest in all Title III offerings during any 12-month period is:
- If your annual income or net worth is less than $107,000, you may invest the greater of:
- $2,200; or
- 5% of the greater of your annual income or net worth.
- If your annual income and net worth are both at least $107,000, you can invest the lesser of:
- $107,000; or
- 10% of the greater of your annual income or net worth.
These limits do not apply to “accredited Investors,” who may invest up to the maximum amount of an offering, and in as many offerings as they like. Investment limits are adjusted periodically by the SEC, based on inflation.
You and your spouse may combine your incomes and assets for purposes of determining how much you may invest; although if you do so, you will be treated as a single investor for purposes of determining how much either of you may invest.
EXAMPLE: Investor Jones earns $107,000 per year and has a net worth of $150,000. That means he qualifies to invest $15,000 in Reg CF campaigns in a 12-month period. Investor Jones makes his first Title III investment on December 1, 2020, investing $7,500 in Company X. On November 27, 2021, Investor Jones would like to make his second Title III investment, investing $8,000 in Company Y. But he can’t; he can invest only $7,500 in Company Y. But he could invest $7,500 in Company Y on November 27, 2021, and another $500 (actually, another $7,500, if he wanted to) on December 1, 2021.
How to Invest
First, register at our site. You will establish secure log-in credentials and provide us with some information about yourself.
Under Title III, the entire investment process happens online through our site. We will never send you paper, call you on the phone (except in some emergencies) or ask to meet with you. If anyone requests that you provide them with your login credentials, asks you to sign a paper document, or to meet with you in person regarding Startups and offerings on our site, it is not us.
Making an Investment
You can explore and view investment opportunities as soon as you visit the site. When you click on an opportunity that interests you, you will be able to see all the information available about the opportunity (see Information the Startup Will Disclose -- Before You Invest below). But you won’t be allowed to invest until you register.
Once you decide to invest, click on the “Invest” button. We will ask for more information, arrange for you to pay for your investment and ask you to sign one or more documents with the Issuer. For example, you might be asked to electronically sign (“e-sign”) something called an “Investment Agreement.”
Having done that, you will be deemed to have made an “investment commitment.” But you’ll still have a chance to cancel that commitment before the funding campaign concludes, as described below.
Notice of Investment Commitment
Once we receive your investment commitment, we will email confirmation to you with a link to your Fundify portfolio where you can access:
- The dollar amount of your commitment
- The price of the securities you committed to buy
- The name of the Issuer
- The date and time by which you may cancel your commitment
Target Offering Amount and Offering Deadline
For each offering, the Issuer will disclose a “target offering amount,” meaning the minimum amount the Issuer is trying to raise (in most cases this will be at least $25,000 ), and an “offering deadline.” If the Issuer doesn’t raise the target amount before the offering deadline, then the offering will be canceled and any investors who have made investment commitments will receive their money back.
If the Issuer reaches the target offering amount before the offering deadline, it may close the offering early as long as (1) the offering has remained open for at least 21 days, and (2) we give a notice to investors. The notice must:
- Specify the new deadline, which must be at least five days after the date of our notice;
- Notify investors that they may cancel their investment commitment for any reason up until 48 hours before the new deadline; and
- Notify investors whether the issuer will continue to accept investment commitments during the 48 hour period before the new deadline.
If an Issuer intends to accept investments over and above the target offering amount, it must disclose the maximum amount it will accept and how it will handle “over-subscriptions.” For example, the Issuer might allocate the securities on a first-come, first-served basis, or pro-rata among all of the investors who make investment commitments, or in some other way. Reg CF maximum amounts can now be up to $5 million per offering.
Your Right to Cancel Your Investment
You can cancel your investment commitment at any time up to 48 hours before the offering deadline, for any reason.
Also, if an Issuer makes a material change to the terms of an offering or the information previously provided by the Issuer changes, we provide a means by which the Issuer will send an electronic message to any Investor who has made an investment commitment. The electronic message will describe that the Investor's investment commitment is cancelled unless the Investor reconfirms the investment commitment within five (5) business days of receipt of the message.
