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.
1. Sources Of Funding
Starting or growing a business requires capital. Here are some sources of capital that entrepreneurs and other business operators use to fund their companies.
Bootstrapping – most entrepreneurs get initial funding for their businesses using personal savings and zero interest credit cards to leverage their own assets. In turn, this will make potential investors more comfortable knowing you have skin in the game.
Friends and Family – friends and family can provide either equity or debt funding and might be more flexible on the repayment. To avoid disagreements and violations of state and federal securities laws, seek the formal advice of a qualified attorney and formalize the agreement in writing before receiving the funding and .
Accelerators and Incubators – while focusing on accelerating startups and providing resources and connections, these organizations might also provide funding. Usually, they use an equity or convertible note approach and have standard terms for all participants in the program.
Crowdfunding – online platforms that allow individuals and businesses to raise money from multiple backers. There are several platforms online where to find a mechanism that is best for you, including debt, equity, or other structures. This mechanism allows companies to tap into a bigger pool of funds and build a support group around the business.
Small business loans – there are numerous organizations that lend to small businesses, including private banks, federal agencies, credit unions and others. Most lenders will want the loan to be secured by assets of some type, will require a credit score, will require the business to be profitable or have positive cash flows, and will set an interest rate. Fursa does not offer instruments that collect interest.
Economic Development Programs – the state, county and municipal economic development offices have an interest in helping businesses succeed to boost local and regional economies. Depending on the location and the type of business, these agencies might offer financial resources, including loans and grants.
Partners – finding a partner that could become a source of funding. Strategic partners can benefit from supporting the business and therefore would be willing to align resources.
Hedge funds, endowment funds, and family offices – one of their focuses is funding small businesses. These lenders often are willing to make longer-term commitments and might be interested in impactful businesses.
Angel investors – these people are usually accredited and are looking to invest in promising businesses. An increasing number of angels are successful entrepreneurs. Today they are forming investment groups to spread risk and to pool research.
Venture capital – these firms provide funding at different stages of company growth and might focus on specific industries. They are typically looking to make relatively large investments and take a significant share of the issuer. On the upside, VC does follow up investments and some provide support and resources as well as a validation point.
2. Raising Money For A Business
When raising funds for growing a business, it is important to consider multiple factors and prepare the right documents. First of all, you need to estimate how much you need to raise based on the expenses you need to cover over a period of time. Given the target fundraising amount, you can now estimate the options – is it possible to get an interest-free loan for that sum or do you need to look for investors.
Regardless of which mechanism you choose to raise money, you need to know your target investor who is interested in backing companies in this industry, stage of development, and funding size. It will also save you time if you talk to people who are potentially investing.
All investors will do due-diligence on the issuer, team and the product/service, here are some things they are looking for:
- believable market size • detailed customer acquisition plan
- competition as a validation • business model
- clear market target • exit strategy
- use of the funds
Securing funding almost always requires a formal business plan. It should not be longer than 20-40 pages. It should include:
- summary of the current strategy • a marketing plan
- key metrics • a management team description
- milestones • financials (income, cashflow, expenses)
- executive summary balance sheet projections)
Funding via Fursa
Fursa is a funding portal under Regulation Crowdfunding which enables private companies to raise funds from the crowd using ethical (halal) investment structures and documentation. Some of the investment structures include sharing in profits, cost-plus sales on a deferred payment plan, simple agreements for future equity (SAFE for short) which could pay investors a return a future sale of shares of the company, and other innovative structures to meet shariah compliance standards reviewed by Fursa’s shariah advisor.
In general, the FURSA process includes the following steps:
Companies can apply to fundraise on fursa.capital. All applications are reviewed by the FURSA Team and certain basic identity checks and other information to reduce the likelihood of fraud.
