All investments involve the risk of losing capital. We encourage investors to familiarize themselves with the risks related to any target company or investment product and what they can do to manage their own investment-related risks.
Unlisted growth companies are high-risk investments. Making a high-risk investment involves risks, for example the risk of losing your investment, lack of liquidity, irregular or rare dividends and dilution of your stake. Please study the following risk warning before making a high-risk investment.
It is recommended that you familiarize yourself with the investment target of your choice, reduce risks by investing in several investment targets and balance your investment portfolio with more liquid investments. We also advise you to pay attention to the Target Company specific risk descriptions, which you will find included in the pitch materials.
Never invest more than what you are ready to lose!
Properties and risks related to financial instruments
i. Risks related to financial instruments
There are always risks related to investing in financial instruments. Risks refer to the degree of uncertainty and potential financial loss inherent in an investment decision. Earlier financial profit is never a guarantee of future profits. The client is always responsible for bearing the financial consequences of their investment decisions and therefore has to familiarise with the information provided about the financial instruments and the terms that apply.
Unlisted growth companies are high-risk investments. Making a high-risk investment involves risks such as losing the investment, lack of liquidity, irregular or rare dividends and dilution of your stake.
It is recommended that the investors familiarise themselves with the investment target of their choice, reduce risks by investing in several investment targets and balance their investment portfolio with more liquid investments. Invesdor also advise the investors to pay attention to the Target Company specific risk descriptions, which are found included in the pitch materials.
ii. Central definitions related to risks
Market risk means the risk caused by economic developments or other events that affect the entire market.
Liquidity risk means the risk of being unable to sell your investment at a certain time, because the trading is minimal or there is no secondary market.
Interest rate risk means the risk caused by changing interest rates. Increasing interest rate lowers the market prices of a fixed-interest bond and decreasing interest rate increases the market price.
Issuer risk means the possibility of changes in the financial position of the issuer of a security, which could lead to insolvency of the issuer.
Tax risk means the risks of changes in tax regulation or tax rates causing adverse taxation.
Foreign exchange risk refers to the effect that movements in exchange rates can have on the value of your investment.
iii. Properties and risks related to crowdfunding in general
Crowdfunding is an umbrella term that refers to a way of collecting funds from a large number of people, typically online, by means of a public funding campaign. Crowdfunding is a form of crowdsourcing, which refers to obtaining services, ideas or content from the online community.
At the core of crowdfunding are three defining aspects: Investments come from large numbers of investors (hence the ‘crowd’), the average investment is relatively low (from hundreds to thousands of euros) and the investments and fundraising campaigns often take place online.
Crowdfunding can refer to several very different types of fundraising. Invesdor offers equity and debt crowdfunding, which together form the category of investment crowdfunding. In this type of crowdfunding, the entity seeking funding is always a company, generally a limited liability company. In exchange for money the company gives investors shares of the company (equity crowdfunding) or bonds or IOUs (debt crowdfunding). For those who provide funding, participating in a crowdfunding campaign equals to making an investment: it carries a risk of losing the invested capital while also having the potential to make a profit. Equity crowdfunding and debt crowdfunding are most suitable for companies that already have revenues and are looking to fund their growth. At Invesdor, we focus solely on equity crowdfunding and debt (bond) crowdfunding.
When making an investment, there is always a risk of losing money. Both equity and debt crowdfunding investments are generally regarded as high-risk investments as the investments are often made in early-stage companies that have a higher failure and bankruptcy risk compared to more established companies, they generally do not pay dividends, and the liquidity for the investment is low because the securities are not listed on a trading venue. These investment risks are somewhat lower if the funding round is for an IPO, as listed shares are considered ordinary investment instruments. Investors should always carefully consider what they are investing in and invest responsibly.
iv. Properties and risks related to debt crowdfunding
The investor will not become a shareholder in the Target Company and thus they usually will not profit from a possible increase in the valuation of the company. Instead the company will make interest payments on predetermined interest payment dates throughout the loan period and at the end of the period pays back the principal amount in full. Invesdor or any other party will not, in any situation, be held responsible for the Target Company’s solvency, and the investor might lose the invested capital partly or in full. Bonds are high-risk investment products.
Losing the invested capital and interest. The Target Company might not be able to stay solvent throughout the loan period, making it possible that the company will not be able to pay back the invested capital at the end of the loan period. In the worst-case scenario, the investor will act as a bankruptcy creditor and might not get the capital back in full. The Target Company might not be able to pay the interests either. The investor is responsible for their investment decisions and no one will compensate the possible losses caused by poorly performing investments.
Poor liquidity. Liquidity means the ability to convert the investment into cash. Bonds are by definition transferable. However, aftermarkets for unlisted securities are still fairly quiet and it may be difficult to sell the bond, or you may not be able to sell it at all during the loan period.
