Educational Material
Kapp Crowdfunding Group, LLC
(Kappital)
Educational Materials
1. Regulation Crowdfunding Rules
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 $1.0 million, excluding the value of their homes, or annual income of more than $200,000. These rules went into effect on May 16, 2016 and were amended on March 15, 2021.
The JOBS Act is intended to help provide sponsors 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 $5,000,000 million 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 greater of annual income or net worth, if annual income or net worth of the investor is less than $124,000, or
● 10% of greater of annual income or net worth (not to exceed an amount sold of $124,000), if both annual income and net worth of the investor is equal to or more than $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) provides 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. For more information, please check other Educational Materials.
2. Types of Business Investments
Kappital allows issuers/sponsors to raise capital for their real estate projects by selling equity interest. Equity will take the form of common stock, preferred stock, limited partnership interests or limited liability company interests in the issuer/property holding entity or a crowdfunding SPV formed for the purpose of investing in the issuer/property holding entity. For purposes of comparison, the various forms of investments offered on the Kappital platform are describe below.
Common Stock
Common stock is the simplest form of equity. This type of shares is ordinary company shares most commonly held by founders and employees. Common shareholders are generally granted voting rights, but can be limited and often have lesser rights than those granted to preferred shareholders. Common 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.
The risks associated with Common Stock include:
· No liquidity- Common Stock sold in an offering will be restricted and may not be sold or transferred unless subsequently registered or pursuant to an exemption.
· Difficult to value- stock offered will be from privately held corporations and as such there is no way to truly value the stock.
· Lack of control. Common stock sold in offerings usually constitutes a minority position, and as such, holders of common stock may not have the ability to elect directors or otherwise control the management of the company.
· Last one to get paid- Upon the sale, liquidation or dissolution of the company, the holders of the common stock will only receive proceeds after the company has paid its debts and made preferential payments to preferred stock holders (if any).
Preferred Equity
Preferred equity is usually issued to institutional 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.
The risks associated with Preferred Equity include:
· No liquidity- Like Common Stock, Preferred Equity sold in an offering will be restricted and may not be sold or transferred unless subsequently registered or pursuant to an exemption.
· Difficult to value- Preferred Equity, like common stock, is equity in privately held corporations and as such it is very difficult to value.
· Lack of control. While some classes of preferred stock may have greater voting rights, some classes may be based on the number of shares received to common shares or may not have voting rights at all, and as such, holders of common stock may not have the ability to elect directors or otherwise control the management of the company.
Limited Partnership/Limited Liability Company Interests
Partnership Interests and Limited Liability Company Interests are equity interests which have the rights associated with such interests as described in the company’s limited liability company agreement, and may have various preferences, rights or limitations.
· Depending on how such interests are described in the partnership or operating agreement, the interests may have limited or no voting rights, will be subordinated to debt and may be subordinated to other types of interests.
· No liquidity- Interests sold in an offering will be restricted and may not be sold or transferred unless subsequently registered or pursuant to an exemption.
· Difficult to value- Interests are equity in privately held corporations and as such it is very difficult to value.
3. Investment Limits
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, than 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 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 $124,000.
● Accredited investors have no investment limits.
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.
To invest in securities offered under Regulation Crowdfunding on www.kappital.com, 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 startup investing as disclosed on the profile page as well as in the Kappital 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 and for any reason 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 Kappital 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 case 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.
4. 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:
Assets
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
Investments
Determine the current market value of your investments, including:
● Annuities
● Bonds
● Life insurance cash value
● Mutual funds
● Pensions
● Retirement plans – IRA, 401(k), 403(b), etc.
● Stocks
● 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.
● Boats
● Collectibles – antiques, art, coins, etc.
● Household furnishings
● Jewelry
● Primary residence
● Rental properties
● Vacation or second home
● Vehicles
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:
Liabilities
Secured liabilities
Determine the amount of your secured liabilities, including:
● Automobile loan(s)
● Home equity loan
● Margin loans
● Mortgage
● Rental real estate mortgage
● Second mortgage
● Vacation/second home mortgage
Unsecured Labilities
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.
Example:
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.
