Information for Potential Investors

EnergyFunders Marketplace is referenced herein as the “Portal” or “intermediary” or sometimes, “EnergyFunders Marketplace”.

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Important Things to Know About Investing in a Regulation Crowdfunding Offering

It is important that prior to each investment in any investment opportunity, that the investor understand and acknowledge that:

  1. there are restrictions on the investor’s ability to cancel an investment commitment and obtain a return of investment;
  2. it may be difficult for the investor to resell securities acquired in crowdfunding offerings; and
  3. investing in crowdfunding securities involves risk. The investor should not invest any funds unless the investor can afford to lose the entire amount

Once an investor submits an investment commitment to the Portal, the Portal sends a notification through e-mail to the investor, including:

  • The date of the transaction;
  • The type of security the investor is purchasing;
  • The identity, price and number of securities purchased by the investor, total number of securities sold by the issuer in the offering, and the sale price of the securities;
  • If a callable security, the first date that the security can be called by the issuer;
  • Specified terms of the security; and
  • The source, form and amount of any remuneration received or to be received by the intermediary in connection with the transaction, including any remuneration received or to be received by the intermediary from persons other than the issuer.

The Portal is unable to hold investor funds or securities; therefore, instead, a “qualified third party” including a bank, escrow agent or a registered transfer agent will handle the committed funds or securities issued in the offering.  The escrow agent will transfer the investment funds to the issuer if the target offering amount is met or exceeded. If not, the funds are returned to investors if the target is not met.

The Portal holds itself to strict standards for allowing investors to cancel investment commitments and therefore provides investors with an unconditional right to cancel any investment commitment until 48 hours prior to the issuer’s deadline for closing the offering. Within the final 48 hours of the offering’s deadline, investors are allowed to cancel commitments only if there is a material change in the offering. Issuers may accelerate deadlines to offerings that reach or exceed the target prior to the initial deadline, but to do this, issuers must ensure all of the following (a) The offering has been open for at least 21 days; (b) the intermediary provides notice of the new deadline at least five business days prior to the new deadline; (c) investors may cancel their commitments up to 48 hours prior to the new deadline; and (d) at the new deadline, the issuer’s offering continues to meet or exceed the target.

If a material change occurs, the Portal alerts investors who have made commitments of the change and inform them that their commitments will be canceled if they do not reconfirm their commitments. The Portal must then cancel commitments and notify, through email or other electronic media, all investors who do not reconfirm their commitments and arrange for return of the investors’ funds. Additionally, an offering may be terminated because the target was not met or the issuer chose to terminate for a different reason. In these instances, the Portal will notify the investors of the cancellation and return their funds, and prevent any further commitments on that offering.

Cancelling Your Investment and When Cancellation is No Longer Available

You’re free to cancel an investment up to 48 hours before a deal closes, just go to your portfolio page to cancel.  If do not cancel 48 hours prior to deadline, funds released to issuer in exchange for securities

The Funding Portal will notify investors when the target raise amount is hit.

The offering may close early if provides 5 days’ notice of new deadline

The issuer may cancel the investment commitment under the following circumstances:

  • For any offering that has not yet been completed or terminated, an issuer can file on Form C/A an amendment to its offering statement to disclose changes, additions or updates to information. An amendment is required for changes, additions or updates that are material, and in those required instances the issuer must reconfirm outstanding investment commitments within 5 business days, or the investor’s commitment will be considered cancelled. If the Portal was required to cancel the investment commitment, it must then send a notice of the cancellation to the investor and direct a refuse of the investor’s funds.
  • Offering fails to reach target by the specified deadline. If an issuer does not raise the target funds by the deadline it established, the Portal has five days to provide investors with notice of the cancellation of the investment commitment, direct the refund of investor funds, and prevent investors from committing any additional funds to the offering.
  • Issuer may cancel the offering for another reason.

Per Individual Investment Limitations (27 CFR § 227.100(a)(2))

For Regulation Crowdfunding Offerings, the Portal calculates your annual investment limit based on the net worth and income provided upon account opening. Investment limits are for every 12 month period. Every investment in a Regulation Crowdfunding offering counts towards the annual limit. We will not let you invest greater then this amount. The SEC made it pretty complicated on how this number is calculated, but if you’re curious:

  • Everyone can invest at least $2,200
  • If either your net worth or income are below $107k, you may legally invest a maximum of 5% of the lesser number.
  • If both your net worth or income are above $107k, you may legally invest a maximum of 10% of the lesser number.
  • No one may invest more than $107,000. Accredited investors are subject to the same investment limitations as everyone else, no matter how silly that is.

Non-U.S. citizens can invest unless your country’s laws prevent you from investing.

(For Regulation D offerings, only Accredited Investors may invest, and they have no limits. Accredited investors are wealthy people: typically making over $200,000 per year ($300,000 if joint with spouse) or having over $1 million in assets, minus their home.)

To find out your investment limits, open an investor account.

Even more specifically, Under Rule 100, each investor on the Portal is permitted to invest no more than the following amounts in Section 4(a)(6) offerings across all issuers in any rolling 12-month period:

  • For individuals with either an annual income or net worth that is less than $107,000, the greater of:
  • $2,200; and
  • 5% of the lesser of the investor’s annual income and net worth.
  • For individuals with both an annual income and net worth of at least $107,000, 10% of the lesser of:
  • the investor’s annual income (not to exceed an amount sold of $107,000 to each individual); and
  • net worth (not to exceed an amount sold of $107,000 to each individual).

On the Portal, annual income and net worth are calculated in accordance with the SEC’s rules for determining whether an individual is an accredited investor.  These dollar thresholds are required to be adjusted by the SEC at least once every five years.

Issuers on the Portal can and are intended to rely on the efforts of the Portal to determine whether an investor has reached the individual limits (provided that the issuer does not have actual knowledge to the contrary).

After signup is complete, the investor must go through a short investor education course and successfully complete a quiz upon completion of the course.

  • The results will be recorded in the database and date and time stamped.
  • Prior to each investment, the investor must provide his or her net worth, yearly income, amount invested in the rolling 12 month period in regulation CF projects and amount desired to invest. The platform’s logic will determine whether and how much the investor can invest in the particular investment.
  • Investor risk affirmation. In the electronically signed subscription agreement.  Investment is not finalized until the confirm button at the very end  of the process is pressed by the investor.  That occurs after the electronic execution of the subscription agreement.
  • Investment confirmation and cancellation notices.

Non-U.S. citizens can invest unless your country’s laws prevent you from investing.

Acknowledgement of Risk

Regulation CF requires that the Portal receive a representation from the investor that the investor has reviewed the educational materials and understands that the entire amount of the investment is at risk and may be lost before the intermediary accepts any investor commitments for any particular offering. 17 C.F.R. § 227.303(b)(2)(i).  Additionally, pursuant to 17 C.F.R. § 227.303(b)(2)(i), the Platform requires the investor to complete a questionnaire that demonstrates his or her understanding that:

  • There are restrictions on the investor’s ability to cancel an investment commitment and obtain a return of the commitment.
  • It may be difficult to resell securities acquired in an offering under section 4(a)(6).
  • Investing in securities sold under section 4(a)(6) involves risk, and the investor should not invest unless he or she is able to bear the loss of the entire investment.

The Portal has ensured that investors make these representations to the Portal each time they are required to do so and it retains an electronic copy in its database (including its redundant private blockchain database) associated with each investor’s record.

Opening of Investor Accounts

The Portal will may not accept any investment commitment from a prospective investor in a transaction under Regulation CF until that investor has opened an account with the intermediary and consented to electronic delivery of materials. 17 C.F.R. § 227.302(a)(1).  The SEC does not specify the exact information that the intermediary must obtain from an investor; therefore the Portal has been free to determine what it will require for business and compliance purposes.

Intermediaries and Investors

All investors interested in investing through the Portal must open an account with the Portal and consent to the delivery of educational materials and other communications via electronic means.

Educational material the Portal makes available to investors, include:

  • The process for the offer, purchase and issuance of securities and types of securities sold through the intermediary;
  • The risks and restrictions on the amount and resale of securities sold under Section 4(a)(6);
  • The types of information that an issuer is required to provide to investors;
  • The issuer’s and investor’s investment commitment-cancellation rights; and
  • The terms of the ongoing relationship between the issuer and intermediary beyond the offering.

The Portal ensures the requisite educational materials are available to investors on the platform and provides current educational materials to investors before accepting any additional investment commitments or conducting any additional Section 4(a)(6) offerings. In addition to providing this information to investors, the Portal obtains from the investor confirmation that he or she: (1) has reviewed these educational materials, (2) understands that he or she may lose the entire investment and is in a financial condition to bear the loss, and (3) has completed a questionnaire showing that he or she understands the financial risks of the investment and other statutory aspects of Title III.

The Portal ensures that disclose information related to compensation is accurately conveyed where applicable. Specifically, the Portal ensures that investors receive disclosures of compensation from any promoters receiving compensation from an issuer to promote their offering. The Portal also discloses to investors how the intermediary itself is compensated in connection with the Section 4(a)(6) offerings through its platform.

The Portal must provide potential investors and the SEC any information required to be provided by the issuer under Reg CF Rules 201 and 203(a). This information must be: (1) publicly available in a manner in which a person accessing the platform can save, download, or store the information; (2) made publicly available on the platform for 21 days prior to the sale of any securities in the offering; and (3) remain publicly available until the sale of securities is completed or cancelled. The Portal will not require a potential investor to first establish an account with the intermediary in order to be able to view this information.

