Understand the opportunity. Know the risks.

Educational Materials

Educational materials are available on Issuance Express. Additional links below provide investment guidance and regulations from the SEC (Securities and Exchange Commission) and FINRA (Financial Industry Regulatory Authority).

American JOBS Act Details

The American JOBS Act has created a new opportunity for Entrepreneurs to raise capital and Investors to now invest in private early stage opportunities. Previously these early stage investments were limited to accredited investors (those with a net worth of more than $1M or income of more than $200k). This is an exciting time for entrepreneurs and investors, but there are some specific requirements outlined below from the SEC which must be followed. This is a summary.

The limits on the amount investors may invest.

Regulation Crowdfunding rules limit the amount an Investor may invest in all crowdfunding offerings in any 12-month period.

Unaccredited Investors:

• If either your annual income or your net worth is less than $124,000, then during any 12-month period, you can invest up to the greater of either $2,500 or 5% of the greater of your annual income or net worth.

• If your annual income and net worth are equal to or more than $124,000, then during any 12-month period, you can invest up to 10% of your annual income or net worth, whichever is greater, but not to exceed $124,000.

Accredited Investors:

• If you are an accredited investor, then there are no limits on how much you can invest.

• An individual will be considered an accredited investor if he or she:

  • Earned income that exceeded $200,000 (or $300,000 together with a spouse or spousal equivalent) in each of the prior two years and reasonably expects the same for the current year,

  • Has a net worth over $1 million, either alone or together with a spouse or spousal equivalent (excluding the value of the person's primary residence and any loans secured by the residence (up to the value of the residence)), OR

  • An individual holds certain professional certifications, designations, or credentials in good standing, including a Series 7, 65, or 82 license.

  • A spousal equivalent means a cohabitant occupying a relationship equivalent to that of a spouse.

  • There are different accreditation rules for entities such as companies and trusts.

Joint calculation:

• You can calculate your annual income or net worth by jointly including your spouse's income or assets, and the property doesn't need to be held together. However, if you calculate your income or assets jointly with your spouse, each crowdfunding investment cannot exceed the limit that would apply to an individual investor at that annual income or net worth level.

All investors:

• Holders of securities sold in a crowdfunding offering will generally be required to hold all securities purchased for at least one year before engaging in sales.

Crowdfunding Requirements Issuers (Entrepreneurs and Companies raising money are Issuers)

• An issuer must be a Company (c-corp, s-corp, LLC, LLP) organized under the laws of a U.S. state and can raise up to $5M per year. To qualify you must disclose historical financials, a business plan, management background, projected financials, use of proceeds, a methodology for pricing the equity or debt offering and more.

• Issuance Express provides a step by step process to make it easy.

• Additional details include:

  • A clearly defined Offering, valuation assumptions and Use of Proceeds

  • Financial statements will be provided to the SEC, investors and Issuance Express in connection with an offering under the crowdfunding rules must:

    • (1) be prepared in accordance with US generally accepted accounting principles;

    • (2) cover the two most recently completed fiscal years of the issuer (or shorter period since the inception of the issuer, if applicable); and

    • (3) be certified (and accompanied by tax returns), reviewed or audited, depending upon the aggregate amount of securities offered by the issuer during the preceding 12-month period.

• Offering $124,000 of securities or less; financial statements must be certified by the principal executive officer of the issuer to be true and complete

• If offering more than $124,000, but not more than $618,000, of securities, financial statements must be reviewed (but not audited) by an independent public accountant.

• If offering more than $618,000 of securities, financial statements must be audited by an independent public accountant, except that a company offering more than $618,000 of securities pursuant to the crowdfunding exemption for the first time would be permitted to provide reviewed rather than audited financial statements.

Company Structure

Corporation

The IRS allows corporations to choose to be taxed as either a C corporation or an S corporation. Income from C corporations is subject to double taxation; that is, the corporation pays taxes on its net income and then the shareholders also pay taxes on the income that they receive from the corporation. S corporations have only one level of taxation. The shareholders still have to pay taxes on money that they receive from the corporation, but an S corporation does not pay taxes on its net income. While the S corporation is popular among small business owners, C corporations have greater tax planning flexibility and can shield shareholders from direct tax liability. Most crowdfunding companies are not S corporations because of the limitation on share that can be issued to investors. The most common type of Corporation which has investors is a Corporation. The shareholders benefit from the appreciation in the value of the shares and cash flow if the company issues a dividend. Corporations issue shares of stock to its investors. This may be common stock, or preferred stock which has a higher priority over common stock in the event of a liquidation of the company. Each share has a PAR Value and Purchase price.

