A new way to invest in early-stage companies
After you invest
Netcapital Systems offers a secondary transfer platform (STP) that gives current investors the chance to sell shares in a company they have invested in through Netcapital and buyers the opportunity to invest in companies after they have completed a capital raise through Netcapital. Currently, only securities sold on the Netcapital platform in a 4(a)(6) offering are eligible for transfer on the STP. References to securities sold in a 506(c) offering on the Netcapital platform are for illustrative purposes for when such securities may be eligible for transfer on the STP.
Restrictions do apply to the STP, and it’s important to remember that the investments made through Netcapital are quite illiquid. You should not expect to be able to resell your shares immediately.
The Secondary Transfer Platform:
The Secondary Transfer Platform (STP) allows buyers and sellers to transact when they agree on a price for a security on Netcapital. It provides current investors with the potential for liquidity and new investors a continued chance to invest in companies that have closed their initial raise on Netcapital. For all investors, it widens the universe of securities eligible for investments and may help many investors create more diversified investment portfolios of securities available for purchase through Netcapital.
How do I sell securities using the STP?
- Head to your dashboard here.
- Click a row under the “Investments” header and click the “Sell Shares” button.
- Specify the number of shares you’re willing to sell.
- Decide on a price per share.
- Click “Place Order” and the company’s offering page will now display that shares are available for purchase.
- If a buyer purchases those shares, you will receive a notification of the transaction and funds will transfer into your wallet.
How do I buy securities using the STP?
- Click on the offering page of the company whose shares you would like to purchase.
- Click “Invest” and specify the quantity of shares and price at which you would like to purchase.
- Click “Continue.” Certain shares are only available for resale to accredited investors, and in those cases you will here be shown a screen verifying that you are accredited.
- Click “Continue” on the confirmation screen to submit your order.
- If your transaction settles, you will be displayed a confirmation of your purchase and funding will be transferred from your wallet to the seller.
Are there restrictions on selling or transferring purchased shares?
Investments made through Netcapital do not trade in the public markets, and are thus illiquid with reselling restrictions. Applicable restrictions depend on whether the shares you purchased were sold in a 4(a)(6) offering or a 506(c) offering and whether or not a buyer is an accredited investor. Shares sold in a 506(c) offering are currently not eligible for transfer on the STP.
Investors are permitted to sell securities to any of the 6 types of eligible buyers:
- The company itself
- An “accredited investor”
- Part of an offering registered with SEC (for example, if the company registers these shares to be sold as part of an IPO)
- An eligible family member
- A trust controlled by the purchaser, a trust created for the benefit of a member of the purchaser’s family, or
- A transfer in connection with the death or divorce of the purchaser.
If an investor is not selling to a buyer that qualifies under the conditions above, and the investor purchased 4(a)(6) securities, they are required to hold these securities for at least one year from the date the securities were issued by the company. Under certain circumstances accredited investors with securities purchased in a 506(c) offering are permitted to resell the shares after a 90 day holding period. Purchasers of these shares must be accredited investors, and sellers are prohibited from having any affiliation with the issuer of the shares.
There may be no market for the shares even after the initial holding period. It is important that you only invest capital with the expectation of holding your investment for an indefinite period of time, and with the real risk of a total loss of your investment in mind. Only invest an amount you can afford to lose without changing your lifestyle.
Who qualifies as a family member?:
The Securities and Exchange Commission has defined the individuals who qualify as a family member. A family member of the seller includes a child, stepchild, grandchild, parent, stepparent, grandparent, spouse or spousal equivalent, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, sister-in-law, and any adoptive relationships.
How do I know if I am an accredited investor?:
To be considered an accredited investor you must meet one of the following tests:
- A net worth over $1 million, either alone or together with a spouse (excluding the value of the person’s primary residence); OR
- An annual income of at least $200,000 (or $300,000 combined income if married) in each of the prior two years, and reasonably expects the same for the current year
The term "accredited investor" is defined in Rule 501 of SEC Regulation D.
