The services provided by Crowdbase Ltd cover a wide range of Financial Instruments. Every type of Financial Instrument has unique characteristics and entails different risks. Some Financial Instruments may not be suitable for all clients; this matter depends on the client’s investment knowledge, expertise and risk appetite. If an instrument is not appropirate for an investor, a warning message will be displayed before investing.
Crowdbase provides concise and clear information to clients about the risks associated with each category of Financial Instruments and acknowledge the nature of risks entailed in each category of Financial Instruments. This notice cannot and does not disclose or explain all of the risks and other significant aspects involved in dealing in all Financial Instrument and investment services.
Crowdfunders should be aware of the risks associated with Financial Instruments before proceeding with any form of investment. There are several risk factors for all types of investments which can affect the value and price of the client’s assets and their return. To make the right investment decision, the client should consider the type of risk that may affect the value of his portfolio and define its ‘risk appetite’.
The price or value of an investment (even unlisted investments) may depend on the markets’ fluctuations which cannot be determined by anyone. Previous results do not constitute an indication for future return. Therefore, relevant investment risks depend on various factors based on the nature and characteristics of the Financial Instruments a client may decide to invest in.
Crowdbase Ltd does not and cannot guarantee the initial capital of the client’s funds invested in any financial instrument. The Clients should not engage in any investment directly or indirectly in Financial Instruments unless they know and understand the risks involved for each one of the Financial Instruments.
Description of Financial Instruments
Shares and other types of Equity Instruments
Shares represent a share of ownership in a company. It is the unit in which the share capital of a company is divided in and which provides the shareholder with voting rights. Furthermore, the shareholder is entitled to receive a certain level of the company’s earnings (dividend payments) that may arise from the company’s operations. Dividends are not guaranteed, and a company has the right to decide not to pay a dividend. The investor may also buy a company’s shares so that he/she can make a profit from reselling them. However, the return of the investment is not guaranteed because the share’s price depends on the company’s performance, the evaluation of the market’s performance, the existing national and international economic circumstances, the relevant risk of each sector and/or the specific risk for each company. Investing in shares may also entail a risk regarding the dividend payment as well as the potential capital loss. Moreover, trading shares on regulated markets does not guarantee the liquidity of these shares (see ‘Liquidity risk’).
Unlike ordinary shares, preference shares give shareholders the right to a fixed dividend, the calculation if which is not based on the success of the issuer company. They, therefore, tend to be a less risky form of investment than ordinary shares. Preference shares do not usually give shareholders the right to vote at general meetings of the issuer, but shareholders will have a greater preference to any surplus funds of the issuer, but shareholders will have a greater preference to any surplus funds of the issuer than ordinary shareholders, should the issuer go into liquidation. There is still a risk that the client may lose all or part of its capital.
Shares and Equity investments may be subject to any of the following risks: market risk, liquidity risk, issuer risk, and exchange rate risk, systemic and non-systemic risk. Therefore, shares and equity investments may be regarded as not having guaranteed performance since the investor’s invested principal may suffer losses.
- Liquidity risk: Liquidity is the ability of a firm, company, or even an individual to pay its debts without suffering catastrophic losses. Conversely, liquidity risk stems from the lack of marketability of an investment that can't be bought or sold quickly enough to prevent or minimize a loss. The smaller the size of the security or its issuer, the larger the liquidity risk. Given the nature of crowdfunding (unlisted shares and relatively) small companies, there is significant potential for such risk.
- Issuer risk: The risk of the issuer’s insolvency, changing of credit and other ratings of the issuer, bringing suits or claims against the issuer that may result in dramatic decrease of value of the issuer’s securities or failure to redeem the debt securities.
- Exchange rate risk: Exchange rate risk, or foreign exchange (forex) risk, is an unavoidable risk of foreign investment, but it can be mitigated considerably through hedging techniques. This risk only to investors outside the Euro zone.
- Systematic risk: Systematic risk refers to the risk inherent to the entire market or market segment. Although the securities will not be listed, they could still be affected by market movements.
