This page contains important information for investors to review before making an investment commitment. Neighbor Capital may update this page from time to time. Investors are encouraged to consult this page whenever they have a question about investing in our offerings. Investors are also encouraged to visit the SEC and FINRA and read their investor bulletins regarding Regulation Crowdfunding.
How much money can I invest?
The amount of money you may invest is limited by your annual income, net worth, and any other investments you have made under Regulation Crowdfunding in the last twelve months. Before making any investment commitment, you will be asked to complete an investor qualification questionnaire, which will help you determine the maximum amount of money you are allowed to invest. This is provided to you for your convenience, but you and you alone are responsible for complying to the investment limits that you are subject to.
If your annual income or net worth is less than $107,000, you may invest the greater of $2,200 or 5% of your annual income or net worth, whichever is less.
If both your annual income and net worth is equal to or more than $107,000, then you may invest 10% of your annual income or net worth, whichever is less, up to $107,000.
The following table provides a few examples:
|Annual Income||Net Worth||Calculation||12-month Limit|
|$30,000||$105,000||$2,200 or 5% of $30,000 ($1,500), whichever is greater||$2,200|
|$150,000||$80,000||$2,200 or 5% of $80,000 ($4,000), whichever is greater||$4,000|
|$150,000||$107,000||10% of $107,000 ($10,700)||$10,700|
|$200,000||$900,000||10% of $200,000 ($20,000)||$20,000|
|$1.2 million||$2 million||10% of $1.2 million ($120,000), subject to cap||$107,000|
Joint calculation. If you are married, you can calculate your investment limits by adding your annual income or net worth with your spouse’s income or assets, even if that property is not held jointly. However, if you do calculate your income or assets jointly with your spouse, each of your crowdfunding investments together cannot exceed the limit that would apply to an individual investor at that annual income or net worth level.
How do I calculate my net worth?
Your net worth is all your assets minus all your liabilities.
For purposes of crowdfunding, the value of your primary residence is not included in your net worth calculation. In addition, any mortgage or other loan on your home does not count as a liability up to the fair market value of your home. If the loan is for more than the fair market value of your home (i.e., if your mortgage is underwater), then the loan amount that is over the fair market value counts as a liability under the net worth test.
Further, any increase in the loan amount in the 60 days prior to your purchase of the securities (even if the loan amount doesn’t exceed the value of the residence) will count as a liability as well. This is to prevent your net worth from being artificially inflated through converting home equity into cash or other assets.
While your individual circumstances will vary, the following table sets forth examples of calculations under the net worth test in order to determine crowdfunding investment limits:
|Primary Residence (not included except for related liabilities below):
Home equity line
More than 60 days old
Less than 60 days old
401(k), IRA accounts
|Total included assets||$190,000||$190,000||$190,000|
Student and car loans
Portion of underwater mortgage
Home equity line (less than 60 days old)
|Total included liabilities||$120,000||$130,000||$150,000|
How do I make an investment?
Small business owners (also known as “issuers”) list investment opportunities (also known as “offerings”) on the Site to allow investors like you to make investments in their businesses. Once you see a business or businesses that you would like to invest in, you open an account and make an investment commitment. You can only purchase crowdfunding investments through a crowdfunding intermediary, either a broker-dealer or a funding portal registered with the Securities Exchange Commission (SEC) and a member of the Financial Industry Regulatory Authority (FINRA). Neighbor Capital is a funding portal registered with the SEC and a member of FINRA.
You are only allowed to open an account if you agree to accept all written communications relating to your crowdfunding investment electronically.
What happens after I make an investment commitment?
Each offering (investment opportunity) will specify a targeted offering amount. This is the amount that investors, in the aggregate, must commit to the offering before the business owner can receive any money from the investors.
Targeted offering amount reached or exceeded
Our platform will show each issuer’s progress in reaching the targeted offering amount. We will notify you when 50% of the targeted amount is reached and again when 100% of the targeted amount is reached.
If the targeted offering amount is reached, the issuer may either wait until the offering deadline to close the offering or it may close the offering at an earlier date if the offering has been open for at least 21 days. If the offering closes at an earlier date, we will notify you of the new offering deadline at least 5 days before the offering closes.