The Portal ensures that investors participating in offerings through its platform have not exceeded the statutory limits for aggregate purchases in Section 4(a)(6) offerings. Similar to the standard for ensuring issuer compliance with relevant statutes and regulations, the Portal holds itself to the standard that it must have a “reasonable basis” for believing each investor complies with all requirements and can rely on an investor’s representations regarding financial status and investment history. The Portal exercises its own discretion in developing their methods for verifying investor compliance and requires each investor to receive education materials, affirm they have been read and received, and then complete a financial quiz before being allowed to invest.  Also, because each and every investment, an investor is required to enter current information about his or her net worth, income, and amount of money invested in Regulation CF offerings in the trailing 12 months.  The logic of the Platform’s website calculates the maximum amount of money the given investor may invest and the investor is informed that this is the maximum amount.  Further, the investor is then limited by protocol to invest no more than the maximum amount in the offering that triggered the investor to make such disclosures about his or her net worth, etc. Given that the SEC provides potential options for investor compliance verification, the Portal’s website acts as a central depository for crowdfunding investments, requires the submission of investor financial information as discussed as well as the completion of a short questionnaire regarding financial understanding.

The Portal ensures each offering is open for public view for 21 days prior to accepting investment.  Additionally, interested investors can add the offering to his or her “watch list” which allows him to keep abreast of offerings in which he is interested.  However, he cannot invest until the offering has been available for public view for 21 days.

Securities issued pursuant to section 4(a)(6) are not freely transferrable by the purchaser for one year after the date of purchase. 15 U.S.C. § 77d-1(e) (2012).  The statutory text outlines four situations in which a transfer may be made prior to the end of the one-year period; the SEC did not significantly alter these provisions in its Rule 501. 17 C.F.R. § 227.501.  Prior to the end of one year, transfers may be made, pursuant to 17 C.F.R. §  227.501:

  • to the issuer of the securities;
  • to an accredited investor;
  • as part of an offering registered with the SEC; or
  • to a member of the family of the purchaser or the equivalent, to a trust controlled by the purchaser, to a trust created for the benefit of a member of the family of the purchaser, or in connection with the death or divorce of the purchaser.

The SEC clarified that the transfer restrictions apply to all holders during the one-year period whether they purchased their securities from the issuer or in a secondary transaction. Crowdfunding, Securities Act Release No. 9974, 80 Fed. Reg. 71387 (Oct. 30, 2015) at 71476. The SEC did not provide  guidance  or  structure  with respect to subsequent trading of crowdfunding securities. However, the JOBS Act preemption of state regulation applies only to the initial offer and sale of securities by the issuer. After the end of the statutory restriction on transfer, investors will likely be able to transfer their securities to someone else without registration at the federal level, in reliance on section 4(a)(1) of the Securities Act. 15 U.S.C. § 77d(a)(1) (2012). However, subsequent trades must also be made in accordance with state law, and the law varies widely from state to state regarding how securities of nonpublic companies can be resold. Crowdfunding securities will thus be illiquid.

The educational materials for investors contain the following notable attributes:

  1. The process for the offer, purchase, and issuance of securities using the intermediary.
  2. The risks associated with investing in securities offered and sold under Section 4(a)(6).
  3. The types of securities that may be offered on the intermediary’s platform and the risks associated with each type of security, including the risk of dilution.
  4. The restrictions on the resale of securities offered and sold under Section 4(a)(6).
  5. The types of information that an issuer must provide in annual reports, the frequency of the delivery of that information, and the possibility that the issuer’s obligation to file annual reports may terminate in the future (in which case, an investor may not continually have current financial information about the issuer).
  6. The limitations on the amounts investors may invest.
  7. The circumstances in which the issuer may cancel an investment commitment.
  8. The limitations on an investor’s right to cancel an investment commitment.
  9. The need for the investor to consider whether investing in a security offered and sold under Section 4(a)(6) is appropriate for that investor.
  10. That following completion of an offering, there may or may not be any ongoing relationship between the issuer and the intermediary.
  11. That any person promoting an issuer’s offering for compensation, whether past or prospective, must clearly disclose in all communications on the platform the receipt of the compensation and the fact that that person is engaging in promotional activities on behalf of the issuer.
  12. The manner in which the intermediary is to be compensated in connection with offerings and sales of securities under Section 4(a)(6).

General Risks When Investing in a Company Through Regulation Crowdfunding

You should consult your own legal, tax and financial advisers regarding the suitability, desirability and appropriateness of purchasing interests through Regulation Crowdfunding in an entity, including a startup or a company (hereinafter a “Company”.) You should also carefully consider the following risks prior to investing in a Company:

General

An investment in a Company involves significant risks, only some of which are described in this Agreement, and is suitable only for sophisticated investors who have limited need for liquidity in their investment, who can afford the potential loss of their investment and who meet the conditions for eligibility set forth in this Agreement. An investment in a Company is not intended as a complete investment program. Companies are early stage venture companies. Venture investments involve a high degree of risk and many or most venture investments lose money. After a Liquidity Event (if any), you may ultimately receive cash, securities, or a combination of cash and securities (and in some cases nothing at all). If you receive securities, the securities may not be publicly traded, and may not have any significant value.

No Guarantee of Investment Returns

No guarantee can be made of the future performance or financial results of any Company, and an investment in a Company may result in a gain or loss upon termination or liquidation of your investment.

Restrictions on Resale or Transfer

The Company Securities are issued in a transaction exempt from registration under the 1933 Act and are not registered thereunder or any other law of the United States, or under the securities laws of any state or other jurisdiction. Company Securities purchased through the Site in Reg Crowdfunding Offerings cannot be resold, pledged, assigned or otherwise disposed of during the one-year period starting with the date of purchase, unless they are transferred: (1) to the Company itself; (2) to an “accredited investor” (as defined in as defined in Regulation D under the 1933 Act); (3) in connection with a registered offering of the Company Securities with the SEC; (4) to a family member of the Member, or to a trust of the Member or one of its family members; or (5) in connection with the Member’s death or divorce.

However, even if you are able to sell or transfer your Company Securities, there is a limited market for the sale of a Company Securities, and there is no guarantee that a market will develop in the future for the Company Securities you purchase. Therefore, if you require liquidity in your investment, you should not invest in a Company.

No Control Over Management of the Companies

You will not have any right to manage, influence or control the management or operations of Companies. In particular, you will not have, or will have only limited, voting rights associated with your Company Securities, but in any event will not have voting powers to direct the management decisions of the Company. You must refer to the voting provisions in the relevant investment contract that controls your investment. The success of any Company investment depends on the ability and success of the management of the Company, in addition to economic and market factors.

No Control Over Company Future Valuation

Valuations may fluctuate considerably and the price paid for Company Securities by you may bear limited or no relationship to future valuations of the Company’s securities in any market that may develop for such securities, whether private or public.

Limited Information About Companies

Due to the nature of private companies, there may be limited information—financial, operating or otherwise—regarding each Company. You should read and understand the risk factors contained in the Company Information, including the Form C, before investing in Company Securities. Each Company is solely responsible for providing risk factors, conflicts of interest, and other disclosures that you should consider when investing in Company Securities.

No Assurance of Profit

An investment in Company Securities may not generate profits for you. A return on investment will depend upon successful liquidity of a Company’s securities and thus, the ultimate value of any investment depends upon factors beyond your or EF Portal’s control. You will typically not receive returns, if any, until a Liquidity Event, which may not occur for many years. You must therefore bear the economic risk of an investment for an indefinite period of time.

Direct Investment in Companies in Reg Crowdfunding Offerings

In Reg Crowdfunding Offerings, Members will invest directly in the securities of Companies. The Company will not be managed by EF Portal or any of its affiliates in any respect. The terms of any investment in a Company effected through a Reg Crowdfunding Offering will be set by the Company, and to the extent any negotiation occurs, it will be solely between a Member and the Company.

Lack of Regulatory Oversight of Reg Crowdfunding Offerings and Offering Materials

EF Portal and the Third Party Funding Portals are registered as funding portals with the SEC and are members of the Financial Industry Regulatory Authority (“FINRA”). As such, EF Portal and Third Party Funding Portals must submit certain information and materials to FINRA and the SEC and are subject to examination by FINRA and the SEC. In addition, Companies must file with the SEC a disclosure document called a Form C and updates and amendments to the Form C. However, the funding portal regulatory regime and the Form C are not as comprehensive as the regulatory regime and disclosure documents that apply to offerings registered under the Securities Act of 1933, and, as a result, you may not receive the same level of disclosure and oversight that is available in registered offerings.

Review of Reg Crowdfunding Offering Documents by SEC and EF Portal and/or a Third Party Funding Portal No Indicator of Likely Success of Company or Guarantee of Investment Returns

Under Regulation Crowdfunding, a Company must file a Form C disclosure document with the SEC and provide the disclosure to prospective investors. As noted above, EF Portal will perform a limited review of Companies, including the information proposed to be provided to the SEC and potential investors, to determine whether to permit a Company to engage in Reg Crowdfunding Offerings on the Site. However, none of the SEC, EF Portal or any Third Party Funding Portal (if applicable) will be reviewing any Company’s Form C or other offering materials with the view to determine the likelihood of success of the Company’s business strategy or the likelihood that it will generate investment returns. Further, the review of a Company’s Form C by the SEC under Regulation Crowdfunding does not indicate the SEC’s endorsement of such Company or its view with regard to the likely financial performance of the Company or the advisability of investing in such Company, and is not a guarantee of investment returns.

An Investment in a Company Does Not Offer a Complete Investment Program

An investment in a Company is not a complete or diversified investment program and should represent only a small portion of a potential investor’s investment portfolio.

Possibility of Phantom Income

It is possible that your investment will result in “phantom income,” which could require you to pay taxes on your investment even though the Company does not distribute any income (or does not distribute sufficient income to pay the taxes).

Speculative

Investments in startups and early-stage ventures are speculative and these enterprises often fail. 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 prepared to lose your entire investment.

