HMx Funding Pathways
With all funding pathways, the Entrepreneur (“Issuer”) dictates the campaign terms, allowing them to maintain control of their business.
*As a funding portal, we do not provide legal, accounting or investment advice. We encourage all Issuers to consult their attorneys and accountants to ensure full compliance with all legal and accounting requirements.
Regulation Crowdfunding (Reg CF) Filings
For the last 80 years, private companies could only raise capital from accredited investors, the wealthiest 2% of Americans. On April 5, 2012, President Obama signed a landmark piece of legislation called The JOBS Act, allowing entrepreneurs to go to the crowd and publicly advertise their capital raises. On May 16, 2016, four years after the JOBS Act was signed, Title III (aka Reg CF) of the JOBS Act went into effect, allowing private early-stage companies to raise money from all Americans.
Title III of the JOBS Act outlines Reg CF, a type of offering allowing private companies to raise up to $5 million from all Americans. Reg CF allows private companies to raise funds online from all investors, both nonaccredited and accredited in a 12-month period. In return, investors receive securities or equity in your company.
The JOBS Act also requires all transactions under Reg CF to take place online through SEC-registered broker-dealers or funding portals, such as Hospitality Multiple.
All Offering types available through HMx fall under Reg CF and are outlined below.
Debt/Traditional Loans
Debt Securities, specifically, promissory notes require the Issuer to pay the Investor’s money back, plus interest at a specified rate, over a specified time period.
For Issuers
Companies must complete and file a Form C with the Securities and Exchange Commission (SEC) in order to launch a Reg CF offering. The Form C includes basic information about the company and its offering and is a condition to making a Reg CF offering available to investors. It is important to note that the SEC does not review the Form C, and therefore is not recommending and/or approving any of the securities being offered.
For more information on Reg CF, visit the Securities and Exchange Commission (SEC) website. And check out this video and Form C Checklist from LawCloud, one of HMx’s recommended legal resources.
For Investors
Owning a promissory note does not make you an owner of the company. Instead, you are a creditor. As long as the company has enough money to repay your loan, plus any interest you’ve been promised, the value of your security stays the same; the fluctuations of the fortunes of the company don’t affect you, unless the fortunes go way down. On the other hand, you don’t share in the appreciation if things go well. If the company increases in value 100-fold, you just have the right to get your money back, plus interest.
Risks Associated with Debt Securities
- You have a limited upside: As a creditor of the company, the most you can hope to receive is your money back plus interest. You cannot receive more than that even if the company turns into the next Facebook.
- You do have a downside: Conversely, if the company loses enough value, you could lose some or all your money.
- Subordination of rights to other lenders: Typically, when you buy a debt security on our Platform, while you will have a higher priority than holders of the equity securities in the company, you will have a lower priority than some other lenders, like banks or leasing companies. In the event of bankruptcy, they would have the right to be paid first, up to the value of the assets in which they have security interests, while you would only be paid from the excess, if any.
- Lack of security: Sometimes when you buy a debt security on our Platform, it will be secured by property, like an interest in real estate or equity. Other times it will not.
- Lack of guarantee: Sometimes when you buy a debt security on our Platform, it will be guaranteed by the owner of the business, or by someone else. Other times it will not.
- Issuers typically will not have third party credit ratings: Credit rating agencies, notably Moody’s and Standard & Poor’s, assign credit ratings to debt issuers. These ratings are intended to help investors gauge the ability of the issuer to repay the loan. Companies on our Platform generally will not be rated by either Moody’s or Standard & Poor’s, leaving investors with no objective measure by which to judge the company’s creditworthiness.
- Interest rate might not adequately compensate you for risk: Theoretically, the interest rate paid by a company should compensate the creditor for the level of risk the creditor is assuming. That’s why consumers generally pay one interest rate, large corporations pay a lower interest rate, and the Federal government (which can print money if necessary) pays the lowest rate of all. However, the chances are very high that when you lend money to a company on the Platform (buying a promissory note is the same as lending money), the interest rate might not compensate you adequately for the level of risk.
Revenue Share Notes
A regular promissory note requires the Issuer make specified payments of interest and principal at specified times. In contrast, a revenue-sharing note requires the Issuer to pay a specified percentage of its revenue. For example, a revenue-sharing note might require the Issuer to pay investors 5% of its revenue for four years. Typically, a revenue-sharing note will also state a maximum that investors are entitled to receive (e.g., double their investment) and a due date for repayment of the original investment.
For Issuers
Companies must complete and file a Form C with the Securities and Exchange Commission (SEC) in order to launch a Reg CF offering. The Form C includes basic information about the company and its offering and is a condition to making a Reg CF offering available to investors. It is important to note that the SEC does not review the Form C, and therefore is not recommending and/or approving any of the securities being offered.
For more information on Reg CF, visit the Securities and Exchange Commission (SEC) website. And check out this video and Form C Checklist from LawCloud, one of HMx’s recommended legal resources.
