Risks of Investing

Many of the Securities listed on our Platform are speculative and involve significant risk, including the risk that you could lose some or all of your money. We’re describing some of the factors that make these investments risky in five ways:

• First, because many of the opportunities on our Platform will be in small businesses, we’ll describe risks common to those businesses.

• Second, we’ll describe risks common to most of the businesses on our App.

• Third, we’ll describe risks common to the music business.

• Fourth, we'll describe risks associated with equity securities.

• Fifth, when you review a particular investment opportunity, the Issuer will also provide a list of risks specific to that opportunity.

The order in which these factors are discussed, here on in the Issuer’s materials, is not intended to suggest that some factors are more important than others.

Risks Associated with Small Businesses

Lack of Professional Management

Most small companies are managed by their founders. Very often the founder of a company is very strong in one area – for example, she might be an extremely effective salesperson or a terrific baker – but lacks experience or skills in other critical areas. It might be a long time before (1) a startup can afford to hire professional management, and (2) the founder recognizes the need for professional management. In the meantime, the company and its investors could suffer.

Lack of Access to Capital

Small companies have very limited access to capital, a situation that Title III Funding Portals hope to improve but cannot fix entirely. Frequently these companies cannot qualify for bank loans, leaving the company to live off the credit card debt incurred by the founder. Capital is the oxygen of any business, and without it a business will eventually suffocate and fail.

Limited Products and Services

Most small businesses sell only one or two products or services, making them vulnerable to changes in technology and/or customer preferences.

Lack of Accounting Controls

Larger companies typically have in place strict accounting controls to prevent theft and embezzlement. Smaller companies typically lack these controls, exposing themselves to additional risk.

Lack of Technology

Many small businesses cannot afford the technology that a larger business would use to create efficiencies and cost savings.

Cash Flow Shortfalls

Many small businesses experience frequent shortfalls in cash flow. If a business doesn’t have enough money to meet payroll, it might not make payments on obligations to its investors, either.

Competition

A small business is likely to be vulnerable to competition, whether in the form of another small business or a national chain.

Risks Common to Companies on the Platform Generally

Reliance on Management

Most of the time, the securities you buy through our Platform will not give you the right to participate in the management of the company. Furthermore, if the founders or other key personnel of the issuer were to leave the company or become unable to work, the company (and your investment) could suffer substantially. Thus, you should not invest unless you are comfortable relying on the company’s management team. You will almost never have the right to oust management, no matter what you think of them.

Inability to Sell Your Investment

The law prohibits you from selling your securities (except in certain very limited circumstances) for one year after you acquire them. Even after that one-year period, a host of Federal and State securities laws may limit or restrict your ability to sell your securities. Even if you are permitted to sell, you will likely have difficulty finding a buyer because there will be no established market. Given these factors, you should be prepared to hold your investment (your promissory note) for its full term.

The Issuer Might Need More Capital

An issuer might need to raise more capital in the future to fund new product development, expand its operations, buy property and equipment, hire new team members, market its products and services, pay overhead and general administrative expenses, or a variety of other reasons. There is no assurance that additional capital will be available when needed, or that it will be available on terms that are not adverse to your interests as an investor. If the company is unable to obtain additional funding when needed, it could be forced to delay its business plan or even cease operations altogether.

Changes in economic conditions could hurt an issuer’s businesses

Factors like global or national economic recessions, changes in interest rates, changes in credit markets, changes in capital market conditions, declining employment, decreases in real estate values, changes in tax policy, changes in political conditions, and wars and other crises, among other factors, hurt businesses generally and small, local businesses in particular. These events are generally unpredictable.

No Registration Under Securities Laws

The securities sold on our Platform will not be registered with the SEC or the securities regulator of any State. Hence, neither the companies nor their securities will be subject to the same degree of regulation and scrutiny as if they were registered.

Incomplete Offering Information

Title III does not require us or the issuer to provide you with all the information that would be required in some other kinds of securities offerings, such as a public offering of shares (for example, publicly-traded firms must generally provide investors with quarterly and annual financial statements that have been audited by an independent accounting firm). Although Title III does require extensive information, as described above, it is possible that you would make a different decision if you had more information.

Lack of Ongoing Information

Companies that issue securities using Title III are required to provide some information to investors for at least one year following the offering. However, this information is far more limited than the information that would be required of a publicly-reporting company; and the company is allowed to stop providing annual information in certain circumstances.

Breaches of Security

It is possible that our systems would be “hacked,” leading to the theft or disclosure of confidential information you have provided to us. Because techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until they are launched against a target, we and our vendors may be unable to anticipate these techniques or to implement adequate preventative measures.

Uninsured Losses

A given company might not buy enough insurance to guard against the risks of its business, whether because it doesn’t know enough about insurance, because it can’t afford adequate insurance, or some combination of the two. Also, there are some kinds of risks that are simply impossible to insure against, at least at a reasonable cost. Therefore, any company could incur an uninsured loss that could damage its business.

The Owners Could Be Bad People or Do Bad Things

Before we allow a company on our Platform, we run certain background checks, including criminal background checks. However, there is no way to know for certain that someone is honest, and even generally honest people sometimes do dishonest things in desperate situations – for example, when their company is on the line, or they’re going through a divorce or other stressful life event. It is possible that the management of a company, or an employee, would steal from or otherwise cheat the company, and you.

Unreliable Financial Projections

Issuers might provide financial projections reflecting what they believe are reasonable assumptions concerning their businesses. However, the nature of business is that financial projections are rarely accurate, not because issuers intend to mislead investors but because so many things can change, and business is so difficult to predict.

