Investor Education

Investor Education Provided by              

What is Crowdfunding?

Crowdfunding is the process of raising money to fund what is typically a business venture or project through many investors or donors using an online platform. As well as funding entrepreneurs, crowdfunding platforms also raise funds for a range of creative and charitable campaigns.    

Under rules effective May 16, 2016, all U.S.-based investors now have the opportunity to participate in the capital raising activities of start-up and early-stage private companies. Businesses based in the U.S. that meet certain criteria are able to offer securities to individuals through online funding ‘portals’.

What is Private Equity Crowdfunding?

Private Equity Crowdfunding offers individual investors the opportunity to fund a business in return for an ownership share in the company, a share of the revenues generated by the company, a loan to the company or a loan that could convert to equity in the company. The types of securities offered by private companies on this platform include equity (both common stock and preferred stock), debt, convertible securities and revenue participation notes. It is the responsibility of the company offering the securities on this platform to describe the specific risks associated with the type of security that they are offering as a part of their Form C as filed with the Securities and Exchange Commission. It is also the responsibility of the company Offering securities on this platform to ensure that the information they file with the Securities and Exchange Commission is complete and accurate. The risks associated with the security that a company Offers should be evaluated within the context of facts and circumstances applicable to each company and the risks associated with investing in private companies. In other words a top down approach of understanding the risks associated with investing in private companies as described in this education material must be accompanied with a bottom up approach to evaluating the risks as described by the companies that are Offering a specific security to be effective. (“CSF”) is a SEC registered funding portal offering access to these private equity investments.

Private equity investing itself has been around for years, but has tended to be the preserve of ‘angel’ investors and venture capitalists. More recently, high net worth accredited investors have been able to participate in private equity investing through online funding portals. 

All individuals investing in private equity crowdfunded securities offerings must comply with limitations based on investor’s net worth and annual income. Due to the risks involved with this type of investing, U.S. regulatory authorities have set specific limits for these transactions in any 12-month period.

Do I have to invest through an online platform?

An individual can invest in private equity crowdfunded offerings only through an online platform.These platforms include funding portal websites and mobile apps, as well as broker-dealer portals.  Companies may not offer crowdfunded securities to investors directly. Investors must use a registered broker-dealer or registered funding portal.

Acting in its capacity as a registered funding portal, CSF facilitates the matching of private companies seeking to raise capital with individuals seeking to make private equity investments. CSF does not provide investment advice or recommendations to individuals. 

Please consult with an investment advisor regarding your overall investment goals and risk parameters to determine how private equity investing may fit into your overall investment strategy.

What is the Investor Education Requirement?

Funding Portals must provide individual investors with educational information in compliance with regulatory requirements. The investor education requirement is intended to facilitate a better understanding of the general features and risks to which an individual is exposed when making a private equity investment online via a crowdfunding portal. 

Consultation with a professional investment advisor before making any private equity investment is a prudent step for individuals planning to make an investment in a company via a crowdfunding portal. 

What are the Private Equity Investment Limitations?

There are NO investment limits for Accredited Investors.

For Non Accredited Investors investment limitations apply.

Investment Limitations for No Accredited Investors;

If either your annual income or your net worth is less than $107,000, then during any 12-month period, you can invest up to the greater of $2,200 or 5% of the greater of your annual income or net worth.

If both your annual income and your net worth are equal to or more than $107,000, then during any 12-month period, you can invest up to 10% of annual income or net worth, whichever is greater, but not to exceed $107,000.

Calculating net worth involves adding up all your assets and subtracting all your liabilities. The resulting sum is your net worth.

For purposes of determining eligibility in crowdfunding offerings, the value of your primary residence is not included in your net worth calculation.

       Please note: Any mortgage or other loan on your home does not count as a liability up to the fair market value of your home.  If the loan is for more than the fair market value of your home (i.e., if your mortgage exceeds your home’s likely resale price), then the loan amount that is over the fair market value counts as a liability under the net worth test.

       Further, any increase in the loan amount in the 60 days prior to your purchase of the securities (even if the loan amount doesn’t exceed the value of the residence) will count as a liability as well.  The reason for this is to prevent net worth from being artificially inflated through converting home equity into cash or other assets.
The following table provides a few hypothetical examples of calculating the 12 month limit on your private equity crowdfunded investments:

Source: U.S. Securities and Exchange Commission, Investor Bulletin 2/16/16
Questions regarding specific individual crowdfunding eligibility should be directed to a qualified professional.

What are the Primary Risk Considerations?

An individual considering a private equity offering via a crowdfunding platform should be aware that private equity investments may involve very high risks. 

