If you own equity in a company, you become a shareholder of the company and own a small part of the business. Whether or not you have a vote in the direction of the company depends on what sort of shares the company is offering. Crowdfunding investors, unlike venture capitalists or angel investors who make large investments, are unlikely to have any say in the company's direction. Until the company "goes public" and does an IPO, the only way to get any of your money back is through the private markets, e.g. by finding an accredited investor to buy your shares, selling the shares back to the company (if the company wants to buy them), or selling the shares to an Angel Investor or venture capitalist who is interested in the company. It is not as easy as selling shares on the public markets. Equity can also be subject to dilution.
All the jargon used in investing can seem overwhelming at times. Explore the Lexicon to learn the language that will help make you a smart investor.
The exemption that is going to be available for crowdfunding is Section 4(6) of the Securities Act. It will be available for offers and sales made through a registered portal. This means that until portals are registered, an investor cannot make an investment in crowdfunding stock or bonds, and startups cannot legally make offers or sales of crowdfunding securities.
Other exemptions to registration include private placements under Section 4(2) of Reg D, which is mainly restricted to accredited investors; Rule 144A which is restricted to qualified institutional buyers, specific securities under Section 3, transactional exemptions under Section 4, international securities under Reg S, Private Investment in Public equity (a PIPE deal), etc.
An investor holding crowdfunding securities has limited exit options. These include selling the securities back to the company, selling to an accredited investor, selling in a registered offering of securities (e.g. an IPO), selling to a family member on death or divorce, and other restrictions imposed by the SEC.
FINRA is a self-regulatory organization for all securities firms doing business in the United States. FINRA sets its own rules and regulations in consultation with the Securities and Exchange Commission.
An audit is an examination and evaluation of the financial statements of an organization. An audit is required for offers of more than $500,000 under the CROWDFUND Act. An auditor will ascertain the validity and reliability of information contained in the financial statements. An auditor typically issues an opinion as to whether the financial statements are presented fairly in all material respects. An audit is not a total guarantee of accuracy as it seeks to provide only reasonable assurance that the financial statements are free from error.
During a financial statement review, an accountant will review the financial statements prepared by a company to establish whether there are material modifications necessary to bring the statements into conformity with an applicable financial reporting framework. This process is less intensive than an audit and is required for offerings between $100,000 and $500,000 under the CROWDFUND Act.
A report summarizing the financial conditions of a company over a specified period of time. Financial statements generally include the balance sheet and income statement of a company, and often a statement of cash flows.
All crowdfunding transactions must be made through a broker or funding portal registered with the SEC. Funding portals are subject to many regulations. Some highlights are that the funding portal must be registered with the SEC and a self-regulatory organization, provide SEC-mandated disclosures and investor education material, ensure that investors review the education material and demonstrate understanding of the risks involved, take measures to reduce the risk of fraud, make information regarding the company available to investors at least 21 days before any sales take place, and protect investor privacy.
All income received by a company without deducting costs.