- Non-Systematic risk: Non-systematic risk is the risk that is unique to a specific company or industry. Although non-systematic risk can be high for new ventures provided on the platform, the risk can be reduced through diversification which will be suggested to clients.
- Transferability risk: The risk of being unable to sell or transfer your investment. Given that the securities acquired through the crowdfunding platform will not be publicly listed, customers will need to privately arrange the sale of their own securities.
- An equity investment risk could arise when the Issuer does not grow in value or, if it does, it may elect not to pay dividends, or the share price may fall. If the share or equity instrument price falls, the company, if listed or traded on-exchange, may then find it difficult to raise further capital to finance the business, and the company’s performance may deteriorate vis à vis its competitors, leading to further reductions in the share price. Ultimately, the company may become vulnerable to a takeover or may fail. In addition, there is a risk that there could be volatility or problems in the sector that the Issuer is in. Even if the Issuer is listed or traded on an exchange, there is no guarantee of liquidity, whereby shares could become very difficult to dispose of.
Bonds and Debentures
Bonds are debt securities which represent the issuer’s debt towards the investor. When an investor buys a bond, he/she lends a certain amount of money to the bond issuer. Therefore, the bond constitutes a debt towards the lender, which must be paid at a specific date specified at the bond documentation. If provided for in the bond’s documentation, the borrower is also obliged to pay interest to the bondholder. The interest rate, the frequency of interest payment and the amount of the interest are specified by in the bond’s documentation. Possible bonds’ issuers can be the Government, banks, municipalities or companies.
The bond’s yield is determined by the difference between the capital paid at the bond’s issue date and the amount due at the maturity of the bond.
High-yield bonds are bonds with speculative characteristics, and which are rated with a low credit rating by international credit rating agents such as Moody’s rating of Baa or BBB rating of low or medium return. These bonds carry a coupon that is relatively high to reflect the higher level of risk to investors.
The main risks faced by bondholders are credit spread risk, and interest rate risk because the bond’s price usually moves inversely to the direction of interest rates changes and/or the credit spreads. Bondholders are also subjected to risk of default of the issuer and liquidity risk.
Structured bonds allow the investor to access other Financial Instruments, notably shares, through an initial investment in bonds. The three more common types of bonds that give access to the company’s share capital are the following:
These bonds can be converted into shares of the issuing company upon request of the bondholder. The bond’s maturity and conversion dates are specified in the bond’s issued terms where the conversion ratio is defined and where it is specified that the bond issuer has the right to call the bond’s early redemption. The bond holder’s protection clauses are also described in detail in the bond’s issue documentation.
Bonds Redeemable in Shares
Such bonds are only redeemable in shares, on the issuer’s option. The bondholder is exposed to the same risks inherent in shares.
These types of bonds allow the issuer early repayment (partial or in full) of their principal at a specific period before the bonds’ stated maturity date. These bonds are subject to prepayment risk. The issuers of such fixed income instruments may not be willing or able to prepay the principal at the prescribed earlier date, thus prolonging the life of the instrument.
The risks entailed in all the above-mentioned instruments are related to their complex nature. For as long as they remain in the investor’s possession, the investor is exposed to risks as well as to possible fluctuations and/or volatility of the principal shares’ value. After the conversion, exchange or redemption of the bonds, the investors are exposed to risks similar to those of shares.
The price or value of an investment will depend on fluctuations in the financial markets outside of anyone’s control. Past performance is no indicator of future performance. The nature and extent of investment risks vary between countries and from investment to investment. These investment risks will vary with, amongst other things, the type of investment being made, including how the financial products have been created or their terms drafted, the needs and objectives of particular investors, the manner in which a particular investment is made or offered, sold or traded, the location or domicile of the issuer, the diversification or concentration in a portfolio (e.g. the amount invested in any one currency, security, country or issuer), the complexity of the transaction and the use of leverage. Further, the markets in which the various financial instruments are traded are subject to considerable fluctuations, and Crowdbase cannot guarantee specific returns.
