Investors in private deals will be confronted all manner of with risk disclosures from the issuer whenthey evaluate the investment. We have previously written about the disclosures surrounding audits and offered suggestions to consider when contemplating moving ahead or pausing an investment decision. Today at Deal Report we want to talk about two investment risk disclosures.
When you consider an investment, you will see some variation of each of these statements:
- The investment is suitable only for persons who can afford to lose their entire investment.
- Investors must understand that such investment could be illiquid for an indefinite period.
Both of these statements are true. Private investing is risky, and the startups who utilize Regulation A, Regulation CF, and Regulation D may not be well-established companies and they are generally not publicly listed stocks.
The good news is that new companies that are succeeding can sometimes provide liquidity fairly quickly, even without an IPO. Gatsby, a trading platform that raised capital using Regulation A on the Dealmaker platform, announced that it was being purchased by rising trading company eToro just a few months after its raise closed. The deal is nearing completion, and we will have some further detail regarding the deal after it does, but the short version is that Regulation A investors will see about a 100% return on their investment, paid in cash, after less than a year.
However, even without a quick IPO or acquisition, a company can demonstrate that it is increasing its value to investors. As an investor, there are several signs that things are going well enough that you can be confident that your investment will be successful, even if you cannot yet realize the investment exit value.
Important Disclosure! These are not official recommendations. Investing is risky. Before making any investments, we strongly advise you to discuss your investment options with
your financial advisor, including whether any investment is suitable for your specific financial circumstances and needs.
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Companies can raise money at higher prices. When a company increases the price at which it is raising capital, investors cannot sell at the new, higher price. But if the raise is successful it is a very good sign that many new investors are persuaded that the company is worth more than it was when it raised money at the lower price. We have written about raising money at increasing prices before, and about why it might be a good idea to join in the new raise.
The company can earn money. Most private companies are not yet generating profits, but some are. And of course, if earnings are increasing, there is a good chance that the company’s value is also increasing. A good check of this metric is to see how the public markets are doing. If the market generally or the sector the company operates in is seeing declining stock prices even as earnings rise, an investor might be concerned.
Related to earnings, some companies pay a dividend. Dividends are rare among private deals, but they do occur. If that dividend increases, that’s a good indication that the company is creating value for investors, and any cash distribution that does not reduce your shareholding also decreases your investment risk in that company as your capital is slowly returned to you.
NAVs can increase. Some companies, such as REITS, often report the net asset value of their holdings and REIT investors use that as an important valuation tool. As with earnings, there is no guarantee that a rising NAV equals an increase in share values since REITS can trade at a premium or discount to the NAV. As with other companies, tracking the public markets can give you a good idea of whether the increased NAV equates to increased value for shareholders. Another industry where there might be a rough equivalent to NAV is crypto.
Your checklist items: When you are considering or make a private investment, look for signs that its value is increasing even if the company has not achieved an exit event like an IPO or an acquisition. If the company is raising more money, consider participating in the new round if the company continues to meet your expectations.
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