How do I decide on the price to sell my shares?:
You will have the ability to create and decide on a price to sell your shares. Many of the companies that have raised capital with Netcapital are early-stage companies, so the value of your shares in the company may be difficult to determine. We recommend that you research each company when establishing a price.
When investing in early stage companies, the most common way to make money is when the company you are investing in either conducts an initial public offering (IPO) or gets acquired. In the meantime, you should not have any expectation for being able to resell your shares for a profit. The investments offered on our website are risky, and you should not have any expectation of returns.
Will I be charged a fee to transact on the STP?
Currently, there is no fee for buyers or sellers on the STP.
Do Asks expire?
When you submit an order to sell, your ask will not expire. You may withdraw your ask at any time on your dashboard.
What happens after an investor purchases my shares?:
Once you are matched with a buyer and the transaction is completed, the shares will be transferred to the new buyer’s name and the funds will be transferred from the seller into your Netcapital wallet.
What if I don’t match with a buyer?
Having trouble finding a match? Don’t worry. You won't lose control over your investment. If your investment is not sold to a buyer, your shares will remain in your name. You may reconsider the price of your ask at any time through your dashboard until you either withdraw your ask or a buyer accepts your ask and the sale of your shares is made.
How do I purchase shares as a new or current investor:
As a new investor looking to purchase shares, you will need to load funds into your Netcapital wallet. Once the funds are in your wallet you’ll be able to create bids for securities. Make sure that your wallet is funded as investments will not be processed if there are not enough funds in your account.
Are there any tax consequences?
The STP involves a purchase and sale of a security. You may experience a gain or loss when you sell a security and the nature of this gain or loss (i.e, short- or long-term) will depend on how long you held the shares sold. Please be sure to consult your tax advisor if you have any questions on the tax implications of the sale of a security purchased through Netcapital.
When you invest on Netcapital, you receive either Common Stock (if you invest in a Corporation) or Membership Units (if you invest in an LLC).
All shares purchased through Netcapital are recorded electronically and therefore you will not receive paper stock certificates when the deal closes. You will receive an electronic receipt from Netcapital and the number of shares you own will be accessible via the investor dashboard in your Netcapital account. This "book-entry" method of recording your ownership is how most stocks are issued today and it means that you don’t get a physical stock certificate; instead, shares are held via electronic record by the issuing company’s transfer agent. The benefits of electronic book-entry is to minimize the costs and problems of lost or missing certificates, which can be difficult for investors and companies alike to manage.
Your shares can be viewed on your Netcapital dashboard.
There is the possibility that your ownership percentage may be diluted, and your voting power may be diminished overtime as the company you invest in continues to grow and raises additional capital by selling shares to other investors.
Growing startups often conduct multiple stages of capital raises, all the way to a possible IPO. For each stage, the company issues additional stock to the new investors.
When a startup is struggling, it may pursue the option of going bankrupt or raising more money in a "down round", which means the value of the company decreased since the last capital raising stage. This is an adverse outcome for both the founders and past investors as dilution occurs much more dramatically in this instance. However, this result may be preferable to the startup going bankrupt and its investors losing everything.
Companies that raise money under Section 4(a)(6) are required by the SEC to file an annual report on their financial condition, unless certain conditions are met. Companies may, at their discretion, send investor updates through the Netcapital system at any time. There are no SEC financial disclosure, or ongoing disclosure or filing requirements for 506(c) offerings.
Because shares in companies on our platform are not traded, it can be difficult to monitor a change in price unless there is another investment round or an exit (meaning the company is sold or goes public). In both of those circumstances, the Issuer is required to disclose this information in an annual report. Netcapital does not provide statements in the interim.
After the offering, can I contact the entrepreneur?
Netcapital will manage investor-relations communication between investors and companies after closing. It may be difficult to get the attention of founders and CEOs as their focus will be on running their businesses.