1. Types Of Business Investments
Although FURSA may not offer all of the below on its platform, there are several other investment structures that are used to invest in private companies. These are described below:
Revenue Sharing Investments
Revenue-based financing is a hybrid that combines features from venture capital funding and bank loans. Payments to the investors are based on the company’s revenue.. Revenue-sharing investors may own shares of the company, but they do not sit on the board of the company they fund or have any other voting rights to control the actions of the company.
Common stock is the simplest form of equity. These are ordinary company shares most commonly held by founders and employees. Common stock shareholders are generally granted voting rights, but can be limited in some ways and often have less rights than those granted to preferred shareholders. Common stock shareholders can only claim their share of a company’s assets after the claims of debt holders and preferred equity holders (in that order) have been met.
Preferred equity is usually issued to outside investors. This type of equity may include rights that prevent or minimize the effects of dilution or grants special privileges in situations when the issuer is sold.
A convertible note is a form of debt that converts into equity, usually in conjunction with a future financing round. The investor loans money to a company with the expectation they will receive equity in the issuer in the future at a discounted price per share to future investors. Fursa does not currently support this type of investment.
A debt investment represents a deferred payment over a period of time. In such an investment, investors have a fixed return and usually receive payments until a specified due date in the future.
2. How to Assess Investment Opportunities
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. Read The Investing Process [insert hyperlink for jumping to that section] to learn more about due diligence.
3. The Investing Process
The basic steps of the investing process in private companies:
Due diligence – you need to review key documents, research the issuer and team. Some things to pay attention to are idea scalability, market positioning, relevant experience of the individuals operating the issuer, financial status of the issuer, revenue model, and exit potential.
Depending on the investment mechanism, you will have some legal paperwork such as verification of your identity and investor limits before making an investment into a private company.
To make an investment, you will normally sign an investment agreement that sets out the terms of the investment. In some transactions, the documents will be held in escrow until certain conditions are met.
Transfer the funds to the escrow bank account. Your funds may be transferred into an escrow account held by a third-party for safe-keeping until the funds are released to the issuer once certain conditions are met. Once the conditions of the escrow are met the documents and/or funds will be released to the issuer.
General Considerations – Notwithstanding the foregoing, these investments are illiquid, risky and speculative and you may lose your entire investment. The foregoing verification process does not guarantee that any company will be successful or that you will receive a positive return on your investment. Each company review is tailored to the nature of the issuer, so the mentioned review process is not the exact process for every issuer. Completing the verification process does not guarantee that the issuer has no outstanding issues or that problems will not arise in the future. While the foregoing process is designed to identify material issues, there is no guarantee that there will not be errors, omissions, or oversights in the process.
For additional information about investing please consult www.sec.gov about investing basics.
4. Understanding Investment Returns
If you are looking to start investing in private companies, you need to understand what happens after you have made an investment and how to manage your portfolio. Following completion of an offering conducted through Fursa, there may or may not be any ongoing relationship between the issuer and Fursa.
What Happens After You Invest?
Depending on the range of factors, such as the performance of the business, the terms of your investment, the terms of any subsequent rounds of financing, and the terms of any liquidity event, there are a few possible outcomes for your investment, which include:
- Total loss of capital invested
- Recovery of some principle but with some losses
- Return of capital
- Return of capital with a small profit
- Significant investment return above the capital invested
Some useful terms you want to know:
Return On Investment
ROI – a performance measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments. ROI measures the amount of return on an investment relative to the investment’s cost. To calculate ROI, the benefit (or return) of an investment is divided by the cost of the investment, and the result is expressed as a percentage or a ratio. Small business investments typically take at least five to ten years to show a return, so you should only invest capital that you are able to have remain invested for a long time frame.
Loss Of Capital
The majority of startup investments result in the total or near total loss of the principal invested in the startup. You should monitor the companies that you have invested in and request updates so that you know when to consider an investment as a total loss. These losses may be tax deductible – you might need to consult with a tax advisor to learn more.
The returns which investors receive in an acquisition generally depend upon the structure and terms of the acquisition agreements and the type of security that such investor hold. Typically, investors holding debt instruments in an acquired company will either be paid in full as part of the transaction, or the acquiring entity may elect to assume such debt instruments and continue to make payments in accordance with the terms of the debt instrument.
In certain circumstances you may be able to sell your securities to a third-party. These types of sales may be limited by the terms of your investment, transfer restrictions under US securities laws, and/or a lack of willing purchasers. In the future, secondary markets may emerge to facilitate these transactions but at this time, due to the limited number of secondary markets, all investments in private companies should be considered illiquid. The reselling of a security offered and sold on our platform is subject to a one year holding period beginning when the securities were issued.