Paying for Your Investment
You can pay via credit card (for amounts up to $20,000), ACH from a U.S. bank or wire transfer. We also accept investments from self-directed IRAs. There is no charge to the Investor.
When you invest, your money will be held in an escrow account administered by a qualified third-party financial institution until the offering is completed. The name of this institution is Fund America, which is wholly owned by Prime Trust, LLC. We, as a Funding Portal, are prohibited from ever holding your money. If the Issuer is successful in raising the target offering amount, Fundify will notify Fund America to release the Investors’ money commitments to the Issuer. We will notify you by email and the investment process will be complete.
Confirmation of Transaction
Before your investment is final, we will email you a confirmation with a link to your Fundify portfolio where you can access:
- The date of the transaction
- The type of security you are buying
- The price and number of securities you are buying, as well as the number of securities sold by the issuer in the entire transaction and the price(s) at which the securities were sold
- If you are buying a debt security, the interest rate and the yield to maturity calculated from the price paid and the maturity date
- If you are buying a callable security, the first date that the security can be called by the issuer
- The source, form and amount of any compensation Fundify expects to receive in the transaction
Restrictions on Resale
Once you buy a security (e.g., a SAFE or a convertible promissory note), you are not allowed to resell or otherwise transfer the security for one year, except for sales or transfers:
- Back to the Issuer;
- To an “accredited Investor;”
- As part of an offering registered with the SEC; or
- To a family member, to a trust you control, to a trust created for the benefit of your family member, or in connection with death or divorce.
The term “family member” includes 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 of the purchaser, and includes adoptive relationships. The term “spousal equivalent” means a cohabitant occupying a relationship generally equivalent to that of a spouse.
An “accredited Investor” means:
- A natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase, excluding the value of the primary residence of such person;
- A natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year;
- A trust with assets in excess of $5 million, not formed for the specific purpose of acquiring the securities offered, whose purchase is directed by a sophisticated person;
- A business in which all the equity owners are accredited investors;
- An employee benefit plan, within the meaning of the Employee Retirement Income Security Act, if a bank, insurance company, or registered investment adviser makes the investment decisions, or if the plan has total assets in excess of $5 million;
- A bank, insurance company, registered investment company, business development company, or small business investment company;
- A charitable organization, corporation, or partnership, not formed for the specific purpose of acquiring the securities offered, with total assets exceeding $5 million; and
- A director, executive officer, or general partner of the company selling the securities, or any director, executive officer, or general partner of a general partner of that issuer.
If you hold a purchased security as specified above, there is no assurance of crowdfunding equity liquidity, even after one year.
Information the Startup (Issuer) Will Disclose – Before You Invest
Before you invest, the Issuer must provide you with extensive information in a Form C, which will be available via a link on our site. The information includes:
- The Issuer’s name, address and website
- The Issuer’s directors and officers
- The principal occupation and employment for the last three years of each director and officer
- The names of each person owning 20% or more of the Issuer’s voting securities
- The risk factors associated with the investment
- The Issuer’s business and business plan
- How the proceeds of the offering (both at the target and maximum amounts)will be used
- The Issuer’s ownership and capital structure
- A description of how rights exercised by the principals of the Issuer could affect Investors
- The compensation paid to Fundify in the offering
- A description of previous offerings by the Issuer
- Whether the Issuer has previously failed to file the reports required by law
- Transactions with officers, directors and other “insiders”
- Whether the Issuer would be disqualified from offering securities under Title III under the “Bad Actor” rules, if the effective date of those rules were different
- A discussion of the Issuer’s financial condition
- How the Issuer will deal with over-subscriptions
- Where on the Issuer's website it will post annual reports, and when the annual reports will be available
- Financial information about the Issuer, as described below
- Any other information necessary in order to make the statements made, in light of the circumstances in which they were made, not misleading
What types of financial information an Issuer must provide depends on three things:
- The maximum amount of money the Issuer is trying to raise in the current offering;
- Whether this is the Issuer’s first offering using Title III; and
- If this is not the Issuer’s first offering using Title III, how much the Issuer has raised in other Title III offerings during the last 12 months.