5. How To Assess Investment Opportunity
Assessing a startup 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:
• Product
● Property Location
● Term of loan (if debt)
● Management team backgrounds
● Differentiation and defensibility
● Business model
● Market
● Competitive landscape
● Historical financial performance
● Financial projections
● Unit economics
● Capitalization table
● Use of proceeds
● Legal
Usually, investors are looking for a scalable idea, committed and skillful team, good market positioning, potential for fast profitability, and momentum. If you choose to take the process to the next step, you need to know how to read the Term of the offering.
Deal terms provide a simplified summary of the key terms of the investment agreement. Investment terms for the revenue sharing model contain information relating to:
• Minimum Amount of investment the company is looking to raise
• Maximum Amount of investment the company is looking to raise
• Fixed percentage of the quarterly revenue to be paid to investors
• Return multiple on the investment
On Kappital, the deal terms that are presented on the offering pages are final terms and are not generally negotiated or changed once a funding round has begun.
6. Risks of investing
This information below sets out the risks that investors need to consider when making an investment in a company on Kappital. Investing in real estate and real estate related ventures is 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, market conditions, real estate related risks, and the experience of the sponsor or manager. 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.
The securities offered and sold on the Platform in reliance on section 4(a)(6) are subject to risks. Investors are strongly encouraged to consider whether investing in a security offered and sold in reliance on Section4(a)(6 is appropriate for an investor Please review the Risk Factors regarding risks associated with each type of security, including the risk of having limited or no voting power, limited or no liquidity and limited rights.
Each investor should carefully consider whether investing in the Revenue Sharing Interests through the Kappital Platform is an appropriate investment and whether such investor can bear the risks associated with such investment.
The risks associated with Common Stock include:
· No liquidity- Common Stock sold in an offering will be restricted and may not be sold or transferred unless subsequently registered or pursuant to an exemption.
· Difficult to value- stock offered will be from privately held corporations and as such there is no way to truly value the stock.
· Lack of control. Common stock sold in offerings usually constitutes a minority position, and as such, holders of common stock may not have the ability to elect directors or otherwise control the management of the company.
· Last one to get paid- Upon the sale, liquidation or dissolution of the company, the holders of the common stock will only receive proceeds after the company has paid its debts and made preferential payments to preferred stock holders (if any).
The risks associated with Preferred Equity include:
· No liquidity- Like Common Stock, Preferred Equity sold in an offering will be restricted and may not be sold or transferred unless subsequently registered or pursuant to an exemption.
· Difficult to value- Preferred Equity, like common stock, is equity in privately held corporations and as such it is very difficult to value.
· Lack of control. While some classes of preferred stock may have greater voting rights, some classes may be based on the number of shares received to common shares or may not have voting rights at all, and as such, holders of common stock may not have the ability to elect directors or otherwise control the management of the company.
The risks associated with Limited Partnership and Limited Liability Company Interests include:
· Depending on how such interests are described in the partnership or operating agreement, the interests may have limited or no voting rights, will be subordinated to debt and may be subordinated to other types of interests.
· No liquidity- Interests sold in an offering will be restricted and may not be sold or transferred unless subsequently registered or pursuant to an exemption.
· Difficult to value- Interests are equity in privately held corporations and as such it is very difficult to value.
Illiquid Investments. Investments made in reliance on section 4(a)(6) on the platform are subject to restrictions on transfer and are generally illiquid. No transfers may be made unless the securities are registered or eligible for an exemption from registration.
Dependence on Management and Key Personnel. The business of the issuer will be greatly dependent upon the participation of its sponsor Officers and Directors and other key personnel. The issuer will need to hire additional management and key personnel as the issuer grows in order to properly manage the issuer. There are no assurances that the qualified personnel can be hired and, if hired, can be retained.
Market Uncertainty. Although the issuer believes that there will be a market for what it offers, there can be no assurance that a profitable market will exist or continue to exist or that it will grow. Potential Investors must consider that, even if markets exist or arise, there is no assurance that the issuer will be able to reach a profitable level of operations selling to such markets.
Real Estate Risks. Real property investments are subject to varying degrees of risk. These risks include changes in general or local economic conditions, interest rates, availability of mortgage funds, real estate taxes and other operating expenses, environmental changes, acts of God (which may result in uninsured losses), local employment conditions, domestic and foreign competition, and other factors, which are beyond the control of the Companies and the Manager. Real estate values are affected by a number of factors, including (i) changes in the general economic climate, (ii) local conditions (such a an oversupply of space or a reduction in demand for space), (iii) the quality and philosophy of management, (iv) competition based on rental rates, (v) attractiveness and location of the properties, (vi) financial condition of tenants, buyers and sellers of properties, (vii) quality of maintenance, insurance and management services and (viii) changes in operating costs. Real estate values also are affected by such factors as government regulations (including those governing usage, improvements zoning and taxes), interest rate levels, the availability of financing and potential liability under changing environmental and other laws. investment may be limited to single properties, which means that an investment will not provide diversification.
