What’s this suitability test?

Posted by The Eureeca Team on Sep 21, 2015 2:00:00 PM

As many of you know, Eureeca received regulatory approval from the UK Financial Conduct Authority (FCA) in in the beginning of 2015. What does it mean for everyone? Simply put, it means that when you invest through Eureeca you can rest assured you’re doing so in the most secure environment possible.

An investor suitability test is a new component of the Eureeca investment process that is required for FCA-regulated equity crowdfunding platforms like us. All would-be investors must pass the test before they can start investing.

The test is designed to ensure that potential entrepreneurs and crowdinvestors understand the investment process and the risks involved with financing early-stage businesses and SMEs.

While the suitability test is perhaps a small hassle, it is actually a good thing. Although many of us know and understand the risks involved with investing in businesses on Eureeca, not everyone does, and these people should be made aware of what they are getting into.

Here is a list of the questions you can expect to see when you take the test and the relevant explanations:

1. Which of these is the best method to use when investing in early-stage businesses and SMEs?

    1. Invest all the money you have in a single business
    2. Spread your risk by investing in multiple businesses

Explanation: Investments such as these are high risk, high reward in nature, so it is advisable to account for this risk by diversifying your investment portfolio.

 

2. Given the numerous challenges that they face, most early-stage businesses and SMEs are, statistically speaking, likely to:

    1. Succeed
    2. Break even
    3. Fail

Explanation: There are a number of challenges involved with successfully running an early-stage business or SME, including a lack of access to capital, product development, marketing, operations management, and competition, so a majority of early-stage businesses and SMEs end up failing.

 

3. If at some point in the future, after raising funds on Eureeca, a business fails for any reason (bankruptcy, product failure, etc.), what happens to my investment?

    1. No one will be liable to pay me back the amount I invested
    2. The Entrepreneur will pay me back
    3. Eureeca will pay me back

Explanation: Just as in the offline world, no one is liable to reimburse you for an investment in a company that fails. This is the risk involved with investments such as these, which also have the potential to generate high returns.

 

4. Will I be able to get my money back whenever I wish?

    1. Yes, the business legally must pay me back my investment whenever I want
    2. No, typically I will not easily be able to sell my shares unless the business is bought or floated on a stock exchange

Explanation: Private equity investment in early-stage businesses and SMEs -- the type of investment opportunities found on Eureeca -- are illiquid in nature, meaning that without access to public markets investors will have a hard time selling their shares. It is a long-term investment, or what is called “patient capital,” and returns are typically generated when the business begins trading on a public exchange, or more like, is acquired by a larger company.

 

5. Do early-stage businesses and SMEs pay dividends?

    1. Yes, I can expect dividends periodically
    2. No, generally they do not pay dividends

Explanation: Early-stage businesses and SMEs are not obligated to pay dividends, and are likely to reinject any profits back into the business.

 

6. If I invest in the equity of an early-stage business or SME, and the business succeeds, and I want to cash in on the success:

    1. Unless the business is bought or floated on a stock exchange, it may be difficult to find someone to buy my shares
    2. The business will always be required to buy back my shares at a set price

Explanation: Any investment you make on Eureeca will be highly illiquid, meaning that it is unlikely you will be able to sell your shares except in the event of an IPO, an acquisition, or if another investor approaches you wanting to buy them.

 

7. What will happen to the level of your shareholding if the business issues more shares in the future after I invest?

    1. My proportionate shareholding of the business will increase
    2. My proportionate shareholding of the business will decrease

Explanation: Early-stage businesses and SMEs have the right to issue additional shares during future fundraising rounds, which will dilute your shareholding in the business.

 

Whew! Now that that is over with, you should have a pretty good understanding about the nature of SME private equities and the risks involved with this type of investing. This is a very exciting asset class to add to your portfolio but it’s important to understand what you’re getting involved with before you invest. Start crowdinvesting and diversifying your portfolio today!