Where the maximum amount of the Title III offering, together with all other Title III offerings of the same Issuer within the last 12 months, is:
The Issuer must provide (in GAAP format):
$250,000 or less
The Issuer’s total income, tax income, and total tax, as reported on the Issuer’s Federal tax return, certified by the principal executive officer of the Issuer; and financial statements of the Issuer, certified by the principal executive officer of the Issuer. If financial statements are available that have been reviewed or audited by a public accountant that is independent of the Issuer, then those financial statements will be used instead.
More than $250,000,
but less than $535,000
Financial statements that have been reviewed by a public accountant that is independent of the Issuer, but if financial statements are available that have been audited by a public accountant that is independent of the Issuer, then those financial statements will be used instead.
More than $535,000
More than $1,070,000
If this is the Issuer’s first Title III offering, financial statements that have been reviewed by a public accountant that is independent of the Issuer. If this is not the Issuer’s first Title III offering, financial statements that have been audited by a public accountant that is independent of the Issuer.
Regardless of whether this is the Issuer’s first Title III offering, financial statements must be provided that have been audited by a public accountant that is independent of the Issuer.
All financial statements must be prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). Financial statement reviews must be conducted in accordance with the Statements on Standards for Accounting and Review Services issued by the Accounting and Review Services Committee of the AICPA. Financial statement audits must be conducted in accordance with either (i) auditing standards of the AICPA, or (ii) the standards of the Public Company Accounting Oversight Board.
If Information Changes Before Closing
If you make an investment commitment and there are important changes between the date of your commitment and the date the funding campaign concludes, then (1) the Issuer must notify you of the changes and (2) your investment commitment will be canceled automatically unless you reconfirm your commitment within five business days of receipt of the notice.
After You Invest
After you invest, the Issuer is generally required to file annual reports with the SEC and post them on its own website within 120 days after the end of the fiscal year. The annual report will typically include:
- The same types of information included on the Form C you saw when you invested;
- Updated financial statements certified by the principal executive officer of the Issuer (the financial statements don’t have to be reviewed or audited, but if the Issuer already has reviewed or audited financial statements, they must be provided); and
- Updated disclosures about the Issuer’s financial condition.
The Issuer is allowed to stop filing annual reports upon the earlier to occur of:
- The date the Issuer has filed at least one annual report and has fewer than 300 shareholders of record;
- The date the Issuer has filed at least three annual reports and has total assets no greater than $10 million;
- The date the Issuer or someone else buys all of the securities issued in the Title III offering;
- The date the Issuer registers its securities and is required to file reports under the Securities Exchange Act of 1934; or
- The date the Issuer is dissolved under state law.
At best, you will have current information about the Issuer once per year. If the Issuer stops providing annual reports, you won’t have current financial information about the Issuer at all.
An Issuer might hire a public relations firm or other third party to promote its offering on Fundify – for example, by talking about the offering on the discussion board. Or an employee or Founder of the Issuer might do the same thing. In either case, the person doing the promoting must identify himself or herself on Fundify and disclose that he or she is engaged in promotional activity. In the case of a third party, the third party must also disclose that it is being paid for its promotional activity.
The following is a nonexhaustive list of general risks that are associated with Title III investments displayed on our funding portal platform. Investors should review the issuer’s offering documentation for additional information related to risk and consult with a qualified financial and tax advisor prior to making any investment.
Risk of Loss: The risk that the Investor may not receive part, or all, of the amount invested to purchase the security. Investors should only invest money in Title III securities that they can afford to lose.
Liquidity Risk: The risk of a lack of an active secondary market for securities purchased. Investors will not be able to sell Title III securities for the one year resale restriction period. Further, there may not be a ready market to sell Title III securities after the restricted period is over.
Market risk: The possibility for an Investor to experience losses due to factors that affect the overall performance of the financial markets in which the Investor is involved.