No Control. Investors will have limited or no control over the management of the issuer or any decisions related to its operations, the management of the real estate project or other matters and will be wholly dependent upon the sponsor or management of the issuer.
Economic Downturns. Financial difficulties of the end users/customers to which the issuer expects to sell its services may adversely affect the issuer’s revenues, costs and collections. If the general economy is performing poorly, then the collectability of receivables may be adversely affected, causing an increase in aged receivables and/or a reduced collection rate. Company profits could be adversely affected if the issuer is forced to write off uncollected accounts. In addition, economic downturns could adversely affect the fiscal health of key customers/clients or impair their ability to continue to operate during a recession, which would decrease the issuer’s revenues unless the issuer is able to replace any lost business.
Competition. In general, the market in which the issuer will compete is expected to be competitive. In general, the issuer’s potential competitors may have longer operating histories, greater brand recognition and significantly greater financial, marketing and other resources than the issuer and that their superiority to the issuer in these areas will likely continue into the future. Barriers to entry for new competitors of the issuer may be low, and current and new competitors may launch competitive services at a relatively low cost.
Technological Change May Adversely Affect the issuer’s Business. The issuer’s ability to remain competitive may depend in part upon its ability to develop new and enhanced services and to introduce these services in a timely and cost-effective manner. In addition, service introductions or enhancements by the issuer’s competitors or the use of other technologies could cause a decline in revenue for the issuer’s existing services. There can be no assurances that the issuer shall be successful in selecting, developing, and marketing new services or in enhancing its existing services.
Limited Spreading of Risks; No Current Diversification of Services. The ability of the issuer to diversify or expand its activities is might be limited. Due to the comparatively small capitalization and the budget of the issuer and its reliance on a single service for success, there will be less spreading of risks than may occur in some other organizations.
Dependence on Offering Proceeds; Immediate Need for Capital to Continue in Business. The issuer may have limited working capital and, accordingly, an immediate need for the proceeds in order to pursue its business activities. Although the issuer believes that the anticipated net proceeds will enable the issuer to continue to pursue developing its business, its cost estimates for operation may be inaccurate and/or the net proceeds of the offering may provide insufficient working capital.
Need to Raise Future Rounds of Additional Capital or Financing to Continue in Operation. In order to effectively execute its business plan and pursue its business activities, the issuer may need to raise additional capital in future investment rounds or other financings, which may include debt and/or equity and/or leasing transactions (“Future Rounds”) or otherwise obtain financing. If the issuer cannot or does not raise Future Rounds or obtain other financing needed, then it is likely that the issuer will be forced to discontinue its operations, and the issuer likely will fail. In such case, the Investors will likely lose their entire investments. There can be no assurance that Future Rounds or any additional financing or capital will be available, and the issuer cannot at this time accurately forecast the amount that will be needed, obtainable or obtained in Future Rounds. Even if the issuer raises Future Rounds and/or additional financing or capital is available through loans or other facilities, the issuer will depend substantially upon the availability of cash flow from operations to stay in business. There is no assurance that the issuer can generate cash flow when needed. In the event that the issuer’s operations do not generate necessary cash flow and/or the issuer cannot obtain additional funds if and when needed through other means, the issuer may be forced to limit, curtail or cease its activities with a consequent loss to Investors.
Risk of System Failure; Absence of Redundant Facilities; Capacity Constraints. The issuer may rely on the internet and certain software to operate and manage its business and clients/customers. Accordingly, its business will be dependent on the efficient and uninterrupted operation of computer hardware systems and the internet.
The issuer’s systems and operations will be vulnerable to damage or interruption from fire, flood, power loss, telecommunications failure, break-ins, earthquake and similar events.
The circumstances in which an investment commitment may be cancelled by the issuer:
• In the event than 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 cancelled.
• 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 cancelled.
The circumstances in which an investment commitment may be cancelled 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 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.