Individual investors should thoroughly research any offering before making an investment decision.  Investors should read and fully understand the information about the company and the risks that are disclosed before making any investment. The risk factors involved with private equity investing include, but are not limited to:

Potential Loss of Investment

Due to the fact that many new businesses fail, private equity investments are highly speculative. Unlike an investment in a mature business where there is a track record of revenue and income, the success of a startup or early-stage venture often relies on the development of a new product or service that may or may not find a market. You should be able to afford and be prepared to lose your entire investment. Therefore, an individual should not invest more money in private equity investments than he and or she can afford to lose or without adversely impacting the individual’s standard of living and their associated savings plan as well as their investment plan for retirement.

lliquidity and Lack of Marketability

An individual investor will be limited in their ability to resell their investment for the first year and may need to hold that investment for an indefinite period of time.  Unlike investing in companies listed on a stock exchange where an investor can quickly and easily trade securities on a market, an individual investor may have to locate an interested buyer when they do seek to resell their crowdfunded investment.  Consequently, any investment an individual makes through a crowdfunding platform will likely be highly illiquid. 

Cancellation restrictions   

As detailed under regulations, once an individual makes an investment commitment for a crowdfunding offering, he and or she will be committed to make that investment (unless he and or she cancels the commitment within a specified period of time).  Unless there is a material change affecting the company during the period when securities are being offered, the ability to cancel his and or her investment commitment is limited. Specifically, the individual investor will have up to 48 hours prior to the end of the offer period to change your mind and cancel your investment commitment for any reason. 

Once the offering period is within 48 hours of ending, the individual investor will not be able to cancel for any reason even if the investment commitment is made during this period.  However, if the company makes a material change to the offering terms or other information disclosed to the individual investor, he and or she will be given five business days to reconfirm their investment commitment. Investors should refer to the respective funding portal’s ‘terms of use’ for specific requirements pertaining to the funding portal’s cancellation policies and procedures. 

Valuation and capitalization 

An individual’s crowdfunding investment will typically purchase an equity stake in a startup. Unlike listed companies that are valued publicly through market-driven stock prices, the valuation of private companies, especially startups, is difficult to determine and the individual investor may risk overpaying for the equity stake he and or she receives.  In addition, there may be additional classes of equity with rights that are superior to the class of equity being sold through any given crowdfunding offering.

Limited disclosure  

Regulations stipulate that the issuing company must disclose information about the company, its business plan, the offering, and its anticipated use of proceeds, among other things.  A start-up or early-stage company may be able to provide only limited information about its business plan and operations because it does not have fully developed operations or a long history to provide more disclosure.  The company is also only obligated to file information annually regarding its business, including financial statements. A publicly listed company, in contrast, is required to file annual and quarterly reports and promptly disclose certain events—continuing disclosure that an investor can use to evaluate the status of that investment.  In contrast, an individual investor may have only limited continuing disclosure about their crowdfunding investment.

Investment in personnel  

An start-up or early-stage investment is also an investment in the entrepreneur or management of the company.  Being able to execute on the business plan is often considered an important factor in whether the business is viable and successful. An individual investor should also be aware that a portion of their investment may fund the compensation of the company’s employees, including its management. The individual investor should carefully review any disclosure regarding the company’s use of proceeds.

Possibility of fraud 

In light of the relative ease with which early-stage companies are anticipate to raise funds through crowdfunding, it may be the case that certain opportunities turn out to be money-losing fraudulent schemes. As with other investments, there is no guarantee that crowdfunding investments will be immune from fraud.

Lack of professional guidance  

Companies may partially attribute any early success to the guidance of professional early-stage investors (e.g., angel investors and venture capital firms).  These investors often negotiate for seats on the company’s board of directors and play an important role through their resources, contacts and experience in assisting early-stage companies in executing on their business plans.  An early-stage company primarily financed through crowdfunding may not have the benefit of such professional investors.

Tiered financial disclosure 

The minimum level of financial disclosure required by the company depends on the amount of money being raised or raised by the company in the prior 12 months:
  • $107,000 or less – financial statements and specific line items from income tax returns, both of which are     certified by the principal executive officer of the company. 
  • $107,000.01  to $535,000 – financial statements reviewed by an independent public accountant and the accountant’s review report. 
  • $535,000.01  to $1.07 millionif first time crowdfunding, then financial statements reviewed by an independent public accountant and the accountant’s review report, otherwise,
  • $535,000.01 to $5 million - financial statements audited by an independent public accountant and the accountant’s audit report.
<NOTE> An audit provides a level of scrutiny by the accountant that is higher than a review


Start-ups, early stage and emerging growth private companies do not usually pay dividends. Profits, if any, are typically re-invested into the business to fuel growth, fund capital expenditures and build enterprise value. Companies typically have no obligation to pay equity shareholders dividends and may not disclose that intention. This means that if an investment is made in a private company through a crowdfunding platform, even if the company is successful the crowdfunding investor is unlikely to see any return of capital or return on capital until there is a liquidity event for the issuing company. As already mentioned, even for a successful business this is unlikely to occur for a number of years from the time the initial investment is made. 


Any investment that an individual makes through a crowdfunding platform is likely to be subject to dilution. This means that if the company raises additional equity capital at a later date, it will issue new common or preferred shares in the company to the new investors, and the percentage of the issuing company that the investor previously owned will be reduced. These new shares, often effected through a preferred stock offering, may also have certain preferential rights to dividends, sale proceeds and other matters, and the exercise of these rights may work to the previous investor’s disadvantage.Dilution can also occur as a result of the grant of options (or similar rights to acquire shares) to employees of the issuing company and or to service providers and other parties connected closely with the management of the company.