Targeted offering amount not reached
If the targeted offering amount is not reached, the offering will be canceled and your funds will be promptly returned to you.
What if I change my mind?
If there is a material change in the offering, we will promptly notify you of this change. You must reconfirm your investment commitment within five days of receiving this notice. Otherwise, your investment commitment will be cancelled. Within five business days of the cancellation, we will notify you that your investment commitment was cancelled, the reason for the cancellation, and the refund amount you should expect to receive.
Is there any reason I may not be able to invest in a company after I make an investment commitment? What are my rights when this happens?
An issuer must cancel its offering if it does not reach its targeted offering amount. It may also terminate the offering for other reasons. If either of these scenarios occurs, we will notify you within five business days of the cancellation, disclosing the cancellation to you, the reason for the cancellation, and the refund amount you should expect to receive.
After an issuer cancels its’ offering, neither you nor any other investor will be allowed to make an investment commitment in that offering.
When is my purchase complete?
If issuer reaches or exceeds its targeted offering amount and you do not cancel your investment commitment at least 48 hours before the offering deadline, your purchase will be complete on the offering deadline. We will notify you that the transaction is complete and direct the transmission of your funds to the business or businesses in which you made an investment commitment(s).
The transaction will be recorded in an electronic ledger.
What are the risks of investing in your offerings?
The risk of investing in any business depends, in part, on the particular facts and circumstances of a business or offering. As such, we encourage you to carefully review each issuer’s offering materials before you invest in the offering. The offerings on Neighbor Capital represent offerings made by small local businesses in the area codes 94124, 94134, and 94107 or by small businesses or entrepreneurs impacting those areas. Small businesses and start-ups tend to have high rates of failure even after receiving financing. These investments are speculative and there is a risk that your investment will be lost completely. You should be able to afford and be prepared to lose your entire investment.
You should also be aware that there is limited liquidity in your investment and you should not invest unless you do not need liquidity in your investment for an indefinite time. The chances of an initial public offering or acquisition by another business is low. Thus, it is unlikely that you will be able to sell your securities on a national securities exchange or to another company in an acquisition. You may not sell your securities for at least one year from the purchase date unless in certain limited circumstances. In addition, there currently is no secondary market for the sale of securities issued under Regulation Crowdfunding. This means that in order to sell your securities, you may have to locate an interested buyer.
Given the above factors, you must consider whether investing in the securities offered on our platform is appropriate for you.
What types of securities do you offer?
We offer equity and debt securities on our platform. We also offer SAFEs.
When you invest in an equity security, you become a part-owner of the company. Each share you purchase represents an ownership interest in the company. Your return on investment depends on the occurrence of a liquidity event, such as being acquired by another company or being sold on a national securities exchange. However, these events may not occur for many years or at all. In addition, even if a liquidation event occurs, you may receive nothing at all. Thus, you should only invest if your investment can be illiquid for an indefinite amount of time and you can afford the risk of losing your entire investment.
Your rights depend on the type of equity that you purchase. You may see the following types of equity securities offered on our platform: common shares and preferred shares.
When you invest in a debt security, your return on investment is the interest rate that accumulates on the amount that you invest (the principal). In a debt offering, the company is promising to pay you interest on your investment and to return the principal to you on a specified date (the “due date” or “maturity date”). However, there is a risk that you will not get paid back at all. Unlike an investment in an equity security, you do not own any part of the company. We may offer the following types of debt securities on our platform: secured debt, unsecured debt, or convertible debt.
A SAFE, short for Simple Agreement for Future Equity is an agreement between the investor and the company that when a specific event occurs, the investor’s money will be converted into stock. The SAFE-holder will then become a shareholder and the SAFE will terminate.
What rights do I have investing in different types of securities?
The rights you have depend on the type of equity you purchase. The following is only a summary of the common types of rights you have when purchasing certain types of securities. Your specific rights are set out in the Company’s offering memorandum and investor contract, such as a subscription agreement or promissory note. As such, it is important that you read the offering memorandum and all related offering documents carefully before making an investment.