Shares in these types of companies work in the same way as shares described above. For real estate crowdfunding campaigns, a Special Purpose Vehicle (SPV) is set up, which works like a limited liability company. This protects investors from any additional liability beyond their initial investment. In these types of projects, a contractual agreement is signed between the SPV and the management company that will manage the property. The management company will be entitled to a portion of the cash flows, enough to cover their operating costs. Depending on the ownership percentage share each investor holds in these vehicles, they are entitled to the cash flows generated by the property in the form of rent, or capital appreciation when the property is sold, after deducting the fees paid out to the management company of the property.
With real estate debt securities, investors are acting as lenders to the property owner or the deal sponsor. The loan is secured by the property itself and investors receive a fixed rate of return that is determined by the interest rate on the debt and the amount they have originally invested. Holding debt instruments on real estate properties means that investors are at the bottom of the capital stack, meaning that they have priority when it comes to claiming a pay-out from the property in an event of default.
Crowdbase will primarily focus on sourcing residential real estate projects in both multi-family (apartments) and single-family (houses), as well as retail projects, either single units or retail centres. However, Crowdbase can also source other types of real estate projects, such as office buildings, student housing, warehouse and land (e.g. parking space).
Even though securities in real estate might be considered as less risky than other types of securities such as common equity in private companies, there are no guaranteed returns. Some of the investment risks include market fluctuations, construction setbacks, higher maintenance expenses and liquidity risk. There is no guarantee that investors will receive the advertised return or even a return equal to the initial amount invested.
Where transferable securities are offered through an SPV, additional risk must be considered on a look-through basis. These risks may arise from the management entity of the SPV and indirectly affect the performance of the investments in the SPV.
Market risk is the risk of a change in the value of an investment due to changes in general market factors such as interest rates fluctuations, exchange rates fluctuations, equity market indices, credit spread, share prices, principal products’ prices or fluctuations in volatility. In the case of negative fluctuation in prices, investors in Financial Instruments run the risk of losing part or all of their invested capital.
Interest rate risk
Interest rate risk is associated with unfavourable interest rates’ fluctuations. Interest rates risk also includes the cost of upkeeping. The up keeping cost is positive or negative of the financing cost of the asset is respectively higher or lower than the received interest. Thus, the upkeeping cost for a loan with a floating interest can increase with a rise in the interest rate. Interest rates’ fluctuations can expose the owner of Financial Instruments to a risk of capital loss, but the risk level depends on the type of the financial instrument.
Foreign exchange risk
The Foreign Exchange Risk exists when the value of an underlying instrument is calculated or associated with a currency index other than the currency of the investor. A decrease or increase of exchange rates can provoke, depending on the case, a rise or fall of the value of the financial instrument, the value of which is denominated in a foreign currency.
Interest spread risk
Credit spread is the difference between a prearranged reference interest rate (e.g. Euribor) and the bond’s real interest rate. This difference depends on the credit rating of the bond’s issuer. Spread risk consists in the downgrading of the issuer’s credit rating, which will lead to an increase of the credit spread and a decrease of the bond’s current value.
The risk associated with the loss of the real capital value which is caused by a greater than expected inflation rise.
Risk of early redemption
In case the bond type gives the issuer the right to revoke and redeem the bonds earlier than their maturity, the investor faces the risk of the bonds to be revoked or redeemed at an unfavourable price.
Investment risks reflect the volatility of an investment’s performance. The relation between performance and risk is proportional that is the achievement of a higher return presupposes that the investor undertakes higher or greater risk and vice versa.
The risk stemming from the lack of marketability of an investment that cannot be bought or sold quickly enough to prevent or minimize a loss. Market’s liquidity depends on the market’s organization (stock exchange or over the counter) but also of the relevant instruments. Selling or buying a common product may be easy but there may be greater difficulties for very specific products. There is usually a liquidity risk for investment products of low tradability.
The risk that an issuer of a bond may be unable to make timely principal and interest payments or when a company’s share price may be minimized in case the company bankrupts.
