Congratulations, you’ve made or are about to make an investment into a startup via SeedInvest! You are taking part in an opportunity that was only made available to Main Street investors recently. In the US, it only became legal for non-accredited investors to invest in privately-held companies in 2015, so it’s not an asset class that’s widely understood outside of the world of professional venture capitalists and angel investors. You certainly aren’t alone if right now you’re asking yourself, “What happens now?”, which is why we’ve created this guide that outlines what you can expect next.

Offering exemptions

Offering exemptions are the different ways certain companies can compliantly offer and sell securities without needing to register with the SEC. SeedInvest facilitates fundraises under three different offering exemptions–Regulation D, Regulation A, and Regulation CF. Each offering exemption has its own nuances, some of which we will go into later. You can also learn more on our Academy.

Regulatory and compliance

You may know that SeedInvest is a broker-dealer, but what exactly does that mean, and how does it affect you? While broker-dealers are subject to numerous rules and regulations, from the perspective of investors, one of the most notable requirements is that we are required to have standards in place to make sure we can detect suspicious transactions and financial crime, as well as evaluate startup investment opportunities before making them available to our investor community. Once an investment is made, our system automatically reviews an investor’s information to make sure we meet our regulatory obligations.

Investment follow-ups

We may require additional information from you before your investment is finalized, in which case we will send an email to obtain it. You can check to see whether there are outstanding items via your portfolio page. The most common follow-ups you can expect are around:

  • Suitability: Investing in startups is inherently risky.
    • Does your financial situation make investing in an illiquid, high risk asset class appropriate for you?
    • Identity: In order to protect against fraud, we prioritize safety by conducting AML (anti-money laundering) and KYC (know your customer) checks.
  • Have you provided sufficient information for us to confirm your identity?
    • Accredited Status: Certain types of offering exemptions only allow startups to raise capital from accredited investors. Are you qualified to invest under the offering exemption a company is using?

Funding

We can accommodate a few electronic funding methods:

  • ACH: We initiate this transaction from your bank account once you have verified your account information. To do this, we use a system called Plaid, which requires you to log in using your online banking credentials. Plaid then instantly authenticates your bank account. Alternatively, if you prefer not to use Plaid or your bank is not supported by them, we can instead verify your bank account by conducting a “penny test”, which takes 24-48 hours. This consists of two small test deposits sent to your bank account to verify we have the correct account information on file and that you have access to that account. We do this by having you verify the amounts of those deposits through your SeedInvest account once you receive them.
  • Wire: You initiate this transaction from your bank account using the wire instructions automatically sent to you upon completing the online investment process (this may take 1-2 days while we run the aforementioned compliance checks).
  • Debit cards: We initiate this transaction through a payment processor once we have verified electronically that the funds are available.

Processing state

Your investment will be labeled as “processing” until it is formally “closed”, the timing of which will vary depending on the specific offering exemption the company is fundraising under. You will be notified when your investment is closed, as well as if there are any outstanding items to complete ahead of that. That said, it is common for investments in privately-held companies not to close immediately, and on SeedInvest you may need to wait until the round officially ends on the platform before the closing occurs.

Closing timeline

The timeline for a company’s closing on investment funds varies depending on the offering exemption under which the campaign is being conducted.

  • For Regulation A offerings, we conduct what are known as “rolling closes” during which anywhere from a few dozen to a few hundred investments are finalized and closed in a single batch. We do this, in part, to help reduce operational burdens on the company. At present, we seek to conduct Regulation A closings every two weeks after a company has reached their escrow target. Once an investor’s follow-ups have been completed and the funds received in escrow, the investment will automatically be included in the next close.
  • For companies conducting “traditional” Regulation D private placements, or under Regulation CF, formal closing operations typically don’t begin until the fundraising campaign has ended. This is generally the earlier of (1) the company’s stated campaign end date or (2) when the company’s round is filled. If requested by the issuer, we can also conduct “rolling closes”, but only if closing conditions, such as hitting the escrow target, have been met.
  • For both Regulation D and Regulation CF offerings, if you’ve completed the investment process (and the round is not already oversubscribed), then your spot in the round is secure (SeedInvest operates on a first-come, first-served basis).

In escrow

When you initiate an investment through the SeedInvest platform, funds are held securely in an independent third-party escrow account until the closing conditions have been met and the investment is formally closed. To protect investors, companies must reach a minimum escrow target to have a successful fundraising campaign. Investments are not finalized until the company raises enough money to meet its target and completes all other closing conditions and regulatory procedures. Only then will the money be released to the company.

Once the company accepts your investment, your money will be transferred from the escrow account to the company in exchange for the purchased securities. In the case of an unsuccessful round (or if you choose to cancel the investment before the campaign ends), funds will be promptly returned to investors.[1]

Portfolio company updates

You should expect to receive quarterly updates from the companies in which you invest. A good investment update will include information about the company’s progress, information about industry developments, any business challenges, and ways you (the investor) can help. Investors will be notified of any updates via email and will be able to access the report in the documents tab of your investor account. Your investor account is also where you can manage your holdings, pending investment activity, account details, and funding methods.

While many companies take it upon themselves to update their investors directly, SeedInvest distributes updates to investors where possible. However, when it comes to shareholder and portfolio management, it is still a bit early for us, but we do plan to add additional features in the future, depending on what the company you invested in has signed up for.

Liquidity and exit events

Never invest more than you can afford to lose entirely. Once your investment has been closed, you should anticipate holding investments for an average of 5-7+ years before a potential liquidity event.[2] Liquidation events can come in many forms, but most typically include IPOs, acquisitions, mergers, and/or bankruptcy. In such instances, you might receive common stock, cash, or shares of the new entity, respectively. In the event of a public offering (i.e., IPO) your shares would likely convert into common stock.

Investors should be notified by the company directly regarding any liquidity events, and SeedInvest will also endeavor to disseminate updates to our investor base where possible.

The importance of diversification

Investing in startups is exciting and has the potential for outsized returns, but it’s not without its risks. It’s commonly accepted that the majority of your returns will be concentrated in just a select few startups, and a liquidation event is not guaranteed. Most companies will likely either fail or fail to provide a meaningful return for their investors. That’s part of why building a diversified portfolio is so important–it increases the odds of having one of these “winners” in your portfolio. We therefore advise investors to build a diversified portfolio of 10+ startups to help mitigate the inherent risks.[3] Learn more about the importance of diversification.

Ready to get started? Head to our offerings page to browse the companies currently fundraising.

 

[1] SI Securities does not provide custody services in connection with any investments made through the platform. Customer securities and account balances, not held directly by the customer or in escrow, are held by New Direction Trust Company (“NDTCO”) for the benefit of customers. NDTCO is an unaffiliated limited purpose trust company chartered under the laws of the State of Kansas.
[2] Private, early-stage companies represent high-risk, long-term, illiquid investments. As such we advise all of our investors to err on the side of caution and expect to hold their investments for an average of 5-7 years before any potential liquidity event may take place. Please keep in mind though that is also likely that an individual company may not succeed and fail before any such liquidity event which is why building a portfolio of startup investments is so crucial.
[3] Will a more diversified portfolio guarantee success? While a more diversified asset allocation in one’s portfolio has historically correlated with increased likelihood of higher returns, past performance is no guarantee of future results. Startups raising capital on SeedInvest are not necessarily representative of those which have generated positive historical returns. In addition, early-stage startup investing has a higher rate of failure, volatility, and less liquidity. Only those prepared for extreme volatility, a lack of liquidity, and the risk of losing their entire investment should invest in early-stage startup investments.

This post was written by Alice Hankin on March 20, 2020

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