As a holder of common shares, you have the right to vote, but your right to be paid is subordinate to preferred shareholders. This means that if a company pays dividends, preferred shareholders will be paid first. If a company liquidates, preferred shareholders will also be paid first.
Your ownership percentage and thus your right to vote may be diluted if a company engages in a subsequent offering and issues additional shares. For example, if a company has 100 unique shareholders, each shareholder owns 1% of the company. If the company issues 100 additional shares for a subsequent offering, the current shareholders will have their ownership interest, and thus, their voting power, cut in half or reduced to 0.5%. Even though your percentage ownership is reduced, the money raised from the new offering may increase the company’s profits and the value of its shares.
Preferred shares have preferred dividend rights, meaning that dividends will be paid to preferred shareholders before common shareholders. A dividend is a percentage or dollar amount that a shareholder earns for each share that he/she owns. Dividends may be cumulative or noncumulative.
Cumulative dividends accumulate even if the board does not declare them. This means that for as long as you own the company’s shares, you continue accruing dividends on every share that you own. However, the Company may not be able to pay any of the accrued dividends.
Unlike cumulative dividends, noncumulative dividends do not accumulate and you are not entitled to receive any dividends unless the board declares them.
Preferred shares also liquidation preferences, meaning that a preferred shareholder will be paid before a common shareholder.
Evidence of Ownership
Some companies send a copy of a share certificate to shareholders as proof that they are shareholders of the company. Other companies simply record the transaction in a stock transfer ledger that indicates information of the offer and sale of the security, such as, date offered, date sold, offer price, price paid, price per share, total shares sold, and name of the shareholder.
Secured debt is secured by something called, collateral. Collateral is an asset or assets that a company pledges to secure the debt. Personal property, such as, a business’s assets or its shares are examples of collateral. If the company fails to pay back their debt—i.e., your initial investment in the company—it will repay you with their collateral. Although a company will agree to maintain their collateral, there is no guarantee that the collateral the company has when you make the investment will be worth the same amount that it did at the time you made the investment on the maturity date. There is also a risk that the collateral will cease to exist at a later date or be of very little or no value.
Unsecured debt is not secured by anything. This means that if the company does not pay you back, unlike with secured debt, you cannot look to their assets for repayment.
As a debt holder, you are the company’s creditor. Companies pay their creditors in order of priority. Any creditor senior in priority to you will be paid before you and any creditor junior in priority to you will be paid after you. If there is no money remaining after creditors senior to you have been paid, you may lose some or all of your investment.
Convertible debt (also called a “convertible note”) is debt that converts into equity if an event or events (“Conversion Event”) specified in the company’s offering documents occur. As an investor in a convertible debt offering, you become a debt-holder (or note-holder). This means that you are entitled to earn interest on your investment before the investment converts or before the company pays you back the amount invested (the principal) plus any accrued and unpaid interest. Once the Conversion Event occurs, however, your debt will convert to equity and you will become a shareholder of the company. This means that you will get an ownership interest in the company and the company is no longer liable to pay you any additional interest or return your principal. However, unless the Conversion Event is an initial public offering, there may be limited liquidity in your shares. Thus, you should not invest in convertible debt unless you can bear the economic risk of your investment being illiquid for an indefinite amount of time.
The number of shares you are entitled to purchase upon a Conversion Event depends on the amount invested and whether the convertible note has a cap or a discount. A convertible note can have a cap, a discount, or both. If a convertible note has both a cap and a discount, the scenario most favorable to the investor will apply.
The cap refers to the valuation cap. If there is a cap, the investor is entitled to buy the stock at the price at conversion or the price of the cap, whichever is lower. The price per share for note-holders is determined by the number of shares issued and the lower of the cap or share price. Assuming the cap price is $5 million and the valuation price for a Series A financing is $10 million and 1,000,000 shares are issued, the note-holders are entitled to pay $5 per share, whereas Series A investors would pay $10 per share. Assuming an investor purchased a convertible note for $2,000, the investor would be entitled to 400 shares of the company (assuming no interest for simplicity in illustrating the concept).