Illiquidity

Your ability to resell your investment in the first year will be restricted with narrow exceptions. You may need to hold your investment for an indefinite period of time. Unlike investing in companies listed on a stock exchange where you can quickly and easily trade securities, you may have to locate an interested private buyer when you do seek to resell your crowdfunded investment.

No voting rights

You will likely not have any voting rights. If you receive voting shares in a company, your voting rights will likely be diluted when the company raises additional funds.

Cancellation restrictions.

Once you make an investment in a crowdfunding offering, you can cancel the investment at any time and for any reason up to 48 hours before the offering deadline.

Valuation and capitalization

Unlike listed companies that are valued publicly through market-driven stock prices, the valuation of private companies, especially startups, is difficult. You risk overpaying for the equity stake you receive. The class of equity being sold via a crowdfunding offering may have fewer rights than other equity classes issued by a company.

Limited disclosure

The company must disclose information about itself, its business plan, the offering, and its anticipated use of proceeds, among other things. An 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 regarding its business annually, including financial statements.

Under certain circumstances the company may cease to publish annual reports and you will have no further no information rights.

Investment in personnel 

An early-stage investment is also an investment in the founding entrepreneur(s) and/or management of the company. Being able to execute on the business plan is often an important factor determining whether the business will be viable and successful. You should also be aware that a portion of your investment may fund the compensation of the company’s employees, including its management. You should carefully review any disclosure regarding the company’s use of proceeds.

Possibility of fraud

As with other investments, there is no guarantee that crowdfunding investments will be immune from fraud.

Lack of professional guidance

Many successful companies partially attribute their 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.

Other Specific Risks Associated with Investing in a Particular Company May Not Be Disclosed by the Company

Each Company will disclose in the Company Information the particular risks associated with an investment in the Company. YOU SHOULD CONSULT YOUR OWN LEGAL AND TAX ADVISERS REGARDING THE POSSIBLE TAX AND OTHER CONSEQUENCES OF BUYING, HOLDING, TRANSFERRING AND REDEEMING STARTUP SECURITIES.

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.

Investment in new concepts and technologies

The value of an Investor’s investment in Startups may be susceptible to factors affecting the relevant 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.

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.

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. An Investor’s shares in a Startup may be non-voting shares. Even with voting shares, 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.

No voting rights

If and when you receive voting shares in a Startup, your voting rights will likely be diluted when the Startup raises additional funds.

Lack of information for monitoring and valuing startups

The Investor may not be able to obtain all information it would want regarding a particular Startup, on a timely basis or at all. It is possible that the Investor 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, 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.

Legal and regulatory risks associated with crowdfunding

There is no assurance that a Startup will comply with all requirements mandated by federal laws permitting private company to fundraise from retail investors on a Title III crowdfunding portal such as Republic, whether before, during or after its offering on Republic.

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.

Limited operating history of startups

A Startup may be a newly formed entity with little or no operating history. Each offering should be evaluated on the basis that the Startup’s business plan and projections may not prove accurate and that the Startup will not achieve its objective. Past performance of a Startup or its team is not predictive of future results.

Diverse investors

Investors and employees in a Startup may have conflicting investment, tax, and other interests with respect to Startup ownership, which may arise from the structuring of the Startup or the timing of a sale of the Startup or other factors. As a consequence, decisions made by the Startup management on such matters may be more beneficial for some Investors than for others. Investors should be aware that Startup management tends to consider the investment and tax objective of its shareholders as a whole when making decisions on investment structure or timing of sale, and not the circumstances of any Investor individually.

Lack of investor control

Investors in a Startup will not make decisions with respect to the Startup’s business and affairs.

 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 a Startups makes 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.

Investment Risks

Principal risk: Investing in start-ups will put the entire amount of your investment at risk. There are many situations in which the company may fail completely or you may not be able to sell the stock that you own in the company. In these situations, you may lose the entire amount of your investment. For investments in startups, total loss of capital is a highly likely outcome. Investing in startups involves a high level of risk and you should not invest any funds unless you are able to bear the entire loss of the investment.

Returns risk: The amount of return on investment, if any, is highly variable and not guaranteed. Some startups may be successful and generate significant returns, but many will not be successful and will only generate small returns, if any at all. Any returns that you may receive will be variable in amount, frequency, and timing. You should not invest any funds in which you require a regular, predictable and/or stable return.

Returns delay: Any returns may take several years to materialize. Most startups take five to seven years to generate any investment return, if any at all. It may also take many years before you will know if a startup investment will generate any return. You should not invest any funds in which you require a return within a certain timeframe.

Liquidity risk: It may be difficult to sell your securities. Startup investments are privately held companies and are not traded on a public stock exchange. Also, there is currently no readily available secondary market for private buyers to purchase your securities. Furthermore, there may be restrictions on the resale of the securities you purchase and your ability to transfer. You should not invest any funds in which you require the ability to withdraw, cash-out, or liquidate within a certain period of time.

Security Risks

Instrument risk: You may be investing in preferred equity, common equity, or convertible notes. These securities instruments all have different inherent risks caused by their structure. You should take the time to understand the nature of the securities instrument that you are investing in.

Dilution: Startup companies may need to raise additional capital in the future. When these new investors make their investment into the company they may receive newly issued securities. These new securities will dilute the percentage ownership that you have in the business.

Minority stake: As a smaller shareholder in the business you may have less voting rights or ability to influence the direction of the company than larger investors. In some cases, this may mean that your securities are treated less preferentially than larger security holders.

Valuation risk: Unlike publicly traded companies that are valued publicly through market-driven stock prices, the valuation of private companies, especially startups, is difficult to assess. The issuer will set the share price for your investment and you may risk overpaying for your investment. The price you pay for your investment may have a material impact on your eventual return, if any at all.

See below for a description of Crowd Notes and risk disclosures related to Crowd Notes.

Business Risks

Failure risk: Investments in startups are speculative and these companies often fail. Unlike an investment in a mature business where there is a track record of revenue and income, the success of a startup 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.

Revenue risk: The company is still in an early phase, and may be just beginning to implement its business plan. There can be no assurance that it will ever operate profitably. The likelihood of achieving profitability should be considered in light of the problems, expenses, difficulties, complications and delays usually encountered by companies in their early stages of development. The company may not be successful in attaining the objectives necessary for it to overcome these risks and uncertainties.

Funding risk: The company may require funds in excess of its existing cash resources to fund operating expenses, develop new products, expand its marketing capabilities, and finance general and administrative activities. Due to market conditions at the time the company needs additional funding, it is possible that the company will be unable to obtain additional funding when it needs it, or the terms of any available funding may be unfavorable. If the company is unable to obtain additional funding, it may not be able to repay debts when they are due or the new funding may excessively dilute existing investors. If the company is unable to obtain additional funding as and when needed, it could be forced to delay its development, marketing and expansion efforts and, if it continues to experience losses, potentially cease operations.

Disclosure risks: The company is at an early stage may only be able to provide limited information about its business plan and operations because it does not have fully developed operations or a long trading history. The company is also only obligated to provide limited information regarding its business and financial affairs to investors.

Personnel risks: An investment in a startup is also an investment in the management of the company. Being able to execute on the business plan is often an important factor in whether the business is viable and successful. You should be aware that a portion of your investment may fund the compensation of the company’s employees, including its management. You should carefully review any disclosure regarding the company’s use of proceeds. You should also carefully consider the experience and expertise of the management team.

Fraud risks: It is possible that certain people involved in the company may commit fraud or mislead investors. If fraud or misleading conduct occurs, then your total investment may be lost. You should carefully review any disclosures regarding the company’s management team and make your own assessment of the likelihood of any potential fraud.

Lack of professional guidance: Many successful startups partially attribute their early success to the guidance of professional investors (e.g., angel investors and venture capital firms). These investors often play an important role through their resources, contacts and experience in assisting startup companies in executing on their business plans. A startup company primarily financed by smaller investors may not have the benefit of such professional investors. You should consider the existing professional investors in the company and whether or not they or any other professional investors are participating in the current round.

Growth risk: For a startup to succeed, it will need to expand significantly. There can be no assurance that it will achieve this expansion. Expansion may place a significant strain on the company’s management, operational and financial resources. To manage growth, the company will be required to implement operational and financial systems, procedures and controls. It also will be required to expand its finance, administrative and operations staff. There can be no assurance that the company’s current and planned personnel, systems, procedures and controls will be adequate to support its future operations. The company’s failure to manage growth effectively could have a material adverse effect on its business, results of operations, and financial condition.

Competition risk: The startup may face competition from other companies, some of which might have received more funding than the startup has. One or more of the company’s competitors could offer services similar to those offered by the company at significantly lower prices, which would cause downward pressure on the prices the company would be able to charge for its services. If the company is not able to charge the prices it anticipates charging for its services, there may be a material adverse effect on the company’s results of operations and financial condition.

Market demand risk: While the company believes that there will be customer demand for its products, there is no assurance that there will be broad market acceptance of the company’s offerings. There also may not be broad market acceptance of the company’s offerings if its competitors offer products which are preferred by prospective customers. In such event, there may be a material adverse effect on the company’s results of operations and financial condition, and the company may not be able to achieve its goals.

Control risks: Because the company’s founders, directors and executive officers may be among the company’s largest stockholders, they can exert significant control over the company’s business and affairs and have actual or potential interests that may depart from yours. The company’s founders, directors and executive officers may own or control a significant percentage of the company. In addition to their board seats, such persons will have significant influence over corporate actions requiring stockholder approval, irrespective of how the company’s other stockholders, including you, may vote. Such persons’ ownership may also discourage a potential acquirer from making an offer to acquire the company, which in turn could reduce the company’s stock price or prevent you from realizing a premium on your investment.