- Compliance Verification
Exemption under the Regulated Crowdfunding requires:
- Offering will not be integrated with other offerings
- Company must use one online intermediary (Fursa is the intermediary)
- Company must be a US entity
- Company cannot be an Investment Company (as defined by US securities laws) or a company relying on an exemption from the ‘40 Act
- Must have a business plan
- Cannot be a public reporting company
- If the Company has conducted an offering pursuant to Regulation CF in the past, it must be compliant with ongoing reporting requirements
- Certain personnel of the Company cannot be a Bad Actor (as defined by applicable US Securities laws)
The issuer needs to have the right disclosures prepared for filing with the SEC. One of these disclosures is called Form C. As part of Form C, issuers will need to make the following information available on their campaign page and filed with the SEC:
- Name, legal status, address, website
- Directors, officers, background, offices held
- Identity of 20% beneficial holders of voting securities
- Description of the business
- Financial condition
- Target offering amount, maximum amount, deadline
- Description of the securities including prices and how its determined
- Use of proceeds
- Risk factors
- Ownership, capitalization, indebtedness
- Offering mechanics
- Related party transactions
In addition to Form C, financial information required will depend on the size of the intended investment needs:
- Up to $124,000: Information from tax return filed for the most recently completed fiscal year, GAAP financials for past two years or time in existence, and certified by CEO
- Over $124,000 up to $618,000: GAAP financials for, past two years or time in existence, certified by CEO and reviewed by a public accounting firm
- Over $618,000: GAAP financials for, past two years or time in existence, certified by CEO and audited by a public accounting firm
- One time exemption for first time crowdfunding companies, which are allowed to provide reviewed financial statements rather than audited
- Fundraising Campaign
The information about the offering and the issuer should be available for at least 21 days before the sale of securities. All the committed funds from investors are held in an escrow account. The issuer has to reach the minimum target amount before the deadline in order to receive the funds. Issuers are required to provide progress reports on the offering according to the disclosure requirements through Form C-U, which must be filed with the SEC and made available on the campaign page. Once the amount is reached, the funds are transferred to the issuer bank account and the investment becomes effective.
FURSA facilitates the whole process, including document signing and payments of any gains to investors after funding is complete.
How Crowdfunding Works
1. How it Acts as a Bridge
Crowdfunding allows companies to raise funds from investors who find their growth prospects to be appealing. It acts as a bridge between companies looking for investment that might not qualify for institutional lending and investors who would not qualify for larger private investments who are looking for investment opportunities.
2. Promoting Crowdfunding Campaigns
Rule 204 of Regulation Crowdfunding would allow companies to publish a notice advertising the terms of an offering in reliance on Section 4(a)(6) so long as the notice includes no more than the following “tombstone” type information:
- a statement that the issuer is conducting an offering
- the name of the intermediary through which the offering is being conducted
- a link directing the investor to the intermediary’s platform
- the terms of the offering
- the amount of securities offered
- the nature of the securities
- the price of the securities
- the closing date of the offering period
- factual information about the legal identity and business location of the issuer
- the name of the issuer of the security
- the address
- phone number
- e-mail address of a representative
- a brief description of the business
What companies can do:
- Promote your offering on social media such as Twitter, Facebook, and LinkedIn
- Send email blasts to relevant email lists about your offering
- Speak about your offering at demo days, pitch events, and public events
- Talk to the press and bloggers about your offering
- Limit advertising materials to broad, non-sensitive, non-controversial statements
- Have each key employee, 20% shareholder, director, and officer, new investor, broker, solicitor or other “promoter” complete a Bad Actor Questionnaire
What companies CANNOT do:
- Make any untrue statements, misrepresentations or omissions (anti-fraud applies) regarding the offering
- Include sensitive, confidential or controversial information in public advertisements
- Include any information in excess of the “tombstone” information set forth above.
There are no limitations on the distribution of the notice so companies should consider reaching out to customers, personal and professional networks via emails, run events to allow potential investors to learn more about the business, product and team. Social media and online communities can be a great way to reach potential investors among your followers and spread the word about the campaign.
3. Investor Relations
It’s important to have an open communication channel to keep your investors informed. Maintaining long-term relationships with your investors is one of the most important parts of maximizing the added value that strategic investors can provide to your business. The communications are best delivered in writing, either through mail or e-mail.
Many early-stage companies choose to provide investor updates on either a monthly or quarterly basis. These periodic updates usually include information about key metrics, traction, and any business issues that have arisen. This update can include links to new articles about the business, information about new partners, team members, opportunities, etc. You also want to notify investors about any current and upcoming issues that the issuer may face, particularly those that relate to fiduciary duty and organizational impact.
