Investment Risk Statement
Every person who decides to invest in a single company or multiple early stage companies (each, a “Start-up”) on the GoTroo.com Platform (“Investor”) should be aware that an investment in a Start-up involves a high degree of risk, regardless of whether such investment is direct or through a vehicle formed for purposes of accommodating a co-investment arrangement (“Vehicle”) with a lead investor (“Lead”). There can be no assurance that:
- a Vehicle’s investment objectives will be achieved,
- a Start-up will achieve its business plan,
- a Lead has the necessary experience in investing or mentoring, or
- an Investor will receive a return of any part of its investment.
In addition, there may be occasions when Crowdco Inc. (“Crowdco”), a Lead, and/or their respective related parties may encounter potential conflicts of interest in connection with a Vehicle, such that said party may avoid a loss, or even realize a gain, when other Investors in the Vehicle are suffering losses. The following considerations, among others, should be carefully evaluated before making an investment in a Start-up directly or via a Vehicle.
Risk inherent in Start-up investments: an Investor may, and frequently does, lose all of his/her investment
A crowdfunding investment is highly risky. You may lose all your investment and you may not be able to sell any securities you purchase. Financial and operating risks confronting Start-ups are significant. While targeted returns should reflect the perceived level of risk in any investment situation, such returns may never be realized and/or may not be adequate to compensate an Investor, a Lead or a Vehicle for risks taken. Loss of an Investor’s entire investment is possible and can easily occur. Moreover, the timing of any return on investment is highly uncertain.
The Start-up market is highly competitive and the percentage of companies that survive and prosper is small. Start-up investments often experience unexpected problems in the areas of product development, manufacturing, marketing, sales, financing, and general management, among others, which frequently cannot be solved. In addition, Start-ups may require substantial amounts of financing, which may not be available through institutional private placements, the public markets or otherwise.
Experienced angel investors will typically lower their risk of losing their investment capital by spreading their start-up investment capital over a number of different Start-ups (often 10, 20 or more investments).
Investment in technologies
The value of an Investor’s or a Vehicle’s interests in Start-ups may be susceptible to factors affecting the technology industry and/or to greater risk than an investment in a broader range of securities. Some of the many specific risks faced by such technology Start-ups include:
- Rapidly changing technologies;
- Products or technologies that may quickly become obsolete;
- Scarcity of management, technical, scientific, research, sales and marketing personnel with appropriate training;
- The possibility of lawsuits related to patents, copyrights and other intellectual property;
- Rapidly changing investor sentiments and preferences with regard to technology sector investments (which are generally perceived as risky); and
- Exposure to government regulation, making these companies susceptible to changes in government policy and delays or failures in:
- securing regulatory approvals,
- obtaining R&D or other tax credits or subsidies,
- securing intellectual property rights.
Changing economic conditions
The success of any investment activity is determined to some degree by general economic conditions. The availability, unavailability, or hindered operation of external credit markets, equity markets and other economic systems which an individual Start-up, an Investor, a Lead or a Vehicle may depend upon to achieve their objectives may have a significant negative impact on their operations and profitability. The stability and sustainability of growth in global economies may be impacted by terrorism, acts of war, natural disasters or a variety of other unpredictable events. There can be no assurance that such markets and economic systems will be available or will be available as anticipated or needed for an investment in a Start-up to be successful or for a Vehicle to operate successfully. Changing economic conditions could potentially, and frequently do, adversely impact the valuation of portfolio holdings.
Future and past performance
The past performance of a Start-up or its management, a Lead, or principals of Crowdco, is not predictive of a Start-up’s or a Vehicle’s future results. There can be no assurance that targeted results will be achieved. Loss of principal is possible, and even likely, on any given investment.
Difficulty in valuing Start-up investments
It is enormously difficult to determine an objective value for any Start-up. In addition to the difficulty of determining the magnitude of the risks applicable to a given Start-up and the likelihood that a given Start-up’s business will be a success, there generally will be no readily available market for a Start-up’s equity securities, and hence, an Investor’s investments will be difficult to value and is likely to remain illiquid for an extended period of time.
A significant portion of an Investor’s investments (either directly or through Vehicles) will represent minority stakes in privately held companies. As is the case with minority holdings in general, such minority stakes will have neither the control characteristics of majority stakes nor the valuation premiums accorded majority or controlling stakes. Investors and Vehicles will be reliant on the existing management and board of directors of such companies, which may include representatives of other financial investors with whom the Investor or Vehicle is not affiliated and whose interests may conflict with the interests of the Investor or Vehicle.
