INVESTOR EDUCATION PACKAGE
This Investor Education Package is intended to provide you with important information about investing through our Funding Portal. Before investing, you should carefully review and understand this information. If you don’t understand something or have a question, please contact us via email at firstname.lastname@example.org
This document is intended to help explain:
- What we do, and how we do it.
- The process for buying securities through our Funding Portal.
- The limitations on the amounts you may invest.
- Your right to cancel your investment commitment.
- The circumstances in which the issuer may cancel your investment commitment.
- The risks associated with investing in the securities sold through our Funding Portal.
- The kinds of securities that may be offered on our Funding Portal and some of the risks associated with each type.
- Restrictions on your right to sell securities you purchase on our Funding Portal.
- The information “issuers” (companies raising money on our Funding Portal) are required to disclose to you, and when and how often you can expect such information.
- Our relationship with the issuers on our Funding Portal, including information about the compensation we will receive from them.
We expect to update this document from time to time.
These definitions apply throughout this Investor Education Package:
Site – Our Internet site located at www.ignitesocialimpact.com.
Platform – Another word we use to refer to our Internet site.
Issuer – A company trying to raise money from investors on our Site, by selling its Securities.
Security – A share of stock, a promissory note, a bond, or any other instrument offered by an Issuer on our Site.
Title III – Title III of the JOBS Act of 2012, which allows “Regulation Crowdfunding.”
Funding Portal – A term used to describe Internet sites allowed to offer and sell Securities under Title III. We are a Funding Portal.
SEC – The U.S. Securities and Exchange Commission. The website: www.sec.gov.
FINRA – The Financial Industry Regulatory Authority. The website: www.finra.org.
Investing in the companies that will be offered on our Site is very different than investing in the public stock market. The companies at our Site are likely to be small, with limited or no track records and little profits, if any.
The first thing for you to consider, before you go further, is whether it is appropriate for you to invest in any of these companies based on your own personal circumstances. Among the questions you should ask yourself are:
- Can I afford to lose all the money I invest?
- If I lose all or part of my money, will I be okay psychologically?
- Do I understand the company I am thinking about investing in? Do I understand its product or service? Am I personally familiar with that market?
- Do I understand the business the company is conducting? Do I understand how the company can make money?
- Do I understand the Security I’m buying?
- Do I trust the owners and managers of the company?
- Do I understand the documents I’m being asked to sign?
- Do I feel comfortable making this decision myself? If not, have I consulted with an advisor?
Only if you can truthfully answer “Yes” to all those questions should you invest.
What we do
Being a Funding Portal isn’t the same as being a registered “broker-dealer.” We are not a registered broker-dealer.
When you invest, you are not investing in us or in any entity affiliated with us, you are purchasing an interest in a security being offered via Reg CF by a company that has chosen to raise money using our funding portal.
As an intermediary we do not guarantee any particular outcome and are not responsible for what happens to your investment – all investments are undertaken at your own risk. We also do not guarantee the accuracy of the information you receive from issuers. Our job is to facilitate investments by providing a platform that brings together companies and investors.
- Select which Issuers to list on our platform, by among other things:
*Conducting background checks on the issuer and its principals
*Conducting due diligence to have a reasonable basis for believing the issuer is complying with all its obligations
*Conducting due diligence to have a reasonable basis for believing the issuer has established a means to keep accurate records of the holders of its securities
- Advise Issuers about their offerings, and help prepare offering documents
- Screen investors to ensure that they satisfy applicable per-investor limits (discussed below)
- Provide communication channels between you and the Issuer, and between you and other potential investors, where you can ask questions and exchange information
- Provide search functions or other tools for investors
- Provide you with educational materials to help you assess the risks of investing (e.g., this document)
- Keep records of investor communications and materials
- Offer investment advice or recommendations
- Guarantee any particular investment outcome
- Speak to investors about the merits of any particular company or offering
Issuers will pay us to be on our Funding Portal. They might pay us flat fees, commissions based on the amount of money they raise, or in other ways. They might also pay us for specified services we provide to them and reimburse us for expenses we incur on their behalf. For each offering you invest in, we will disclose our compensation.
