What’s this suitability test?

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 

Note: There is no crystal ball in business so we won’t always get it right when it comes to knowing which business ideas are likely to succeed and which are likely to fail. As early-stage businesses are high reward/high risk in nature, the best way of maximising your chance of investing in a successful company is to spread the risk by building a portfolio of several smaller investments on Eureeca.

2. Given the competitive environment, most early-stage businesses and SMEs are, statistically
speaking, likely to:

1. Succeed
2. Break even
3. Struggle to get profitability and risk failing 

Note: Despite working hard to invest all of their resources to avoid failure, most early-stage businesses and SMEs will struggle to get profitability due to a lack of access to capital, product development, marketing, operations management, and competition, and will fail. Investing in start- ups should only be done as part of a diversified portfolio. 

3. If at some point in the future, after raising funds on Eureeca, a business shuts down 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

Note: 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. How easy is it to sell my shares after I invest in a business?

1. It is easy to sell my shares whenever I want as the business legally must pay me back my shares at a set price
2. I will not be able to sell my shares easily unless the business is bought or floated on a stock exchange

Note: If you invest in a business on the platform, even if it successful, you are unlikely to see any return on capital or profit unless the company is acquired, you sell your shares to a third party (such as via the secondary market Eureeca is building), or back to the company. However, by becoming a part of the investor ecosystem of that business, you will be playing an important role in keeping the business attractive for future investors to join.

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

1. Yes, I can expect dividends periodically
2. No, generally profits are reinvested into the business rather than paid out as dividends

Note: Early-stage businesses and SMEs are not obligated to pay dividends. Any profits the business makes are typically re-invested into the business to fuel growth and build long-term shareholder value by increasing the value of the company. 

6. What will happen to the proportion of shares that I own  if the business raises more funds in the future by issuing more shares (thus increasing the total number of shares in the company) after I  invest?

1. The proportion of shares that I own in the business will increase
2. The proportion of shares that I own in the business will decrease

Note: It is normal for practice in the investment world that companies go through many rounds of funding in order to scale, grow and hopefully increase the value of the business. Although the percentage of the company that you own will decrease as more shares are added, the aim is that the value of those shared will have gone up. In other words, as the pie gets bigger with every funding round, the number of shares you own (i.e. the size of your piece of pie in this example) is the same, but it is now part of a bigger pie. Most companies will also offer you the option of reinvesting in order to maintain your proportionate shareholding; this will require additional capital from your side, however. 

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!

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