Lack of information for monitoring and valuing Start-ups
The Investor, the Lead or the Vehicle may not be able to obtain all information it would want regarding a particular Start-up, on a timely basis or at all. It is possible that the Investor or the Vehicle may not be aware on a timely basis of material adverse changes that have occurred with respect to certain of its investments. As a result of these difficulties, as well as other uncertainties, an Investor may not have accurate information about a Start-up’s current value or the value of the securities held by a Vehicle.
No assurance of additional capital for Start-ups
After an Investor has invested in a Start-up, either directly or through a Vehicle, continued development, marketing and sales of the Start-up’s products or services, or administrative, legal, regulatory or other needs, may require that it obtain additional financing. In particular, technology Start-ups generally have substantial capital needs that are typically funded over several stages of investment. Such additional financing may not be available on favorable terms, or at all.
Absence of liquidity and public markets
An Investor’s investments will generally be private, illiquid holdings. As such, there will be no public markets for the securities held by the Investor, directly or through a Vehicle, and no readily available liquidity mechanism at any particular time for any of the investments. In addition, an investment in a Vehicle will be illiquid, not freely transferrable, and involves a high degree of risk. There is no public market for membership interests in a Vehicle (an “Interest”), and it is not expected that a public market will develop. Consequently, an Investor will bear the economic risks of its investment for the term of a Vehicle.
Legal and regulatory risks
No securities regulatory authority or regulator has approved or expressed an opinion about the securities offered on the GoTroo.com Platform.
No Vehicle is, nor expects to be, registered as an “investment fund” under Canadian securities laws and regulations (the “Securities Laws”). Rather, the Vehicles and Start-ups will rely on exemptions in conformity with orders, decisions and/or instruments of provincial authorities implementing the Notice 45-316 and/or with provincial Regulations 45-106 and/or eventually 45-108. There is no assurance that such exemptions will continue to be available to these entities.
Neither a Vehicle, nor a Start-up nor their counsel can assure an Investor that, under certain conditions, changed circumstances, or changes in the law, the Vehicle or Start-up may not become subject to the Securities Laws or other burdensome regulation.
Canadian securities regulators have indicated that registration is not required so long as any investment advice provided to a typical private equity fund (as described below) in connection with the purchase and sale of the securities of its portfolio companies is incidental to such fund’s active management of these companies.
Canadian securities regulators have identified the following as being characteristic of a typical private equity fund (and, conversely, not the characteristics of an ‘investment fund’):
- money is raised under provincial Regulation 45-106 (a Regulation adopted under applicable provincial securities laws), including for trades to ‘accredited investors’;
- money is raised under upcoming Crowdfunding provincial Regulation 45-108 (a Regulation announced by certain Canadian provincial regulators);
- money is raised under orders, decisions and/or instruments of provincial Regulators having implemented the Notice 45-316 for Start-up Crowdfunding Registration and Prospectus Exemptions;
- Investor’s money is to remain invested for a period of time;
- target assets are generally not publicly traded securities;
- the fund generally becomes actively involved in the management of the portfolio Start-up, often over several years (for example, representation on the board of directors, direct involvement in the appointment of managers and/or a say in material management decisions);
- the fund looks to realise on its investment either through a public offering of the portfolio Start-up’s securities or a sale of the portfolio Start-up’s business, at which point, the Investors money will generally be returned to them along with any profit;
- Investors rely on the expertise of the Lead to select and manage the portfolio Start-up in which the fund invests; and
- the general partner or manager typically receives a management fee or ‘carried interest’ in the profits generated from its investments and does not receive compensation for raising capital or trading in securities.
There are many tax risks relating to investments in Start-ups that are difficult to address and complicated. You should consult your tax advisor for information about the tax consequences of purchasing equity securities of a Start-up or an Interest in a Vehicle.
Withholding and other taxes
The structure of any investment in a Start-up or in or by a Vehicle may not be tax efficient for any particular Investor, and no Start-up or Vehicle guarantees that any particular tax result will be achieved. In addition, tax reporting requirements may be imposed on Investors under the laws of the jurisdictions in which Investors are liable for taxation or in which a Vehicle makes investments. Investors should consult their own professional advisors with respect to the tax consequences to them of an investment in a Start-up or a Vehicle under the laws of the jurisdictions in which the Investors and/or the Start-up or Vehicle are liable for taxation.
