LACK OF PROFESSIONAL MANAGEMENT:  Most small companies are managed by their founders. Very often the founder of a company is very strong in one area – for example, she might be an extremely effective salesperson or a terrific baker – but lacks experience or skills in other critical areas. It might be a long time before (1) a startup can afford to hire professional management, and (2) the founder recognizes the need for professional management. In the meantime, the company and its investors could suffer.

LACK OF ACCESS TO CAPITAL:  Small companies have very limited access to capital, a situation that Title III Funding Portals hope to improve but cannot fix entirely. Frequently these companies cannot qualify for bank loans, leaving the company to live off the credit card debt incurred by the founder. Capital is the oxygen of any business, and without it a business will eventually suffocate and fail.

LIMITED PRODUCTS AND SERVICES:  Most small businesses sell only one or two products or services, making them vulnerable to changes in technology and/or customer preferences.

LACK OF ACCOUNTING CONTROLS:  Larger companies typically have in place strict accounting controls to prevent theft and embezzlement. Smaller companies typically lack these controls, exposing themselves to additional risk.

LACK OF TECHNOLOGY:  Many small businesses cannot afford the technology that a larger business would use to create efficiencies and cost savings.

CASH FLOW SHORTFALLS:  Many small businesses experience frequent shortfalls in cash flow. If a business doesn’t have enough money to meet payroll, it might not make payments on obligations to its investors, either.

COMPETITION:  A small business is likely to be vulnerable to competition, whether in the form of another small business or a national chain.

RISKS ASSOCIATED WITH TECHNOLOGY COMPANIES:  Many of the Issuers on our Platform will be in the technology industry. Investing in technology can be enormously profitable but is also very risky. Among other things:

• We know technology will continue to advance, but it is extremely difficult to predict in exactly what direction. Most new technologies never achieve commercial success.
• Competition in the technology industry is intense.
• A few companies – Google, Apple, Amazon, and Facebook – dominate the technology industry. When one of these companies announces that it intends to invest in a given technology, the announcement itself can destroy smaller companies.
• Technology changes rapidly. Nokia, now almost forgotten, was the powerhouse of telephone handset manufacturers not long ago. MySpace was a very promising company until Facebook took over the space. Within the last 12 months Zoom has lapped all its competition in the video conferencing space. One after another technology companies rise and fall. Thus, while a technology company might find quick success it can just as quickly become obsolete.

RISKS ASSOCIATED WITH HEALTHCARE COMPANIES:  Many of the Issuers on our Platform will be in the healthcare industry. Although healthcare spending represents a significant portion of the American economy and is likely to grow as the population ages, investing in healthcare startups is very risky. Among other things, taking a new drug or therapy from idea to product takes a long time, is very expensive, and must surmount tall regulatory barriers. Often, a drug or therapy that seems promising at the outset, or even after extensive trials, ultimately fails.

RELIANCE ON MANAGEMENT:  Most of the time, the securities you buy through our Platform will not give you the right to participate in the management of the company. Furthermore, if the founders or other key personnel of the issuer were to leave the company or become unable to work, the company (and your investment) could suffer substantially. Thus, you should not invest unless you are comfortable relying on the company’s management team. You will almost never have the right to oust management, no matter what you think of them.

INABILITY TO SELL YOUR INVESTMENT: The law prohibits you from selling your securities (except in certain very limited circumstances) for one year after you acquire them. Even after that one-year period, a host of Federal and State securities laws may limit or restrict your ability to sell your securities. Even if you are permitted to sell, you will likely have difficulty finding a buyer because there will be no established market. Given these factors, you should be prepared to hold your investment (your promissory note) for its full term.

THE ISSUER MIGHT NEED MORE CAPITAL:  An issuer might need to raise more capital in the future to fund new product development, expand its operations, buy property and equipment, hire new team members, market its products and services, pay overhead and general administrative expenses, or a variety of other reasons. There is no assurance that additional capital will be available when needed, or that it will be available on terms that are not adverse to your interests as an investor. If the company is unable to obtain additional funding when needed, it could be forced to delay its business plan or even cease operations altogether.

