This Investor Education Package 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 contact@wealthfundsus.com. This document is intended to help explain:
We expect to update this document from time to time.
Investing in the companies that will be offered on our Site is very different than investing in the public stock market. The companies hosted on our Site are exclusively real estate syndications, some of whom may have limited or no track records, unproven business models, little profits or even revenue, and managed by individuals with limited experience managing successful real estate syndications.
Wealth Funds LLC is an SEC and FINRA registered Funding Portal. We are an online real estate investment platform that aims to provide investors exposure to a portfolio of primarily cash flowing properties located in markets where we feel the risk-return characteristics are favorable. In other words, when you invest, you are not investing in us or any entity affiliated with us, but instead, you are investing in third-party businesses who have chosen to raise capital on our Site.
Wealth Funds LLC intends to offer investors an opportunity to participate in Regulation Crowdfunding offerings related to both commercial and residential real estate investments. The offerings will include both debt and equity financing opportunities.
With all those caveats, and in view of the risks listed in the “Risks of Investing” section below, 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 circumstances. Among the questions you should ask yourself are:
Only if you can truthfully answer Yes to all those questions should you invest.
These definitions apply throughout this Investor Education Package:
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.
Think of us (and every other Funding Portal) as a marketplace, or a shopping mall, bringing together companies and investors. When you invest, you are not investing in us 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 an intermediary, or marketplace, we do not guarantee any particular outcome 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 job is to facilitate investments and help ensure that transactions between investors and issuers meet legal requirements.
What We Do
What We Don’t Do
Our Relationship with Issuers
Issuers will pay us to be on our Funding Portal. 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 stock. 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.
We will never own any financial interest in Issuers listed on our Funding Portal other than Securities we receive from them as compensation.
After an offering is complete, we might or might not have an ongoing relationship with the Issuer. The Issuer 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.
Communication Channels
We will maintain online communications channels – 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 Issuer, 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.
We, the Funding Portal, generally aren’t allowed to participate in the chat room, except to establish guidelines and remove potentially abusive or fraudulent content.
Under regulations issued by the SEC, we are required to:
It is important to note that we are not required to conclude that Issuers on our Platform represent good investments for investors. In fact, we are not even allowed to tell you if we think that one Issuer is a better investment than another Issuer. You have to make those decisions on your own.
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:
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. As explained above, we will conduct background checks before allowing an Issuer to list on our Platform.
We could offer any kind of Security on the Platform, including:
Sometimes, a company will offer a debt security, like a promissory note, that is “secured” by collateral. This means that, in the event the company does not have enough money to repay your loan or the interest you’ve been promised, you will be entitled to the assets of the company, i.e., the company’s collateral. You will also take priority ahead of other unsecured creditors of the company if you and other unsecured creditors both claim the same assets.
When you review the opportunities at the Site, each opportunity will explain what kind of Security is being offered.
How much you can invest in any 12-month period depends on a combination of your net worth (less the value of your primary residence if you own a home) and your annual income.
Note, that you don't have to make these calculations: your limit is automatically calculated when you become an investor.
If either your annual income or your net worth is less than $107,000, you can invest up to the greater of either $2,200 or 5% of the greater of your annual income or net worth during any 12-month period.
If both your annual income and your net worth are equal to or more than $107,000, then you can invest up to 10% of annual income or net worth, whichever is greater, up to a maximum of $107,000 during any 12-month period.
These limits apply to all investors who do not qualify as “accredited investors.”
The following table provides a few examples:
| Annual Income | Net Worth | Calculation | 12-month Limit |
| $30,000 | $40,000 | greater of $2,200 or 5% of $40,000 ($2,000) | $2,000 |
| $150,000 | $80,000 | greater of $2,200 or 5% of $150,000 ($7,500) | $7,500 |
| $150,000 | $107,000 | 10% of $150,000 ($15,000) | $15,000 |
| $175,000 | $900,000 | 10% of $900,000 ($90,000) | $90,000 |
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.