Limits on Liability of Company Management

Many companies limit the liability of management, making it difficult or impossible for investors to sue managers successfully if they make mistakes or conduct themselves improperly (not all liability can be waived, however). You should assume that you will never be able to sue the management of any company, even if they make decisions you believe are plainly wrong.

Changes in Laws

Changes in laws or regulations, including but not limited to zoning laws, environmental laws, tax laws, consumer protection laws, securities laws, antitrust laws, and health care laws, could adversely affect many companies.

Conflicts of Interest with Us

In most cases, we make money as soon as you invest. You, on the other hand, make money only if your investments turn out to be successful. Or to put it a different way, at least in the short term it is in our interest to have you invest as much as possible in as many companies as possible, even if they all fail and you lose your money.

Conflict of Interest with Companies and their Management

In many ways your interests and the interests of company management will coincide: you both want the company to be as successful as possible. However, your interests might be in conflict in other important areas, including these:

• You might want the company to distribute money, while the company might prefer to reinvest it back into the business.

• You might wish the company would be sold so you can realize a profit from your investment, while management might want to continue operating the business.

• You would like to keep the compensation of managers low, while managers want to make as much as they can.

Lack of Professional Advice

Because of the limits imposed by law, you might invest only a few hundred or a few thousand dollars in a given company. At that level of investment, you might decide that it’s not worthwhile for you to hire lawyers and other advisors to evaluate the company. Yet if you don’t hire advisors, you are in many respects “flying blind” and more likely to make a poor decision.

Your Interests Aren’t Represented by Our Lawyers

We have lawyers who represent us, and most of the companies on the Platform also have lawyers, who represent them. These lawyers have drafted the Terms of Use and Privacy Policy on the App, and will draft all the documents you are required to sign. None of these lawyers represents you personally. If you want your interests to be represented, you will have to hire your own lawyer, at your own cost.

Future Investors Might Have Superior Rights

If the company needs more capital in the future and sells stock to raise that capital, the new investors might have rights superior to yours. For example, they might have the right to be paid before you are, to receive larger distributions, to have a greater voice in management, or otherwise.

Our companies will not be subject to the corporate governance requirements of the national securities exchanges

Any company whose securities are listed on a national stock exchange (for example, the New York Stock Exchange) is subject to a number of rules about corporate governance that are intended to protect investors. For example, the major U.S. stock exchanges require listed companies to have an audit committee made up entirely of independent members of the board of directors (i.e., directors with no material outside relationships with the company or management), which is responsible for monitoring the company’s compliance with the law. Companies listed on our Platform typically will not be required to implement these and other stockholder protections. 

Risks Associated with the Music Industry

Risks of Competition

There is no limit to the number of musicians competing for the public’s attention, more every day. And, because of the internet, there are fewer and fewer barriers to entry – a new artist can burst on the scene and capture market share with a TikTok post. Hence, no matter how popular an artist is today there will be new competitors tomorrow.

Uncertainty About Ownership

We will try to ensure that the artist owns the musical rights he or she claims to own. Nevertheless, it is possible that an artist would be mistaken or untruthful about ownership and that our processes would fail to uncover the mistake. In that case Investors wouldn’t receive the distributions they expected to receive.

Popular Tastes Can Change Quickly

Popular tastes can change very quickly. An artist or a song popular today can lose the public’s attention almost overnight.

Risks from Personal Behavior

The success of a musician can be affected not only by the public’s changing musical tastes, but also by the personal behavior of the musician. A leaked video of the musician helping homeless people might cause sales to spike– while a deleted Facebook post where the musician insulted a minority might cause sales to stop.

Risks Associated with Equity Securities

Equity Comes Last in the Capital Stack

The holders of the equity interests stand to profit most if the company does well, but stand last in line to be paid when the company dissolves. Everyone – the bank, the holders of debt securities, even ordinary trade creditors – has the right to be paid first. You might buy equity hoping the company will be the next Facebook, but face the risk that it will be the next Theranos.

In Most Cases, You Will Be A Minority Investor

Investors will typically be “minority” owners of companies on the Platform, meaning that other parties will have complete voting and managerial control over the company. As a minority stockholder, you typically will not have the right or ability to influence the direction of the company. You will generally be a passive investor. In some cases, this may mean that your securities are treated less preferentially than those of larger security holders.

Possible Tax Cost

Many of the companies on the Platform will be limited liability companies. In almost every case these limited liability companies will be taxed as partnerships, with the result that their taxable income will “flow through” and be reported on the tax returns of the equity owners. It is therefore possible that you would be required to report taxable income of a given company on your personal tax return, and pay tax on it, even if the company doesn’t distribute any money to you. To put it differently, your taxable income from a limited liability company is not limited to the distributions you receive.

Your Interest Might Be Diluted

As an equity owner, your interest will be “diluted” immediately, in the sense that (1) the “book value” of the company is very likely to be lower than the price you are paying, and (2) the founder of the company, and possibly others, bought their stock at a lower price than you are buying yours. Your interest could be further “diluted” in the future if the company sells stock at a lower price than you paid.

Future Investors Might Have Superior Rights

If the company needs more capital in the future and sells stock to raise that capital, the new investors might have rights superior to yours. For example, they might have the right to be paid before you are, to receive larger distributions, to have a greater voice in management, or otherwise.

Dilution of Voting Rights

Even if you have any voting rights to begin with (and many of the securities offered on the Platform will have no voting rights), these rights will be diluted if the company issues additional equity securities.