Finance Related Updates
You should always notify your existing investors of a new financing round. Your investor agreements may also legally require you to do so when future capital rounds take place. Some investors from previous rounds may also have the legal right to participate in new rounds of capital raising. Maintaining good records of each investor’s holdings and contact details is vital for companies that are raising multiple rounds of capital.
When you receive offers to acquire the business, the terms of your investor agreement may require you to notify the investors of any such offers.
An initial public offering is the offering of shares in your company for sale to the public and the listing of those shares on a publicly traded stock exchange. An offering of this type may need to be notified to existing shareholders in advance.
Quarterly and annual reports should include detailed financial information. Also, depending on the level of involvement of the investor, phone calls and in person meetings can be beneficial. Consider scheduling semi-annual meetings or brainstorming sessions with investors, either in person or via conference call.
Why is Investor Relations important?
- It forces you to be accountable to yourself and to your investors
- It encourages ongoing evaluation of your company and business model on a monthly and/or quarterly basis
- It helps investors identify potential areas of growth, partnerships, or new business opportunities
- A record of strong investor communication and a documented history of the issuer’s performance can help attract new investors
- Investor relations and reporting are important infrastructure components for larger companies and you should start developing this infrastructure early
4. Crowdfunding Regulations
Crowdfunding is an evolving method of using the Internet to raise capital to support businesses. An entity or individual raising funds through crowdfunding typically seeks small individual contributions from a large number of people. Individuals interested in the crowdfunding campaign – members of the “crowd” – may share information about the project, cause, idea or business with each other and use the information to decide whether to fund the campaign based on the collective “wisdom of the crowd.” The Jumpstart Our Business Startups Act (the “JOBS Act”), enacted on April 5, 2012, establishes a regulatory structure for startups and small businesses to raise capital through securities offerings using the Internet through crowdfunding.
The Regulation CF was approved on October 30, 2015, allowing anyone in the US to invest in companies over the internet using regulated crowdfunding. Private companies were previously allowed to solicit only accredited investors – those with a net worth of at least $1 million, excluding the value of their homes, or annual income of more than $200,000. These rules went into effect on May 16, 2016.
The JOBS Act is intended to help provide Issuers and small businesses with capital by making relatively low dollar offerings of securities and investments less costly. Congress included a number of provisions intended to protect investors who engage in these transactions, including investment limits, required disclosures by issuers, and a requirement to use regulated intermediaries.
Offerings under the new legislation can be made either via existing broker-dealers, or via a new class of regulated registrants called “funding portals.” These portals have to provide enough information for investors to make an educated investment decision as well as to conduct background checks on issuers, their executives, and their officers to reduce fraud risk. They also must make issuer information available on their platforms for at least 21 days before securities can be sold, and enable conversations “among the crowd” about each offering in addition to having the option of a question-and-answer format.
Crowdfunding triggers the application of the federal securities laws because it involves the offer and sale of a security. Under the Securities Act of 1933 (“Securities Act”), the offer and sale of securities is required to be registered unless an exemption is available. Registered offerings are generally not feasible for raising smaller amounts of capital, as is done in a typical crowdfunding transaction, because of the high costs of conducting a registered offering and the resulting ongoing reporting obligations under the Securities Exchange Act of 1934 (“Exchange Act”) that may arise as a result of the offering.
Regulation Crowdfunding (Title III of the JOBS Act) (“Reg CF”) added new Securities Act Section 4(a)(6), which provides an exemption from the registration requirements of Securities Act Section 5 for certain crowdfunding transactions. To qualify for the exemption under Section 4(a)(6), crowdfunding transactions by an issuer must meet specified requirements, including the following:
- the amount raised must not exceed $1,070,000 in a 12-month period;
- individual investments in all crowdfunding issuers in a 12-month period are limited to:
- the greater of $2,500 or 5% of the lesser of annual income or net worth, if annual income or net worth of the investor is less than $124,000, or
- 10% of annual income or net worth (not to exceed an amount sold of $107,000), if both annual income and net worth of the investor is $124,000 or more;
- All transactions must be conducted through an intermediary that either is registered as a broker-dealer or is registered as a new type of entity called a “funding portal”.