Agency and Control 

An agency relationship arises whenever one party delegates decision-making authority or control over resources to another party. This will likely be the case for individuals making a private equity investment. While agency and control relationships often work well, problems may arise if Management and or Members of the company’s Board of Directors make decisions that are not in the best interests of the company’s shareholders.


Voting rights, privileges and restrictions can vary considerably with different classes of equity securities.


Investing in start-ups and early stage private companies should ideally be done as part of a diversified portfolio strategy. This means that an investor in private equity should invest in a manner that is suitable to his and or her individual financial situation and investment strategy. Risk tolerance, return objectives and financial constraints should be an integral part of the process of determining if investments in private companies are suitable for you.


What are the distinctions of being a crowdfunding investor?

Being a crowdfunding investor is different than being a shareholder in a publicly listed company.  For example, an individual cannot sell their shares at any time, in contrast to investors holding shares in a publicly listed company. In fact, the individual crowdfunding investors are restricted from reselling their shares for the first year, unless the shares are transferred:
  • to the company that issued the securities; 
  • to an accredited investor
  • to a family member
  • in connection with your death or divorce or other similar circumstance; 
  • to a trust controlled by you or a trust created for the benefit of a family     member; 
  • as part of an offering registered with the SEC.
Another difference from being a shareholder of a publicly listed company is the amount of information you would receive about your investment. Publicly listed companies generally are required to disclose information about their performances at least on a quarterly and annual basis and on a regular basis about material events that affect the company. In contrast, crowdfunding companies are only required to disclose annually their results of operations and financial statements.  

Can the rewards really make the risk worthwhile?

Provided that an individual take steps to fully understand the company and the risks involved, investing in private equity may potentially prove rewarding and passively involve that individual in promising new businesses as a private equity investor.  However, investors should be prepared for the associated risks, including the potential of losing the principal invested and the lack of a ready secondary market.
Besides the potential financial returns, there are other possible benefits to investing in private equity. These potential benefits include helping to fund new ideas, innovation, as well as the next generation of successful American businesses, creating jobs and engaging with some fascinating entrepreneurs and potentially likeminded investors.

Are there steps that can be taken to help mitigate the investment risks?

There are a number of steps an individual can take to help mitigate the risks involved in private equity investing. These include involving a qualified investment advisor in the investment planning process. Additionally, an individual investor should fully understand all the terms, conditions and risks detailed within the respective offering document as well as adequately research the industry in which the company operates, its competitors, its addressable market, prospects for success and perform extensive due diligence on the company. 

What are some of the ways that an individual investor may conduct due diligence on a company prior to making a private equity investment?

It is important that an individual investor take the time to fully understand each investment he and or she may make via a crowdfunding platform. A company that offers securities through a crowdfunding platform must comply with specific disclosures and ongoing reporting requirements as mandated by the SEC.
The Form C that the Issuer files with the SEC as a requirement to offer securities using the crowdfunding exemption via a crowdfunding portal is available as a download in several places including the SEC Edgar data repository, the issuing company and the funding portal websites. The Form C filing will contain information on the issuing company. This mandated SEC filing includes required disclosures about the company, its business plan, financial condition, the securities being offered to investors and other essential information which the individual investor should carefully read, review and understand, including:
·      Company’s (issuer) name, legal status, mailing and email address
·      Names of Directors and Officers, as well as each person holding a beneficial interest of 20% of more of the shares of the issuer
·      A description of the business of the issuer and the anticipated business plan
·      A description of the financial condition of the issuer
·      A description of the stated purpose and intended use of proceeds from the offering
·      The target offering amount, the deadline to reach the target and regular updates about the progress of the offering
·      The price to the public of the securities or the method for determining the price
·      A description of the ownership and capital structure of the issuer, including:
o  Terms of the securities being offered
o  Each other class of securities
o  Number of shares offered and outstanding
o  Voting rights
o  Any limitation to Voting Rights
o  Summary of differences between offered securities and other classes
o  The risks to purchasers
o  Minority interest
o    Corporate actions
·      Additional issuances
·      Share repurchases
·      Sale of issuer or assets
·      Transactions with related parties
o  Name and ownership level of 20% beneficial owners
o  Description on the restrictions on transfer of ownership
o  How the securities being offered are being valued currently and may be valued in the future, including during subsequent corporate actions
·      Additional disclosures
o  Registered Intermediary Name, SEC File Number and CRD#
o  Compensation paid to the Registered Intermediary for conducting the offering, including the amount of any referral or other fees associated with the offering
o  Certain legends in the offering statement, including the risks of investing in a crowdfunding transaction & required reporting
·      Current number of employees
·      Risk factors
·      Indebtedness
·      Prior exempt offerings, in any
·      Related party transactions, limited to those occurring since the beginning of the issuer’s last fiscal year, and only those that cumulatively exceed 5% of the aggregate capital raised during the preceding 12 months
·      Issuer to disclose the location on its website where investors can find the issuer’s Annual Report and the date by which the Report will be available
·      Disclosure to include any material information necessary in order to make the statements made, in light of circumstances under which they were made, not misleading
·      An Issuer must disclose whether it or any of its predecessors previously failed to comply with the ongoing reporting requirements of Regulation Crowdfunding         
It is typically very difficult to forecast financial performance accurately for early stage private companies, and actual performance will often differ from the forecasts as disclosed in the company’s Form C filing. However, such forecasts can give a good indication of what the company perceives and represents its potential could be.