In some cases, an Issuer might pay us in whole or in part with its own Securities, e.g., with its own promissory note. This will always be the same class of Security that is being offered to investors on our Platform. For example, if the issuer is offering common stock to investors, only common stock could be used for our compensation.
We will never own any financial interest in Issuers listed on our Funding Portal other than Securities we receive from them as compensation.
After an offering is complete, we might or might not have an ongoing relationship with the Issuer. The Issuer may decide to use our Funding Portal to raise money in the future, or use services provided by (and pay compensation to) entities affiliated with us.
We will maintain online communications channels –chat rooms, basically – where you can communicate with other investors and with the Issuer. All discussions on the chat rooms will be open to the public, but only investors who have registered with us are allowed to post. Representatives of the Issuer, and anyone engaged in promoting the offering, must clearly identify themselves as such. The chat room is where you can ask questions about investment opportunities that interest you.
We, the Funding Portal, generally aren’t allowed to participate in the chat room, except to establish guidelines and remove potentially abusive or fraudulent content.
How we screen and don’t screen issuers
Under regulations issued by the SEC, we are required to:
- Have a “reasonable basis” for believing that every Issuer on our Platform is eligible to offer its Securities on our Platform, and is complying with Title III. We might perform our own due diligence, but we are generally allowed to rely on the representations of the Issuer.
- Have a “reasonable basis” for believing that every Issuer on our Platform has established means to accurate records of the holders (owners) of its Securities. Again, we might perform our own due diligence, but we are generally allowed to rely on the representations of the Issuer.
- Deny access to the Platform to any Issuer if:
*We have a “reasonable basis” for believing that an Issuer or any of its officers, directors, or beneficial owner of 20% or more of its outstanding voting securities is subject to disqualification under the rules discussed under “Disqualification of Issuers” below. We are not allowed to rely solely on the Issuer’s representations to form this “reasonable belief,” but must conduct background checks with third parties.
*We have a “reasonable basis” for believing that the Issuer or the offering presents the potential for fraud or otherwise raises concerns about investor protection, or we can’t effectively assess the risk.
We will comply with all those requirements. But – and this is very important – we are not required to conclude that Issuers on our Platform represent good investments for investors. In fact, we are not even allowed to tell you if we think that one Issuer is a better investment than another Issuer. You have to make those decisions on your own.
Title III may not be used if the Issuer or certain other people have been the subject of certain disqualifying events during the last 10 years.
The “certain other people” are:
- Any predecessor of the Issuer;
- Any director, officer, general partner, or manager of the Issuer;
- A person owning 20% or more of the Issuer’s voting power;
- Any promoter associated with the Issuer;
- Any person who will be paid for soliciting investors; and
- Any general partner, director, officer, or manager of such a solicitor.
The “certain disqualifying events” include a long list of events, all involving improper actions in the securities business – for example, the conviction of a felony or misdemeanor in connection with the purchase or sale of any security, or the loss of license of a securities broker for misconduct. As explained above, we will conduct background checks before allowing an Issuer to list on our Platform.
The kind of securities we will offer
Specifically, promissory notes. The promissory notes will require the Issuer to pay your money back, plus interest at a specified rate, over a specified time period. Owning a promissory note does not make you an owner of the company. Instead, you are a creditor. As long as the company has enough money to repay your loan, plus any interest you’ve been promised, the value of your security stays the same; the fluctuations of the fortunes of the company don’t affect you, unless the fortunes go way down. On the other hand, you don’t share in the appreciation if things go well. If the company increases in value 100-fold, you just have the right to get your money back, plus interest.
A regular promissory note requires the Issuer make specified payments of interest and principal at specified times. In contrast, a revenue-sharing note requires the Issuer to pay a specified percentage of its revenue. For example, a revenue-sharing note might require the Issuer to pay investors 5% of its revenue for four years. Typically, a revenue-sharing note will also state a maximum that investors are entitled to receive (e.g., double their investment) and a due date for repayment of the original investment.
