We love crowdfunding here at CrowdCheck, and we really believe it is a great opportunity to invest in some interesting, novel and amazing companies. And you may have sorted through the companies to discover what you believe will be the next Facebook or Google. And you may be right and may have found your pink unicorn with rainbows, sparkles and all things shiny. But then you read what you have purchased, only to discover that the security that you think you have purchased doesn’t hold the windfall that you are expecting. There may be provisions and/or terms in the security or in the subscription agreement that you sign to purchase that security that detract from what you have purchased, either in its current value or in investment potential.
It is as important to know what you have purchased as it is to know about the company issuing the security. When buying securities under Regulation CF, remember that, unlike Regulation A offerings, the SEC has not reviewed the offering statement to make sure that the terms of the securities are clearly disclosed to investors.
Some provisions and terms to be on the look out for include the following:
- Redemption provisions – these are provisions that may allow a company to buy back the security. There is no set rule on when a redemption provision kicks in (i.e., under what circumstance a company can repurchase the security), at what price (i.e., how much they need to pay you to buy it back or how the price will be determined), etc. However, we did see a company try to leave itself the opportunity to redeem at any time at the original sales price – talk about limiting any upside potential!
- Voting terms – you may think you are buying voting securities, only to discover that the subscription agreement contains a clause granting voting rights to the CEO through an irrevocable proxy. Many companies use this tool, but if they do it should be clearly disclosed that the company is selling non-voting securities.
- Transfer restrictions – you are purchasing securities under Reg CF and think that they will be freely tradable (or at least after the one-year holding period under Reg CF). However, a deeper dive into the documents may reveal that the company has placed onerous restrictions on transferability (for instance, the issuer’s prior approval or an opinion of counsel (at your expense of course) is required for transfers). All items that may make it hard for you to sell your security when it has reached its potential.
None of the items listed above are per se deal killers but you should be aware of what you are purchasing, and the issuer should detail these terms in your offering documents – including in the risk factor section and the description of the securities. We implore you to both read all the disclosure, especially when written by a reputable firm, and to look through the offering documents itself. Also, if CrowdCheck has done a due diligence report for the company, this information will be clearly laid out for you in our report as well. Read any diligence report as well as reading the Form C carefully!