What are follow-on or new funding rounds?

It is anticipated that due to the startup phase that most companies will be in while presenting offerings on crowdfunding platforms, most companies that raise money on a crowdfunding platform will likely need to raise further funding in future. If an existing investor does not participate in follow-on or new funding rounds that occur at a time in the future then his and or her percentage ownership of the company will be reduced. 


To learn more about crowdfunding, see the recently adopted SEC rules.

For information about Investment Advisors see Investment Adviser Public Disclosure (IAPD) website, visit

For information about Registered Broker Dealers and Registered Funding Portals see FINRA’s BrokerCheck, visit

For information on how to search for company documents in the SEC’s EDGAR database, see Using EDGAR - Researching Public Companies.

For another resource for using EDGAR, see Researching Public Companies Through EDGAR: A Guide for Investors.

For more information about accredited investors, see SEC Investor Bulletin.

For additional investor educational information, see the SEC’s website for individual investors,    

For information on private placements in general, see

Summary of Risk Considerations and Individual Investor Affirmations

Individuals that sign on to CSF’s crowdfunding portal must acknowledge that they have read and understand the CSF Investor Education information before they are given permission to gain access to the securities offered for investment consideration. In addition, individuals that request access to view and potentially participate in an offering of securities via the CSF crowdfunding portal must complete a Questionnaire. The Questionnaire is intended to affirm the individual investor’s understanding of certain risks and representations, including:

a.    An affirmation that the loss of an entire investment is possible.
b.   An affirmation that bearing such a loss would be within the risk tolerance of your overall investment portfolio.
c.    An affirmation that the individual investor is qualified to determine that private equity is a suitable investment for him and or her or that the individual investor has been advised to that effect by his and or her investment advisor.
d.   An affirmation of the risk associated with the illiquidity of private equity investments (the restrictions on opportunities to buy or sell ownership interests in private equity companies).
e.   An affirmation that the risk of having limited voting power as a result of the small dollar amount invested and the potential dilution of private equity ownership.
Investing via CSF’s Platform
Please note: In consideration of the breadth and depth of information required to make informed decisions regarding the securities offered via CSF’scrowdfunding platform, we encourage investors to consult with an investment advisor. 
Every investor registered on this site is required to read and review this investor education section. In addition to the previous overview & risk consideration sections, each registered investor must acknowledge and affirm the following eight criteria for participation:
1. You have reviewed the process for the offer, purchase and issuance of security through CSF’s platform 
2. You are aware of the types of securities offered on CSF’s platform and associated security-specific risks: 
3. You are aware of the restrictions on the resale of securities offered through the CSF portal.
4. You have been informed of the type of information which an Issuer must disclose and separately must report on an annual basis and the possibility that the issuer’s obligation to file annual reports may terminate in the future.
5. You are aware of the limits of the investable amount on this and similar registered portals, specifically;
--  No Non Accredited Investor in a 12-month period may purchase crowdfunded securities that, in aggregate, from all issuers, exceed the greater of $2,200 or 5% of the greater of Annual Income or Net Worth, as applicable, if either the Annual Income or Net Worth of the investor is less than $107,000.
--  If both Annual Income and New Worth exceed $107,000, the limit is 10% of the greater of Annual Income or Net Worth, as applicable, not to exceed a maximum aggregate amount of $107,000.
6.  You are aware of the circumstances where the issuer can cancel an offering and on an investor’s right to cancel an order up to 48 hours prior to a scheduled closing.
7.  Following the completion of an offering there may or may not be any ongoing relationship between an issuer and CSF
8.  You are able to assume the risks associated with private equity investing, including:
a.  an understanding that the loss of entire investment is possible
b.  that bearing such a loss would be within the risk parameters of your overall investment portfolio
c.   an understanding of the level of risk typically applicable to investments in startups
d.  an appreciation of the level of risk generally applicable to emerging businesses and small issuers
e.  an understanding the risk of illiquidity
f.    your acknowledgement that investing in start-up companies may or may not be appropriate for a given investor
Please Note: CSF will maintain current versions of all educational materials and make revised materials available to all investors prior to accepting any additional investment commitments or effecting further transactions of securities offered through our platform.
(The section below links from ‘process’ above in item 1 above and from the Investor Questionnaire)
Process for Offering, Sale and Issuance of Securities 
All crowdfunding transactions must be facilitated through a Registered Intermediary such as CSF, a platform for U.S. investors operating under SEC & FINRA guidelines. The following 10 steps describe of process of making an investment through the CSF portal:
1.  You will register as an investor, providing CSF with contact information, your occupation and the name of your primary financial institution (bank or broker-dealer).