RISKS ASSOCIATED WITH EACH TYPE OF SECURITY AVAILABLE FOR PURCHASE

General Top Risks of Private Company Investment

Loss of capital. Many start-ups fail. In fact just about 90% of them do. Due to this, it is more likely that you will lose the capital you invested, rather than receive a return from it. Investors should, hence, be extremely conscious of how much capital they invest in private companies and whether the amount of risk posed by private companies matches their risk profile. Investors should ensure they do not invest more capital than they can afford to lose or that would put them in financial hardship.

Potential for fraud. Private company investment is less stringently regulated than other financial market transactions. For this reason, not all the information may be given to investors that is usually required for public equity transactions. Fraudulent activity can occur in the form of company providing misleading and deceptive information to investors.

Dilution. Any investment in private companies is subject to dilution, meaning the decline of your percentage ownership of the business. Dilution may occur if the business decides to raise additional capital in the future, issue new shares to investors and give the option of grants to employees. This often means that the value of your shares in the company will decline, as dilution decreases the initial value of your investment.

Illiquidity. Investment in private companies is highly illiquid. As there is no secondary market for private company shares, it is unlikely that you will be able to sell. Shares can only be sold if the business is bought by another company or floats its shares on the securities exchange.

Rarity of dividends. Dividends are rarely payed by private companies. If you invest in a private company, even if the business is successful, it is unlikely you will receive profits or return until you are able to sell your shares of the business.

The awareness of the potential risks in private company investments is key to an investment process that is safe in nature. Avenues that facilitate private company investment, such as equity crowdfunding platforms, do not offer a guarantee that investors will be protected from the risks. For this reason, diligence on the behalf of the investor is vital in order to ensure the investment choice was an informative one.

Despite the numerous risks listed above, investors should not disregard private companies as an investment avenue. All investments are characterized by different risk-return characteristics and like any investment, private companies have their benefits. Private company investment is definitely not for everyone, but for those who choose it, knowledge is undeniably an essential ingredient to success.

Very! You should not allocate more than a few percent of your investment portfolio to startup investing. You should never invest so much that it would impact your lifestyle or retirement plans if your entire investment is lost. Every investment listed on EnergyFunders Marketplace is much riskier than a public company listed on the stock market.

It’s rare for an investment on EnergyFunders Marketplace to offer voting rights directly to smaller investors because founders fear it can scare off venture capitalists who invest in later rounds, due to the hassle of collecting thousands of signatures. You should assume your investment does not include voting rights unless specified otherwise. Your stake will almost certainly be diluted when companies raise follow-on funding.

Yes. An equity stake will almost certainly be diluted.

Successful startups host multiple series of financings, all the way to IPO. For each financing, the startup issues additional stock to the new investors. As long as the value of the company increases with each funding round, this is healthy and normal. Historically, investors in private startups have experienced a range of outcomes, from losing their entire investment to making very favorable returns. Startup investing is quite risky and it is likely that you will lose your entire investment–you should be prepared to experience nearly any possible outcome.

Sometimes, when things are not going well, the startup is given the option of going bankrupt or raising more money in a “down round”, which means the value of the company decreased since the last financing. This is very bad for the founders and past investors alike; the dilution happens much more rapidly. But it’s preferable to the startup going bankrupt and the investors losing everything.

Types of Securities

The funding portal intends to offer the following types of securities:

  1. Common Stock
  2. Crowd Note
  3. SAFE
  4. KISS

Common Stock Risks

Common stock is a type of equity share issued by a corporation or entity. The buyers of common stock are referred to as shareholders.

Ownership Equity

Common stocks are fractional shares or a percentage equity ownership of an entity. Shares represent a proportional stake in the company’s net worth, income, cash flow, dividend, etc. Shareholder privileges usually include voting rights on issues that require shareholder approval and electing the directors of the entity.

Why Issue Common Stock?

When a company needs to raise capital for starting or growing their business they can borrow the money or sell investors’ (shareholders) shares or ownership in the company.

Advantages of Common Stock

Some investors prefer equity ownership to owning bonds and cash. Owning equity might generate higher returns that bonds or cash, but it is also generally riskier to hold and could generate lower returns or an entire loss of investment. Ultimately, whether and how much equity you should own as a percentage of your portfolio depends on your unique situation and your tolerance for risk.

Stock ownership is one of the foundations of capitalism and a free enterprise system. Common stock provides benefits to the issuer, shareholder, and society in general.

The issuer raises capital for producing goods or services. The shareholder receives the fractional benefits of an enterprise that is much larger than they would normally be able to participate in. Society enjoys the benefits of the goods and services of the issuing company as well as the jobs produced by the company. And let’s not forget the taxes paid by both the company and shareholders.

Risks of Common Stock

Owners of common stock have no guarantees, but are accepting the risk in exchange for potential greater gains than other safer investments. However, the shareholder’s liability is limited to the price paid for the common stock.

Common stock can be very volatile and is generally considered a high risk investment class. In the case of liquidation of the business, owners of common stock are last in line behind creditors, bondholders, and preferred stockholders.

Risks of Crowd Notes

The below description is based on terms of typical Crowd Notes, but each offering may contain its own specific terms. The Crowd Note is a specific type of promissory note that provides Investors the right to convert their Crowd Note into a class of preferred stock in the Company, when and if the Company makes an equity offering in which it sells preferred stock at a fixed pre-money valuation. In the event that the Company does not undertake an offering of preferred stock, the Crowd Note may convert to common stock in the Company in the event of a change of control of the Company (such as an acquisition of the Company) or an initial public offering  of the Company’s securities that is registered with the Securities and Exchange Commission. In the event the Company does not make a Preferred Stock offering, register an IPO or get acquired by another company, the Crowd Note will convert into preferred stock commencing on a maturity date, or the Company will pay back the Investor the purchase amount of the Crowd Notes plus any accrued interest.

Included in the Crowd Note are certain defined terms that are important to your understanding of the operation of the Crowd Note. Some of those terms are explained here. All of the following explanations are qualified in their entirety by the terms set out in the Crowd Note itself, which investors will sign when they invest in a company and can be viewed on the Company’s profile page on EnergyFunders.com.

“Purchase Price” – means the amount invested by each investor in this offering.

“Discount” – means the percentage the percentage discount applied to a future conversion to Preferred Stock. The per share price for holders of Crowd Notes when applying the Discount will be the product of 1 minus the Discount multiplied by the per share price of the future Preferred Stock financing.

“Valuation Cap” – means the implied value of the capital stock of the Company when determining the per share price for holders of Crowd Notes in the event of a future Preferred Stock financing. A valuation cap does not imply that the Company is worth the amount of the cap, either at the time of this Offering or at the time of the conversion of the Crowd Notes.

“Maturity Date” – means the date the Crowd Notes will either convert or the investors will be paid back the purchase amount for the Crowd Notes plus any interest accrued as of that date.

            Procedure for Conversion of Crowd Notes to Preferred Stock. Crowd Notes may convert in the following circumstances:

  • If a “Corporate Transaction” (such as the sale of the Company) occurs prior to a “qualified equity financing” (i.e. a preferred stock financing raising of not less than a specific amount such as $1,000,000).
  • Once a “Qualified Equity Financing” occurs, the notes thereafter will automatically convert into the shares of preferred stock sold in the qualified equity financing.
  • If the “Maturity Date” is reached, the note holders will have the option, by decision of the majority of outstanding note holders, to convert into the Company’s most senior class of preferred stock, and if no preferred stock has been issued, then shares of the Company’s common stock.

The price at which Crowd Notes may convert will be:

  • At a discount of 20% to the price in the Qualified Equity Financing, subject to a specific valuation cap (i.e.$5,000,000), if the conversion takes place in the Qualified Equity Financing; or
  • If conversion takes place upon a Corporate Transaction prior to a Qualified Equity Financing, the greater of twice the outstanding principal of the Crowd Notes, or the amount of stock the Crowd Notes would convert into under the Valuation Cap; or
  • If conversion takes place prior to a Qualified Equity Financing because the Maturity Date has been reached, subject to a Valuation Cap

Until the earlier of the Qualified Equity Financing or the Corporate Transaction, the Crowd Notes accrue an annual interest rate compounded quarterly.

           Right to Distribution upon Liquidation. If the Company ceases operations, liquidates, dissolves, winds up or has its assets assigned to creditors prior to an issuance of securities involving preferred stock, the Company will pay first the other holders of existing preferred stock, based on the terms of the Company’s Certificate of Incorporation, and then holders of the Crowd Notes. These payments will occur before any distributions to holders of common stock. If there are not sufficient Company assets to pay holders of the Crowd Notes the amount of their investments, as determined by the Company’s board of directors, payments will be made on a pro-rata basis. In this case, Investors may not recoup part or all of their investment from the Company.

            Voting Rights. There are no voting rights associated with the Crowd Notes. In the event of a conversion to preferred stock, Investors may receive a class of Preferred Stock without voting rights.

            Special Rights for Major Investors. Investors who invest at least a certain amount (i.e. $25,000) and are “accredited investors” may receive Preferred Stock with voting rights after the equity offering triggering the conversion of Crowd Notes.

SAFE Risks (“Simple Agreement for Equity”) – Not a “Safe Investment” – Know What it is and Know the Risks

 Simple Agreements for Future Equity (SAFE) originally were designed for a specific type of startup. SAFEs were developed in Silicon Valley as a way for venture capital investors to quickly invest in a hot startup without burdening the startup with the more labored negotiations an equity offering may entail.  Oftentimes, for the venture capital investor, it was more important to get the investment opportunity, and possible future opportunities, with the startup than it was to protect the relatively small investment represented by the SAFE.  In addition, the various mechanisms of the SAFE, from the triggering events to the conversion terms, were designed to best operate in the context of a fast growing startup likely to need and attract additional capital from sophisticated venture capital investors.