Operational risk, such as breakdowns of essential systems and controls, including IT systems, can have an adverse impact on all Financial Instruments. Business risk, especially the risk that the business is run incompetently, may also adversely affect shareholders or other investors in such a business. Personnel and organisational changes may severely affect such risks and, in general, operational risk may not be apparent outside the organisation.
Is defined as the possibility that the counterparty might default within a specific period of time. Counterparty risk is related with three factors: the amount of the debt, the possibility of insolvency and the proportion of the debt that will be recovered in case of insolvency. For example, an investor must consider the liability of a bonds’ issuer. That is his ability to pay or redeem the loan, according to the case. Regarding over-the-counter derivative products − transactions which do not involve debt − the counterparty risk is equal to the replacement value of this derivative product at any given time if it has a positive value.
Valuation risk is connected to the negative fluctuations of variables which are taken into account at the valuation of an investment, i.e. volatility/instability, interest rates and/or the estimated dividend yield.
Any foreign investment or investment that contains a foreign element is possible subject to overseas risks. These risks are likely to differ from those of the market where the instrument is issued or the investor’s market.
Systemic risk is the risk arising from interdependencies within markets or among markets, which results in problems possibly appearing in one of them spreading to other market participants or other markets. It involves the entire financial sector and not any one individual participant or market and appears in the form of chain reactions. For example this risk may occur in case a member responsible for the payment of the instrument is unable to fulfil its obligations and, thus, may lead the other members of the payment system to a similar inability.
Non-systemic risk is non-market or specific risk associated with a particular issuer of a security. It is sometimes called unique risk or diversifiable risk as it can be eliminated with diversification. It basically relates to the uncertainty associated with the company the investor wishes to invest into.
Apart from the aforementioned risks, Force Majeure is a risk associated with industrial or natural disasters or with decisions made by regulatory authorities or market operators and result e.g. in the suspension of the listing of a Financial Instrument in the stock exchange market. The issuer or the market is not responsible for cases of Force Majeure. However, these events, given that they have a great impact, may influence the issuer’s ability in fulfilling its obligations or affect the market’s operation.
Political or legal risk
The risk that a government (or any other competent authority) imposing new taxes or new regulatory or legal obligations or restrictions on the securities that have already been bought by the investor. These are the risks deriving from government acts, market operation rules, etc. Investments in emerging markets products are usually riskier than the respective investments in developed markets. For such investment moves it is absolutely necessary that investors proceed to a detailed analysis of each individual danger.
Such as breakdowns or malfunctioning of essential systems and controls, including IT systems, can impact on all financial products. There is a risk that other circumstances may prevent Crowdbase from executing orders or prevent any participant in the relevant markets from accessing any electronic online trading platform. These include, for example, system errors and outages, maintenance periods, internet connectivity issues and failures of third parties on whom the client or Crowdbase is dependent (for example, internet service providers or electricity companies).There may be circumstances beyond Crowdbase’s control that can affect its ability to support the Client’s trading.
Risks specific to certain types of bonds
Additional risks may be associated with certain types of bond, for example floating rate notes, reverse floating rate notes, zero coupon bonds, foreign currency bonds, convertible bonds, reverse convertible notes, indexed bonds, and subordinated bonds. For such bonds, the client is advised to make inquiries about the risks referred to in the issuance prospectus and not to purchase such securities before being certain that all risks are fully understood. In the case of subordinated bonds, the client is advised to enquire about the ranking of the debenture compared to the issuer’s other debentures. Indeed, if the issuer becomes bankrupt, those bonds will only be redeemed after repayment of all higher ranked creditors and as such there is a risk that the client will not be reimbursed. In the case of reverse convertible notes, there is a risk that the client will not be entirely reimbursed but will receive only an amount equivalent to the underlying securities at maturity.
The information that Crowdbase provides in this document is for general information purposes only. Accordingly, a Client prior to making any investment decision in Financial Instrument must consider his personal objectives and financial situation and the significant risk of possible loss inherent in any investment product.