Termination of Information. Although the issuer shall be required to provide annual reports, an issuer shall no longer be required to provide annual reports or updates upon the occurrence of the following events:
● 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.
7. 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 the intermediary, there may or may not be any ongoing relationship between the issuer and intermediary.
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 the 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.
Acquisition.
The returns which investors receive in an acquisition generally depend upon the structure and terms of the acquisition agreements and they type of security which those investor’s 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 instrument and continue to make payments in accordance with the terms of the debt instrument.
Secondary Sale.
The securities sold in this offering are restricted and may only be transferred in accordance with applicable securities law. 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 the 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 and all investments in private companies should be considered as illiquid.
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.
Anti-Dilution Protections.
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.
Follow-on Rounds.
Most sponsors raise multiple rounds of investment but part of the value of an early-stage investment may include the right to invest into future rounds in the same company. You may have a legal right to invest in follow-on rounds through “pro-rata” rights to maintain your percentage ownership or first right of refusal on a certain amount of stock in future rounds.
Exit.
Exit usually refers to a liquidity event, such as the sale of the asset or a refinance.
Debt Investments
Debt investments generate interest income which may or may not be paid on a regular basis. Some loans require the regular payment of interest (and possibly a portion of the principal), which would be distributed to investors. Other loans accumulate interest and require payment of that interest in a single large “balloon” payment at the end of the term. At the end of the term, all accrued but unpaid interest, together with the remaining principal amount, and any fees or expenses incurred by the lender.
Secured Debt
Issuers may seek financing in the form of secured debt. Some of the instruments used for these types of investments are set forth below:
1) Multi-beneficiary loans. These are loans where multiple parties are names as holders/lenders on the note and listed on the deed of trust as beneficiaries. In this situation, each investor holds a percentage interest in the note and the instrument securing the underlying collateral.
2) Secured Notes. Investors will purchase notes which are secured by a security instrument in the underlying collateral which is held by an indenture trustee for the benefit of the note holders.
Interest Rates
Interest rates on the loans will vary, but could range between 5% and 15%.
Other Fees
In addition to interest, investors may also participate in other fees, such as loan arrangement fees, late payment fees and penalties, default fees, loan modification fees and other loan fees.
Default and Foreclosure
In the event of a default on a loan, Kappital, or a third party trustee holding the collateral on behalf of the lenders, 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.
Bankruptcy
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 investors returns.
8. 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. Investors are strongly encouraged to consider whether investing in a security offered and sold in reliance on Section4(a)(6 is appropriate for an investor. Here are some tips on setting an investment strategy:
• Asset Type
• Location of Asset
● Market sector
● Geography
● Business models
● Investment size
● Type of investment (debt/equity/other)
● Number of investments
When investing, it is important to account for risk. 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.
●
Becoming a strategic investor is a great opportunity to contribute more than just money, if the investors are willing to share their experience and expertise or opening up their network of contacts.
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.
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. The updates may also include requests for advice, assistance or strategic introductions.
9. Investing
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, financial status of the issuer, revenue model, exit potential, etc.
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.
Investing On Kappital
Kappital is an online funding platform which facilitates equity investments under the regulated Crowdfunding rules. The main steps in the investment process on Kappital include:
1. Click “Invest”
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.
2 Funds
After signing the agreement, your funds will automatically be transferred and placed into an escrow account. The funds will remain in escrow until they are released to the issuer that you are investing in or returned back to you.
3. Confirmation
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 investment, the proposed transaction will be cancelled and the escrow agent will return the funds from the escrow back into your 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. Kappital does not receive or take custody of investor funds at any point during the investment process.
Kappital reviews the following information about companies listed on its platform:
● Legal and Confirmatory Due Diligence
● Organization of the issuer
● Corporate structure and ownership
● Review of property/project
● Disclosure information and terms of the offering
● Risks
● Investment Structure
● Historical financials
● Financial projections
Note: Kappital is not a broker dealer and is not providing advice. Investors are expected to perform their own due diligence of each opportunity.
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 investment 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.
10. Sources Of Funding
Starting and growing a business requires capital. Here are some sources of capital that entrepreneurs use to fund their companies.
Bootstrapping - most entrepreneurs get initial funding for their businesses using savings accounts and zero interest credit cards to leveraging other personal 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 friends and family feeling like “fools” you might want to structure this type of funding as a high interest loan for a specific period of time.