To calculate your net worth you simply add your assets and subtract your liabilities. The result is your net worth. Please note that for purposes of determining eligibility in crowdfunding offerings, the value of your primary residence is not included in your net worth calculation.
In addition, any mortgage or other loan on your primary residence does not count as a liability up to the fair market value of your primary residence. If the loan is for more than the fair market value of your primary residence (i.e., if your mortgage is underwater), 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.
Remember, 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, however.
EXAMPLE: Investor Smith earns $100,000 per year and has a net worth of $150,000. Investor Smith makes his first Title III investment on December 1, 2022, investing $5,000 in Company X. On November 27, 2023, Investor Smith would like to make his second Title III investment, investing $3,000 in Company Y. But he can’t; he can invest only $2,500 in Company Y. But he could invest $2,500 in Company Y on November 27, 2023 and another $2,500 (actually, up to another $7,500, if he wanted to) on December 1, 2023.
See more examples in the SEC Investor Bulletin.
Registration
First, register at the Site. There, you will establish log-in credentials and provide us with some information about yourself.
You will also be asked to review and confirm that you will comply with our Terms of Use and Privacy Policy, and consent to electronic delivery (i.e., email) of all documents.
We have the right to reject or revoke your registration to our Site for any reason, including a violation of our Terms of Use or Privacy Policy.
Online Process
Under Title III, the entire investment process happens online, through the Site. We will never send you paper, call you on the phone (except in some emergencies), or ask to meet with you.
Making an Investment
You can see 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 of the information available about the opportunity (see the “Issuer Information” section below). But you won’t be allowed to invest until you register.
Once you decide to invest, click on the “Invest Now” 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 sign something called a “Subscription Agreement.”
Having done all that, you will be deemed to have made an “investment commitment.” But you’ll still have a chance to cancel, as described below.
Notice of Investment Commitment
Once we receive your investment commitment, we will notify you of:
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 some cases this could be as little as $1), and an “offering deadline.” If the Issuer doesn’t raise the target amount before the offering deadline, then the offering will be cancelled 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:
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.
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. The Site will explain how.
Also, if there is a “material” change in the offering (an important change) after you make your investment commitment, then you must reconfirm your investment commitment within five days after such material change is made; otherwise, your investment commitment will be cancelled, and committed funds will be returned.
Paying for Your Investment
You will pay for your securities using one of the options described on the Site. Your payment options might include a direct transfer from your bank account, a wire transfer, or a credit card. You might be charged a convenience fee for using a credit card.
When you invest, your money will be held in an account administered by a qualified third-party financial institution until the offering is completed. We, as a Funding Portal, are prohibited from holding your money. If the Issuer is successful in raising the target offering amount, the bank will release the investors’ money to the Company. We will notify you by email and the investment process will be complete.
Confirmation of Transaction
Before your investment is final, we will send you a notice disclosing, among other things:
Once you buy a Security (e.g., a share of stock), you aren’t allowed to sell or otherwise transfer the Security for one year, except for sales or transfers described below. You should know that there may be no market for the securities after the initial 12-month restricted period.
An “accredited investor” means:
It is important that you only invest capital with the expectation of holding your investment for an indefinite period of time, and with the real risk of a total loss of your investment in mind. Only invest an amount you can afford to lose without changing your lifestyle.
Before You Invest
Before you invest, the Issuer must provide you with extensive information on a Form C, which will be available on the Site. The information includes:
What types of financial information an Issuer must provide depends on three things:
| Where the 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: |
| $107,000 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 statement will be used instead. |
| More than $107,000, 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 statement will be used instead. |
| More than $535,000 | 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. |
All financial statements must be prepared in accordance with U.S. “generally accepted accounting principals.” 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 investment is concluded, then (1) the Issuer must notify you of the changes, (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 Issuer is allowed to stop filing annual reports upon the earlier to occur of:
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 the Issuer’s offering on the Platform – for example, by talking about the offering in our chat room. 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 the Platform 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.