In addition, Reg CF:
- adds Securities Act Section 4A, which requires, among other things, that issuers and intermediaries that facilitate transactions between issuers and investors in reliance on Section 4(a)(6) provide certain information to investors and potential investors, take other actions and provide notices and other information to the Commission;
- adds Exchange Act Section 3(h), which requires the Commission to adopt rules to exempt, either conditionally or unconditionally, “funding portals” from having to register as a broker-dealer pursuant to Exchange Act Section 15(a)(1);
- mandates that the Commission establish disqualification provisions under which an issuer would not be able to avail itself of the Section 4(a)(6) exemption if the issuer or an intermediary was subject to a disqualifying event; and
- adds Exchange Act Section 12(g)(6), which requires the Commission to adopt rules to exempt from the registration requirements of Section 12(g), either conditionally or unconditionally, securities acquired pursuant to an offering made in reliance on Section 4(a)(6).
All investors are recommended to read SEC’s “Bulletin on Equity Crowdfunding for Investors” before making an investment decision.
5. Company Disclosures and Reporting
Under the rules certain companies would not be eligible to use the exemption, including non-U.S. companies, Exchange Act reporting companies, certain investment companies, companies that have failed to comply with the annual reporting requirements under Regulation Crowdfunding during the two years immediately preceding the filing of the offering statement, 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.
Reg CF requires companies that rely on the new rules to conduct a crowdfunding offering to file certain information with the Commission and provide this information to investors and the intermediary facilitating the offering, including among other things, to disclose:
- Business name, address and incorporation information;
- A description of the business and business plan;
- Financial Reporting Requirements. GAAP Financial statements of the issuer that, depending on the amount offered and sold during a 12-month period, are accompanied by information from the issuer’s tax returns, reviewed by an independent public accountant, or audited by an independent auditor.:
- Under $107k – Internal financial statement review
- $107k-535k – CPA reviewed financial statements
- 535k-$1,070,000 – 3rd Party audited financial statements
- 1st time crowdfunding issuers offering more than $535,000 would be permitted to provide reviewed, rather than audited, financial statements.
- The price to the public of the securities or the method for determining the price, the target offering amount, the deadline to reach the target offering amount, and whether the issuer will accept investments in excess of the target offering amount;
- The narrative discussion of its financial condition covering, among other things, its historic results of operations and liquidity and capital resources;
- A company offering more than $535,000 but not more than $1.07 million of securities relying on these rules for the first time would be permitted to provide reviewed rather than audited financial statements, unless financial statements of the issuer are available that have been audited by an independent auditor;
- A description of the business and the use of proceeds from the offering;
- Information about officers and directors (including their history with the issuer, business experience for the past three years and other information) as well as owners of 20 percent or more of the issuer;
- The identity of the Crowdfunding Portal for the offering and compensation being paid to it;
- Number of current employees;
- Certain related-party transactions;
- and other information required by the Form C.
You need to file updates to Form C (designated Form C-U) with information on the progress toward reaching the Target Amount no later than five business days after each of the dates when the issuer reaches 50 percent and 100 percent of the target offering.
If an issuer will accept proceeds in excess of the target offering amount, the issuer is required to file a Form C-U with the updated amount of securities sold, no later than five business days after the offering deadline.
Disclosure must be amended if a material change or update occurs by filing a (designated Form C-A and investors must reconfirm their commitment within five business days or their commitment will be considered canceled).
You would be required to file with the SEC and post to your website an annual report within 120 days of the end of each fiscal year (designated Form C-AR). This annual report would include information similar to the offering statement on Form C, including the financial statement and narrative disclosures meeting the highest standard applicable to any of the issuer’s past offerings pursuant to the Crowdfunding Exemption, but excluding offering-specific information.
In certain circumstances a company may terminate its ongoing reporting requirement if:
- The issuer becomes a fully-reporting registrant with the SEC;
- The issuer has filed at least one annual report, but has no more than 300 shareholders of record;
- The issuer has filed at least three annual reports, and has no more than $10 million in assets;
- The issuer or another party purchases or repurchases all the securities sold in reliance on Section 4(a)(6); or
- The issuer ceases to do business.
You would be required to file a notice of termination of its annual reporting obligation on Form C-TR.
How Fursa Works
1. The first and largest Crowdfunding platform for Halal businesses
Fursa is a Halal Crowdfunding platform that lists Shariah Compliant investment opportunities for investors to invest in. It is one of the first of it’s kind to be based out of the US.