CHANGES IN ECONOMIC CONDITIONS COULD HURT AN ISSUER’S BUSINESSES: Factors like global or national economic recessions, changes in interest rates, changes in credit markets, changes in capital market conditions, declining employment, decreases in real estate values, changes in tax policy, changes in political conditions, and wars and other crises, among other factors, hurt businesses generally and small, local businesses in particular. These events are generally unpredictable.

NO REGISTRATION UNDER SECURITIES LAWS: The securities sold on our Platform will not be registered with the SEC or the securities regulator of any State. Hence, neither the companies nor their securities will be subject to the same degree of regulation and scrutiny as if they were registered.

INCOMPLETE OFFERING INFORMATION:  Title III does not require us or the issuer to provide you with all the information that would be required in some other kinds of securities offerings, such as a public offering of shares (for example, publicly-traded firms must generally provide investors with quarterly and annual financial statements that have been audited by an independent accounting firm). Although Title III does require extensive information, as described above, it is possible that you would make a different decision if you had more information.

LACK OF ONGOING INFORMATION:  Companies that issue securities using Title III are required to provide some information to investors for at least one year following the offering. However, this information is far more limited than the information that would be required of a publicly-reporting company; and the company is allowed to stop providing annual information in certain circumstances.

BREACHES OF SECURITY:  It is possible that our systems would be “hacked,” leading to the theft or disclosure of confidential information you have provided to us. Because techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until they are launched against a target, we and our vendors may be unable to anticipate these techniques or to implement adequate preventative measures.

UNINSURED LOSSES:  A given company might not buy enough insurance to guard against the risks of its business, whether because it doesn’t know enough about insurance, because it can’t afford adequate insurance, or some combination of the two. Also, there are some kinds of risks that are simply impossible to insure against, at least at a reasonable cost. Therefore, any company could incur an uninsured loss that could damage its business.

THE OWNERS COULD BE BAD PEOPLE OR DO BAD THINGS:  Before we allow a company on our Platform, we run certain background checks, including criminal background checks. However, there is no way to know for certain that someone is honest, and even generally honest people sometimes do dishonest things in desperate situations – for example, when their company is on the line, or they’re going through a divorce or other stressful life event. It is possible that the management of a company, or an employee, would steal from or otherwise cheat the company, and you.

UNRELIABLE FINANCIAL PROJECTIONS:   Issuers might provide financial projections reflecting what they believe are reasonable assumptions concerning their businesses. However, the nature of business is that financial projections are rarely accurate, not because issuers intend to mislead investors but because so many things can change, and business is so difficult to predict.

LIMITS ON LIABILITY OF COMPANY MANAGEMENT:  Many companies limit the liability of management, making it difficult or impossible for investors to sue managers successfully if they make mistakes or conduct themselves improperly (not all liability can be waived, however). You should assume that you will never be able to sue the management of any company, even if they make decisions you believe are plainly wrong.

CHANGES IN LAWS:  Changes in laws or regulations, including but not limited to zoning laws, environmental laws, tax laws, consumer protection laws, securities laws, antitrust laws, and health care laws, could adversely affect many companies.

CONFLICTS OF INTEREST WITH US:  In most cases, we make money as soon as you invest. You, on the other hand, make money only if your investments turn out to be successful. Or to put it a different way, at least in the short term it is in our interest to have you invest as much as possible in as many companies as possible, even if they all fail and you lose your money.

CONFLICT OF INTEREST WITH COMPANIES AND THEIR MANAGEMENT: In many ways your interests and the interests of company management will coincide:  you both want the company to be as successful as possible. However, your interests might be in conflict in other important areas, including these:

• You might want the company to distribute money, while the company might prefer to reinvest it back into the business.
• You might wish the company would be sold so you can realize a profit from your investment, while management might want to continue operating the business.
• You would like to keep the compensation of managers low, while managers want to make as much as they can.

LACK OF PROFESSIONAL ADVICE:  Because of the limits imposed by law, you might invest only a few hundred or a few thousand dollars in a given company. At that level of investment, you might decide that it’s not worthwhile for you to hire lawyers and other advisors to evaluate the company. Yet if you don’t hire advisors, you are in many respects “flying blind” and more likely to make a poor decision.

YOUR INTERESTS AREN’T REPRESENTED BY OUR LAWYERS:  We have lawyers who represent us, and most of the companies on the Platform also have lawyers, who represent them. These lawyers have drafted the Terms of Use and Privacy Policy on the Site, and will draft all the documents you are required to sign. None of these lawyers represents you personally. If you want your interests to be represented, you will have to hire your own lawyer, at your own cost.