Many of the Securities listed on our Platform are speculative and involve significant risk, including the risk that you could lose some or all of your money. We’re described some of the factors that make these investments risky in four ways:
The order in which these factors are discussed, either here on in the Issuer’s materials, is not intended to suggest that some factors are more important than others.
Risks Associated with Owning in Real Estate
REAL ESTATE ASSETS ARE SUBJECT TO THE RISKS TYPICALLY ASSOCIATED WITH REAL ESTATE. Real estate assets are subject to the risks typically associated with real property. The value of real estate may be adversely affected by a number of risks, including:
The value of each property is affected significantly by its ability to generate cash flow and net income, which in turn depends on the amount of rental or other income that can be generated net of expenses required to be incurred with respect to a property. Many expenditures associated with a property (such as operating expenses and capital expenditures) cannot be reduced when there is a reduction in income from the property.
These factors may have a material adverse effect on the value that can be realize from real estate assets.
ISSUERS MAY BE SUBJECT TO UNKNOWN OR CONTINGENT LIABILITIES RELATED TO PROPERTIES THAT WE ACQUIRE FOR WHICH WE MAY HAVE LIMITED OR NO RECOURSE AGAINST THE SELLERS. Assets and entities that issuers may acquire in the future may be subject to unknown or contingent liabilities for which we may have limited or no recourse against the sellers. Unknown or contingent liabilities might include liabilities for clean-up or remediation of environmental conditions, claims of tenants, vendors or other persons dealing with the acquired entities, tax liabilities and other liabilities whether incurred in the ordinary course of business or otherwise. In the future issuers may enter into transactions with limited representations and warranties or with representations and warranties that do not survive the closing of the transactions or that only survive for a limited period, in which event we would have no or limited recourse against the sellers of such properties. While issuers expect to usually require the sellers to indemnify them with respect to breaches of representations and warranties that survive, such indemnification is often limited and subject to various materiality thresholds, a significant deductible, or an aggregate cap on losses.
As a result, there is no guarantee that issuers will recover any amounts with respect to losses due to breaches by the sellers of their representations and warranties. In addition, the total amount of costs and expenses that an issuer may incur with respect to liabilities associated with acquired properties and entities may exceed an issuer’s expectations, which may adversely affect an issuers business, financial condition, results of operations and cash flow. Finally, issuers expect that indemnification agreements between them and the sellers will typically provide that the sellers will retain certain specified liabilities relating to the assets and entities acquired by issuers. While the sellers are generally contractually obligated to pay all losses and other expenses relating to such retained liabilities, there can be no guarantee that such arrangements will not require issuers to incur losses or other expenses as well.
ISSUERS MAY NOT BE ABLE TO SELL THEIR PROPERTIES AT A PRICE EQUAL TO OR GREATER THAN THE PRICE FOR WHICH AN ISSUER PURCHASED SUCH PROPERTIES, WHICH MAY LEAD TO A DECREASE IN THE VALUE OF AN ISSUER’S ASSETS. The value of a property to a potential purchaser may not increase over time, which may restrict an issuer’s ability to sell a property, or if an issuer is able to sell such property, may lead to a sale price less than the price that it paid to purchase a property.
PROPERTIES THAT HAVE SIGNIFICANT VACANCIES COULD BE DIFFICULT TO SELL, WHICH COULD DIMINISH THE RETURN ON THESE PROPERTIES. A property may incur vacancies either by the expiration of tenant leases or the continued default of tenants under their leases. If vacancies continue for a long period of time, an issuer may suffer reduced revenues resulting in less cash available for distribution to investors. In addition, the resale value of the property could be diminished because the market value of the issuer’s properties may depend in part upon the value of the cash flow generated by the leases associated with that property. Such a reduction in the resale value of a property could also reduce the value of investors’ investment.
Further, a decline in general economic conditions could lead to an increase in tenant defaults, lower rental rates and less demand for residential real estate space in that market. As a result of these trends, issuers may be more inclined to provide leasing incentives to their tenants in order to compete in a more competitive leasing environment. Such trends may result in reduced revenue and lower resale value of properties, which may reduce investor returns.