Accelerators and Incubators - while focusing on accelerating startups and providing resources and connections, these organizations might also provide funding. Usually, they use equity or convertible note approach and have standard terms for all participants for the program.
Crowdfunding - online platforms that allow individuals and businesses to raise money from multiple backers. There are enough platforms out there to find a mechanism that is best for you, including debt, equity, revenue sharing, or other securities or rewards-based donations.
Small business loans - there are numerous organizations that lend to small businesses. Most lenders will want the loan to be secured by assets of some type, will require credit score and will set an interest rate. The Small Business Administration (SBA) has many programs that can help small businesses get access to capital.
Banks – traditionally banks make small business loans. They typically require a track record, a guarantee on the loan while many of them require the business to be profitable or have positive cash flows.
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 the focuses is funding small businesses. These lenders often are willing to make longer-term loans and might be interested in impactful businesses.
Angel investors - these people are accredited and are looking to invest in promising businesses. The 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 on different stages 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 do follow up investments and some provide support and resources as well as a validation point.
Crowd Investing - the emerging mechanism of raising money from anyone - including accredited and non-accredited investors - using an online portal. This mechanism allows companies to tap into a bigger pool of funds and build a support group around the business.
11. Raising Money For A Project
When raising funds for growing a property/project, 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 and the duration. Given the target fundraising amount, you can now estimate the options - is it possible to get a low interest 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 who is your target investor - who is interested in backing companies in this industry, stage, and traction. 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:
• market size • property type
• competition as a validation • location
● market data • exit strategy
● use of the funds
● revenue/projected revenue
Funding Via Kappital
Kappital is a funding portal under the Reg CF which enables real estate developers and sponsors to raise funds from the crowd using equity investments. Kappital allows issuers/sponsors to raise equity capital for their real estate projects. Equity will take the form of common stock, preferred stock, limited partnership interests or limited liability company interests in the issuer/property holding entity or a crowdfunding SPV formed for the purpose of investing in the issuer/property holding entity.
Companies are limited to raising $5,000,000 in a rolling 12-month period under the Regulated Crowdfunding exemption.
In general, the Kappital process includes the following steps:
a. Application
Companies can apply to fundraise on www.kappital.com. All applications are reviewed by the Kappital Team and are verified on matching the criteria.
b. Compliance Verification
Exemption under the Regulated Crowdfunding requires:
● Offering will not be integrated with other offerings
● Company must use one online intermediary
● Company must be US entity
● Company cannot be Investment Company or company relying on an exemption from the ‘40 Act
● Must have a business plan
● Cannot be public reporting company
● If conducted an offering pursuant to Regulation CF in the past must be compliant with ongoing reporting requirements
● Cannot be a Bad Actor
The issuer need to have the right disclosures prepared for filing with the SEC. As part of Form C, issuers will need to make the following information is documented:
● Name, legal status, address, website
● Directors, officers, background, offices held
● Identity of 20% beneficial holders of voting securities
● Description of the business/Property
● Market information
● Financial condition
● Target offering amount, maximum amount, deadline
● Description of the securities including prices and how 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:
For offerings that, together with all other amounts sold under section 4(a)(6) of the Securities Act (15 U.S.C. 77d(a)(6)) within the preceding 12-month period, have, in the aggregate, the following target offering amounts:
(1) $107,000 or less, the amount of total income, taxable income and total tax, or the equivalent line items, as reported on the federal income tax returns filed by the issuer for the most recently completed year (if any), which shall be certified by the principal executive officer of the issuer to reflect accurately the information reported on the issuer's federal income tax returns, and financial statements of the issuer, which shall be certified by the principal executive officer of the issuer to be true and complete in all material respects. If financial statements of the issuer are available that have either been reviewed or audited by a public accountant that is independent of the issuer, the issuer must provide those financial statements instead and need not include the information reported on the federal income tax returns or the certifications of the principal executive officer;
(2) More than $107,000, but not more than $535,000, financial statements of the issuer reviewed by a public accountant that is independent of the issuer. If financial statements of the issuer are available that have been audited by a public accountant that is independent of the issuer, the issuer must provide those financial statements instead and need not include the reviewed financial statements; and
(3) More than $535,000, financial statements of the issuer audited by a public accountant that is independent of the issuer; provided, however, that for issuers that have not previously sold securities in reliance on section 4(a)(6) of the Securities Act (15 U.S.C. 77d(a)(6)), offerings that have a target offering amount of more than $535,000, but not more than $1,070,000, financial statements of the issuer reviewed by a public accountant that is independent of the issuer. If financial statements of the issuer are available that have been audited by a public accountant that is independent of the issuer, the issuer must provide those financial statements instead and need not include the reviewed financial statements.
c. 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. You are required to provide progress reports on the offering according to the disclosure requirements - Form C-U must be filed. Once the amount is reached, the funds are transferred to the issuer bank account.
