Risks of Investing in Loop via Crowdfunding

April 7, 2021
3 min read

What are some of the risks involved in investing?

Note: We’ve prepared the following section as an excerpt from our full risk disclosures for your convenience.

Crowdfunding investments are risky and speculative. You should do your own research and scrutinize all disclosed risk factors before making an investment decision.

Speculative

Investments in startups, early-stage ventures and emerging technology companies are speculative and these enterprises often fail. Unlike an investment in a mature business, where there is a track record of revenue and income, the success of a startup, early-stage venture or emerging technology company often relies on the development of a new product or service that may or may not find a market. You should be prepared to lose your entire investment.

Illiquidity

Your ability to resell your investment in the first year will be restricted with narrow exceptions. You may need to hold your investment for an indefinite period of time. Unlike investing in companies listed on a stock exchange, where you can quickly and easily trade securities, you may have to locate an interested private buyer to resell your crowdfunded investment.

No voting rights

Investment instruments hosted on Loop are typically held via the Crowd SAFE, which does not provide voting rights to investors. Investors may receive voting rights if that instrument converts to stock, but crowdfunding investors’ voting rights will mostly likely be diluted when as the company raises additional funds. In addition, crypto-assets typically do not have voting rights and owning a token will not give you influence over the token maker or seller.

Cancellation restrictions

Once you make an investment, you can cancel the investment at any time and for any reason up to 48 hours before the campaign deadline. Some campaigns may have multiple deadlines around rolling closes. Investors should pay attention to notices companies provide regarding rolling closes.

Valuation and capitalization

No exchange or other secondary market is expected for securities sold under Regulation CF. Companies fundraising via Regulation CF are often early-stage startups and are unlikely to have substantial operating or financial histories. There is limited–if any–information for valuing securities offered through Loop and there is a substantial risk that the price of securities purchased on Loop may exceed their value and any amount for which they may eventually be resold. Also, securities sold on Loop may provide investors with inferior terms than similar securities provided by a company in other offerings.

Limited disclosure

The company must disclose information about itself, its business plan, the offering, and its anticipated use of proceeds, among other things. It’s important to note that an early-stage company may be able to provide only limited information about its business plan and operations because it is still developing its operations. The company is also only obligated to file information regarding its business annually, including financial statements.

Under certain circumstances the company may cease to publish annual reports and investors may have no information rights.

Investment in personnel

An investment in a startup, early-stage venture or emerging technology company is also an investment in the founding entrepreneur(s) and/or the company’s management. Being able to execute on the business plan is an important factor in determining whether the business will be viable and successful. A portion of each investment may be used to fund salaries. Investors should carefully review any disclosure regarding the company’s use of funds.

Possibility of fraud

There is a risk that a company raising on Loop engages in fraud. Loop vets the companies we host, but there is no way to control the actions of a company once a campaign ends and Loop cannot verify everything.

Lack of professional guidance

Many successful companies partially attribute their early success to the guidance of professional early-stage investors (e.g. angel investors and venture capital firms). These investors often negotiate for seats on the company’s board of directors and play an important role in providing additional resources, contacts and experience in assisting early-stage companies in executing on their business plans. An early-stage company primarily financed through crowdfunding may not have the benefit of such professional investors.

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