Checklist for Equity Crowdfunding Investors

This checklist is for equity crowdfunding investors interested in analyzing Reg CF, Reg A+, or Reg D 506(c) exempt offerings listed on funding portals, through broker dealers, or direct through an "Invest Now" button on a company's website. Not legal or financial advice, just a starting point to help you out.

December 8th, 2023 by Russ Urban

✅ Read the Company's Filing: The Form C (Reg CF), Form 1-A (Reg A+), or Form D (Reg D 506(c)).

✅ Your understanding of the offering will be enhanced and you will see a more complete picture of an offering.

✅ There are very good reasons that company's must file with the SEC. Take advantage of this resource.

✅ Don't rely on just a company's offering page. Go deeper than this.

✅ Use of Proceeds: What is the planned use of proceeds from the equity crowdfunding offering?

✅ If funds are being used to cash out the shares of founders or others ("Selling Shareholders"), this is generally not a good sign.

✅ Current Funding Round: What round is it in? Seed / Angel, Series A, B, C, D?

✅ The round can tell you a lot about how far along the company is in its funding history.

✅ Earlier rounds are generally less expensive than later rounds of funding as long as the company isn't having a down round.

✅ Earlier rounds are generally more risky even though they may be less expensive in terms of the cost of equity.

✅ Generally, the company is less proven in earlier rounds than it may be in later up rounds.

✅ Usually a company in the seed or angel round (or Series A) may still be developing their product.

✅ Each round comes with its own valuation. If the company's valuation is greater than the previous round then it's having an "up round" and if its valuation is less than the previous round then its have a "down round".

✅ Security Type: The Financial Instrument Being Offered.

✅ Know what type of security that you are getting in return for your investment.

✅ Broad Categories of Security Type: 1) Equity, 2) Future Equity, 3) Debt, 4) Hybrid.

✅ 1) Equity: Common Stock, Preferred Stock, Equity, Crowd SPA, Crowd IPA, Membership Units, Non-Voting Equity, STO, Token, SWIFT Preferred Equity.

✅ 2) Future Equity: CAFES, Crowd SAFE, SAFT, SAFE, Options, Warrant.

✅ 3) Debt: Secured Loan, Unsecured Loan, Debenture, 1st Lien Debt, 2nd Lie Debt, Currency, Debt, Revenue Sharing, Promissory Note, Crowd SDA.

✅ 4) Hybrid: Convertible Note, Crowd Note, DUSTO, SWIFT Convertible Note.

✅ Valuation: A Very Important Metric.

✅ Is the valuation fair for the company?

✅ Is the valuation inflated? This is not good.

✅ Does the company appear to be undervalued based on its valuation? This is something stock investors look for when determining potentially good investments.

✅ The private markets are generally much less efficient in determining valuation than the public markets. Equity crowdfunding valuations are more subjective.

✅ Analyzing an Offering / Company: What would you value the company at?

✅ Many companies in equity crowdfunding do not have financial traction yet. Still, read through the financials in their SEC filing and the entire SEC filing for that matter.

✅ Get a good feel for what the company does including its product / services, its industry or niche, the problems its solving or industry that it may be disrupting.

✅ Is the industry that it is operating in established or relatively new and is it an industry with a future? If it's an established industry, can this company disrupt that industry?

✅ Is the company seeing traction and if not does the company have the management team or talent to see traction in the industry or niche?

✅ Is the company taking a new or innovative approach?

✅ What is the competitive landscape that this company is facing? Can the company's management team overcome a David vs. Goliath situation?

✅ How far along is the company compared to their valuation? In your judgement, is the company undervalued, fairly valued for both sides (company and investors), or overvalued?

✅ Potential Ability to Exit: Equity crowdfunding investments are generally "long-term investments" and "illiquid", but you still want the potential to be able to exit or cash in your investment down the road.

✅ Reg CF and Reg D 506(c) shares are generally restricted for 1-year (from date the subscription agreement / purchase occurs). Reg A+ shares are generally not restricted upon issuance.

✅ Does the portal that the company is listed on offer a secondary market or other route such as an ATS (Alternative Trading System) for companies to list on? This however is no guarantee that an exit will occur.

✅ Has the company discussed any potential exit strategies / goals / aims as part of their future business plans? Issuer's can not promise or guarantee an exit.

✅ There is never a guarantee of an exit. An exit event depends on numerous factors, many of which are outside the company's control.

✅ Study, Study, Study. Always be learning. Always find new sources of information and strategies.

✅ It is up to you to develop your own investment style, this is just a starting point and should not be relied upon.

✅ As a Rule: Do not expect an exit from any offering & never invest in any offering unless you can afford to lose your entire investment.

✅ Find Equity Crowdfunding Offerings at CrowdTide.com