Unsecurity of the bonds. Bonds are typically unsecured. This means that if a company loses its solvency, no security is guarding the invested capital or the unpaid interest payments, and the investor might lose their investment. In case of insolvency, secured debts and other preferential claims are paid before the unsecured ones and unsecured bond holders are in a weak position in the order of creditors in liquidation.
Repayment risk. The Target Company can pay the borrowed capital back at any point in time before the end of the loan period and the investor cannot prevent this. However, the investor is entitled to receive at least 75 % of the interest for the whole loan period.
Lending capital for the whole loan period. The investor has no other way to turn their investment into cash during the loan period but to sell the bond forward. Redemption clauses relating to equity investing do not apply to bonds.
Interest risk. The interest rate for the loan is predetermined and changes in the general level of interest rates won’t have an effect on it.
Foreign exchange risk. Foreign exchange risk refers to the effect that movements in exchange rates can have on the value of your investment. When you invest in an offering organized in a foreign currency, you are subject to foreign exchange risk. Furthermore, depending on your chosen payment method, your bank may charge a currency conversion fee according to their pricing.
v. Properties and risks related to convertible bonds
Convertible bonds are hybrid securities that combine features of a regular bond (such as interest payments) with the option of converting the bond into shares of the issuing company at a later date. Invesdor offers two types of convertible bond products that companies can utilize in their funding rounds: the Classic Convertible Bond for mature companies and the Bridge Convertible Bond for growth companies.
When issued, convertible bonds act as regular bonds. The bond's terms, however, detail how the bonds can be converted into shares of the issuing company. These terms will include, among other terms, the conversion price which will determine the number of shares the convertible bond can be converted into (predetermined conversion price or a discount percentage), interest rate, situations when the conversion can take place and events that may trigger an automated conversion process.
It is also possible that the company that issued the convertible bond becomes insolvent, i.e. is unable to meet its financial obligations, or goes bankrupt during the course of the bond’s lifetime. In such cases, the investor faces the risk of losing some or all of their invested capital.
For example, the issuing company might be able to make the interest payments for a while, but then become insolvent and face a bankruptcy. The bondholders would have their bonds automatically converted into shares. As the company would in this scenario be bankrupt, its shares would, however, be worthless. The former bondholders (now shareholders) could still keep any interest payments they received before but could lose any unpaid accrued interest and their original investment amount.
The convertible bonds do not usually have any collateral. The liquidity is also poor as unlisted securities do not currently have active aftermarkets.
The risks described above apply to both the Classic Convertible and the Bridge Convertible.
vi. Properties and risks related to equity crowdfunding
By using Invesdor’s Service, an investor can subscribe shares of unlisted Targets. The shares include normal shareholder rights set out in the legislation of the Target’s home state, unless stated otherwise in the material related to the funding round.
Irregular or rare dividends. Especially in the beginning, it is not very likely for the Target Company to pay dividends. Paying of dividends depends on the results the Target Company is making, and companies in their early phase usually invest their profit in their growth. You are likely to not get continuous returns on the investment and it is possible that you will not get returns at all.
Losing the invested capital. Please be aware, that the majority of start-ups fail and are not able to reach their goals as planned. It is likely that you will never get any returns on your investment and you lose the entire capital invested or a portion of it. If the Target Company fails, no-one will pay back your investment, thus you should never invest more than what you are ready to lose and spread your risks by diversifying your investment portfolio.
Poor liquidity. Liquidity means the ability to convert the investment into cash. Shares are by definition transferable, although there may be some restrictions to the transferability. However, aftermarkets for unlisted securities are still fairly quiet and it may be difficult to sell your shares or you may not be able to sell them at all.
Dilution. Dilution refers to the decrease of an investor’s relative ownership in a company caused by the company issuing more shares. Many Target Companies will eventually organize a second funding round. Your stake in the company will be diluted unless you subscribe more shares in proportion to your existing stake, however, this may not be possible if the Target Company organizes a directed share issue surpassing the existing shareholders’ pre-emptive right.
Foreign exchange risk. Foreign exchange risk refers to the effect that movements in exchange rates can have on the value of your investment. When you invest in an offering organized in a currency other than your own, you are subject to foreign exchange risk. Furthermore, depending on your chosen payment method, your bank may charge a currency conversion fee according to their pricing.
The information given herein will possibly change from time to time. Information regarding the changes will be available in the Risk Warning section on the Invesdor webpage (www.invesdor.com). Changes and updates will enter into force the day after being published.
Spread your risks by diversifying your investment portfolio! Investing through Invesdor is an excellent way to invest in unlisted growth companies, but in addition to this we recommend balancing your investment portfolio with lower risk investments. This way your portfolio is not dependent on the success of one growth company only.