FUTURE INVESTORS MIGHT HAVE SUPERIOR RIGHTS:  If the company needs more capital in the future and sells stock to raise that capital, the new investors might have rights superior to yours. For example, they might have the right to be paid before you are, to receive larger distributions, to have a greater voice in management, or otherwise.

OUR COMPANIES WILL NOT BE SUBJECT TO THE CORPORATE GOVERNANCE REQUIREMENTS OF THE NATIONAL SECURITIES EXCHANGES:  Any company whose securities are listed on a national stock exchange (for example, the New York Stock Exchange) is subject to a number of rules about corporate governance that are intended to protect investors.  For example, the major U.S. stock exchanges require listed companies to have an audit committee made up entirely of independent members of the board of directors (i.e., directors with no material outside relationships with the company or management), which is responsible for monitoring the company’s compliance with the law. Companies listed on our Platform typically will not be required to implement these and other stockholder protections.

EQUITY COMES LAST IN THE CAPITAL STACK:  The holders of the equity interests stand to profit most if the company does well, but stand last in line to be paid when the company dissolves. Everyone – the bank, the holders of debt securities, even ordinary trade creditors – has the right to be paid first. You might buy equity hoping the company will be the next Facebook, but face the risk that it will be the next Theranos.

IN MOST CASES, YOU WILL BE A MINORITY INVESTOR: Investors will typically be “minority” owners of companies on the Platform, meaning that other parties will have complete voting and managerial control over the company. As a minority stockholder, you typically will not have the right or ability to influence the direction of the company. You will generally be a passive investor. In some cases, this may mean that your securities are treated less preferentially than those of larger security holders.

POSSIBLE TAX COST:  Many of the companies on the Platform will be limited liability companies. In almost every case these limited liability companies will be taxed as partnerships, with the result that their taxable income will “flow through” and be reported on the tax returns of the equity owners. It is therefore possible that you would be required to report taxable income of a given company on your personal tax return, and pay tax on it, even if the company doesn’t distribute any money to you. To put it differently, your taxable income from a limited liability company is not limited to the distributions you receive.

YOUR INTEREST MIGHT BE DILUTED:  As an equity owner, your interest will be “diluted” immediately, in the sense that (1) the “book value” of the company is very likely to be lower than the price you are paying, and (2) the founder of the company, and possibly others, bought their stock at a lower price than you are buying yours. Your interest could be further “diluted” in the future if the company sells stock at a lower price than you paid.

FUTURE INVESTORS MIGHT HAVE SUPERIOR RIGHTS:  If the company needs more capital in the future and sells stock to raise that capital, the new investors might have rights superior to yours. For example, they might have the right to be paid before you are, to receive larger distributions, to have a greater voice in management, or otherwise.

DILUTION OF VOTING RIGHTS:  Even if you have any voting rights to begin with (and many of the equity securities offered on the Platform will have no voting rights), these rights will be diluted if the company issues additional equity securities.

No Conversion:  Typically, a convertible note converts to equity when the issuer engages in a subsequent round of financing when the value of the issuer is determined (a so-called “pricing round”). However, there is no guaranty that the issuer will raise more money. In that case the investor is left with merely a debt security, with all the associated risks.

Subordination To Rights Of Other Lenders:  Typically, when you buy a convertible note on our Platform, while you will have a higher priority than holders of the equity securities in the company, you will have a lower priority than some other lenders, like banks or leasing companies. In the event of bankruptcy, they would have the right to be paid first, up to the value of the assets in which they have security interests, while you would only be paid from the excess, if any.

Lack of Security:  The convertible notes sold on our Platform typically will not be secured by property, like an interest in real estate or equity.

Lack of Information About Value:  When you buy a convertible notes the issuer will place a “cap” – a maximum – on the value of the company. Theoretically the cap works to your advantage, but in reality you will not be able to determine whether the cap is too high.

Lack of Input on Pricing Round:  A convertible note typically converts to equity automatically in the event of a pricing round. However, the terms of the equity the company issues in the pricing round is being negotiated (if at all) by the new investors, not by you. In effect, you have to accept whatever form of equity they will accept.