2.  You will create an account after reading and acknowledging investor disclosure information.

3.  You will be required to submit an investor questionnaire affirming your understanding of the risks and process of investing through CSF’s platform. You should commit ample time to reading and understanding the investor education section prior to reviewing current investment opportunities listed on this site.

4.  After completing the investor education materials, you will affirm that you have read and understand the required investment disclosures, including information on reps, warranties and indemnifications.

5.  After establishing your account and completing the investor education questionnaire, you will then be able to see available offerings on CSF’s platform. For each currently available offering, you will be able to access the company’s description and business plan, including the following information:

a.  Total funds the company is seeking to raise
b.  Total number of shares offered
c.   Estimated valuation of outstanding shares after offering
d.  Closing date of the offering
e.  Shares sold to date
f.    Registered investors
g.  Participating investors

You will have an opportunity to post messages and discuss the company’s business strategy in an online community of potential investors prior to placing an order
6.  To place an order, you will first determine your maximum allowable amount. You will provide certain financial information and your year-to-date equity crowdfunding investments. After your maximum investable amount is established, you will enter the actual number of shares that you wish to purchase.

7.  You will finalize an order by contacting a third party provider to submit payment.

8.  You will receive order information subject to final sale. It will be your responsibility to cancel an order (if appropriate) no later than 48 hours prior to the designated closing date. You will receive final order confirmation from CSF on the closing date.

9.  You will have continuing access to discussion boards and alerts on topics such as new investor education content. 

10. If an issuer does not complete an offering on a specified date, each investor will receive notification of the cancellation within five business days. The notification must disclose the reason for the cancellation and the refund amount that the investor is expected to receive.

11.  Securities issued in a transaction via a crowdfunding platform may not be transferred during a one-year period beginning when the securities were issued, unless the securities are transferred to the issuer of the securities, to an accredited investor, as part of an IPO, or to a family member of the purchaser. This would include a trust controlled by the purchaser, a trust created for the benefit of a member of the family of the purchaser, or in connection with the death or divorce of a purchaser.

This educational material has been prepared in accordance with requirements under SEC Rule 302. No regulatory body has endorsed or approved these educational materials. This educational material is for informational purposes only and does not constitute an offer, solicitation or endorsement of any specific investment product or financial strategy. Specific investment terms are for illustration purposes only and may not reflect the actual terms of an investment product available for purchase via the Firm’s platform. 

This educational material may not contain a complete discussion of investment terms or risks and you should only rely on the information contained in relevant prospectus and/or offering documentation prior to purchasing an investment product. Any investments or strategies referenced herein do not take into account the investment objectives, financial situation or particular needs of any specific person. Suitability of these securities must be independently determined for each individual investor. The Firm explicitly disclaims any responsibility for product suitability. 

Any investment security sold prior to maturity may be worth more or less than the original amount invested.  Depending upon the specific investment product, investment risks include, but are not limited to, interest rate risk, credit risk, call risk and liquidity risk.  Additionally, unless otherwise specified in the respective offering documentation, the product(s) discussed herein are not FDIC insured, may lose value, and are not bank guaranteed.  Investors should carefully review and understand the offering documents and consult with their financial and tax advisors prior to investing in any investment product(s). Past performance is not indicative of future results.
Investment securities described herein may not be offered for sale in any state or jurisdiction in which such an offer, solicitation or sale would be unlawful or prohibited by the specific offering documentation.

© 2021 All rights reserved. This material is strictly for specified recipients only and may not be reproduced, distributed or forwarded in any manner without written permission.

Glossary of Crowdfunding Terms

Accredited Investors: There are two ways in which an individual can be an accredited investor. One of the following must be true in order for an individual to be an accredited investor. 
·      First, an accredited investor must have at least $1 million in net worth at the time of investment. This worth can be measured jointly with a spouse as well. 
·      Second, an accredited investor must have an income of more than $200,000 in each of the two previous fiscal years.
·      However, if the income is joint with a spouse, the previous yearly income must be more than $300,000.

Acquisition: An acquisition may occur when a larger company purchases a controlling interest in an early stage company. Acquisition by a larger company is a common goal for startups pursuing equity campaigns.

Add-on services: Assistance an investor may provide to your company aside from their monetary contribution— for example, making introductions to other investors, helping to assemble a management team or helping to prepare for an IPO.

Angel Investors: An angel investor is an individual who makes an early investment in a start-up or company in exchange for debt or equity in said company. Angel investors can often organize themselves into groups in order to pool investments. This investor can also be an early advisor to the company as well.

Benchmarks: Performance goals used to measure the success of a company. Many investors use certain benchmarks – for example, yearly revenue or yearly increase in sales – to decide whether a company merits additional funding.

Buyout: The purchase of either a company or a controlling interest in a company’s shares or business. A buyout is often the long-term goal of startups and other businesses pursuing equity fundraise campaigns.

Board of directors: A group of people elected to act as representatives of the stockholders in a company. Members of the board of directors handle management-related policies and make decisions regarding major company issues, including the hiring/firing of executives, options policies and executive compensations. The board of directors should fairly balance the interests of both management and shareholders alike.

