Since the Securities and Exchange Commission (SEC) established rules that now allow individual investors to become involved with securities-based crowdfunding in May of 2016, a number of issuers have begun to offer what they call Simple Agreement for Future Equity (SAFE). Despite the name, the SEC notes that this new type of security is neither “safe” nor “simple” in some situations. Understanding the terms of these investments is a key part of keeping your money safe, so here are five key things to keep in mind about these offerings.
- These are not common stocks. When buying common stock, you purchase an ownership stake in that company and are entitled to certain rights guaranteed by federal securities law and state corporate law. These types of investments do not give you that ownership stake – instead, certain terms need to be met in order for you to receive any shares.
- Not all SAFEs are created equal. SAFEs offered by different companies may use different terms to describe the events that would trigger your investment, and the conversion price and provisions concerning conversion may vary between issuers. Before you commit any of your hard-earned dollars to this investment, make sure that you read and understand all terms set forth in the agreement.
- Understand the conversion triggers of your SAFE investment. Before you invest, you need to know which scenarios act as a trigger. Some examples include the company’s initial public offering and a merger with another company or companies. If these triggering events occur, like the sale of the company or an additional round of financing, then you will receive the shares you invested in. However, if these triggering events never occur, then you may lose some or all of your investment.
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