Limited Liability Company

A limited liability company, or LLC, is a business entity created under state law that combines characteristics of both a corporation and a partnership. Like a corporation, the owners of an LLC are generally not personally liable for company debts. Like a sole proprietorship or a partnership, an LLC has operating flexibility and is, by default, a pass through entity for tax purposes. This means that the LLC does not pay taxes on its profits, but instead, profits and losses are passed through to the owners, who must then pay tax on their share of LLC income.

Trademark & Patents

Here's what you can trademark (consult a trademark attorney):

• Name: Most commonly your company's name, but also a line of products or sub-entity directly tied to the marketing and sale of your products and services.

• Logo: Your company logo or other symbol or design used to create brand recognition.

• Phrase: Your company slogan or other phrase used as a brand for your products or services.

Patent and Patent Pending:

The exclusive right granted by a government to an inventor to manufacture, use, or sell an invention for a certain number of years. Many inventors and manufacturers apply for official patents through the United States Patents and Trade Office (USPTO), but the approval process can take at least 18 months. In order to establish ownership of a product idea, inventors and manufacturers often place the words Patent Pending (abbreviated Pat. Pend.) directly on the products until the official patent is issued. This term lets other inventors and marketers know that the USPTO application process has already begun and it's only a matter of time before a 20 year patent is granted, at least in the case of products. In some rare cases the patent may not be issued if it is found to infringe on a prior existing patent.

There are 2 types of patents:

1) A design patent protects the ornamental design, configuration, improved decorative appearance, or shape of an invention. This patent is appropriate when the basic product already exists in the marketplace and is not being improved upon in function but only in style. For example, designer eyeglass frames (improvement on eyeglasses). A U.S. design patent lasts for 14 years.

2) A utility patent protects any new invention or functional improvements on existing inventions. This can be to a product, machine, software, a process, or even composition of matter. For example, a new self-fastener diaper. A provisional patent is a fast way to get protection and gives the filer 12 months to file the full patent application.

Board of Directors or Board of Managers

Corporations:

A board of directors is a body of elected or appointed members who jointly oversee the activities of a company or organization and who owe a fiduciary duty to its shareholders or members. A board's activities are determined by the powers, duties, and responsibilities delegated to it or conferred on it by an authority outside itself. These matters are typically detailed in the organization's bylaws. In a stock corporation, the board is elected by the shareholders and is the highest authority in the management of the corporation.

LLC:

If an LLC is Manager-managed, the power and authority of the company's management lies within its Board of Managers, which is similar to the Board of Directors of a Corporation. If an LLC is Member-managed, there is no Board of Managers, and the LLC is directly managed by its Members (the owners).

Advisory Board:

An advisory board is a body that provides non-binding strategic advice to the management of a corporation, organization, or foundation. The informal nature of an advisory board gives greater flexibility in structure and management compared to the Board of Directors. Typically these are experts in your industry who provide experience, knowledge and guidance to the management team. Compensation may be in the form of stock or cash.

Financial Plan

Income Statement

Income statement, also known as profit and loss statement, or statement of revenue and expense. The income statement is one of the four major financial statements. The other three are the balance sheet, the statement of cash flows, and the statement of changes in shareholders' equity.

If a company distributes its financial statements to the public, it is required to follow generally accepted accounting principles (GAAP) in the preparation of those statements from the Financial Accounting Standards Board (FASB). This is required to raise funds through Issuance Express. The financial statements need to be either Audited or Reviewed.

The Income Statement is a financial statement that measures a company's financial performance over a specific accounting period. Financial performance is assessed by giving a summary of how the business incurs its revenues and expenses through both operating and non-operating activities. It also shows the net profit or loss incurred over a specific accounting period, typically over a fiscal quarter or year.

Valuation

It's commonly said that business valuation is more art than science.

Nevertheless, entrepreneurs need to put a value on their startups in order to raise money, and investors need to put a value on their investments to generate liquidity. By definition, startups don't have a history of financial performance on which to base a valuation. Therefore, it's up to the entrepreneur to develop a process for valuing the company based on comparables and financial projections.

Comparables

Find out how much similar companies in your industry and geography are worth. You can use sites such as BizBuySell and BizQuest to determine how much businesses are selling for in your industry. If you have a high-tech or high-growth startup, accountants and lawyers are among the best advisors to help you determine the market rate for comparable companies at your stage.

Issuance Express is not an Advisory firm and can not help determine the value of your business or amount of investment capital to raise. But here is a quick way to state your valuation.