When you buy an “equity security,” like the common stock of a corporation, you become an owner of the company. The value of your interest fluctuates with the fortunes of the company; if the company does well the value of your interest goes up, while if it does poorly the value goes down, possibly all the way to zero. As an owner, you generally have the right to share in any profit distributions made by the company, and you also share in the appreciation in the value of the company. When a company dissolves, the owners of the equity securities are paid last, after all the creditors.
In some cases, a company will offer a “preferred equity security,” like the preferred stock of a corporation. Typically, the holders of the preferred equity security have a right to receive distributions before the holders of the regular equity securities. For example, the holders of a preferred stock might have the right to receive a 4% dividend before dividends are paid to the holders of common stock. But preferred equity is still equity. The holders of preferred equity are paid after creditors.
These securities start out as debt securities but can be changed – converted – into equity. For example, a company might issue a debt security, which compensates the holder with a defined interest rate, and that can be converted by the holder into common stock at some specified time. The conversion is triggered upon the occurrence of a specified event such as an additional fundraising round, and holders of the convertible note generally enjoy a discount with respect to the company valuation during the liquidity event.
Limits on how much you may invest
Title III limits how much you can invest every year – not only in any one company, or through any one Funding Portal, but also in all companies through all Funding Portals. These limits apply only to your investments under Title III (Regulation Crowdfunding), however.
Specifically, the maximum amount you can invest in all Title III offerings during any period of 12 months is:
- If your annual income or net worth is less than $107,000, you may invest the greater of:
5% of the lesser of your annual income or net worth.
- If your annual income and net worth are both at least $107,000, you can invest the lesser of:
10% of the lesser of your annual income or net worth.
These limits apply to everyone, including “accredited investors.” They are adjusted periodically by the SEC, based on inflation. During the 12-month period, the aggregate amount of securities sold to an investor through all Regulation Crowdfunding offerings may not exceed $107,000, regardless of the investor’s annual income or net worth.
You and your spouse may combine your incomes and assets for purposes of determining how much you may invest, although if you do so, you will be treated as a single investor for purposes of determining how much either of you may invest.
EXAMPLE: Investor Smith earns $107,000 per year and has a net worth of $150,000. Investor Smith makes his first Title III investment on December 1, 2016, investing $7,500 in Company X. On November 27, 2017 Investor Smith would like to make his second Title III investment, investing $5,000 in Company Y. But he can’t; he can invest only $3,200 in Company Y. But he could invest $3,200 in Company Y on November 27, 2017 and another $1,800 (actually, another $10,700, if he wanted to) on December 1, 2017.
How to invest
First, register at the Site. There, you will establish log-in credentials and provide us with some information about yourself.
Under Title III, the entire investment process happens online, through the Site. We will never send you paper, call you on the phone (except in some emergencies), or ask to meet with you.
You can see investment opportunities as soon as you visit the Site. When you click on an opportunity that interests you, you will be able to see all the information available about the opportunity (see the “Issuer Information” section below). But you won’t be allowed to invest until you register.
Once you decide to invest, click on the “INVEST” button. We will ask for more information, arrange for you to pay for your investment, and ask you to sign one or more documents with the Issuer. For example, you might be asked to sign something called an “Investment Agreement.”
Having done all that, you will be deemed to have made an “investment commitment.” But you’ll still have a chance to cancel, as described below.
Once we receive your investment commitment, we will notify you of:
- The dollar amount of your commitment
- The price of the Securities you committed to buy
- The name of the Issuer
- The date and time by which you may cancel your commitment
For each offering, the Issuer will disclose a “target offering amount,” meaning the minimum amount the Issuer is trying to raise (in some cases this could be as little as $1), and an “offering deadline.” If the Issuer doesn’t raise the target amount before the offering deadline, then the offering will be cancelled and any investors who have made investment commitments will receive their money back.