2. Investing in Fursa
FURSA Capital is an online funding platform which facilitates revenue sharing investments under the regulated Crowdfunding rules. The main steps in the investment process on FURSA include:
In order to participate in the platform, you must sign up and register with the FURSA platform. This requires you to provide certain personal and financial information, which will be securely stored by FURSA. At this time, you may also create and fund a digital wallet, which will be maintained by Prime Trust. This will require you to enter into an agreement with Prime Trust. Your digital wallet can be funded and used to invest in opportunities on the platform.
After you have completed your due diligence of the issuer and the offering, click the “invest” button on the issuer’s profile page. This will start the investment process during which you will choose the amount of investment and provide additional information. We facilitate the signing of the agreement between you and the issuer. Your information will then be pre-populated into the issuer’s offering documents, which you can sign electronically through the platform.
After signing the agreement, your funds will automatically be transferred from your digital wallet and placed into an escrow account. The funds will remain in escrow until they are released to the issuer or returned back to your digital wallet.
Once the fundraising round closes, you will receive confirmation of success and counter-signed legal agreements. In the case of an unsuccessful round or if you canceled your investment, the proposed transaction will be canceled and the escrow agent will return the funds from the escrow back into your digital wallet or bank account.
In order to protect investors, companies are required to reach a minimum funding target to have a successful fundraising campaign. That means that investments are not finalized until the issuer raises enough money to meet its funding target and completes all other closing conditions. Once the funding target has been met, the money is released to the issuer and investors will receive the confirmation of their investment in the applicable security. If the minimum funding target is not met, subscription amounts are returned to investors by the escrow agent. FURSA does not receive or take custody of investor funds at any point during the investment process.
FURSA reviews the following information about companies listed on its platform:
- Legal and Confirmatory Due Diligence
- Organization of the issuer
- Corporate structure and ownership
- Disclosure information and terms of the offering
- Investment Structure
- Historical financials
- Financial projections
Note: FURSA is not a broker dealer and is not providing advice. Investors are expected to perform their own due diligence of each opportunity.
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 same 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.
A Primer on Islamic Finance
- What is Halal and Shariah Compliant?
Halal is an Arabic word that translates to “permissible” in English. A Halal transaction denotes an economic transaction that is deemed permissible under Islamic Law.
And Shariah refers to a set of Islamic religious laws that governs aspects of day-to-day life for Muslims in addition to religious rituals. Sharia law also provides religious followers with a set of principles and guidelines to help them make important decisions in their lives, such as finances and investments. Islamic banking and finance outline where money can be invested and rules about interest. (Source: Investopedia).
Are Fursa’s Products Shariah Compliant?
Fursa is a platform built on Islamic principles. So each and every product under the brand is Shariah Compliant. All Fursa products are certified for Shariah compliance by Amanah Advisors and Mufti Faraz Adam’s team.
What is Islamic Finance
Islamic finance refers to how businesses and individuals raise capital in accordance with Sharia, or Islamic law. It also refers to the types of investments that are permissible under this form of law. Islamic finance can be seen as a unique form of socially responsible investment. (Here’s the full Investopedia article for more).
Why is Islamic Finance Better
Islamic Finance focuses on equitable distribution of profits to all parties by risk and reward sharing. It is based on the premise that all business ventures are subject to risk and investors should share the risk and revenue in proportion to their investments. This lack of a fixed rate means the rich cannot take advantage of the resource strapped poor by lending money at rates that work to “keep the poor, poor”.
What types of investment vehicles do Islamic Finance offer
What is a Murabaha
Murabaha, also referred to as cost-plus financing, is an Islamic financing structure in which the seller and buyer agree to the cost and markup of an asset. The markup takes the place of interest, which is illegal in Islamic law. As such, murabaha is not an interest-bearing loan (qardh ribawi) but is an acceptable form of credit sale under Islamic law. As with a rent-to-own arrangement, the purchaser does not become the true owner until the loan is fully paid. (Source)
What is Istisna
Istisna is a type of sale transaction where the buyer places an order with the seller to manufacture a certain asset and the sale is completed upon delivery of the asset to the buyer. Istisna is used for providing financing facilities for transactions where customers are involved in manufacturing or construction. Under the Istisna Financing transaction, the client manufactures goods for the Bank and upon delivery of the goods to the Bank, the client is appointed as Agent of the Bank to sell those goods in the market. (Source)
What is Ijaraha
In traditional fiqh, it means a contract for the hiring of persons or renting/leasing of the services or the “usufruct” of a property, generally for a fixed period and price. (Source).
