Here are a few definitions of some of the terms you may have seen on your term sheet, Form C, or in conversation with our team!
Regulation Crowdfunding (Reg CF) - the set of US federal rules governing crowdfunding offerings, which allow small businesses to raise capital from a large number of investors.
Debt - a financial promise to borrow money with an agreement to pay it back with interest over a set period of time.
Promissory Note - the legal document in which the borrower makes a written promise to repay a specific sum of money. It outlines the terms of the loan, including the principal amount, interest rate, repayment schedule, and other relevant terms and conditions.
Personal Guaranty - in this legal commitment, an individual (the guarantor), often the business owner, personally ensures the repayment of a loan in the event the business cannot meet its financial obligations. Common in small business lending, the guarantor pledges their personal assets to settle the business debt, providing an extra layer of assurance for lenders.
Lien - a legal right or interest that a lender has in the borrower's property, granted until the debt obligation is satisfied. This interest serves as security for the repayment of a loan. The most common types of liens are:
Blanket Lien - a comprehensive legal claim on all of a borrower's assets, providing the lender with a security interest in all present and future assets.
Purchase Money Lien - a claim on a specific asset, such as equipment to be purchased.
Securities and Exchange Commission (SEC) - the US federal regulatory agency responsible for overseeing and enforcing securities laws. Established in 1934, the SEC's primary mission is to protect investors, maintain fair and efficient markets, and facilitate capital formation. It achieves this by regulating the securities industry, ensuring full and accurate disclosure of financial information by publicly traded companies, and monitoring securities transactions to prevent fraudulent or manipulative practices.
Financial Industry Regulatory Authority (FINRA) - a non-governmental organization authorized by the U.S. government to regulate the financial industry. It serves as a self-regulatory organization responsible for setting and enforcing industry standards, rules, and regulations to protect investors and maintain market integrity. FINRA oversees Reg CF compliance to ensure fair and transparent financial markets.
Funding Portal - Honeycomb is a funding portal, an online platform, registered with the SEC and FINRA, that facilitates the raising of capital for businesses through Reg CF. Funding portals provide a digital marketplace where businesses can showcase their offerings and investors can discover and participate in these new investment opportunities. Funding portals play a pivotal role in connecting issuers with potential investors, ensuring compliance with relevant regulations, and promoting transparency throughout the investment process, making it easier for small businesses to access capital.
Principal - the initial amount of money you borrow and commit to repay to your investors. With each scheduled payment, a portion is allocated to reduce the principal balance gradually paying down to zero over the term of the loan.
Interest - the cost of borrowing money, calculated as a percentage of the outstanding principal. This cost is incorporated into regular loan payments, and as the loan is progressively repaid, the proportion allocated to interest gradually diminishes.
Form C - a required document filed with the SEC when a company intends to conduct a Reg CF offering. It serves as a disclosure document, providing information about the company, its financials, the terms of the offering, and other important details. This form is a key component in the regulatory process, ensuring transparency and compliance when raising capital from a broad range of investors through Reg CF.
Form C/A - An amendment to the original Form C filed with the SEC as part of the Reg CF offering. This form is submitted by a company to update or correct information previously filed in its original Form C. It allows businesses to provide additional details, make necessary changes, or address any material developments that may have occurred since the initial filing. If there is a change to the offering’s terms, it is considered a material change, and all investors in the offering will need to reconfirm their investment.
Amortizing Loan - a type of loan where the borrower makes monthly payments that cover both the interest on the loan and a portion of the loan's principal. These payments are structured so that over the life of the loan, the entire debt is gradually paid off. As the loan matures, a larger portion of each payment goes toward reducing the principal balance, while the interest portion decreases.
Interest-Only Period - a specific phase within a loan term during which the borrower is only required to make payments that cover the interest on the loan, and no payments are made toward the principal amount borrowed. During the interest-only period, monthly payments are generally lower, but once it ends, the borrower's payments increase to start reducing the loan's principal balance.
Escrow - the neutral-party bank account used for securely holding investor funds until the offering reaches its funding goal.
Equity - ownership interest in a company. Equity can be acquired through the purchase of shares of stock, and it entitles the holder to a proportional share of the company's profits, as well as voting rights in certain corporate matters. Unlike debt, which represents a loan that must be repaid, equity implies a long-term stake in the success and growth of the company.
Simple Agreement for Future Equity (SAFE) - A SAFE is a financial instrument commonly used in early-stage startup financing as an alternative to traditional equity or debt instruments. It is designed to simplify and expedite the investment process for both startups and investors. A SAFE is not a debt instrument, nor does it represent an immediate equity stake in the company. Instead, it is a contractual agreement that provides investors with the right to receive equity in the company at a later date, typically upon the occurrence of a specific trigger event, such as a future equity financing round or the company's exit.
Convertible Note - a Convertible Note is a type of debt instrument frequently utilized in early-stage financing by startups. Unlike traditional debt, a Convertible Note has the potential to convert into equity under predefined conditions. It serves as a short-term loan with the expectation that it will convert into shares of the company's stock at a later date, typically during a subsequent financing round.