If the Issuer reaches the target offering amount before the offering deadline, it may close the offering early as long as (1) the offering has remained open for at least 21 days, and (2) we give a notice to investors. The notice must:
- Specify the new deadline, which must be at least five days after the date of our notice;
- Notify investors that they may cancel their investment commitment for any reason up until 48 hours before the new deadline; and
- Notify investors whether the issuer will continue to accept investment commitments during the 48 hour period before the new deadline.
If an Issuer intends to accept investments over and above the target offering amount, it must disclose the maximum amount it will accept and how it will handle “over-subscriptions.” For example, the Issuer might allocate the securities on a first-come first-served basis, or pro-rata among all of the investors who make investment commitments, or in some other way.
You can cancel your investment commitment at any time up to 48 hours before the offering deadline, for any reason. The Site will explain how.
Also, if there is a “material” change in the offering (an important change) after you make your investment commitment, then your commitment will automatically be cancelled, and you will be asked to make a new commitment based on the new information.
During the investment process, you will be offered several payment methods such as direct transfer from your bank account (an ACH transfer), check or credit card, and you will receive specific instructions for each method of payment. All payment methods will be free to you.
When you invest, your money will be held in an account administered by a qualified third-party financial institution until the offering is completed. We, as a Funding Portal, are prohibited from holding your money. If the Issuer is successful in raising the target offering amount, the bank will release the investors’ money to the Company. We will notify you by email and the investment process will be complete.
Before your investment is final, we will send you a notice disclosing, among other things:
- The date of the transaction
- The type of Security you are buying
- The price and number of Securities you are buying, as well as the number of Securities sold by the issuer in the entire transaction and the price(s) at which the Securities were sold
- If you are buying a debt security, the interest rate and the yield to maturity calculated from the price paid and the maturity date
- If you are buying a callable security, the first date that the security can be called by the issuer
- The source, form and amount of any compensation we, the Funding Portal, expect to receive in the transaction
Restrictions on resale
Once you buy a Security (e.g., a promissory note), you aren’t allowed to sell or otherwise transfer the Security for one year, except for sales or transfers:
- Back to the Issuer;
- To an “accredited investor”;
- As part of an offering registered with the SEC; or
- To a family member, to a trust you control, to a trust created for the benefit of your family member, or in connection with death or divorce.
The term “family member” includes a child, stepchild, grandchild, parent, stepparent, grandparent, spouse or spousal equivalent, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law of the purchaser, and includes adoptive relationships. The term “spousal equivalent” means a cohabitant occupying a relationship generally equivalent to that of a spouse.
An “accredited investor” means:
- A natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase, excluding the value of the primary residence of such person;
- A natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year;
- A trust with assets in excess of $5 million, not formed for the specific purpose of acquiring the securities offered, whose purchase is directed by a sophisticated person;
- A business in which all the equity owners are accredited investors;
- An employee benefit plan, within the meaning of the Employee Retirement Income Security Act, if a bank, insurance company, or registered investment adviser makes the investment decisions, or if the plan has total assets in excess of $5 million;
- A bank, insurance company, registered investment company, business development company, or small business investment company;
- A charitable organization, corporation, or partnership, not formed for the specific purpose of acquiring the securities offered, with total assets exceeding $5 million; and
- A director, executive officer, or general partner of the company selling the securities, or any director, executive officer, or general partner of a general partner of that issuer.
Information the issuer will disclose
Before you invest, the Issuer must provide you with extensive information on a Form C, which will be available on the Site. The information includes:
- The Issuer’s name, address, and website
- The Issuer’s directors and officers
- The principal occupation and employment for the last three years of each director and officer
- The names of each person owning 20% or more of the Issuer’s voting securities
- The risk factors associated with the investment
- The Issuer’s business and business plan
- How the proceeds of the offering will be used
- The Issuer’s ownership and capital structure
- A description of how rights exercised by the principals of the Issuer could affect investors
- The compensation paid to us in the offering
- A description of previous offerings by the Issuer
- Whether the Issuer has previously failed to file the reports required by law
- Transactions with officers, directors, and other “insiders”
- Whether the Issuer would be disqualified from offering securities under Title III under the “bad actor” rules, if the effective date of those rules were different
- A discussion of the Issuer’s financial condition
- How the Issuer will deal with over-subscriptions
- Where on the Issuers website it will post annual reports, and when the annual reports will be available
- Financial information about the Issuer, as described below
- Any other information necessary in order to make the statements made, in light of the circumstances in which they were made, not misleading
What types of financial information an Issuer must provide depends on three things:
- How much money the Issuer is trying to raise in the current offering;
- Whether this is the Issuer’s first offering using Title III; and
- If this is not the Issuer’s first offering using Title III, how much the Issuer has raised in other Title III offerings during the last 12 months.