UNINSURED LOSSES RELATING TO REAL PROPERTY OR EXCESSIVELY EXPENSIVE PREMIUMS FOR INSURANCE COVERAGE COULD REDUCE AN ISSUER’S CASH FLOWS AND THE RETURN ON INVESTORS’ INVESTMENTS. There are types of losses, generally catastrophic in nature, such as losses due to wars, acts of terrorism, earthquakes, floods, hurricanes, pollution or environmental matters that are uninsurable or not economically insurable, or may be insured subject to limitations, such as large deductibles or co-payments. Insurance risks associated with such catastrophic events could sharply increase the premiums issuers pay for coverage against property and casualty claims.
If any of an issuer’s properties incur a casualty loss that is not fully insured, the value of the issuer’s assets will be reduced by any such uninsured loss, which may reduce the value of investors’ investments. In addition, other than any working capital reserve or other reserves an issuer may establish, issuers may not have sources of funding to repair or reconstruct any uninsured property. Also, to the extent issuers must pay unexpectedly large amounts for insurance, such issuers could suffer reduced earnings that would result in lower distributions to investors.
Additionally, mortgage lenders insist in some cases that multifamily property owners purchase coverage against terrorism as a condition for providing mortgage loans. Accordingly, to the extent terrorism risk insurance policies are not available at reasonable costs, if at all, an issuer’s ability to finance or refinance its properties could be impaired. In such instances, issuers may be required to provide other financial support, either through financial assurances or self-insurance, to cover potential losses. Issuers may not have adequate, or any, coverage for such losses.
CLIMATE CHANGE MAY ADVERSELY AFFECT AN ISSUER’S BUSINESS. To the extent that climate change does occur and affects the markets that issuers invest in, issuers may experience extreme weather and changes in precipitation and temperature, all of which may result in physical damage or a decrease in demand for a property that such issuers acquire. Should the impact of climate change be material in nature or occur for lengthy periods of time, the financial condition or results of operations for a property would be adversely affected. In addition, changes in federal and state legislation and regulation on climate change could result in increased capital expenditures to improve the energy efficiency of a property that issuers acquire in order to comply with such regulations.
ACQUIRING OR ATTEMPTING TO ACQUIRE MULTIPLE PROPERTIES IN A SINGLE TRANSACTION MAY ADVERSELY AFFECT ISSUER OPERATIONS. From time to time, issuers may attempt to acquire multiple properties in a single transaction. Multiple property portfolio acquisitions are more complex and expensive than single-property acquisitions, and the risk that a portfolio acquisition does not close may be greater than in a single-property acquisition. A seller may require that a group of properties be purchased as a package even though an issuer may not want to purchase one or more properties in the portfolio. In these situations, if an issuer is unable to identify another person or entity to acquire the unwanted properties, it may be required to operate or attempt to dispose of such properties. To acquire multiple properties in a single transaction, issuers may be required to accumulate a large amount of cash. Issuers expect the returns that they earn on such cash to be less than the ultimate returns in real property and therefore, accumulating such cash could reduce the funds available for distributions to issuers’ investors.
COSTS ASSOCIATED WITH COMPLYING WITH THE AMERICANS WITH DISABILITIES ACT AND SIMILAR LAWS (INCLUDING BUT NOT LIMITED TO FAIR HOUSING AMENDMENTS ACT OF 1988 AND THE REHABILITATION ACT OF 1973) MAY DECREASE CASH AVAILABLE FOR DISTRIBUTIONS TO INVESTORS. Issuers’ properties may be subject to the Americans with Disabilities Act of 1990, as amended, or the ADA. Under the ADA, all places of public accommodation are required to comply with federal requirements related to access and use by disabled persons. The Fair Housing Amendments Act of 1988 requires apartment communities first occupied after March 13, 1991 to comply with design and construction requirements for disabled access. For projects receiving federal funds, the Rehabilitation Act of 1973 also has requirements regarding disabled access. If one or more of an issuer’s properties are not in compliance with such laws, then such issuer could be required to incur additional costs to bring the property into compliance. Issuers cannot predict the ultimate amount of the cost of compliance with such laws. Noncompliance with these laws could also result in the imposition of fines or an award of damages to private litigants. Substantial costs incurred to comply with such laws, as well as fines or damages resulting from actual or alleged noncompliance with such laws, could adversely affect issuers, including their future results of operations and cash flows.