Interest rate risk: The risk that arises for bond owners from fluctuating interest rates. How much interest rate risk of a bond depends on how sensitive its price is to interest rate changes in the market. The bond’s sensitivity depends on two things: the bond's time to maturity and the coupon rate of the bond.
Inflation Risk: The risk that the purchasing power of the investment asset does not keep pace with the purchasing power of another asset such as the currency used to initially purchase the investment asset.
Performance Risk: It is not possible to predict the performance of a company based upon its past performance. Past performance is not indicative of future results, and there can be no assurance that targeted results will be achieved. Loss of principal is possible, and even likely, on any given investment.
Dilution Risk: The risk that the issuing company may issue additional equity securities in the future, which will result in the percentage of ownership that the Investor previously held being lower after the additional issuance of equity.
Risks of Investing
Crowdfunding is risky. You may multiply your money or lose it completely. Shares received may never resell. Equity crowdfunding securities are speculative and involve significant risk, including the risk that you could lose some or all of your money. We’re describing some of the factors that make these investments risky in four ways:
- First, because many of the opportunities on our platform will be in small businesses, we’ll describe risks common to those businesses.
- Second, we’ll describe risks common to most of the businesses on Fundify.
- Third, we'll describe risks associated with debt securities and equity securities.
- Fourth, when you review a particular investment opportunity, the Issuer will also provide a list of risks specific to that opportunity.
The order in which these factors are discussed, either here or in the Issuer’s materials, is not intended to suggest that some factors are more important than others.
Risks Associated with Small Businesses
Lack of Professional Management: Most small 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 baker – 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: Small companies have very limited access to capital, a situation that Title III funding portals hope to improve but cannot fix entirely. Frequently these companies cannot qualify for bank loans, leaving the company to live off the credit card debt incurred by the Founder. Capital is the oxygen of any business, and without it a business will eventually suffocate and fail.
Limited Products and Services: Most small 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: Many small businesses cannot afford the technology that a larger business would use to create efficiencies and cost savings.
Cash Flow Shortfalls: Many small 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: A small business is likely to be vulnerable to competition, whether in the form of another small business or a national chain.
Risks Common to Companies on the Platform Generally
Reliance on Management: Most of the time, the securities you buy through our platform will not give you the right to participate in the management of the company. Furthermore, if the Founders or other key personnel of the issuer were to leave the company or become unable to work, the company (and your investment) could suffer substantially. Thus, you should not invest unless you are comfortable relying on the company’s management team. You will almost never have the right to oust management, no matter what you think of them.
Inability to Sell Your Investment: The law prohibits you from selling your securities (except in certain very limited circumstances) for one year after you acquire them. Even after that one-year period, a host of federal and state securities laws may limit or restrict your ability to sell your securities. Even if you are permitted to sell, you will likely have difficulty finding a buyer because there will be no established market. Given these factors, you should be prepared to hold your investment (your promissory note) for its full term.
The Issuer Might Need More Capital: An Issuer might need to raise more capital in the future to fund new product development, expand its operations, buy property and equipment, hire new team members, market its products and services, pay overhead and general administrative expenses, or for a variety of other reasons. There is no assurance that additional capital will be available when needed, or that it will be available on terms that are not adverse to your interests as an Investor. If the company is unable to obtain additional funding when needed, it could be forced to delay its business plan or even cease operations altogether.
Changes in economic conditions could hurt an Issuer’ s businesses: Factors like global or national economic recessions, changes in interest rates, changes in credit markets, changes in capital market conditions, declining employment, decreases in real estate values, changes in tax policy, changes in political conditions, and wars and other crises, among other factors, hurt businesses generally and small, local businesses in particular. These events are generally unpredictable.
No Registration Under Securities Laws: The securities sold on Fundify will not be registered with the SEC or the securities regulator of any state. Hence, neither the companies nor their securities will be subject to the same degree of regulation and scrutiny as if they were registered.