Limited operating history of Vehicles
Each Vehicle is or will be a newly formed entity and has no operating history. Each Vehicle’s investment structure should be evaluated on the basis that a Lead’s assessment of the prospects of investment in any given Start-up may not prove accurate and that the Vehicle will not achieve its investment objective. Past performance of a Lead, Crowdco or their principals, or the management, board or prior investors of a Start-up is not predictive of future results.
Conflicts of interest; investment opportunities
Instances may arise in which the interest of a Lead (or its members or affiliates) may potentially or actually conflict with the interests of a Vehicle and/or its Investors. For example, conflicts of interest may arise as a result of a Lead having investments in portfolio companies of the relevant Vehicle as well as other investments both public and private.
Investors in a Vehicle may have conflicting investment, tax, and other interests with respect to Start-up investments, which may arise from the structuring of a Start-up investment or divestiture or the timing of a sale of a Start-up investment or other factors. As a consequence, decisions made by the Lead on such matters may be more beneficial for some Investors than for others. Investors should be aware that the Lead intends to consider the investment and tax objective of each Vehicle and Investors as a whole when making decisions on investment structure or timing of sale, and not the circumstances of any Investor individually.
Lack of Investor Control
Investors in a Vehicle will not make decisions with respect to the management, disposition or other realization of any investment made by the relevant Vehicle, or other decisions regarding such Vehicle’s business and affairs. Such decisions are generally made by the Lead.
Certain information regarding the Start-ups will be highly confidential. Competitors may benefit from such information if it is ever made public, and that could result in adverse economic consequences to the Investors.
Forward looking information
The information available to Vehicles and Investors may contain "forward-looking information" within the meaning of National Instrument 51-102 Continuous Disclosure Obligations ("NI 51-102"). Such information can be identified by the fact that it does not relate strictly to historical or current facts. Forward-looking information often includes words such as "anticipates," "estimates," "expects," "projects," "intends," "plans," "believes" and words and terms of similar substance in connection with discussions of future operating or financial performance. Examples of forward-looking information include, but are not limited to, statements regarding: (i) the adequacy of a Start-up’s funding to meet its future needs, (ii) the revenue and expenses expected over the life of the Start-up, (iii) the market for a Start-up’s goods or services, or (iv) other similar matters.
Each Start-up’s forward-looking information is based on management's current expectations and assumptions regarding the Start-up’s business and performance, the economy and other future conditions and forecasts of future events, circumstances and results. As with any projection or forecast, forward-looking information are inherently susceptible to uncertainty and changes in circumstances. The Start-up’s actual results may and probably will vary materially from those expressed or implied in its forward-looking information. Important factors that could cause the Start-up’s actual results to differ materially from those in its forward-looking information include government regulations, economic, strategic, political and social conditions and other factors such as:
- recent and future changes in technology, services and standards;
- changes in consumer behavior;
- changes in a Start-up’s plans, initiatives and strategies, and consumer acceptance thereof;
- changes in the plans, initiatives and strategies of the third parties that are necessary or important to the Start-up’s success;
- competitive pressures, including as a result of changes in technology;
- the Start-up's ability to deal effectively with economic slowdowns or other economic or market difficulties;
- increased volatility or decreased liquidity in the capital markets, including any limitation on the Start-up’s ability to access the capital markets for debt securities, refinance its outstanding indebtedness or obtain equity, debt or bank financings on acceptable terms;
- the failure to meet earnings expectations;
- the adequacy of the Start-up's risk management framework;
- changes in Canadian GAAP or other applicable accounting policies;
- the impact of terrorist acts, hostilities, natural disasters (including extreme weather) and pandemic viruses;
- a disruption or failure of the Start-up's or its vendors' network and information systems or other technology on which the Start-up's businesses rely;
- changes in tax, communication and other laws and regulations;
- changes in foreign exchange rates and in the stability and existence of foreign currencies; and
- other risks and uncertainties which may or may not be specifically discussed in materials provided to Investors.
Any forward-looking statement made by a Start-up speaks only as of the date on which it is made. Start-ups are under no obligation to, and generally expressly disclaim any obligation to, update or alter their forward-looking statements, whether as a result of new information, subsequent events or otherwise.
The foregoing risks do not purport to be a complete explanation of all the risks involved in acquiring equity securities in a Start-up or an Interest in a Vehicle. Each Investor is urged to seek its own independent legal and tax advice and read the relevant investment documents before making a determination whether to invest in a Start-up or a Vehicle.
Crowdco and GoTroo are trade marks of Crowdco Inc.
Last updated: 29 June 2015