Bootstrapping: Bootstrapping involves a founder, or founders, using personal finances to fund a new company. This is often sought after due to the fact that founders will not have to dilute their ownership in a company they are starting. Crowdfunding can be useful to a bootstrapped company as it can provide a platform for communicating and networking between new companies and the individuals working at them.

Cap table: Short for the “Capitalization Table”, a cap table is a detailed list of exactly how much stock each entity or person owns. Think of it like a spreadsheet that simply lists names and percentage ownership stakes, all adding up to 100%.

Common vs. preferred stock: There are many “classes” of stock that can be issued in a company, and each class may have its own rights and preferences. Investors often receive preferred stock, which may give them preferences such as the ability to get their investment back first, before the rest of the common stock holders get their proceeds. Founders and employees are usually left with common stock, which means they’re usually the last people to get paid.

Convertible note: A convertible note is a loan made to a company that can be converted into stock by the choice of the issuer or holder at certain events. Each note has an interest rate, a maturity date, and may come with the option to convert at a discount at a future round or time.

Dilution: The effect of giving someone else part of the company’s stock is considered “dilution”. It means that you are diluting your equity stake to make room for someone else. 

Donation-Based Crowdfunding: Donation-Based Crowdfunding: This is similar to reward-based crowdfunding. An investor makes a “donation” to a company and receives value in the form of a product in return. Kickstarter uses this model to essential pre-sale products.

Drag along rights: Designed to protect the majority shareholder in a company, drag-along rights enable a majority shareholder to force a minority shareholder to agree to the sale of a company. The majority owner is required to give the minority shareholder the same price, terms and conditions as any other seller, with the goal of eliminating minority owners and securing 100% of the company’s stocks to the buyer.

Due diligence: The process of investigation and evaluation of the details of a company, which investors complete before they make the final decision whether to invest in that company.

Equity-Based Crowdfunding: Equity-based crowdfunding involves an investor receiving a portion of the company in return for his or her investment. Essentially, the investor will become a shareholder in the company and be able to vote on decisions to be made. Furthermore, the investor may be able to sell his or her share, or a portion thereof, in the future for the current market value. There are certain risks to equity-based crowdfunding as with any other types of investments. 

Executive Summary: A non-technical summary statement at the beginning of a business plan that’s designed to encapsulate your reason for writing the plan.

Exit strategy: the means by which an investor “cashes out” of an investment and earns the return on investment that they are seeking in making the investment in the first place. Typical exit strategies include IPO, acquisition and buyout. Also known as a “harvest strategy” or “liquidity event”.

FINRA: The Financial Industry Regulatory Authority is responsible for governing business between brokers, dealers and the investing public. FINRA aims to eliminate regulatory overlap and cost inefficiencies.

Follow-on investment: An additional investment made by an investor who has already invested in a company, typically made once the company is at a later stage of development.

General Solicitation: General solicitation involves publicly seeking an offer through advertising or mass communication such as social media.

Initial public offering: Commonly abbreviated as IPO, is the first time that stock in a private company is made available to the public. An IPO is a common goal for startups pursuing equity campaigns.

Investor Deck: The pitch deck is typically the first thing you will use when interacting with a potential investor. In many ways, it is one of your most important tools. The content of the pitch deck, along with your presentation, can help the investor to determine whether or not to continue evaluating your business opportunity.

JOBS Act: The Jumpstart Our Business Startups Act (JOBS) was created in order to ease security regulations on small businesses. The JOBS act was signed into law on April 5, 2012.
·      JOBS ACT – Title II (Access to Capital for Job Creators): Title II lifts the ban on advertising for regulation D, Rule 506 and Rule 144A offerings. It also lifts the ban on general solicitation.
·      JOBS ACT – Title III (Crowdfunding): Title III allows individuals to make investments in small companies without being accredited investors. The company is allowed to receive up to $5 million over any 12-month period. Non Accredited Investors may not purchase more than $2,200 in securities or a certain percentage of his or her annual income or net worth during a 12-month period.

Regulation D for Crowdfunding: Regulation D Crowdfunding is the process of seeking funding, either equity or debt, online done by private companies.

Return on investment: or ROI, is the profit or loss resulting from an investment. It’s typically expressed in terms of a percentage. For example, if an investor makes a $5,000 investment in a company and gains $15,000 when the company is acquired by a larger company, that’s an ROI of 200%.

Rewards-Based Crowdfunding: Reward Crowdfunding involves the pre-sale of items that will be created if funding goals are met. This type of funding does not attract investors who are looking for monetary gains, but instead attracts individuals who are looking to have new, one-of-a-kind products before anyone else. This means that most projects that are looking for reward crowdfunding have a new product that requires initial investment to begin production. This is essentially the model that Kickstarter uses.

Risk: The likelihood of loss or less-than-expected returns, including the possibility of losing some or all of the initial investment. Risk is typically quantified using the historical returns or average returns for a specific investment. Please note specific risks linked here.*

SEC: The SEC is a federal agency that enforces federal securities laws and oversees the securities industry.