Incomplete Offering Information: Title III does not require us or the issuer to provide you with all the information that would be required in some other kinds of securities offerings, such as a public offering of shares (for example, publicly traded firms must generally provide investors with quarterly and annual financial statements that have been audited by an independent accounting firm). Although Title III does require extensive information as described on our site, it is possible that you would make a different decision if you had more information.
Lack of Ongoing Information: Companies that issue securities using Title III are required to provide some information to Investors for at least one year following the offering. However, this information is far more limited than the information that would be required of a publicly reporting company; and the company is allowed to stop providing annual information in certain circumstances.
Breaches of Security: It is possible that our systems would be “hacked,” leading to the theft or disclosure of confidential information you have provided to us. Because techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until they are launched against a target, we and our vendors may be unable to anticipate these techniques or to implement adequate preventative measures.
Uninsured Losses: A given company might not buy enough insurance to guard against the risks of its business, whether because it doesn’t know enough about insurance, because it can’t afford adequate insurance, or some combination of the two. Also, there are some kinds of risks that are simply impossible to insure against, at least at a reasonable cost. Therefore, any company could incur an uninsured loss that could damage its business.
The Owners Could Be Bad People or Do Bad Things: Before we allow a company on our platform, we run certain background checks, including criminal background checks. However, there is no way to know for certain that someone is honest, and even generally honest people sometimes do dishonest things in desperate situations – for example, when their company is on the line, or they’re going through a divorce or other stressful life event. It is possible that the management of a company, or an employee, would steal from or otherwise cheat the company and you.
Unreliable Financial Projections: Issuers might provide financial projections reflecting what they believe are reasonable assumptions concerning their businesses. However, the nature of business is that financial projections are rarely accurate, not because issuers intend to mislead Investors but because so many things can change, and business is so difficult to predict.
Limits on Liability of Company Management: Many companies limit the liability of management, making it difficult or impossible for Investors to sue managers successfully if they make mistakes or conduct themselves improperly (not all liability can be waived, however). You should assume that you will never be able to sue the management of any company, even if they make decisions you believe are plainly wrong.
Changes in Laws: Changes in laws or regulations, including but not limited to zoning laws, environmental laws, tax laws, consumer protection laws, securities laws, antitrust laws, and health care laws, could adversely affect many companies.
Conflicts of Interest with Us: In most cases, we make money as soon as you invest. You, on the other hand, make money only if your investments turn out to be successful. Or to put it a different way, at least in the short term, it is in our interest to have you invest as much as possible in as many companies as possible, even if they all fail and you lose your money.
Conflict of Interest with Companies and their Management: In many ways, your interests and the interests of company management will coincide: you both want the company to be as successful as possible. However, your interests might be in conflict in other important areas, including these:
- You might want the company to distribute money, while the company might prefer to reinvest it back into the business.
- You might wish the company would be sold so you can realize a profit from your investment, while management might want to continue operating the business.
- You would like to keep the compensation of managers low, while managers want to make as much as they can.
Lack of Professional Advice: Because of the limits imposed by law, you might invest only a few hundred or a few thousand dollars in a given company. At that level of investment, you might decide that it’s not worthwhile for you to hire lawyers and other advisors to evaluate the company. Yet if you don’t hire advisors, you are in many respects “flying blind” and more likely to make a poor decision.
Future Investors Might Have Superior Rights: If the company needs more capital in the future and sells stock to raise that capital, the new investors might have rights superior to yours. For example, they might have the right to be paid before you are, to receive larger distributions, to have a greater voice in management, or otherwise.
Our companies will not be subject to the corporate governance requirements of the national securities exchanges : Any company whose securities are listed on a national stock exchange (for example, the New York Stock Exchange) is subject to a number of rules about corporate governance that are intended to protect investors. For example, the major U.S. stock exchanges require listed companies to have an audit committee made up entirely of independent members of the board of directors (i.e., directors with no material outside relationships with the company or management), which is responsible for monitoring the company’s compliance with the law. Companies listed on Fundify typically will not be required to implement these and other stockholder protections.
Risks Associated with Debt Securities
You Have a Limited Upside: As a creditor of the company, the most you can hope to receive is your money back plus interest. You cannot receive more than that even if the company turns into the next Facebook.
