Common Investor Questions
What is Regulation Crowdfunding, aka Reg. CF?
Regulation Crowdfunding provides a framework for [registered] funding portals such as FundMe to operate an online platform for businesses to offer and sell securities in reliance on Section 4(a)(6) of the JOBS Act. Before this, it was difficult for private businesses to sell securities to the public. The JOBS Act allows private businesses to sell securities to non-accredited investors (not just investors with a certain level of income and net worth).
How to asses an investment
Assessing an investment is all about doing the proper due diligence to be able to make an informed investment decision. Each investor must conduct their own independent review of the offering documents and perform their own independent due diligence.
Common factors that are reviewed by seasoned investors include:
- Management team backgrounds
- Differentiation and defensibility
- Business model
- Competitive landscape
- Historical financial performance
- Financial projections
- Unit economics
- Capitalization table
- Use of proceeds
Usually investors are looking for an investment that represents an opportunity in an established or up and coming area with identifiable growth over a certain period of time, committed and skillful team, and momentum.
If you choose to take the process to the next step, you need to know how to read the terms under which a potential investment will be made.
Important Terms of Equity Investment include:
- Maximum and Minimum Amount of investment the company is looking to raise
- Type of security offered
- Voting rights
- Anti-dilutive provisions and registration rights
- Liquidation preference
- Conversion rights
- Other offerings
On the FundMe Portal, the deal terms that are presented on the offering pages are final terms and are not generally negotiated or changed once an offering has begun.
How much can you invest?
Reg CF of the JOBS Act establishes the following investor limitations:
- Both accredited investors and non-accredited investors may invest in Reg CF crowdfunding offerings (subject to maximum based on their income and net worth);
- Over a 12-month period (on rolling basis), an individual can invest in the aggregate across all crowdfunding offerings up to:
- If either their annual income or net worth is less than $107,000, they can invest the greater of $2,200 or 5 percent of the greater of the investor’s annual income or net worth
- If both their annual income and net worth are equal to or more than $107,000, investors are allowed to invest up to 10 percent of the greater of their annual income or net worth
- During the 12-month period, the aggregate amount of securities sold to an individual investor through all crowdfunding offerings may not exceed $107,000.
Why do you need your net worth to invest?
We ask you for your net worth because the rules require that we establish a limit to your investment based on a net worth calculation. Calculating net worth involves adding up all your assets and subtracting all your liabilities. The resulting sum is your net worth.
For purposes of Reg. CF, the value of your primary residence is not included in your net worth calculation. In addition, any mortgage or other loan on your home does not count as a liability up to the fair market value of your home. If the loan is for more than the fair market value of your home (i.e., if your mortgage is underwater), then the loan amount that is over the fair market value counts as a liability under the net worth test.
For more information about how to calculate your net worth, please complete the worksheet here on the SEC website.