Seed Round Funding: Seed Round Funding involves an investor making an early stage investment in a company in return for a share of the company. This can be an investment made by a family member or friend, an angel investor, and even through crowdfunding. The capital is typically used to help build traction in order to attract attention from venture capitalists in later stages of fundraising.

Series A Funding: Series A Funding is typically done by a company who is looking to raise significant financial capital. This type of funding is often sought after angel funding has already finished. A series A funding round usually involves a venture capital firm making a significant investment in a company in return for a percentage share of it.

Stock option pool: When a company takes on an investment, the investor will usually request (or, more accurately, insist) that you allocate a certain percentage of the company’s shares to a Stock Option Pool for future employees. That pool comes out of your portion of the stock, not the investors. Stock option pools will typically range from as little as 5 points of equity to as much as 20 points.

Term sheet: A non-binding outline of the terms and conditions according to which an investment is to be made—for example, the interest rate of a debt investment, or the valuation for equity. It’s similar to a Letter of Intent in that it indicates a strong interest to move forward, but it’s not the same as guaranteeing an actual deal gets done.

Valuation: An estimation of what your company is worth at a given point in time. While you may be the person who sets the valuation of your company, until an investor agrees to that valuation, and writes a check based on that valuation, it’s not validated.
·      Pre-money valuation is how much the company is worth before the investor puts money into your company. So if you set your valuation to be $2 million, and the angel investor puts in $500,000, your pre-money valuation is $2 million.
·      Post-money valuation is how much the company is worth after the angel investor puts money into your company. So if you set your valuation to be $2 million, and the angel investor puts in $500,000, your post-money valuation is $2.5 million.

Venture Capital: Venture capital usually involves an investment made by a firm in a small company that is seeking growth. This investment is usually much larger than an angel investment and results in the venture capital firm becoming integral in the decision making of the company.

Vesting: A process by which you “earn” your stock over time, much like you earn your salary. The purpose of vesting is to grant stock to people over a fixed period of time so they have an incentive to stick around. A typical vesting period for an employee or Founder might be 3 – 4 years, which would mean they would earn 25% of their stock each year over a 4 year period. If they leave early, the unvested portion returns back to the company.

*Additional Risk Considerations

Every investor (“
Investor”) should be aware that an investment in a single company or multiple companies on a crowdfunding platform (each, a “Startup”) involves a high degree of risk. There can be no assurance that (i) a Fund’s investment objectives will be achieved, (ii) a Startup will achieve its business plan, or (iii) an Investor will receive a return of any part of its investment. The following considerations, among others, should be carefully evaluated before making an investment in a Startup.

Risk Inherent in Startup Investments; an Investor May, and Frequently Does, Lose All of Its Investment

Investments in Startups involve a high degree of risk. Financial and operating risks confronting Startups are significant. While targeted returns should reflect the perceived level of risk in any investment situation, such returns may never be realized and/or may not be adequate to compensate an Investor for risks taken. Loss of an Investor’s entire investment is possible and can easily occur. Moreover, the timing of any return on investment is highly uncertain. 

The Startup market is highly competitive and the percentage of companies that survive and prosper is small. Startup investments often experience unexpected problems in the areas of product development, manufacturing, marketing, financing, and general management, among others, which frequently cannot be solved. In addition, Startups may require substantial amounts of financing, which may not be available through institutional private placements, the public markets or otherwise. 

Changing Economic Conditions

The success of any investment activity is determined to some degree by general economic conditions. The availability, unavailability, or hindered operation of external credit markets, equity markets and other economic systems which an individual Startup may depend upon to achieve its objectives may have a significant negative impact on a Startup’s operations and profitability. The stability and sustainability of growth in global economies may be impacted by terrorism, acts of war or a variety of other unpredictable events. There can be no assurance that such markets and economic systems will be available or will be available as anticipated or needed for an investment in a Startup to be successful. Changing economic conditions could potentially, and frequently do, adversely impact the valuation of portfolio holdings. 

Future and Past Performance

The past performance of a Startup or its management is not predictive of a Startup’s future results. There can be no assurance that targeted results will be achieved. Loss of principal is possible, and even likely, on any given investment. 

Difficulty in Valuing Startup Investments

It is enormously difficult to determine objective values for any Startup. In addition to the difficulty of determining the magnitude of the risks applicable to a given Startup and the likelihood that a given Startup’s business will be a success, there generally will be no readily available market for a Startup’s equity securities, and hence, an Investor’s investments will be difficult to value. 

Minority Investments

A significant portion of an Investor’s investments will represent minority stakes in privately held companies. As is the case with minority holdings in general, such minority stakes will have neither the control characteristics of majority stakes nor the valuation premiums accorded majority or controlling stakes. Investors will be reliant on the existing management and board of directors of such companies, which may include representatives of other financial investors with whom the Investor is not affiliated and whose interests may conflict with the interests of the Investor. 

Lack of Information for Monitoring and Valuing Startups

The Investor may not be able to obtain all desired information regarding a particular Startup, on a timely basis or at all. It is possible that the Investor or may not be aware on a timely basis of material adverse changes that have occurred with respect to certain of its investments. As a result of these difficulties, as well as other uncertainties, an Investor may not have accurate information about a Startup’s current value.