If there is a discount, the investor would pay the discount times the price the stock is worth at the time of conversion. Thus, if a share is valued at $100 in a Series A financing and an investor purchased a note with a 20% discount, the noteholder would have a right to purchase the share at $80, rather than $100. Assuming the note is worth $2,000, the noteholder would be entitled to 25 shares of the company. The Series A investor, however, would only get 20 shares of the company on a $2,000 investment.
Revenue-sharing debt securities are debt securities that give you a percentage share of a company’s revenues, gross profits, or net profits, up to a specified multiple of your original investment. For example, a company may offer you a return of 1.5x of your investment, payable annually as 5% of the company’s annual net profits. If you invest $1,000 in the company, you will receive 5% of the company’s net profits each year until you receive $1,500. At that point, the company would have paid off all debts owed to you. Unlike with other types of debt, there is no set interest rate in a revenue-sharing agreement. Rather, the interest rate is dependent on how quickly the company is able to pay you back.
In a revenue-sharing agreement, it is important to note whether the company is giving you a percentage of its revenue, gross profit, or net profit because this will determine how much money you can expect to receive in a given period:
Revenue is the total amount of money that a company brings in from the sales of its goods or services.
The gross profit is the money a company has remaining after deducting the cost of goods sold from its revenue.
The net profit is the amount of money remaining after a company deducts its total expenses from its total revenue.
Your ability to see a return on investment may vary greatly depending on whether you are entitled to receive a portion of the company’s revenue, gross profit, or net profit. As with the other investments on this site, there is a risk that you will lose your entire investment and you should not invest unless you can bear the economic risk of such loss.
Important Documents for Debt Investments
If you purchase a debt security, you will be provided with a loan agreement and a promissory note. The loan agreement sets forth both the rights and obligations of the company and the investor. If the loan is secured by collateral, the loan agreement will describe the collateral. The promissory note is a written promise of the company’s obligation to pay you. For example, the promissory note may specify the interest rate on your investment, when the interest is due, when the principal is due, and whether the company has the right to prepay.
A SAFE, short for Simple Agreement for Future Equity is an agreement between the investor and the Company, giving the investor the right to purchase stock at a later time. This agreement provides that when a specific event—a liquidity event, such as an acquisition, initial public offering, or a subsequent round of funding—occurs, the investor has the right to purchase a certain number of shares. The SAFE-holder will then become a shareholder and the SAFE will terminate.
The number of shares an investor can purchase depends on the amount invested and whether the SAFE has a cap or a discount. A SAFE can have a cap, a discount, or both. If a SAFE has both a cap and a discount, the scenario most favorable to the investor will apply.
The cap refers to the valuation cap. If there is a cap, the investor is entitled to buy the stock at the price at conversion or the price of the cap, whichever is lower. The price per share for SAFE-holders is determined by the number of shares issued and the lower of the cap or share price. Assuming the cap price is $5 million and the valuation price for a Series A financing is $10 million and 1,000,000 shares are issued, the SAFE-holders are entitled to pay $5 per share, whereas Series A investors would pay $10 per share. Assuming an investor purchased a SAFE for $2,000, the investor would be entitled to 400 shares of the company.
If there is a discount, the investor would pay the discount times the price the stock is worth at the time of conversion. Thus, if a share is valued at $100 and an investor has a 20% discount, the investor would have a right to purchase the share at $80, rather than $100. Assuming the SAFE-holder made a $2,000 investment, the SAFE-holder would be entitled to 25 shares of the company. The Series A investor, however, would only get 20 shares of the company given a $2,000 investment.
The SAFE is designed to function like a convertible note, but is not a debt instrument. It merely allows the investor to purchase shares if and when a specified liquidity event(s) occurs. Unlike with a debt instrument, an investor is not entitled to receive any interest while waiting for the SAFE to convert and there is no maturity date, when the investor can start to expect payments. In addition, there is no guarantee that a liquidity event will ever occur, thus placing the investor’s entire investment at risk. If the company is liquidated in other ways, such as a bankruptcy, the SAFE-holder, unlike a debt holder has no right to any of the company’s assets or the right to receive any of the investment back.
What can I do with my securities after I purchase them?