Risks Associated with Real Estate Syndication Companies
BOTH ISSUERS AND THE MANAGERS OF SUCH ISSUERS ARE OFTEN NEWLY FORMED ENTITIES WITH LIMITED OPERATING HISTORY, WHICH MAKES THEIR FUTURE PERFORMANCE DIFFICULT TO PREDICT. Both the issuer and the manager of the issuer are typically newly formed entities and have limited operating history. You should consider an investment in such issuers’ interests in light of the risks, uncertainties and difficulties frequently encountered by other newly formed companies with similar objectives. To be successful in this market, issuers and their managers must, among other things:
Issuers often have minimal operating capital and for the foreseeable future will be dependent upon their ability to finance their operations from the sale of equity or other financing alternatives. The failure to successfully raise operating capital could result in bankruptcy or other event which would have a material adverse effect on issuers and their investors. There can be no assurance that issuers will achieve their investment objectives.
ANY ADVERSE CHANGES IN A MANAGER’S FINANCIAL HEALTH OR AN ISSUER’S RELATIONSHIP WITH ITS MANAGER OR ITS AFFILIATES COULD HINDER THE ISSUER’S OPERATING PERFORMANCE AND THE RETURN ON YOUR INVESTMENT. The manager will utilize the manager’s personnel to perform services on its behalf for issuers. An issuer’s ability to achieve its investment objectives and to pay distributions to its investors is dependent upon the performance of the manager and its affiliates as well as the manager’s real estate professionals in the identification and acquisition of investments, the management of the issuer’s assets and operation of its day-to-day activities. Any adverse changes in the manager’s financial condition or the issuer’s relationship with its manager could hinder the manager’s ability to successfully manage operations of its properties.
DISRUPTIONS IN THE FINANCIAL MARKETS OR DETERIORATING ECONOMIC CONDITIONS COULD ADVERSELY IMPACT THE RESIDENTIAL REAL ESTATE MARKET, WHICH COULD HINDER ISSUER’S ABILITY TO IMPLEMENT ITS BUSINESS STRATEGY AND GENERATE RETURNS TO YOU. The success of an issuer’s business is significantly related to general economic conditions and, accordingly, its business could be harmed by an economic slowdown and downturn in real estate asset values. Periods of economic slowdown or recession, significantly rising interest rates, declining employment levels, decreasing demand for real estate, declining real estate values, or the public perception that any of these events may occur, may result in a general decline in acquisition, disposition and leasing activity, as well as a general decline in the value of real estate and in rents, which in turn would reduce the value of an issuer’s interests.
During an economic downturn, it may also take longer for an issuer to dispose of real estate investments, or the selling prices may be lower than originally anticipated. As a result, the carrying value of our real estate investments may become impaired and issuers could record losses as a result of such impairment, or issuers could experience reduced profitability related to declines in real estate values or rents. Further, as a result of an issuer’s target leverage, its exposure to adverse general economic conditions may be heightened.
All the conditions described above could adversely impact an issuer’s business performance and profitability, which could result in its failure to make distributions to its investors and could decrease the value of an investment in it. In addition, in an extreme deterioration of its business, an issuer could have insufficient liquidity to meet our debt service obligations when they come due in future years. If an issuer fails to meet its payment or other obligations under secured loans, the lenders will be entitled to proceed against the collateral granted to them to secure the debt owed.