Dilution of Equity
Usually companies raise multiple rounds of investment capital to fund their growth. If you are an early investor, then your percentage ownership of the issuer may be diluted when new investors are granted newly issued shares in the issuer. Sometimes dilution may be a good thing for your investment when new investors are investing at a higher price per share than your original investment and the additional capital is being used to grow the business. As a general rule, if the valuation of the next round is higher than the round that you invested in, then having your percentage ownership “diluted” is not a bad thing.
If you have pro-rata rights or pre-emption rights, you are granted the right to purchase additional stock in the issuer through the current fundraising round to maintain your percentage ownership. If you do not have anti-dilution protection or you do not exercise your pro-rata rights, your percentage ownership in the issuer may be diluted in future rounds. You also should pay attention to the drag along and tag along rights when assessing a company for investment.
Exit usually refers to a liquidity event, such as the sale of the asset or a refinance.
Debt investments generate income which may or may not be paid on a regular basis. Other debt investments may require payment in a single large “balloon” payment at the end of the term.
Default and Foreclosure
In the event of a default on a debt, Fursa would be required to foreclose upon the collateral. In some states this requires the filing of a judicial action and a ruling by a court. Other states allow foreclosure through non-judicial means. Upon completion of the foreclosure, the collateral would be sold and the proceeds distributed to the investors, after deducting the costs of foreclosure incurred by Fursa.
In the event of a default, the borrower may seek bankruptcy protection to prevent or stall the foreclosure process. This would result in additional time and expense, which would possibly reduce an investor’s returns.
5. Managing Your Investment Portfolio
When investing in businesses, most investors follow their own investment strategy that is formed based on their knowledge, experience and expertise as well as personal values and financial situation. Here are some tips on setting an investment strategy:
- Industry – invest in ones you believe have the potential for future stability and/or growth.
- Stage of company – decide what stage to invest in (seed, venture rounds, mature).
- Market sector – invest in sectors of the economy which interest you from an investment perspective.
- Geography – select geographic preferences according to country or region .
- Business models – shortlist business model preferences.
- Investment size – decide on your average bucket size.
- Type of investment (debt/equity/other) – decide on portfolio distribution between different investment types.
- Number of investments – set the amount of diversification you are interested in.
When investing, it is important to account for risk. Risks include, but are not limited to, change in market conditions, competitors of the issuer already in the market place or who may enter the market later, inflation, economic downturn, loss of key management staff or employees,
When investing in startups, since the majority of startups fail and those that do provide a return to their investors may take five to ten years to do so, investors who invest in startups usually take the following precautions:
- Asset allocation: Do not allocate more than 5-10% of your overall portfolio into alternative assets, including startup investment opportunities.
- Diversification: Build a diversified portfolio of a minimum of 10-15 startup investments (diversification does not assure a profit nor does it necessarily hedge against or guarantee against investment loss).
- Investment horizon: Do not invest any capital if you do not feel comfortable having it unavailable for a period of time.
- General risk factors: Investors should also bear in mind the general risks inherent in the asset class.
Follow-on investment strategy is worth considering in advance. If you plan to take advantage of any rights to invest in future investment rounds, this investment strategy is colloquially referred to as keeping “dry powder” to make follow-on investments. In other words, setting aside some money or liquid assets to they are available to you when an opportunity arises to participate in a future investment round in that same issuer.
It is important to monitor your portfolio. Companies that you have invested in should provide regular business updates (some of these updates may be a legal requirement of the investment documents): information about the progress of the issuer, information about developments in the industry and any business challenges.
6. Investment Limits
Regulation Crowdfunding (“Reg CF”) 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 $124,000, then the greater of $2,500 or 5% of the lesser of their annual income or net worth.
- If both their annual income and net worth are equal to or more than $124,000, investors are allowed to invest up to 10 percent of the lesser 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.
Effective on or about March 15, 2021, the rules were changed to allow the greater of income or net worth.
Securities purchased in a crowdfunding transaction generally cannot be resold for one year. Holders of these securities would not count toward the threshold that requires a company to register its securities under Exchange Act Section 12(g) if the issuer is current in its annual reporting obligations, retains the services of a registered transfer agent and has less than $25 million in total assets as of the end of its most recently completed fiscal year. In addition, all transactions relying on the new rules would be required to take place through an SEC-registered intermediary, either a broker-dealer or a funding portal. Fursa is an example of one such funding portal.
To invest in securities offered under Regulation Crowdfunding on www.fursa.capital, simply click on the “Invest” button available on the listing page of the issuer in which you wish to invest. You will be asked to confirm that you have reviewed these educational materials and understand the risks of investing as well as in the Fursa Educational Materials. Once you acknowledge the materials, you will be redirected to our investment flow to complete your investment. Upon confirming the investment, your investment amount will be funded and held in a secured escrow account at a third-party agent.
Investors are allowed to cancel their investment at any time up to 48 hours before the closing date of the offering. In the event the target offering amount is reached prior to the offering deadline, all investors that have confirmed their investment by completing the investment flow on Fursa will be notified five business days prior to the new closing date, which is meant to give investors adequate time to cancel their investment.
