Every investor should be aware that investing in companies on Caravan Funds’ platform involves a high degree of risk, regardless of any assurance provided by the company.
There can be no assurance that:
- any information or projection by the company has been validated or is reliable,
- a startup will achieve its business plan, or
- an investor will receive a return of any part of its investment or
- any investment purchased through the Caravan Funds platform will be able to be resold.
The following considerations, among others, should be carefully evaluated before making an investment in a company through its offering on Caravan Funds.
Risk inherent in startup investments;
investors may, and frequently do, lose all of their investment
Investments in startups (including early-stage ventures and emerging technology companies) involve a high degree of risk. Financial and operating risks confronting startups 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 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 startup market is highly competitive and the percentage of companies that survive and prosper is small. Startups often experience unexpected problems in the areas of product development, manufacturing, marketing, financing, and general management, among others, which frequently cannot be solved. Startups may require substantial amounts of financing, which may not be available through institutional private placements, the public markets or otherwise.
Investment in new concepts and technologies
The value of an investor’s investment in a startup may be susceptible to factors affecting the relevant industry and/or to greater risk than an investment in a vehicle that invests in a broader range of securities. Some of the many specific risks faced by such startups include:
- Rapidly changing technologies;
- Products or technologies that may quickly become obsolete;
- Scarcity of management, technical, scientific, research and marketing personnel with appropriate training;
- The possibility of lawsuits related to patents and 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.
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 startup may depend on to achieve its objectives may have a significant negative impact on a startup’s operations and profitability.
The stability and sustainability of growth in global economies (and as it relates to crypto-currencies, new and emerging decentralized economies) may be impacted by terrorism, acts of war, increased regulatory scrutiny and fragmentation, 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 startup to be successful.
Future and past performance
The past performance of a startup or its management is not predictive of a startup startup’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 startup investments
It is enormously difficult to determine values for any startup. In addition to the difficulty of determining the magnitude of the risks applicable to a given startup and the likelihood that a given startup’s business will be a success, there may not be a market ready for a startup’s securities or other source of price information on arm’s length transactions. Furthermore, there is likely to be little–if any–public information about the operating or financial history for startups that used Caravan Funds to offer securities. Investments in startups made through Caravan Funds will be challenging to value.
Minority investments / limited rights
A significant portion of an investor’s investments through Caravan Funds will represent minority stakes in privately held companies or the right to assets not yet created by the startup. An investor’s interest in a startup may be non-voting shares or may represent a debt interest. Even with voting shares, 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 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 is not affiliated and whose interests may conflict with the interests of the investor.
No voting rights
If and when you receive voting shares in a startup, your voting rights will likely be diluted when the startup raises additional funds. Many investments will never provide the investor the right or ability to vote.
Lack of information for monitoring and valuing startups
The investor may not be able to obtain all information it wants regarding a particular startup. It is possible that the investor 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 startup’s current value.
No assurance of additional capital for startups
After an investor has invested in a startup, continued development and marketing of the startup’s products or services, or administrative, legal, regulatory or other needs, may require that it obtain additional financing. In particular, startups 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, and no readily available liquidity mechanism at any particular time for any of the investments.
Legal and regulatory risks associated with crowdfunding
There is no assurance that a startup will comply with all requirements mandated by federal laws permitting private companies to fundraise from retail investors on a Title III crowdfunding portal such as Caravan Funds, whether before, during or after its offering on Caravan Funds.
There are many tax risks relating to investments in startups, which are complicated and difficult to address. You should consult your tax advisor for information about the tax consequences of purchasing:
- equity or the right to equity securities of a startup;
- debt securities of a startup;
- crypto-assets or the right to crypto-assets of a startup; and
- other unique investment instruments that may be hosted on Caravan Funds.
Withholding and other taxes
The structure of any investment in a startup may not be tax efficient for any particular investor, and no startup 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. Investors should consult their own professional advisors with respect to the tax consequences to them of an investment in a startup under the laws of the jurisdictions in which the investors and/or the startup are liable for taxation. Learn more about taxes here.
Limited operating history of startups
A startup may be a newly formed entity with little or no operating history. Each offering should be evaluated on the basis that the startup’s business plan and projections may not prove accurate and that the startup may not achieve its objective. Past performance of a startup or its team is not predictive of future results.
Investors and employees in a startup may have conflicting investment, tax, and other interests with respect to startup ownership, which may arise from the structuring of the startup or the timing of a sale of the startup or other factors. As a consequence, decisions made by the startup’s management on such matters may be more beneficial for some investors than for others. Investors should be aware that startup management tends to consider the investment and tax objective of its shareholders 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 startup will not make decisions with respect to the startup’s business and affairs.
Need to protect crypto-assets
Investors who receive crypto-assets as part of their investment on Caravan Funds will need to secure those crypto-assets in a wallet with secure key(s). There is risk that the investor could lose their crypto-asset due to a:
- breach of security;
- loss of the wallet (whether physically or control over);
- irrecoverable loss of the private key(s); or
- other factors.
Certain information regarding the startups 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.
The information a startups makes available to investors may contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements can be identified by the fact that they do not relate strictly to historical or current facts. Forward-looking statements often include 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 statements include, but are not limited to, statements regarding:
- the adequacy of a startup’s funding to meet its future needs;
- the revenue and expenses expected over the life of the startup;
- the market for a startup’s goods or services;or
- other similar matters.
Each startup’s forward-looking statements are based on management’s current expectations and assumptions regarding the startup’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 statements are inherently susceptible to error, uncertainty, and changes in circumstances. The startup’s actual results may vary materially from those expressed or implied in its forward-looking statements.
Important factors that could cause the startup’s actual results to differ materially from those in its forward-looking statements include government regulation, economic, strategic, political and social conditions and the following factors:
- errors in estimates such as in the expected market size, expected costs of bringing a product to market, expected timelines and resources required to complete projects, and other operational and financial estimates;
- recent and future changes in technology, services and standards;
- changes in consumer behavior;
- changes in a startup’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 startup’s success;
- competitive pressures, including as a result of changes in technology;
- the startup’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 startup’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 failure to comply with federal, state and foreign regulations as they related to securities offerings and exchanges;
- the adequacy of the startup’s risk management framework;
- changes in U.S. 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 startup’s or its vendors’ network and information systems or other technology upon which the Company’s businesses rely;
- changes in tax, federal communication and other laws and regulations
- digital systems being compromised by hacking, forking and hostile take-over;
- 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 startup speaks only as of the date on which it is made. Startups are under no obligation to, and generally they 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 or debt securities in a startup. Each investor is urged to seek their own independent legal and tax advice and read the relevant investment documents before deciding to invest in a startup on Caravan Funds