|Where the amount of the Title III offering, together with all other Title III offerings of the same Issuer within the last 12 months, is:||The Issuer must provide:|
|$107,000 or less||The Issuer’s total income, tax income, and total tax, as reported on the Issuer’s Federal tax return, certified by the principal executive officer of the Issuer; and financial statements of the Issuer, certified by the principal executive officer of the Issuer. If financial statements are available that have been reviewed or audited by a public accountant that is independent of the Issuer, then those financial statement will be used instead.|
|More than $107,000, but less than $535,000||Financial statements that have been reviewed by a public accountant that is independent of the Issuer, but If financial statements are available that have been audited by a public accountant that is independent of the Issuer, then those financial statement will be used instead.|
|More than $535,000||If this is the Issuer’s first Title III offering, financial statements that have been reviewed by a public accountant that is independent of the Issuer. If this is not the Issuer’s first Title III offering, financial statements that have been audited by a public accountant that is independent of the Issuer.|
All financial statements must be prepared in accordance with U.S. “generally accepted accounting principles.” Financial statement reviews must be conducted in accordance with the Statements on Standards for Accounting and Review Services issued by the Accounting and Review Services Committee of the AICPA. Financial statement audits must be conducted in accordance with either (i) auditing standards of the AICPA, or (ii) the standards of the Public Company Accounting Oversight Board.
If you make an investment commitment and there are important changes between the date of your commitment and the date the investment is concluded, then (1) the Issuer must notify you of the changes, (2) your investment commitment will be canceled automatically unless you reconfirm your commitment within five business days of receipt of the notice.
After you invest, the Issuer is generally required to file annual reports with the SEC and post them on its own website within 120 days after the end of the fiscal year. The annual report will typically include:
- The same types of information included on the Form C you saw when you invested;
- Updated financial statements certified by the principal executive officer of the Issuer (the financial statements don’t have to be reviewed or audited, but if the Issuer already has reviewed or audited financial statements, they must be provided); and
- Updated disclosures about the Issuer’s financial condition.
The Issuer is allowed to stop filing annual reports upon the earlier to occur of:
- The date the Issuer has filed at least one annual report and has fewer than 300 shareholders of record;
- The date the Issuer has filed at least three annual reports and has total assets no greater than $10 million;
- The date the Issuer or someone else buys all of the securities issued in the Title III offering;
- The date the Issuer registers its securities and is required to file reports under the Securities Exchange Act of 1934; or
- The date the Issuer is dissolved under state law.
At best, you will have current information about the Issuer once per year. If the Issuer stops providing annual reports, you won’t have current financial information about the Issuer at all.
An Issuer might hire a public relations firm or other third party to promote the Issuer’s offering on the Platform – for example, by talking about the offering in our chat room. Or an employee or founder of the Issuer might do the same thing. In either case, the person doing the promoting must identify himself or herself on the Platform and disclose that he or she is engaged in promotional activity. In the case of a third party, the third party must also disclose that it is being paid for its promotional activity.
The SEC recently proposed significant changes to Title III, including changes that would:
- Allow accredited investors to invest any amount, with no limits.
- Raise the investment limits for non-accredited investors.
- Raise the amount an Issuer may raise, to $5M per year.
- Limit the kinds of Securities that may be issued.
We will update these Educational Materials when and if any changes become effective.