Furthermore, in the event that the Issuer has a material change in their offering (e.g., terms are updated, company operations have materially changed), all investors will receive a notice of that material change and will be required to reconfirm his or her investment commitment within five business days of the receipt of the notice. If the investor does not confirm their investment, the investment will be automatically canceled and the funds committed will be returned to the investor.
SEC rules also require that Reg CF platforms provide channels for investors to discuss investment opportunities listed on the platform. Without the platform itself vetting projects, this public vetting process is critical. In this manner, the wisdom of the crowd guides investments on a Reg CF platform for non-accredited investors.
7. Risks of investing
This information below sets out the risks that investors need to consider when making an investment in a company on Fursa. Investing is very risky, highly speculative, and investments should not be made by anyone who cannot afford to risk part of or the entire investment.
In making comparisons with other investments, a prospective Investor should consider that the success of any investment depends upon many factors, including opportunity, general economic conditions, and the experience of management. There is no representation that all or any possible factors necessary for success are present in an issuer company. Each prospective investor must conduct his or her own due-diligence and analysis in order to make an investment decision. Fursa does not provide investment advice.
The securities offered and sold on the platform in reliance on section 4(a)(6) are subject to risks. Please review the Risk Factors regarding risks associated with each type of security, including the risk of having no voting power. These Risk Factors are listed in the Form C completed by each issuer and available on the issuer’s campaign page.
Each investor should carefully consider whether investing through the Fursa platform is an appropriate investment and whether such investor can bear the risks associated with such investment, including total loss of their investment.
The circumstances in which an investment commitment may be canceled by the issuer
- In the event that an issuer makes a material change to the terms of an offering or to the information provided by the issuer, investors need to re-confirm their investment in light of the new information. The confirmation must be received within five business days of the investor’s receipt of the notice of the material change or else the investment commitment must be canceled.
- If an issuer does not raise the target funds by the deadline it established, the investors get a notice of the cancellation of the investment commitment within five business days, direct the refund of investor funds, and prevent investors from committing any additional funds to the offering.
- The Issuer may cancel the offering, in that case the investors must be notified and their investment commitments canceled.
The circumstances in which an investment commitment may be canceled by the intermediary
The intermediary can deny access to its platform if the intermediary has a reasonable basis for believing that an issuer, or any of its officers, directors (or any person occupying a similar status or performing a similar function), or any 20 percent beneficial owner of the issuer is subject to a disqualification under Rule 503 of Regulation Crowdfunding or the issuer or offering presents the potential for fraud or otherwise raises concerns regarding investor protection.
8. Calculating your Net Worth
Calculating your net worth FINRA: http://www.finra.org/investors/know-your-net-worth
Net worth is the total assets minus total outside liabilities of an individual or a company. Put another way, net worth is any asset owned minus any debt owed. Calculating your net worth can be a useful tool to gauge your financial health and your financial progress over time.
Step 1, you need to decide if you want to calculate net worth individually (you) or jointly (you and your spouse/partner).
Step 2, you need to list all your assets. The list below will help you classify everything in just a few seconds:
Cash and cash equivalents
Determine the amount of cash and cash equivalents that you have, including:
- Certificates of deposit
- Checking and savings accounts
- Money market accounts
- Physical cash
- Treasury bills
Determine the current market value of your investments, including:
- Life insurance cash value
- Mutual funds
- Retirement plans – IRA, 401(k), 403(b), etc.
- Other investments
Real and personal property
Determine the current market value of your real and personal property. Real property includes land and anything that is permanently attached to the land, such as a house. Personal property is everything else.
- Collectibles – antiques, art, coins, etc.
- Household furnishings
- Primary residence
- Rental properties
- Vacation or second home
Step 3, add cash/cash equivalents, investments, and real/personal property.
The sum represents your total assets.
Step 4, you need to list all your liabilities. Here is the list to help you:
Determine the amount of your secured liabilities, including:
- Automobile loan(s)
- Home equity loan
- Margin loans
- Rental real estate mortgage
- Second mortgage
- Vacation/second home mortgage
Determine the amount of your unsecured liabilities, including:
- Credit card debt
- Medical bills
- Personal loans
- Student loans
- Taxes due
- Other debt and outstanding bills
Step 5, add secured liabilities and unsecured liabilities.
The sum represents your total liabilities.
Step 6, subtract your total liabilities from your total assets. The difference is your net worth.
Let’s consider a couple that has the following assets: primary residence valued at $250,000, an investment portfolio with a market value of $100,000 and automobiles and other assets valued at $25,000. The couple’s liabilities are an outstanding mortgage balance of $100,000 and a car loan of $10,000. The assets ($250,000 + $100,000 + $25,000) minus the liabilities ($100,000 + $10,000) means that the couple’s net worth is $265,000.