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4 Factors To Consider Before Investing in Crowdfunding Deals

Don't jump into that deal before thinking through these points!
Amy Wan, Esq., CIPP/US is a Partner at Trowbridge Sidoti LLP (CrowdfundingLawyers.net). Formerly, she was General Counsel at a prominent real estate crowdfunding platform where she pioneered an iteration of the payment dependent note instrument now commonly used by others in the industry, and advised the company on its Series A funding round. In recognition her work, she was named as a Finalist for the Corporate Counsel of the Year Award 2015 by LA Business Journal. Amy also brings extensive experience in legal innovation and rethinking the delivery of legal services. She is the founder and co-organized of Legal Hackers LA, and was named one of the one of ten women to watch in legal technology by the American Bar Association Journal in 2014. Amy also previously worked on international regulatory coherence at the U.S. Department of Commerce and spent time at the U.S. Department of State and U.S. Department of Transportation as a Presidential Management Fellow. She holds an LL.M. in Public International Law from the London School of Economics and Political Science, a JD from the University of Southern California Gould School of Law, and a BA in Biological Sciences from the University of Southern California.
Amy Wan, Esq., CIPP/US is a Partner at Trowbridge Sidoti LLP (CrowdfundingLawyers.net). Formerly, she was General Counsel at a prominent real estate crowdfunding platform where she pioneered an iteration of the payment dependent note instrument now commonly used by others in the industry, and advised the company on its Series A funding round. In recognition her work, she was named as a Finalist for the Corporate Counsel of the Year Award 2015 by LA Business Journal. Amy also brings extensive experience in legal innovation and rethinking the delivery of legal services. She is the founder and co-organized of Legal Hackers LA, and was named one of the one of ten women to watch in legal technology by the American Bar Association Journal in 2014. Amy also previously worked on international regulatory coherence at the U.S. Department of Commerce and spent time at the U.S. Department of State and U.S. Department of Transportation as a Presidential Management Fellow. She holds an LL.M. in Public International Law from the London School of Economics and Political Science, a JD from the University of Southern California Gould School of Law, and a BA in Biological Sciences from the University of Southern California.

There’s been a lot of talk about investor education in crowdfunding deals, so I thought I’d take a couple moments to write about what I look for when investing.

Before we dive in though, please know that I am NOT a financial advisor or any sort of investing or wealth management expert. You should not rely on anything I say, and I am not endorsing anything I’ve bought. You should consult your own financial advisor about what you should invest in, and invest with the knowledge that you could lose your entire investment. And lastly, as a crowdfunding attorney, as a matter of policy and to deter any conflicts of interest, I do not invest in any companies for whom I act as legal counsel.

1. Debt

Everyone seems to call Regulation Crowdfunding ‘equity crowdfunding.’ That’s a misnomer—it really should be called ‘investment crowdfunding.’ Regulation CF is not limited to equity, and in fact, for many companies, they would be better served with taking on debt. Debt crowdfunding is, essentially, taking one large loan from the crowd (instead of, say, a bank). On one hand, I think a company that chooses the crowd over a bank is making a strategic decision to build community. And if they’re able to properly leverage their crowd, they can help grow their own business. On the other hand, as an investor, I love getting paid back more quickly. Equity offerings have a longer lifecycle—often 5+ years, if ever. They require an acquisition or IPO, and many companies will never IPO, meaning you may never get any return on investment. With debt offerings, you can begin getting paid earlier in the lifecycle while the company is actually doing business.

2. Reg CF-Into-Reg A Deals

As an investor, I personally won’t invest in any Reg CF deal that says they’re going to use the money I invest with them to go pursue a Reg A offering and solicit more investors. That’s not the way I like to see folks do business. I’d much rather they take the money, concentrate on getting more traction or perhaps offering new products, and otherwise growing the company. If, at the end of the day, the company has become more successful and the business merits raising more capital, then they should go raise a Reg A. But I generally frown upon the Reg CF-to-Reg A jump because, most of the time, I don’t think the additional raise is justified.

3. Revenue Sharing

While I generally like royalty or revenue-sharing agreements, one has to be careful as an investor. The more money that’s invested in the offering, the less each investor gets when revenues are paid out, since all investors share in the same percentage of revenue. That is, unless the revenue-sharing agreement is drafted in such a way that solves this issue.

4. Portfolio Aggregation

I’ve invested on multiple platforms and in multiple deals, so I’m pretty sure that I’m soon going to forget and soon will not be able to keep track of my investments anymore. So, I’m testing out NewChip’s app which, among other functions, allows one to track and manage their portfolio across multiple platforms. It’s lessening the pain around keeping track of multiple investments, usernames, and passwords. Full disclosure that NewChip is one of my clients, and I am one of their legal counsel.

Amy Wan, Esq., CIPP/US is a Partner at Trowbridge Sidoti LLP (CrowdfundingLawyers.net).

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