ISSUERS MAY FAIL TO SUCCESSFULLY OPERATE ACQUIRED PROPERTIES, WHICH COULD ADVERSELY AFFECT SUCH ISSUERS AND IMPEDE THEIR GROWTH. An issuer’s manager’s ability to identify and acquire properties on favorable terms and successfully develop, redevelop and/or operate them may be exposed to significant risks. Agreements for the acquisition of properties are subject to customary conditions to closing, including completion of due diligence investigations and other conditions that are not within an issuer’s control, which may not be satisfied. Issuers may be unable to complete an acquisition after incurring certain acquisition-related costs. In addition, if mortgage debt is unavailable at reasonable rates, issuers may be unable to finance the acquisition on favorable terms in the time period we desire, or at all. Issuers may also spend more than budgeted to make necessary improvements or renovations to acquired properties and may not be able to obtain adequate insurance coverage for new properties. Any delay or failure to identify, negotiate, finance and consummate such acquisitions in a timely manner and on favorable terms, or operate acquired properties to meet an issuer’s financial expectations, could impede such issuer’s growth and have an adverse effect on it, including our financial condition, results of operations, cash flow and the market value of our interests.
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 for its full term (in the case of debt securities) or indefinitely (in the case of equity securities).
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 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 start-up companies in particular. These events are generally unpredictable.
NO REGISTRATION UNDER SECURITIES LAWS. The securities sold on our Platform 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 above, 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, include 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 stupid or incompetent.
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:
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.
YOUR INTERESTS AREN’T REPRESENTED BY OUR LAWYERS. We have lawyers who represent us, and most of the companies on the Platform also have lawyers, who represent them. These lawyers have drafted the Terms of Use and Privacy Policy on the Site, and will draft all the documents you are required to sign. None of these lawyers represents you personally. If you want your interests to be represented, you will have to hire your own lawyer, at your own cost.
OUR ISSUERS MAY NOT REALIZE TRADITIONAL "EXIT" OPPORTUNITIES. Traditionally, one of the key means by which early-stage investors such as venture capital firms make money investing in start-ups is through an “exit,” such as an initial public offering (IPO), a sale of the company to a larger competitor, or a subsequent financing round. Title III crowdfunding is a new paradigm and no one knows yet exactly what, if any, exit opportunities will be available to early investors.
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.
IN MOST CASES, YOU WILL BE A MINORITY INVESTOR. Investors will typically be “minority” owners of companies on the Platform, 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 the Platform 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 the Platform 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 our Platform typically will not be required to implement these and other stockholder protections.
Risks Associated with Debt Securities
YOU HAVE NO 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 of your money.
SUBORDINATION TO RIGHTS OF OTHER LENDERS. Typically, when you buy a debt security on our Platform, 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.
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 LEVEL. 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 the Platform (buying a debt security is the same as lending money), the interest rate will not really compensate you for the level of risk.
THE PROCEEDS FROM THE COLLATERAL SECURING DEBT SECURITIES, IF ANY, MAY BE INSUFFICIENT TO SATISFY ANY PAYMENTS ON THE NOTES. When you purchase a debt security on the Platform, it may be secured either by real property, such as a real estate property, or by security interests related to the ownership of real estate property, or not secured at all. The value of the collateral will depend on market and economic conditions at the time of default. Collateral that is sold to satisfy any obligations under the debt security may be insufficient and there is no assurance that the proceeds thereof will be enough to make any payments owed under the debt security. Generally, the collateral securing the debt securities sold on our Platform or the real estate properties underlying any security interests securing the debt securities are highly illiquid and may not be able to be sold in a short period of time, if at all, on favorable terms. Additionally, it may be difficult to value the collateral securing the debt securities and the collateral may be subject to perfection, the consent of third-parties, regulatory and judicial approvals, and applicable laws and regulations such as bankruptcy laws. As a result of the foregoing, by purchasing unsecured debt securities or debt securities secured by collateral, you are at risk of losing your entire investment or a substantial portion of your investment.