FAQs: Local Residents- Finding Local Investments on the Exchange
1) How can I use the Exchange to find local investment opportunities in Maryland? The Maryland Exchange regularly updates its homepage to list current investment offerings from Maryland-based businesses. Click on a business that looks interesting and you’ll connect to the licensed federal crowdfunding portal where the offering is based. There, you can read more about the company and the offering. You can usually even watch a few videos about the company. If you like what you see, invest! But be sure to evaluate the offering carefully first.
2) Once I find a company that I’d like to invest in, how do I do it? The portal sponsoring the offering will provide you with specific instructions about what to do next. In addition to providing payment information (which typically can be as simple as a link to a bank account), you may be asked to provide some information about your income, wealth, and residence. Anyone 18+ with a U.S. bank account can invest at least $2,200 per year, but federal guidelines limit how much unaccredited investors can invest beyond that threshold.
3) How should I evaluate a company before investing? Read carefully all the documents on the portal. As you read about a company, here are some of the questions you should think about:
Intuition – What does your gut say? As Warren Buffet argues, if you don’t understand the business, it’s probably a bad investment.
Core Business – How strong is the core business? Do you love its products or services?
Competitors – How many competitors does the business have locally? How well does the business distinguish itself from its peers?
Intellectual Property – Has the company done enough to protect its IP through patents and trademarks? If the company does not have unique IP, what’s the danger of the model being copied?
Management – Is the business under strong leadership? Do you have faith in the promises made to you as an investor? Do you trust the managers?
Workforce – Does the company have a talented, enthusiastic workforce? Are they compensated well, not just with wages but with benefits? Are they loyal to the company? Do they have a role in management? Do they share in ownership?
Financials – Do you have access to the company’s recent financials? Its profit-and-loss statements? Its balance sheet? If you don’t know much about accounting, you might ask a friend who does to help review these reports.
Projections – Do the company’s assertions about its projected growth make sense, given its past performance?
Social Performance – What’s the company’s environmental record? How well are its workers treated? How much does it give to charity? Companies with high social performance tend to be more trustworthy.
Exit – What’s the end game for the company? Does it want to thrive locally? Grow into a franchise or chain? Be bought out? How will this affect your return?
4) Should I try to speak to the company directly? One benefit of grassroots investment crowdfunding is that it helps democratize local investing. What this means is that every business working to raise capital will visibly have as part of their investment campaign page a way to post questions directly to the business (sort of like an on-line chat room). Thus, you not only will be able to see replies to all your questions, but also can see all the questions and responses to date. Make sure you’re satisfied with the answers before investing.
5) What should I ask about the offering itself? The business’ campaign page will contain a wealth of information, including how the business intends to use the funds, its recent financials, and its financial forecasts. You’ll also be able to see details about the investment offering such as the terms, timeline, and potential risks. Don’t hesitate to ask questions if any of those materials are unclear to you or if you want any additional information about the business and its plans. The ability to post questions directly to the business on their campaign page helps make this easy.
6) What's a Shared Revenue Note? Instead of offering a fixed interest rate, a Shared Revenue note promises investors a certain percentage of a business' revenue over a set period. It will also include a maximum that investors can receive (which is usually 1.5-2x their initial investment) and a due date for repayment.
7) What’s a SAFE Note? Some crowdfunding companies offer investors what they call Simple Agreements for Future Equity (SAFE) Notes. When some event occurs in the future—perhaps the company meets a certain sales target—you then have the ability to buy its initial stock offering at a discounted rate. That can sound like a good deal, but be very sure you understand the terms before buying in.
8) Evaluating local investments sounds like a lot of work. How can I lighten the load? While you can turn to Moody’s and dozens of other companies to evaluate publicly traded companies, no such companies exist to provide you information about local businesses (yet). That’s work you need to do. That's one reason we started the Exchange- to provide local residents interested in investing with a one-stop-shop where they can easily browse through a range of local investment opportunities. We also host events throughout the year to educate people about local investing and introduce them to some of the stellar local businesses currently working to raise money. You also may want to consider working in a group. Forming a local investing club could be a great way to learn with your friends and neighbors.
9) How can I match investments to my financial needs? There are two questions you need to ask yourself: What’s my tolerance for risk? And what’s my need for liquidity? Liquidity refers to your ability to convert the investment into cash.
10) How should I determine if the local investment matches my risk profile? If you don’t really have much in the way of savings and are barely making ends meet, you should not invest locally and perhaps not at all. Or at least you should not invest very much. Honestly, if you’re strapped for cash, you should focus on improving your finances or becoming a homeowner. But if you have a little extra money that you could afford to lose, worst case, then local investing provides some great opportunities.
11) How should I think about liquidity? No one wants to hold ownership certificates or paper bonds forever, especially when your kids are going to college or you face huge medical bills. Putting money on deposit in a bank is almost perfectly liquid, unless you’ve bought CD’s with a certain number of years to mature. But investing in local business is relatively illiquid, because it’s hard to find marketplaces where you can resell your stock shares. Other local securities—say, local bonds or local loans—will have fixed dates for their repayments and are somewhat liquid. Similar to your tolerance for risk, your need for liquidity will change throughout your life. Earlier in your life, you’re less likely to need the funds. As you near and proceed through retirement, you will want to start cashing things in.
FAQs About the Local Investing & The MD Neighborhood Exchange