Generally, you must keep your securities for at least one year after purchasing them. However, you may transfer your securities
- back to the issuer;
- to an accredited investor, upon reasonable belief that the purchaser is an accredited investor;
- as part of an offering registered with the Commission; or
- to a family member of the purchaser or the equivalent, to a trust controlled by the purchaser, to a trust created for the benefit of a member of the family of the purchaser or the equivalent, or in connection with the death or divorce of the purchaser or other similar circumstance.
The one-year resale restriction does not only apply to you (the initial purchaser), but applies to any purchaser during the one-year period beginning when the securities were first issued.
If you need liquidity during the first year of your investment, a crowdfunding investment may not be right for you. Even if you are able to hold the security for more than a year, there is no market for securities issued under Regulation Crowdfunding and a market may never develop. Thus, unless you can bear the risk of an illiquid investment for an indefinite time, you should not invest in securities issued under Regulation Crowdfunding.
What are the risks of dilution?
If the issuer requires additional capital, it may issue additional shares, diluting the ownership percentage of your shares and diminishing any voting power you may have. For example, if 100 shareholders own 10 shares of the company, each shareholder owns 10% of the company. If the company issues an additional 100 shares, the existing shareholders will then only own 5% of the company’s shares and any voting rights they may have will be reduced accordingly.
How will I know what my money is being used for?
Each issuer must file an annual report with the Securities Exchange Commission, no later than 120 days after the end of the fiscal year covered by the report. For example, if a company’s fiscal year ends on December 31, 2016, the company must file its annual report by April 30, 2017. The company is required to state the specific date that it will file its annual report in its offering memorandum. This report will be available to you on the issuer’s website. The specific web address can be found in the issuer’s offering memorandum.
Contents of Annual Report
The annual report must contain the issuer’s financial statements, certified by the principal executive officer of the issuer to be true and complete in all material respects unless reviewed or audited statements are available. Financial statements contain the following:
- balance sheets;
- statements of comprehensive income;
- statements of cash flows;
- statements of changes in stockholders’ equity; and
- notes to the financial statements.
The issuer will also disclose information about the company and its financial condition. This includes a description of the following:
- A discussion of liquidity, capital resources and historical results of operations with a focus on whether historical earnings and cash flows are representative of what investors should expect in the future. If the issuer does not have a prior operating history, the discussion should focus on financial milestones and operational, liquidity and other challenges.
- The issuer shall discuss the period for which the financial statements are provided and disclose any known material changes or trends in the financial condition and results of operations after such period. This discussion should take into account the proceeds of the offering and any other known or pending sources of capital, including how offering proceeds will affect their liquidity, whether these funds and any other additional funds are necessary to the viability of the business and how quickly the issuer anticipates using its available cash. The report may also describe the other available sources of capital to the business, such as lines of credit or required contributions by principal shareholders.
To inform you of financial condition and results of operations of the issuer, you will be provided with management’s perspective on the issuer’s operations and financial results, including information about the issuer’s liquidity and capital resources and any known trends or uncertainties that could materially affect the company’s results.
The types of information that an issuer is required to provide in annual reports, the frequency of the delivery of that information, and the possibility that the issuer’s obligation to file annual reports may terminate in the future. This means that you may not have ongoing financial information about the issuer.
Termination of Reporting Requirements
The issuer is required to submit at least one annual report to you. However, if the following events occur, the issuer does not have to provide you any additional annual reports and you may not continually have current financial info about the issuer:
(1) the issuer is required to file reports under Exchange Act Sections 13(a) or 15(d);
(2) the issuer has filed at least one annual report and has fewer than 300 holders of record;
(3) the issuer has filed at least three annual reports and has total assets that do not exceed $10 million;
(4) the issuer or another party purchases or repurchases all of the securities issued pursuant to Section 4(a)(6), including any payment in full of debt securities or any complete redemption of redeemable securities; or
(5) the issuer liquidates or dissolves in accordance with state law.
Does Neighbor Capital maintain a relationship with the businesses that post offerings on the Site?
No, there is no ongoing relationship between the issuer and Neighbor Capital. Once an offering is complete, the relationship between Neighbor Capital and the issuer will end.