For Investors
Risks Associated with Revenue-Sharing Notes
- You have a limited upside: Although a revenue-sharing note has more upside than a standard note, the upside is still limited.
- Revenue is uncertain: The amount and timing of a company’s revenues can be extremely hard to predict. For example, the management of an Issuer might make decisions they believe will lead to a higher value for the company, but also lead to lower revenue, at least in the short term. In fact, companies like Facebook have achieved extremely high valuations before they achieved significant revenue.
- Arbitrary terms: The terms of your revenue-sharing notes – for example, whether your maximum payout is 1.5 times your investment, 2.0 times your investment, or something else – were likely set by management on an arbitrary basis, without regard to traditional measures of value like profitability.
- Conflicts with management: As the holder of a revenue-sharing note your interests could conflict with the interests of management in terms of the timing of revenue recognition.
- Other risks of debt securities apply: All the risks listed above for debt securities also apply to revenue-sharing notes.
Equity
Investors buy shares or units in the company in exchange for ownership. Investors earn a return if the company is acquired, goes public on the stock market, or pays dividends.
For Issuers
Companies must complete and file a Form C with the Securities and Exchange Commission (SEC) in order to launch a Reg CF offering. The Form C includes basic information about the company and its offering and is a condition to making a Reg CF offering available to investors. It is important to note that the SEC does not review the Form C, and therefore is not recommending and/or approving any of the securities being offered.
For more information on Reg CF, visit the Securities and Exchange Commission (SEC) website. And check out this video and Form C Checklist from LawCloud, one of HMx’s recommended legal resources.
For Investors
When you buy an “equity security,” like the common stock of a corporation, you become an owner of the company. The value of your interest fluctuates with the fortunes of the company; if the company does well the value of your interest goes up, while if it does poorly the value goes down, possibly all the way to zero. As an owner, you generally have the right to share in any profit distributions made by the company, and you also share in the appreciation in the value of the company. Owning an equity security in a company is like owning a house, both the good parts and the bad parts. When a company dissolves, the owners of the equity securities are paid last, after all the creditors.
In some cases, a company will offer a “preferred equity security,” like the preferred stock of a corporation. Typically, the holders of the preferred equity security have a right to receive distributions before the holders of the regular equity securities. For example, the holders of a preferred stock might have the right to receive a 4% dividend before dividends are paid to the holders of common stock. But preferred equity is still equity. The holders of preferred equity are paid after creditors.
SAFE and Convertible Notes
“SAFE” stands for “simple agreement for future equity.” Although there are many kinds of SAFEs, the typical SAFE converts into an equity security – either common stock or preferred stock – when the Issuer raises more money in the future.
Convertible notes are essentially debt obligations in which the investor agrees to loan money to the company. In exchange, the investor receives a promise of repayment, interest on the loan for a period of time and an ability to convert the outstanding amount of the note. For example, a company might issue a debt security that can be converted by the holder into common stock at some specified time. Sometimes the conversion is triggered at the option of the holder, sometimes at the option of the company, and other times upon the occurrence of a specified event. Different from SAFEs, convertible notes generally represent a current legal obligation by the company to you for the outstanding amount of the note.
For Issuers
Companies must complete and file a Form C with the Securities and Exchange Commission (SEC) in order to launch SAFE and Convertible Notes offerings. The Form C includes basic information about the company and its offering and is a condition to making SAFE and Convertible Notes offerings available to investors. It is important to note that the SEC does not review the Form C, and therefore is not recommending and/or approving any of the securities being offered.
For more information on SAFE and Convertible Notes, visit the Securities and Exchange Commission (SEC) website. And check out this video and Form C Checklist from LawCloud, one of HMx’s recommended legal resources.
For Investors
Risks Associated with SAFEs
- No fixed maturity date: Unlike a debt instrument (e.g., a promissory note), there is no maturity date with most SAFES, i.e., no date upon which the SAFE must be repaid.
- The SAFE might never convert: The typical SAFE converts to equity only if the company is sold or raises more equity. If neither of those things happens you could own your SAFE indefinitely.
- SAFEs don’t pay interest: The typical SAFE doesn’t pay interest.
- You don’t know what you’re getting: You don’t know what your SAFE is worth when you buy it. Indeed, this is why SAFEs were invented in the first place – to avoid the need to place a valuation on a small company.
- SAFEs are not appropriate for all issuers: SAFEs were developed in Silicon Valley for a particular kind of company that is common in Silicon Valley: a company expected to experience rapid growth and multiple rounds of financing with an exit (a sale of the company or a public offering) in the not-too-distant future. Of all the companies formed in the U.S. every year, only a small percentage fit that profile. Consequently, SAFEs are not always appropriate.
- Other risks of equity securities apply: All the risks listed above for equity securities also apply to SAFEs.