You Do Have a Downside: Conversely, if the company loses enough value, you could lose some or all your money.
Subordination To Rights Of Other Lenders: Typically, when you buy a debt security on Fundify, while you will have a higher priority than holders of the equity securities in the company, you will have a lower priority than some other lenders, like banks or leasing companies. In the event of bankruptcy, they would have the right to be paid first, up to the value of the assets in which they have security interests, while you would only be paid from the excess, if any.
Lack of Security: Sometimes when you buy a debt security on our platform, it will be secured by property, like an interest in real estate or equity. Other times it will not.
Lack of Guaranty: Sometimes when you buy a debt security on our platform, it will be guaranteed by the owner of the business or by someone else. Other times it will not.
Issuers typically will not have third-party credit ratings: Credit rating agencies, notably Moody’s and Standard & Poor’s, assign credit ratings to debt issuers. These ratings are intended to help investors gauge the ability of the issuer to repay the loan. Companies on our platform generally will not be rated by either Moody’s or Standard & Poor’s, leaving investors with no objective measure by which to judge the company’s creditworthiness.
Interest Rate Might Not Adequately Compensate You for Risk: Theoretically, the interest rate paid by a company should compensate the creditor for the level of risk the creditor is assuming. That’s why consumers generally pay one interest rate, large corporations pay a lower interest rate, and the federal government (which can print money if necessary) pays the lowest rate of all. However, the chances are very high that when you lend money to a company on our platform (buying a promissory note is the same as lending money), the interest rate might not compensate you adequately for the level of risk.
Risks Associated with Equity Securities
Equity Comes Last in the Capital Stack: The holders of the equity interests stand to profit most if the company does well, but stand last in line to be paid when the company dissolves. Everyone – the bank, the holders of debt securities, even ordinary trade creditors – has the right to be paid first. You might buy equity hoping the company will be the next Facebook, but face the risk that it will be the next Theranos.
In Most Cases, You Will Be A Minority Investor: Investors will typically be “minority” owners of companies on Fundify, meaning that other parties will have complete voting and managerial control over the company. As a minority stockholder, you typically will not have the right or ability to influence the direction of the company. You will generally be a passive Investor. In some cases, this may mean that your securities are treated less preferentially than those of larger security holders.
Possible Tax Cost: Many of the companies on Fundify will be limited liability companies. In almost every case these limited liability companies will be taxed as partnerships, with the result that their taxable income will “flow through” and be reported on the tax returns of the equity owners. It is therefore possible that you would be required to report taxable income of a given company on your personal tax return, and pay tax on it, even if the company doesn’t distribute any money to you. To put it differently, your taxable income from a limited liability company is not limited to the distributions you receive.
Your Interest Might Be Diluted: As an equity owner, your interest will be “diluted” immediately, in the sense that (1) the “book value” of the company is very likely to be lower than the price you are paying, and (2) the Founder of the company, and possibly others, bought their stock at a lower price than you are buying yours. Your interest could be further “diluted” in the future if the company sells stock at a lower price than you paid.
Future Investors Might Have Superior Rights: If the company needs more capital in the future and sells stock to raise that capital, the new investors might have rights superior to yours. For example, they might have the right to be paid before you are, to receive larger distributions, to have a greater voice in management, or otherwise.
Dilution of Voting Rights: Even if you have any voting rights to begin with (and many of the equity securities offered on Fundify will have no voting rights), these rights will be diluted if the company issues additional equity securities.
Our companies will not be subject to the corporate governance requirements of the national securities exchanges: Any company whose securities are listed on a national stock exchange (for example, the New York Stock Exchange) is subject to a number of rules about corporate governance that are intended to protect investors. For example, the major U.S. stock exchanges require listed companies to have an audit committee made up entirely of independent members of the board of directors (i.e., directors with no material outside relationships with the company or management), which is responsible for monitoring the company’s compliance with the law. Companies listed on Fundify typically will not be required to implement these and other stockholder protections.