A SAFE is an agreement between an investor and a company which can be used by the company seeking investment to obtain investment with a minimal expense on the part of the company and the investors. The goal is to simplify early-stage fundraising for Companies. SAFEs also prevent Companies using crowdfunding from being left with hundreds of non-accredited investors on their cap table, each with a relatively small investment. SAFEs should be used by companies operating under a plan of growth. The intent of a SAFE is to provide investors with the right receive equity in the Company upon a future round of financing or other triggering event. Investors receiving a SAFE are investing in a Company because they believe in the Company’s growth prospects and its ability to execute its plans to obtain the next round of funding or a liquidity event. Investor should only make such an investment if they are comfortable receiving nothing from the Company until the triggering event.

Investors do not immediately receive equity. Instead, investors will only receive equity or their equitable share upon one or more trigger events, including: (1) Subsequent Equity Financing; (2) a Liquidity Event; or (3) a Dissolution of the Company. Depending on the type of SAFE being offered, investors may receive benefits compared with investors in the next round such as discounts. Investors in SAFEs should be aware that most SAFEs do not contain a maturity Date. Thus, a conversion may not occur if the Company does not hit one of the triggering events.

Investing in startups and early stage companies involves a high degree of risk, including whether the venture succeeds at all as well as the increased illiquidity associated with investing in a company not listed on a stock exchange.

A SAFE is not necessarily a “safe” investment and it involves a high degree of risk. Investing in startups and early stage companies involves a high degree of risk, including whether the venture succeeds at all as well as the increased illiquidity associated with investing in a company not listed on a stock exchange. SAFEs only convert to equity when the issuer triggers a triggering event, and a conversion may not occur if the Company does not hit one of the triggering events. Investing in startups and early stage companies is inherently risky, and your investment may lose value, is not insured, is not guaranteed, and is intended for investors who are familiar with and willing to accept the risks associated with private investments, including the loss their entire investment. These securities are not publicly traded, illiquid, subject to certain restrictions, and are intended for investors who do not have a need for a liquid investment.

KISS Risks (“Keep It Simple Security”) – A Convertible Promissory Note

Contains the same risks as a SAFE – see above.

The KISS is probably best described as a hybrid – seeking to embody the simplicity and ease of use of SAFEs with some of the investor protections associated with convertible notes.

Recognizing that venture capital investors derive the greatest value – and highest returns – from the equity into which their debt securities convert, and not from the 6-to-10 percent coupon common to such notes, prominent West Coast start-up accelerator Y Combinator developed the SAFE as an alternative to the convertible promissory note financing structure. In their standard form, SAFEs provide that the underlying investment converts into equity of the issuer upon certain events, such as a preferred equity financing, an IPO, and/or a change-of-control transaction. Unlike convertible debt securities, however, SAFEs neither accrue interest nor convert into common stock (or, worse for founders, require repayment) at a stated maturity date.  Investors are unable to declare a SAFE in default and seek repayment. Generally, the only negotiating points in a SAFE transaction are the inclusion and amount of a valuation cap and a discounted price on conversion. SAFEs, in theory, are attractive to both early-stage companies and their investors, then, because they allow companies to avoid carrying debt on their balance sheets, can be completed with lower attendant transaction costs, and more accurately reflect the realities of investing in early-stage companies. As a result, SAFEs have gained traction in the West Coast start-up community and are now making their way east. Since our most recent client alert on this issue, members of our Venture Capital and Emerging Growth Companies practice have helped early-stage tech, tech-enabled, and life sciences companies consummate roughly half a dozen SAFE transactions.

Because many in the investment community, especially institutional investors and corporate partners, shun SAFEs due to their lack of investor protections, particularly in the event the company does not raise future rounds of equity capital, and the perception that SAFEs are disproportionately issuer-friendly, we now see the introduction of the KISS.

The KISS (Keep It Simple Security) represents a step toward integration of the SAFE with certain elements of the more investor-friendly convertible debt mechanism. While similar in many respects to the SAFE, the KISS contains certain downside protections standard in most convertible note financings that are absent from SAFE transactions. Specifically, KISSes accrue interest at a stated rate and establish a maturity date after which the holder may convert the underlying investment amount, plus accrued interest, into a newly created series of preferred stock of the company. KISSes also may provide additional rights to qualifying investors. Most commonly, they provide investors with information rights and the right to participate in future company financings. As presently fashioned, KISSes come in two flavors; one more closely tracks a convertible debt structure, and the other an equity financing structure. The latter is similar in all respects to the former, except that the equity KISS instrument does not accrue interest, so it may actually represent an attractive middle ground between the SAFE and the convertible debt KISS instrument.

While KISSes respond to investors’ main concerns regarding SAFEs – namely, lack of interest rate and downside investor protections – we hesitate to declare that KISSes will become the go-to alternative security for early-stage investment transactions; in fact, the KISS may not even overtake its cousin, the SAFE, as the most popular convertible note alternative in the early-stage company financing tool kit. To that end, we have not yet seen KISSes gain the traction that SAFEs, and before them, convertible notes, have enjoyed in the marketplace. Y Combinator developed SAFEs to “replace convertible notes in most cases … [and] address many of the problems with convertible notes while preserving their flexibility.”

KISSes, however, reintroduce many of the shortcomings of convertible notes that SAFEs were designed to overcome. They contain additional points for negotiation, thereby increasing transaction costs and decreasing simplicity; they revert to the traditional convertible debt formulation of accrued interest and conversion upon maturity, without regard to the objectives of early-stage entrepreneurs and investors; and they require founders expend precious time and energy complying with administrative covenants in the transaction documents.

Restrictions of Resale and Transferrability

It’s safest to assume you cannot resell your investment to another investor. First, there is not yet a liquid secondary market like the New York Stock Exchange for private companies. Second, almost every equity security on EnergyFunders Marketplace prohibits resell, as private companies carefully guard the number of shareholders on their “cap table”. Third, Regulation Crowdfunding specifically prohibits resale of securities for one year, except to the issuer, an accredited investor, a family member or their trust.

Securities issued pursuant to section 4(a)(6) are not freely transferrable by the purchaser for one year after the date of purchase. 15 U.S.C. § 77d-1(e) (2012).  The statutory text outlines four situations in which a transfer may be made prior to the end of the one-year period; the SEC did not significantly alter these provisions in its Rule 501. 17 C.F.R. § 227.501.  Prior to the end of one year, transfers may be made, pursuant to 17 C.F.R. §  227.501:

  • to the issuer of the securities;
  • to an accredited investor;
  • as part of an offering registered with the SEC; or
  • to a member of the family of the purchaser or the equivalent, to a trust controlled by the purchaser, to a trust created for the benefit of a member of the family of the purchaser, or in connection with the death or divorce of the purchaser.

 The SEC clarified that the transfer restrictions apply to all holders during the one-year period whether they purchased their securities from the issuer or in a secondary transaction. Crowdfunding, Securities Act Release No. 9974, 80 Fed. Reg. 71387 (Oct. 30, 2015) at 71476. The SEC did not provide  guidance  or  structure  with respect to subsequent trading of crowdfunding securities. However, the JOBS Act preemption of state regulation applies only to the initial offer and sale of securities by the issuer. After the end of the statutory restriction on transfer, investors will likely be able to transfer their securities to someone else without registration at the federal level, in reliance on section 4(a)(1) of the Securities Act. 15 U.S.C. § 77d(a)(1) (2012). However, subsequent trades must also be made in accordance with state law, and the law varies widely from state to state regarding how securities of nonpublic companies can be resold. Crowdfunding securities will thus be illiquid.

Issuer Requirements to Engage in Crowdfunding Transactions

 In order to engage in crowdfunding transactions, issuers must meet the eligibility criteria under Section 4(a)(6) of the Securities Act. Given that the purpose of Section 4(a)(6) of the Securities Act is to “facilitate capital formation by early stage companies that might not otherwise have access to capital,” the SEC excluded certain categories of issuers from relying on the crowdfunding exemption. Some issuers that are excluded are those that:

  • are foreign companies;
  • are subject to Exchange Act reporting requirements;
  • are investment companies under the Investment Company Act of 1940 (the “Investment Company Act”) or companies that are not considered investment companies under Section 3(b) or 3(c) of the Investment Company Act;
  • are disqualified as a “bad actor” (see the bad actor disqualification provisions for Rule 506(d) and (e) of Regulation D under the Securities Act of 1933);
  • have relied on Section 4(a)(6) of the Securities Act and not met certain annual reports filing requirements
  • have no specific business plan or have indicated that their business plan is to engage in a merger or acquisition; and
  • are excluded as deemed appropriate by the SEC.