Balance Sheet

Balance Sheet. If a company distributes its financial statements to the public, it is required to follow generally accepted accounting principles (GAAP) in the preparation of those statements from the Financial Accounting Standards Board (FASB). This is required to raise funds through Issuance Express. The Statements need to be either Audited or Reviewed (See Audited and Reviewed Financials section).

The Balance Sheet is a financial statement that summarizes a company's assets, liabilities and shareholders' equity at a specific point in time. These three balance sheet segments give investors an idea as to what the company owns and owes, as well as the amount invested by shareholders.

The balance sheet adheres to the following formula:

Assets = Liabilities + Shareholders' Equity

The balance sheet gets its name from the fact that the two sides of the equation above assets on the one side and liabilities plus shareholders' equity on the other must balance out. This is intuitive: a company has to pay for all the things it owns (assets) by either borrowing money (taking on liabilities) or taking it from investors (issuing shareholders' equity).

How to Interpret a Balance Sheet: The balance sheet is a snapshot, representing the state of a company's finances at a moment in time. By itself, it cannot give a sense of the trends that are playing out over a longer period. For this reason, the balance sheet should be compared with those of previous periods.

Cash Flow Statement

Cash flow is the net amount of cash and cash-equivalents moving into and out of a business. Positive cash flow indicates that a company's liquid assets are increasing, enabling it to settle debts, reinvest in its business, return money to shareholders, pay expenses and provide a buffer against future financial challenges. Negative cash flow indicates that a company's liquid assets are decreasing. Net cash flow is distinguished from net income, which includes accounts receivable and other items for which payment has not actually been received. Cash flow is used to assess the quality of a company's income, that is, how liquid it is, which can indicate whether the company is positioned to remain solvent.

Common Types of Investments

Equity, Debt, and SAFEs

Equity Financing is the issuance of securities (Common and Preferred Stock) to investors who will then own a piece of the Company. For example, a Company might have 1 million authorized shares of common stock and choose to sell 20% of these shares to investors (200,000 shares) at a predetermined price. Typically these are done in Series. The first offering would be Series A. In this example if they determined a price of $1.00 per share they would receive $200,000 from the sale of these securities. In another year, they may decide to do a Series B offering and sell another 100,000 shares at $2.00 per share; assuming they did a good job with the first $200,000, the value of the company should have increased. This is a typical Equity transaction for a private company.

Debt Financing requires the repayment of the Debt at a predetermined time with interest. Companies that use debt typically have strong cash flow to service the debt payments each month. There are many variations of debt including interest only with balloon payments and different payment schedules.

A SAFE is known as a derivative. In most cases a SAFE may not have a valuation, but plans to set one in the future when certain events take place, such as an institutional investment in the company. SAFEs may offer a discount on the future valuation, a cap, setting a maximum future valuation. Investing in a SAFE means an investor is entitled to a number of shares in the future, based on the valuation and conversion of the SAFE to equity. It is crucial for investors to review the terms of a SAFE carefully. Like all investments, there is the risk of losing your investment. For additional guidance on SAFEs, see Investor.gov’s SAFE guidance.

All crowdfunding investments have a high degree of risk and an investor can see a full loss of their investment.

Stock Option and Warrants

Stock Options:

Employee stock options, or ESOs, represent one form of equity compensation granted by companies to their employees and executives. They give the holder the right to purchase the company stock at a specified price for a limited duration of time in quantities spelled out in the options agreement. A typical option plan is a grant of shares (example: 12,000 shares) with a purchase price (example: $1.00 per share), a schedule such as quarterly vesting over 3 years with an expiration date such as 10 years. Based on this example 1,000 shares would vest each quarter the employee stays with the company. That gives the employee the right to purchase 1,000 shares each quarter for $1.00 per share which the employee can do at any time until the Option expires in 10 years.

Warrants:

A Warrant is a derivative security that gives the holder the right to purchase securities (usually equity) from the issuer at a specific price within a certain time frame. Warrants are often included in a new debt issue as a sweetener to entice investors. For example, an Issuer may take out an unsecured loan for $100,000 and offer 10% Warrant coverage on the loan which if the stock price is $1.00 per share this would be the right to purchase 10,000 shares at $1.00. If the value of the company increases the Warrants are in the money and the Warrant holder could exercise his right to purchase the shares at $1.00 and immediately sell them at the current higher price.

Investors should weigh the risk of investing, which includes the potential loss of investment and the illiquid nature of non-public shares. Please find more information on our disclosure page.