No Conversion:  Typically, a convertible note converts to equity when the issuer engages in a subsequent round of financing when the value of the issuer is determined (a so-called “pricing round”). However, there is no guaranty that the issuer will raise more money. In that case the investor is left with merely a debt security, with all the associated risks.

You Don’t Know What You Are Getting:  In many cases, SAFEs won’t have a valuation cap and you don’t know what your SAFE is worth when you buy it. Indeed, this is why SAFEs were invented in the first place – to avoid the need to place a valuation on a small company.

No Conversion:  The Company may never receive a future equity financing or elect to convert the Securities upon such future financing. Additionally, the Company may never undergo a liquidity event, such as a sale of the Company or an Initial Public Offering.

SAFEs Are Not Appropriate For All Issuers:  SAFEs were developed for a particular kind of companies common in Silicon Valley, expected to experience rapid growth and multiple rounds of financing with an exit (a sale of the company or a public offering). Not all companies fit that profile.

Other Risks Of Equity Securities Apply:  All the risks listed above for equity securities also apply to SAFEs.

Revenue is Unpredictable:  The revenue of many startup companies is unpredictable. You might not receive any payments for an indefinite period, or the payments might start and stop. Revenue sharing notes typically do not provide a steady cash flow.

Your Interests Might Conflict with the Interests of Management:  Holding a revenue sharing note, you might prefer for the company to generate revenue quickly. Members of the management team, on the other hand, might choose to defer generating revenue in favor of other goals, like product development or marketing.

Profit Potential Might Not Adequately Compensate You For Risk:  You have the potential for profit with a revenue sharing note because you might receive in total more than you paid. However, your potential profit is always limited – for example, you might have the potential to earn double what you paid, but never an unlimited amount. There is no way of knowing whether your profit potential is enough compensation for the risk.

Subordination to Rights of Other Lenders:  Typically, when you buy a revenue sharing note, while you will have a higher priority than holders of the equity securities in the company, you will have a lower priority than some other lenders, like banks or leasing companies. In the event of bankruptcy, they would have the right to be paid first, up to the value of the assets in which they have security interests, while you would only be paid from the excess, if any.

Lack of Guaranty:  Even if the company generates no revenue, the holders of revenue sharing notes typically have the right to receive their money back plus a return as of a specified maturity date. However, repayment is not guaranteed by anyone, so you might not be paid at all.

YOU HAVE A LIMITED UPSIDE:  As a creditor of the company, the most you can hope to receive is your money back plus interest. You cannot receive more than that even if the company turns into the next Facebook.

YOU DO HAVE A DOWNSIDE:  Conversely, if the company loses enough value, you could lose some or all your money.

SUBORDINATION TO RIGHTS OF OTHER LENDERS:  Typically, when you buy a debt security on our Platform, while you will have a higher priority than holders of the equity securities in the company, you will have a lower priority than some other lenders, like banks or leasing companies. In the event of bankruptcy, they would have the right to be paid first, up to the value of the assets in which they have security interests, while you would only be paid from the excess, if any.

LACK OF SECURITY:  Sometimes when you buy a debt security on our Platform, it will be secured by property, like an interest in real estate or equity. Other times it will not.

LACK OF GUARANTY:  Sometimes when you buy a debt security on our Platform, it will be guaranteed by the owner of the business, or by someone else. Other times it will not.

ISSUERS TYPICALLY WILL NOT HAVE THIRD PARTY CREDIT RATINGS:  Credit rating agencies, notably Moody’s and Standard & Poor’s, assign credit ratings to debt issuers. These ratings are intended to help investors gauge the ability of the issuer to repay the loan. Companies on our Platform generally will not be rated by either Moody’s or Standard & Poor’s, leaving investors with no objective measure by which to judge the company’s creditworthiness.

INTEREST RATE MIGHT NOT ADEQUATELY COMPENSATE YOU FOR RISK:  Theoretically, the interest rate paid by a company should compensate the creditor for the level of risk the creditor is assuming. That’s why consumers generally pay one interest rate, large corporations pay a lower interest rate, and the Federal government (which can print money if necessary) pays the lowest rate of all. However, the chances are very high that when you lend money to a company on the Platform (buying a promissory note is the same as lending money), the interest rate might not compensate you adequately for the level of risk.