What follows are the various requirements and obligation Reg CF imposes on issuers that are eligible to engage in crowdfunding transactions:

Information Issuers Must Provide – Form C

The SEC requires that issuers provide certain information to investors through the intermediaries’ platforms and to the SEC by filing of Form C via EDGAR. Form C will consist of XML-fillable fields in the front portion of the form and then exhibits, which will include the rest of the information required to be filed.  The Form C can also be filed as PDF with exhibits. Some information is mandatory, but the issuer may include additional information in the form. The mandatory information for each issuer includes the following:

  • The name, legal status (i.e., form, state, and date of organization), physical address, and website address of the issuer.
  • The names of the directors and officers of the issuing organization (and any persons occupying a similar status or performing a similar function), the positions and offices held by those persons, the amount of time they have served in those positions, and the business experience those persons have acquired over the past three years.
  • The name of each person who is a beneficial owner of 20 percent or more of the issuer’s outstanding voting equity securities. These are the same shareholders covered by the bad actor disqualification provisions discussed below.
  • A description of the issuer’s business and an anticipated plan of said business.
  • The number of employees currently working for the issuer.
  • A discussion of the material risk factors that make an investment in the issuer speculative or risky.
  • The target offering amount and the deadline to reach said amount, including a statement that if the sum of the investment commitments does not equal or exceed the target offering amount at the offering deadline, no securities will be sold in the offering, investment commitments will be cancelled, and committed funds will be returned.
  • A statement about whether the issuer will accept investment monies in excess of the target amount and the maximum it will accept. If the issuer accepts investments above the stated target, it must state the method it will use to allocate oversubscriptions.
  • A description of the purpose and intended use of the offering proceeds. The SEC elaborates that it expects issuers to provide a detailed description of the intended use of proceeds with sufficient information to allow investors to understand how the offering proceeds will be used. If an issuer is uncertain as to how the proceeds will be used, it should identify the probable uses and the factors impacting the selection of each such use. Similarly, if the issuer accepts proceeds above the target amount, it should indicate the purpose and intended use for those excess funds.
  • A description of the process to complete the transaction or to cancel an investment commitment.
  • The price of the securities or the method for determining the price. If the issuer has not set a price at the start of the campaign, it must provide a final price prior to any sale of securities.
  • A description of the ownership and capital structure of the issuer. Under this subsection, this requirement also includes:
  • A description of the intermediary’s financial interests in the issuer’s transaction, including the amount of compensation paid to the intermediary for conducting the offering and the amount of any referral or other fees associated with the offering.
  • Any rights held by principal shareholders;
  • the name and ownership percentage of any 20 percent beneficial owner;
    a description of the restrictions on the transfer of the securities.how the securities being offered are valued and how the securities may be valued in the future;
    The name, SEC file number, and Central Registration Depository number of the intermediary conducting the offering.risks to purchasers of the securities relating to minority ownership and the risks associated with corporate actions like the additional issuance of shares, issuer repurchases, and the sale of the issuer or issuer assets to related parties; and
  • Disclosure of the terms of the securities being offered as well as each other class of security of the issuer;
  • A description of the material terms of any indebtedness of the issuer. Material terms include the amount, interest rate, maturity date, and any other terms a purchaser would deem material.
  • A description of any exempt offering conducted within the past three years. The description should include the date of the offering, the offering exemption upon which it relied, the type of securities offered, the amount of securities sold, and the use of the proceeds.
  • A description of any completed or proposed transaction involving the issuer or any entity under common control with the issuer for value exceeding 5 percent of the amount raised under section 4(a)(6) within the past twelve months, including the current offering, when a control person, promoter, or family member had a direct or indirect material interest.
  • A description of the financial condition of the issuer, including information regarding liquidity, capital resources, and historical results of operations covering each period for which financial statements are provided.
  • The tax information and financial statements certified by the CEO and/or reviewed or audited financial statements of the issuer, as applicable, according to the amount of money sought.
  • A description of any events that would have triggered disqualification under the bad actor disqualification provisions had they occurred after the effective date of the final rules.
  • Updates on progress toward meeting the target offering amount.
  • A statement regarding where on the issuer’s website investors will be able to find the issuer’s annual report and the date upon which the annual report will be available.
  • A statement declaring whether the issuer or any of its predecessors failed to comply with the ongoing reporting requirements of Regulation CF.
  • Any other material information necessary to make previous statements not misleading.

The Portal Will Review Disclosures Made by Issuers

Under Rules 201 and 203 of Reg CF, issuers must make certain disclosures to investors, including potential investors, and the relevant intermediary. These disclosures, which are to be filed with the SEC through Form C, cover a wide range of information, and include:

  • Issuer Information
    • General business information;
    • Names and experience of directors and officers;
    • Names of each person who is a beneficial owner of 20% or more of the issuer’s outstanding voting equity securities;
    • Financial condition and financial statements;
    • Ownership and capital structure;
    • Number of employees; and
  • Offering Information
    • Purpose and intended use of the proceeds of the offering;
    • Target offering amount, the deadline to reach that amount and regular updates on the progress of the issuer in meeting that amount (progress updates may be made publicly available on the intermediary’s platform to meet this requirement);
    • Whether issuer would accept investments in excess of target amount, and if so, the maximum amount it would accept;
    • Total amount of securities sold;
    • If an offering is oversubscribed, how shares would be allocated; o Process to cancel an investment commitment or to complete transaction once target amount is met; and o Offering price or method of determining the offering price of the securities; o Location of the issuer’s annual report and date of its availability on the issuer’s website.
  • Intermediary Information
    • Identity of the intermediary, including its name, SEC file number and CRD number (if applicable);
    • Compensation paid to the intermediary, or if the exact amount is unavailable at time of filing, a good faith estimate of the compensation to be paid; and
    • Direct or indirect interest in the issuer held by the intermediary, or any arrangement to acquire and interest.
  • Risk-Related Information
    • Legends about the risk of investing in a crowdfunding transaction; and
    • Risk factors of investing in the issuer’s offering, which are tailored to the issuer’s business.
    • Prior Transactions o Exempt offering conducted by the issuer within the past three years;
    • Failure to previously comply with any ongoing reporting requirements of Reg CF; and
    • Related-party transactions between the issuer and any director or officer of the issuer, any person who is a beneficial owner of 20 % or more of the issuer’s outstanding voting securities, any promoter of the issuer (if the issuer was incorporated or organized within the past three years), or immediate family members of the foregoing persons. These disclosures are limited to related-party transactions in excess of 5% of the amount raised by the issuer under the crowdfunding exemption in the previous 12 months, including the amount of the current 4(a)(6) offering.
  • Miscellaneous
    • Any material information to make statements not misleading; and
    • Any additional disclosures required by the SEC for investor protection and in the public interest.

The Portal Will Ensure Issuers Post Ongoing Reporting to Its Website

Annual Reports. Under Rule 202 of Reg CF, issuers that have sold securities under the crowdfunding exemption must file annual reports with the SEC within 120 days following the end of the relevant fiscal year. Annual reports must include any information required in Form C that is not offering-specific. While an issuer is also required to post annual reports on its website, it is not required to notify or physically deliver annual reports to investors.

Financial Statements. Under Rule 202 of Reg CF, issuers must provide financial statements on an ongoing basis. Generally, issuers are permitted to provide financial statements certified by the principal executive officer, unless they have already prepared financial statements that are audited or reviewed by an independent certified public accountant, in which case those statements must be provided. Unaudited financial statements must be labeled as unaudited.

The financial statements must include balance sheets, statements of comprehensive income, statements of cash flows, statements of changes in stockholders’ equity and notes related to the financial statements. Specific requirements for financial statements also vary depending on the target offering price and for issuers engaging in their first 4(a)(6) offering:

  • Offerings of $107,000 or less:
    • Principal executive officer of the issuer must certify that the financial statements are true and complete in all material respects.
    • Issuer must disclose total income, taxable income and total tax, and have a principal executive officer certify that those amounts match the issuer’s federal income tax returns.
  • Offerings of more than $107,000 but not more than $535,000:
    • Issuers must file and provide reviewed financial statements.
  • Offerings of more than $535,000:
    • Issuers must provide audited financial statements.
    • Issuers engaging in their first 4(a)(6) offering are permitted to provide reviewed financial statements, unless audited financial statements are available.

Due Diligence Check for Issuers Seeking to Place an Offering on the Portal’s Platform

For any given company seeking to become an issuer placing an offering on the Portal’s platform, the following due diligence will be conducted by the Portal’s due diligence team or a service bureau on behalf of the Portal (e.g. Crowdcheck):

  • Address of business
  • Registered Agent for Service of Process
  • Type of company, date incorporated, state of incorporation.
  • Whether company is in good standing with the state in which it is incorporation.
  • Confirm authorized number of shares and issued number of shares
  • Confirm valid and applicable copy of bylaws
  • Confirm identity and appointment dates of directors and officers
  • Confirm the company is duly authorized to list an offering of shares or other securities on the Portal.
  • Confirm representation of the company by applicable professionals; for instance, representation by a particular accounting firm or law firm.
  • Confirm current capitalization table or current ownership.
  • Confirm whether company has subsidiaries.
  • Confirm who founded the company and the identity of key personnel.
  • Confirm employment agreements between key personnel and company.
  • Confirm identity of advisors to the company.
  • Bad actor check – confirm there are no company associated persons who would be considered a bad actor pursuant to Regulation Crowdfunding.
  • Confirm relevant education by officers and directors if touted as material.
  • Confirm employment history of officers or directors if touted as material.
  • Confirm whether company has sought to raise money through Regulation CF before.
  • Confirm factual aspects of company’s business plan. Confirm the description meets regulatory requirements.
  • Confirm lease information for company office and/or any facilities or properties.
  • Confirm whether company’s representation regarding litigation is truthful.
  • Confirm ownership of any web properties or websites
  • Confirm existence of insurance, if necessary.
  • Confirm existence of any patents, if necessary.
  • Confirm necessary attributes of financial statements
  • Confirm whether the company is registered to do business in each state in which it plans to or purports to do business.
  • Confirm whether the company holds all applicable licenses and permits to conduct its business.
  • Confirm that the company has filed taxes as required.
  • Confirm whether representations regarding the nature of the security being offered are truthful.
  • Confirm whether company is aware of state law and ongoing crowdfunding reporting requirements.
  • Confirm identity and legitimacy of company’s chosen stock transfer agent and that it has agreed to serve as stock transfer agent for the company.
  • Confirm identity, type and amounts held in any bank account company identifies and existence of lack of existence of debt obligations to bank(s).
  • Confirm whether company has provided their Form C to the SEC on the relevant date.
  • Potentially, name, address, social security or tax id number, phone number and email address of every officer, director and 10%+ shareholder (including options or warrants).