Kappital.com facilitates the whole process, including document signing and repayments to investors after funding is complete.
12. Promoting Crowdfunding Campaign
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, limited to
● the name of the issuer of the security
● the address
● phone number
● website
● e-mail address of a representative
● a brief description of the business.
What companies can do:
• Promote your financing 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.
The 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.
13. 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.
Updates
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.
Depending on the level of involvement of the investor, phone calls and in person meetings can be beneficial too. 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 investor 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.
14. 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 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.
● For offerings that, together with all other amounts sold under section 4(a)(6) of the Securities Act (15 U.S.C. 77d(a)(6)) within the preceding 12-month period, have, in the aggregate, the following target offering amounts:
● (1) $124,000 or less, the amount of total income, taxable income and total tax, or the equivalent line items, as reported on the federal income tax returns filed by the issuer for the most recently completed year (if any), which shall be certified by the principal executive officer of the issuer to reflect accurately the information reported on the issuer's federal income tax returns, and financial statements of the issuer, which shall be certified by the principal executive officer of the issuer to be true and complete in all material respects. If financial statements of the issuer are available that have either been reviewed or audited by a public accountant that is independent of the issuer, the issuer must provide those financial statements instead and need not include the information reported on the federal income tax returns or the certifications of the principal executive officer;
● (2) More than $24,000, but not more than $618,000, financial statements of the issuer reviewed by a public accountant that is independent of the issuer. If financial statements of the issuer are available that have been audited by a public accountant that is independent of the issuer, the issuer must provide those financial statements instead and need not include the reviewed financial statements; and
● (3) More than $618,000, financial statements of the issuer audited by a public accountant that is independent of the issuer; provided, however, that for issuers that have not previously sold securities in reliance on section 4(a)(6) of the Securities Act (15 U.S.C. 77d(a)(6)), offerings that have a target offering amount of more than $618,000, but not more than $1,235,000, financial statements of the issuer reviewed by a public accountant that is independent of the issuer. If financial statements of the issuer are available that have been audited by a public accountant that is independent of the issuer, the issuer must provide those financial statements instead and need not include the reviewed financial statements.
● 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 ill 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 Form C-A, and investors must reconfirm their commitment within five business days or their commitment will be considered cancelled.
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 statements that have either been reviewed or audited by a public accountant that is independent of the issuer (if available) 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.
15. Continued Disclosures
An issuer is required to provide various types of information to investors, the contents and frequency of such information include:
· Ongoing Reports- An issuer is required to provide an annual report on Form C/AR, which includes financial statements certified by the principal executive officer of the issuer (unless the issuer has reviewed of audited financial statements available). Form C/AR must be filed with the Commission and posted on the issuer’s website. The report must be filed in accordance with the requirements of § 227.203 and Form C (§ 239.900 of this chapter) and no later than 120 days after the end of the fiscal year covered by the report.
The issuers obligations to provide such information shall terminate upon the earliest of:
(1) The issuer is required to file reports under section 13(a) or section 15(d) of the Exchange Act (15 U.S.C. 78m(a) or 78o(d));
(2) The issuer has filed, since its most recent sale of securities pursuant to this part, at least one annual report pursuant to this section and has fewer than 300 holders of record;
(3) The issuer has filed, since its most recent sale of securities pursuant to this part, the annual reports required pursuant to this section for at least the three most recent years and has total assets that do not exceed $10,000,000;
(4) The issuer or another party repurchases all of the securities issued in reliance on section 4(a)(6) of the Securities Act (15 U.S.C. 77d(a)(6)), including any payment in full of debt securities or any complete redemption of redeemable securities; or
(5) The issuer liquidates or dissolves its business in accordance with state law.