What is a shariah compliant safe agreement
A Shariah compliant safe agreement is a variation of the traditional SAFE agreement created by YCombinator that incorporates changes according to Islamic Law.
The original YCombinator SAFE agreements and descriptions can be found here.
With the permission of YCombinator and approval thereafter we created a Shariah compliant safe agreement which is explained by our own Mufti Faraz Adam whose article can be found here and is also highlighted below for reference:
- We believe that generic SAFE agreements have a level of Gharar (uncertainty) and ambiguity in terms of the treatment of the investment for Shariah compliance.
- A SAFE can be easily tweaked for Shariah compliance and should be tweaked to ensure Shariah compliance.
- The first major objection is ownership; a SAFE can potentially be developed to give sufficient ownership relationships and rights to satisfy ownership for Shariah purposes.
- The second objection of Gharar can easily be addressed by valuation caps, time-limit to conversions.
- The third major objection is priority which should be dealt with by ensuring SAFE investors do not receive any preference upon liquidation.
- We conclude that having bona fide equity agreements and ordinary shareholder agreements is best for Shariah compliance. However, if SAFEs facilitate access to capital more efficiently and effectively, and shareholder agreements are not feasible or practical, then SAFEs structured in a particular way as proposed below have the potential to align with Shariah principles.
HISTORY OF SAFE
The SAFE agreement is a relatively recent addition to the seed financing toolkit, popularized by the premier start-up accelerator Y Combinator. When originally introduced by Y Combinator in 2013, the goal of the SAFE was to simplify the process of investing in an early-stage start-up via a seed financing, in advance of the company undertaking a Series A venture financing. The seed round was often a bridge to future financing, and the SAFE was seen as a uniform, contractual vehicle to issue shares in that future financing, with a potential benefit to the investor for making their investment early.
A SAFE (simple agreement for future equity) is an agreement between an investor and a company that provides rights to the investor for registered and legally recognised future equity. It is arguably among the most common forms of financing for early-stage high risk/reward start-ups.
TYPES OF SAFEs
The post-money valuation cap is one of the more popular types of SAFEs, but there are also discount SAFEs (where the investor receives shares based on a discount instead of a valuation cap), valuation cap and discount SAFEs (where both the valuation cap and discount are considered), or Most Favoured Nation (MFN) SAFEs.
Instead of a valuation cap or discount, MFN SAFEs allow investors to adopt the terms of another investor from whom the start-up raises funds, if they find those terms favorable. This kind of SAFE comes into play when a start-up is especially young and difficult to value.
CORE FUNCTION OF SAFEs
The core function of a SAFE is to enable an advance investment in a company to bridge finances until a larger financing round can be completed, at which time the advance investment will convert into shares, with the investor benefiting either from a discount in purchase price or a capped value.
As a one-document security with minimal terms to negotiate (pretty much just the valuation cap and share price), the SAFE should streamline the funding process and reduce the time and expense involved in negotiations and attorney review.
Unlike a straight purchase of equity, shares are not valued at the time the SAFE is signed. Instead, investors and the company negotiate the mechanism by which future shares will be issued, and defer actual valuation. These conditions generally involve a valuation cap for the company and/or a discount to the share valuation at the moment of the trigger event. In this way, the SAFE investor shares in the upside of the company between the time the SAFE is signed (and funding provided) and the trigger event.
SO WHAT ARE THE SHARIAH CONCERNS
A SAFE agreement legally gives the right to future equity. Legally speaking, a SAFE is not a debt either. There is a debate regarding the accounting treatment of SAFEs.
From a Shariah perspective, if SAFEs do not give any equity, what would be the status of the funds? The funds would become a Wadi’ah (custodial funds) if the start-up did not use the money. This is because the start-up has idhn (permission) to take possession (Qabd) of the funds. However, as the funds would be used, the funds would become a Qard from a Shariah perspective. Thereafter, receiving any benefits could well attract Riba.