Eligible and Ineligible Issuers and Bad Actors – Criteria for Excluding Potential Offerings

Only issuers eligible to be exempt from registration under Section 4(a)(6) of the Securities Act will be allowed to engage in crowdfunding transactions on the Portal and such issuers will be limited to raising a maximum of $1,070,000 in a 12-month period.  Issuers that will be excluded from the Portal include (pursuant to Sections 4(a)(6) and 4A(f) of the Securities Act):

  • Non-U.S. companies;
  • Companies that are disqualified under Regulation Crowdfunding disqualification rules (modeled on, and substantially similar to, the Rule 506(d) “bad actor” rules under Regulation D);
  • Investment companies and private funds (and companies excluded from that definition by Sections 3(b) and (c) of the Investment Company Act (including most hedge funds)).
  • Companies that are reporting companies under the Securities Exchange Act of 1934, as amended (“1934 Act”);
  • Companies that are delinquent in filing the ongoing reports required by Regulation Crowdfunding; and
  • Companies that have no specific business plan or have indicated that their business plan is to engage in a merger or acquisition with an unidentified company or companies.
  • Companies that failed to make required Form C filings in the two years before a crowdfunding offering (though the exemption becomes available again once the issuer makes any missed filings).

Virtually any other type of enterprise can raise capital through crowdfunding on the Portal, and there are no restrictions limiting the type of securities that may be offered and sold in reliance on Regulation Crowdfunding. The offering to take the form of common stock, preferred stock, another form of equity interest in the issuer, debt, or any other allowable form of equity or debt so long as issuers understand and it is clear to investors, that any securities purchased in a crowdfunding transaction cannot be transferred for one year, subject to certain exceptions.  Further, issuers need to be aware that they do not need to count the holders of these securities when determining whether they meet the 1934 Act thresholds for registration, as long as the issuer is current in its annual reporting obligations, has less than $25 million in assets, and retains the services of a registered transfer agent for shareholder recordkeeping.

With regard to bad actors, the Portal is aware that an issuer is unable to rely on the crowdfunding exemption if any “covered person” was involved in a “disqualifying event.” Covered persons include:

  • The issuer, its predecessors and certain affiliates.
  • Any of the issuer’s directors, officers, general partners or managing members.
  • Any 20% beneficial owner of the issuer (calculated by voting power).
  • Any promoter connected with the issuer at the time of sale.
  • Any compensated solicitor for the offering.
  • Any director, officer, general partner or managing member of a compensated solicitor for the offering.

The disqualifying events covered by the final rules are modeled on those of Rule 262, and include, among other things, certain securities-law related injunctions and restraining orders entered in the last five years and certain regulatory orders entered in the last ten years. Like the Rule 506 disqualification provision, the final rules include an exception for disqualifying events that the issuer did not know of and, in the exercise of reasonable care, could not have known of. Further, Rule 503 contains disqualification provisions similar to Rule 506(d), which disqualifies certain issuers from relying on the Regulation D safe harbor from Securities Act registration (see Practice Note, Section 4(a)(2) and Regulation D Private Placements: Bad Actors Disqualified from Relying on Safe Harbor).

Further Reporting Requirements and Circumstances Under Which an Issuer Would no Longer Provide Information to Investors

(a) An issuer that has offered and sold securities in reliance on section 4(a)(6) of the Securities Act ( 15 U.S.C. 77d(a)(6)) and in accordance with section 4A of the Securities Act ( 15 U.S.C. 77d-1) and this part must file with the Commission and post on the issuer‘s Web site an annual report along with the financial statements of the issuer certified by the principal executive officer of the issuer to be true and complete in all material respects and a description of the financial condition of the issuer as described in § 227.201(s). If, however, an issuer has available financial statements that have either been reviewed or audited by a public accountant that is independent of the issuer, those financial statements must be provided and the certification by the principal executive officer will not be required. The annual report also must include the disclosure required by paragraphs (a), (b), (c), (d), (e), (f), (m), (p), (q), (r), and (x) of § 227.201. The report must be filed in accordance with the requirements of § 227.203 and Form C ( § 239.900 of this chapter) and no later than 120 days after the end of the fiscal year covered by the report.

Instruction 1 to paragraph (a). Instructions (3), (8), (9), (10), and (11) to paragraph (t) of § 227.201 shall apply for purposes of this section.

Instruction 2 to paragraph (a). An issuer providing financial statements that are not audited or reviewed must have its principal executive officer provide the following certification:

I, [identify the certifying individual], certify that the financial statements of [identify the issuer] included in this Form are true and complete in all material respects.

[Signature and title].

(b) An issuer must continue to comply with the ongoing reporting requirements until one of the following occurs:

(1) The issuer is required to file reports under section 13(a) or section 15(d) of the Exchange Act ( 15 U.S.C. 78m(a) or 78o(d));

(2) The issuer has filed, since its most recent sale of securities pursuant to this part, at least one annual report pursuant to this section and has fewer than 300 holders of record;

(3) The issuer has filed, since its most recent sale of securities pursuant to this part, the annual reports required pursuant to this section for at least the three most recent years and has total assets that do not exceed $10,000,000;

(4) The issuer or another party repurchases all of the securities issued in reliance on section 4(a)(6) of the Securities Act ( 15 U.S.C. 77d(a)(6)), including any payment in full of debt securities or any complete redemption of redeemable securities; or

(5) The issuer liquidates or dissolves its business in accordance with state law.

Do my funds go in an escrow account?

Yes. Your investment is placed in an escrow account hosted at Capital One Bank. For Regulation Crowdfunding offerings, funds are transferred to the startup only after the fundraising target has been met and the round is closed.

It is Very Important for You to Consider Whether Investing in a Particular Regulation Crowdfunding Offering is Appropriate for You as an Investor

EnergyFunders Marketplace is designed to be a platform connecting investors with startup founders or company founders of energy-focused companies. EnergyFunders Marketplace does not recommend you invest in any particular startup or company, even if a startup or company appears to be more featured on energyfunders.com. In an effort to reduce fraud, we apply standards when deciding which startups can fundraise on EnergyFunders Marketplace, but you should conduct your own due diligence to decide which startups, if any, are right for you.

The information regarding companies on EnergyFunders Marketplace is provided by the companies themselves. EnergyFunders Marketplace may assist a company in presenting this information, but we don’t verify its accuracy or endorse the company.

You are responsible for conducting your own due diligence. Groups of prospective investors working together are more likely to discover issues with a startup: the “wisdom of the crowd” at work. When companies are fundraising, investors are highly encouraged to ask detailed questions. If the founder gives answers that are not convincing, then you shouldn’t invest!

Under certain circumstances an issuer may cease to publish annual reports and, therefore, an investor may not continually have current financial information about the issuer.

Any issuer terminating its annual reporting obligations is required to file notice on Form C-TR reporting that it will no longer provide annual reports pursuant to the requirements of Regulation Crowdfunding.

Will I receive an annual report?

If you are an investor in a Regulation Crowdfunding offering, the company will issue an annual report once a year with financial statements and a discussion of its business, no later than 3 months after the end of their fiscal year. Companies are not obligated to file annual reports if they file for an IPO, are acquired by a purchaser, repurchase your investment, have fewer than 300 shareholders after 1 year, if they go bankrupt, or after 3 years if they have less than $10 million in assets. Some startups who can easily raise funding from venture capitalists may decide not to file annual reports, as the only penalty is they may not use Regulation Crowdfunding again until they do so. If a company stops reporting, you may not continuously have current financial information about the company.

More specifically, an issuer that sold securities in a Regulation Crowdfunding offering is required to provide an annual report on Form C-AR no later than 120 days after the end of its fiscal year. The report must be filed on EDGAR and posted on the issuer’s website. The annual report requires information similar to what is required in the offering statement, although neither an audit nor a review of the financial statements is required. Issuers must comply with the annual reporting requirement until one of the following occurs:

(1) the issuer is required to file reports under Exchange Act Sections 13(a) or 15(d);

(2) the issuer has filed at least one annual report and has fewer than 300 holders of record;

(3) the issuer has filed at least three annual reports and has total assets that do not exceed $10 million;

(4) the issuer or another party purchases or repurchases all of the securities issued pursuant to Regulation Crowdfunding, including any payment in full of debt securities or any complete redemption of redeemable securities; or

(5) the issuer liquidates or dissolves in accordance with state law.

FOLLOWING COMPLETION OF AN OFFERING CONDUCTED THROUGH THE PORTAL, THERE MAY OR MAY NOT BE ANY ONGOING RELATIONSHIP BETWEEN THE ISSUER AND THE PORTAL.

Do I have direct access to the founder?

No. We don’t hand out their email addresses or phone numbers. All communications with founders are handled via the EnergyFunders Marketplace website.

Will the startup always use EnergyFunders Marketplace in the future?

After fundraising, EnergyFunders Marketplace provides the startup free continued access to our platform. But there is no guarantee the startup will continue to use our services. They may also decide to raise their next round of financing on a different funding portal.

Transferability of Securities

The Portal ensures each offering is open for public view for 21 days prior to accepting investment.  Additionally, interested investors can add the offering to his or her “watch list” which allows him to keep abreast of offerings in which he is interested.  However, he cannot invest until the offering has been available for public view for 21 days.

Securities issued pursuant to Regulation Crowdfunding are not freely transferrable by the purchaser for one year after the date of purchase. The statutory text outlines four situations in which a transfer may be made prior to the end of the one-year period; the SEC did not significantly alter these provisions in its Rule 501. Prior to the end of one year, transfers may be made, pursuant to 17 C.F.R. §  227.501:

  • to the issuer of the securities;
  • to an accredited investor;
  • as part of an offering registered with the SEC; or
  • to a member of the family of the purchaser or the equivalent, to a trust controlled by the purchaser, to a trust created for the benefit of a member of the family of the purchaser, or in connection with the death or divorce of the purchaser.