No Assurance of Additional Capital for Startups

After an Investor has invested in a Startup, continued development and marketing of the Startup’s products or services, or administrative, legal, regulatory or other needs, may require that it obtain additional financing. In particular, technology Startups generally have substantial capital needs that are typically funded over several stages of investment. Such additional financing may not be available on favorable terms, or at all. 

Absence of Liquidity and Public Markets

An Investor’s investments will generally be private, illiquid holdings. As such, there will be no public markets for the securities held by the Investor and no readily available liquidity mechanism at any particular time for any of the investments. In addition, an investment will be illiquid, not freely transferrable, and involves a high degree of risk.

Investment in Technologies

The value of an Investor’s interests in Startups may be susceptible to factors affecting the technology industry and/or to greater risk than an investment in a vehicle that invests in a broader range of securities. Some of the many specific risks faced by such Startups include: 

·      Rapidly changing technologies; 
·      Products or technologies that may quickly become obsolete; 
·      Scarcity of management, technical, scientific, research and marketing personnel with appropriate training; 
·      The possibility of lawsuits related to patents and intellectual property; 
·      Rapidly changing investor sentiments and preferences with regard to technology sector investments (which are generally perceived as risky); and 
·      Exposure to government regulation, making these companies susceptible to changes in government policy and delays or failures in securing regulatory approvals. 

Tax Risks

There are many tax risks relating to investments in Startups are difficult to address and complicated. You should consult your tax advisor for information about the tax consequences of purchasing equity securities of a Startup.

Withholding and Other Taxes

The structure of any investment in a Startup may not be tax efficient for any particular Investor, and no Startup guarantees that any particular tax result will be achieved. In addition, tax reporting requirements may be imposed on Investors under the laws of the jurisdictions in which Investors are liable for taxation. Investors should consult their own professional advisors with respect to the tax consequences to them of an investment in a Startup under the laws of the jurisdictions in which the Investors and/or the Startup are liable for taxation.

Conflicts of Interest; Investment Opportunities

Instances may arise in which the interest of a early phase investor (e.g. a Lead Angel investor) may potentially or actually conflict with the interests of its Investors. 

Confidential Information

Certain information regarding the Startups will be highly confidential. Competitors may benefit from such information if it is ever made public, and that could result in adverse economic consequences to the Investors. 

Forward Looking Statements

The information available to Investors may contain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements can be identified by the fact that they do not relate strictly to historical or current facts. Forward-looking statements often include words such as "anticipates," "estimates," "expects," "projects," "intends," "plans," "believes" and words and terms of similar substance in connection with discussions of future operating or financial performance. Examples of forward-looking statements include, but are not limited to, statements regarding: (i) the adequacy of a Startup’s funding to meet its future needs, (ii) the revenue and expenses expected over the life of the Startup, (iii) the market for a Startup’s goods or services, or (iv) other similar maters. 

Each Startup’s forward-looking statements are based on management's current expectations and assumptions regarding the Startup’s business and performance, the economy and other future conditions and forecasts of future events, circumstances and results. As with any projection or forecast, forward-looking statements are inherently susceptible to uncertainty and changes in circumstances. The Startup’s actual results may vary materially from those expressed or implied in its forward-looking statements. Important factors that could cause the Startup’s actual results to differ materially from those in its forward-looking statements include government regulation, economic, strategic, political and social conditions and the following factors: 
·      recent and future changes in technology, services and standards;
·      changes in consumer behavior;
·      changes in a Startup’s plans, initiatives and strategies, and consumer acceptance thereof; 
·      changes in the plans, initiatives and strategies of the third parties that are necessary or important to the Startup’s success; 
·      competitive pressures, including as a result of changes in technology; 
·      the Startup's ability to deal effectively with economic slowdowns or other economic or market difficulties; 
·      increased volatility or decreased liquidity in the capital markets, including any limitation on the Startup’s ability to access the capital markets for debt securities, refinance its outstanding indebtedness or obtain equity, debt or bank financings on acceptable terms; 
·      the failure to meet earnings expectations; 
·      the adequacy of the Startup's risk management framework; 
·      changes in U.S. GAAP or other applicable accounting policies; 
·      the impact of terrorist acts, hostilities, natural disasters (including extreme weather) and pandemic viruses; 
·      a disruption or failure of the Startup's or its vendors' network and information systems or other technology on which the Company's businesses rely; 
·      changes in tax, federal communication and other laws and regulations; 
·      changes in foreign exchange rates and in the stability and existence of foreign currencies; and 
·      other risks and uncertainties which may or may not be specifically discussed in materials provided to Investors. 

Any forward-looking statement made by a Startup speaks only as of the date on which it is made. Startups are under no obligation to, and generally expressly disclaim any obligation to, update or alter their forward-looking statements, whether as a result of new information, subsequent events or otherwise. 

The foregoing risks do not purport to be a complete explanation of all the risks involved in acquiring equity securities in a Startup. Each Investor is urged to seek its own independent legal and tax advice and read the relevant investment documents before making a determination whether to invest in a Startup.