Therefore, Milkiyyah (ownership) must be developed for Shariah purposes and Shariah compliance. A start-up must restructure the SAFE and implement the following additional safeguards to make a SAFE satisfy as many Huquq (rights) of Milkiyyah, effectively mirroring an equity investment from the outset in terms of outcomes and consequences, thereby creating a Musharakah for Shariah purposes. This can be done by the following steps:
- Insertion of specific clause – The best method to develop an equity investment for Shariah purposes is to add an explicit clause stating that the SAFE investor will be treated for all intents and purposes at par with shareholders. Of course, management and voting rights are not necessary for the SAFE investors. The principles of Shirkah in Shariah allow that management and voting rights are concentrated in a few shareholders. The key issues which will manifest parity for all parties are dividend income, dissolution and liquidity events. However, start-ups rarely pay dividends at such an early stage of a company.
- Side Letter – A simple side letter can be developed in accordance with one’s jurisdiction to state the explicit treatment of the SAFE investment as an equity. Seek legal advice on this.
- Dissolution event – If the company goes bust before a Series A funding round, the SAFE investors should be treated as equity shareholders and not receive any preference as if they were creditors.
- Liquidity event – If the company is acquired before a series A funding round, the SAFE investors should be treated like ordinary shareholders in terms of rights to net profits.
At the time of a SAFE investment, there is generally no dividend payment nor any sale of the equity. It is very unlikely. All investors as well as the founders are awaiting the next round of funding. Therefore, in this early phase of the start-up, the only material risk of Shariah non-compliance is at a dissolution event or liquidity event, where a SAFE investor can be treated as a creditor or have greater rights than bona fide equity holders. Therefore, it is this risk that needs to be addressed primarily.
Gharar in SAFEs are in two areas:
- Time of conversion
- Valuation at conversion
There is an element of Gharar and uncertainty with SAFEs whereby the conversion to legal equity is unknown and contingent on trigger events. Likewise, there is uncertainty over the valuation at which the conversion will occur. This Gharar needs to be addressed to satisfy the ownership for Shariah purposes. To remedy this Gharar, a SAFE seeking to be Shariah compliant must include:
- Compulsory conversion Time limit – A SAFE should state an absolute end date by which the conversion into equity is exercised. This is critical for Shariah compliance because a SAFE terminates when the investor is issued Series A shares or gets paid cash per any of the provisions in the agreement. This means a SAFE can potentially hang around for a long time.
- Valuation Cap – This ensures that the SAFE will convert into a minimum percentage of the company. Valuation caps are a limit on the pre-money valuation used to determine the conversion price. By limiting the pre-money valuation, valuation caps ensure that safes will convert into a minimum percentage of the company, as calculated prior to the financing. For example, If someone invests $1 million through a safe with a $10 million valuation cap, the safe will never convert into a number of shares that represent less than 10% of the company prior to the preferred stock financing. If the company sold preferred stock at a $20 million pre-money valuation, the safe would convert into $2 million worth of shares.
The issue with Gharar and that which can lead to dispute is the investor receiving less than expected. By having a valuation cap, there is clarity on the minimum, and therefore there is agreement and consent on this amount. If the investor receives more, this will not be a form of Gharar, rather there will be implicit consent and a fortiori the investor will be pleased to receive the extra percentage.
The third Shariah concern in SAFEs are priority and preferred stocks. SAFEs typically provide that, upon a dissolution or winding-up of the company (which is not in connection with a sale of the company), the SAFE holders are entitled to receive the purchase price of their SAFEs before the equity holders receive any distribution of the company’s residual assets. A Shariah Compliant SAFE should avoid any preferential treatment to SAFE investors. This ensures that for Shariah purposes, the SAFE investors are ranked pari passu with equity shareholders.
CALL TO ACTION
Bona fide ordinary shareholder agreements which are structured as Shariah compliant and give the investors equity legally from the outset are the best for Shariah compliance. They ensure rights and obligations are cemented and there is clarity and transparency from the outset. All shareholders are then at equal footing, though the founders may choose to retain managerial and voting rights, which is not a problem.
If ordinary shareholder agreements are not practical or feasible, then to raise funds cheaply, quickly and efficiently, a SAFE can be structured on the above principles to potentially align with Shariah, though any SAFE should and must be reviewed by a Shariah scholar to ensure Shariah compliance.