 The SEC clarified that the transfer restrictions apply to all holders during the one-year period whether they purchased their securities from the issuer or in a secondary transaction. The SEC did not provide  guidance  or  structure  with respect to subsequent trading of crowdfunding securities. However, the JOBS Act preemption of state regulation applies only to the initial offer and sale of securities by the issuer. After the end of the statutory restriction on transfer, investors will likely be able to transfer their securities to someone else without registration at the federal level, in reliance on section 4(a)(1) of the Securities Act. However, subsequent trades must also be made in accordance with state law, and the law varies widely from state to state regarding how securities of nonpublic companies can be resold. Crowdfunding securities will thus be illiquid.

Ongoing Reporting Requirements of Issuers

Crowdfunding issuers will be subject to ongoing reporting requirements under Section 4A(b)(4) of the 1933 Act and Rule 202 of Regulation Crowdfunding.  Issuers will need to file a report with the SEC annually, no later than 120 days after the end of the most recently completed fiscal year covered by the report, and the report also must be posted to the issuer’s website. The annual report must contain information similar to that required in the offering statement, including disclosure about the issuer’s financial condition.  The rules require financial statements of the issuer included in the annual report to be certified by the principal executive officer as true and complete in all material respects, although an issuer that has financial statements that have been reviewed or audited by an independent certified public accountant must provide them instead.

The Portal has a list of independent professionals the issuer can hire to ensure compliance with this obligation.

Form C-A: Amendment

Issuers are required to amend the Form C disclosures for any material change in the offer terms or disclosure previously provided to investors. Issuers can amend previous Form C filings by filing a new Form C and checking the “Form C-A: Amendment” box on the cover.

If any change, addition or update constitutes a material change, the issuer would need to check the box indicating that investors must reconfirm their investment commitments within a five business day period.

Issuers may also voluntarily file a Form C-A to make immaterial changes and in those cases would not check the box indicating that investors must reconfirm their investments.

Form C-U: Progress Update

During the fundraising process, issuers must prepare a couple of regular updates on their progress in meeting the target offering amount, or can simply rely on the Portal to issue progress updates as to the amount of funding achieved for the offering. Issuers can do so by filing a Form C and checking the “Form C-U: Progress Update” box on the cover.  If the issuer hires a professional to prepare its Form C, this professional can also prepare its Form C-U Progress Update.

Updates are required no later than five business days after the issuer has received commitments for 50% of the targeted offering amount and again no later than five business days after receiving commitments for 100% of the targeted offering amount. If the issuer will accept proceeds in excess of the target offering amount, it must also file a Form C-U no later than five business days after the offering deadline, disclosing the total amount of securities sold in the offering.

If multiple Forms C-U are triggered within the same five business day period, the issuer can consolidate the updates into one Form C-U as long as it discloses the most recent threshold that was met and file and provide to the intermediary no later than the day on which the first progress update is due.

Rule 203(3)(iii) permits issuers to satisfy the progress update requirements by relying on the relevant portal to make frequent updates about the issuer’s progress toward meeting the target offering amount publicly available on the portal’s platform. However, if the portal does not provide these updates, the issuer is required to file the interim progress updates. In addition, if relying on Rule 203(3)(iii), the issuer must still file a Form C-U at the end of the offering to disclose the total amount of securities sold offering.

Form C-AR: Annual Report

Each issuer that sold securities in reliance on Regulations Crowdfunding is required to file with the SEC and post to its website an annual report within 120 days of the end of each fiscal year. On this filing the issuer would check the “Form C-AR: Annual Report” box.

This annual report is required to include information similar to the offering statement on Form C, including financial statements certified by the principal executive officer and the narrative disclosures of its financial condition, but excluding offering-specific information.

However, issuers that have financial statements that have been reviewed or audited by an independent certified public accountant because they prepare them for other purposes must provide them and will not be required to have the principal executive officer certification.

Regardless of the amount raised under Regulation Crowdfunding, however, Form C-AR does not require reviewed or audited financial statements from issuers that do not prepare those statements for other purposes.

The annual reporting requirement continues until one of the following events occurs:

  • The issuer becomes a reporting company.
  • The issuer has filed at least one annual report on Form C-AR and has fewer than 300 holders of record.
  • The issuer has filed at least three annual reports and has total assets of no more than $10 million.
  • All the issuer’s securities sold under Regulations Crowdfunding are purchased by a third party or repurchased by the issuer.
  • The issuer liquidates or dissolves its business under state law.

Form C-TR: Termination of Reporting

When an issuer is no longer subject to the ongoing annual reporting requirement, it can terminate its reporting obligations by filing a Form C and checking the “Form C-TR: Termination of Reporting” box on the cover within five business days from the date of the terminating event.

When calculating the number of holders of record for purposes of determining eligibility to terminate its duty to file ongoing reports under Rule 202(b)(2) of Regulation Crowdfunding, an issuer must count all holders of record of securities of the same class of securities issued in the Regulation Crowdfunding offering for which the reporting obligation exists, regardless of whether the holders of record purchased their securities in the Regulation Crowdfunding offering. See SEC Regulation Crowdfunding Compliance and Disclosure Interpretations, Question 202.01.

Restrictions on Promoter Compensation

Rule 205 prohibits the issuer from compensating or committing to compensate, directly or indirectly, any person to promote its Regulation Crowdfunding offerings through the intermediary’s platform, unless the issuer takes reasonable steps to ensure the promoter clearly discloses the past or prospective receipt of compensation with each promotional communication.

These restrictions apply to persons hired specifically to promote the offering, as well as to all issuer employees undertaking promotional activities on behalf of the issuer. 

Compensation Disclosure

The Portal provides notices to new account holders that disclose the manner in which the Portal will be compensated in connection with offerings and sales made in reliance on Reguation Crowdfunding.  The Portal will accept a range of compensation types from issuers (e.g., flat fee, commission, or equity interest) and will ensure the disclosure of each type of compensation that it will accept.

Determining Whether an Investment is Right for You

The Portal is not an investment advisor.  Neither is the issuer.  No investment advice is given on this website nor is any person associated with the Portal or the issuer qualified or authorized to render investment advice.

The SEC has compiled numerous materials for you to use to education yourself in determining whether an investment opportunity will meet your particular situation and goals.  For instance, see SEC Publication entitled, “Questions Your Should Ask About Your Investments”, available athttps://www.sec.gov/investor/pubs/sec-questions-investors-should-ask.pdf.

Further information is available at https://www.sec.gov/page/investor-section-landing.

Further investor education and best practices for investing is available from FINRA’s Investor Education Foundation at http://www.finrafoundation.org/.  FINRA’s investor educational materials and modules through which you can tutor yourself to become a more informed investor are available at http://www.finrafoundation.org/resources/education/

Process for the Offer, Purchase and Issuance of Securities

More specifically, a company that wishes to sell securities through the Portal’s platform (an issuer) will file a Form C with the SEC and provide other require information and documentation.  If these Regulation Crowdfunding filings, information, and documentation meet with approval as to the technical compliance with laws and regulations, the issuer will be permitted to put an offering to sell its securities up on the Portal’s platform.

At that point, any person can access all of the information about the offering on the offering page, or by clicking on links on the offering page that direct the user to all of the issuer’s Regulation Crowdfunding filings with the SEC.

If the user wants to invest, he or she will be require to register an account with the Portal.  Registration of an account is free and will require the user to answer simple questions and provide accurate details about himself or herself.  Once the account has been created, the user is permitted to invest in the offering, provided the user reviews and understands relevant educational material and answers a short quiz and a few short questions confirming important details.

When investing, the user will be guided through an easy, four-step process.  First, the user will input accurate details about himself or herself.  The user will also answer a few questions to ensure that he or she understands the nature and risks of the investment.  Then the user will confirm contact information.  Then the user will choose up the maximum legally allowable amount to invest.  Finally, the user will see confirmation of the purchase he or she intends to make and will choose the method of payment: either by mailing a check or through ACH/E-Check.  Upon choosing the method, the user will see the appropriate instructions.

If the user mails a check, he or she will be doing so by mailing a check to the qualified third party escrow agent, a bank, that will serve as the agent for the escrow account.   The user will follow the specific instructions and include a unique identifying code.

If the user chooses, ACH/E-check, the user will be prompted to securely enter his or her account and routing numbers (which information is not stored by EnergyFunders), in order to have a debit initiated in the amount chosen.  Upon completion of the transaction, this amount will be sent to the escrow account.

No matter which method the user chooses, the user’s funds will be deposited into the escrow account specifically set up to collect investment commitments for the particular offering.   The bank is the escrow agent for this account.  If the target funding goal is not met by the time the time to raise funds has expired, all money will be returned to investors.  (There is no processing fee at this time, so 100% of funds will be returned).  If the issuer cancels, all funds will be returned to investors as well.  If the target funding goal is reached before time expires, then the funds will be transferred to the issuer for use it its business.  If you choose to cancel your investment commitment, you will be able to do so for up to 48 hours before the investment closes.   In any event, if you are due a refund, you will receive it no later than 7 business days after the cancellation or unsuccessful fundraise.  You will receive notice when the investment is a few days away from closing.  If you do not cancel at least 48 hours before the investment closes, you will no longer be able to cancel and your investment will be non-refundable.

If the issuer happens to make or experience a material change in its information or the offering materials, you will be sent notice of the material change and a link to the new offering materials (if applicable).  You will then have five business days to reconfirm your investment commitment or your commitment will be automatically cancelled.  If it is cancelled for failure to reconfirm, you may be able to place a completely new investment in the offering, depending on whether there is still time and space available to do so.

If the offering completes successfully, you will receive what you purchased.  You may have purchased the rights under your subscription to receive equity or other rights in the future–as applicable, in which case no securities will be issued to you at that time.  On the other hand, if you have purchased securities to be received upon closing of the offering, you will receive the securities or evidence that you own such securities from a registered third-party transfer agent engaged by the issuer.

After the offering completes, the issuer is not under any obligation to continue communicating with investors, but is required (unless an exception applies) to continue to make annuals reports as described above.

If you have any questions about how any of this works, we are here to answer your questions.