You might not get your money back.
If it sounds too good to be true, it probably is. Very few, if any, investments are “guaranteed” or risk-free. While debt offerings on NextSeed may provide a security interest (in the form of a lien on the assets of the business itself) or a personal guarantee by the owners of the business, neither of these are absolute guarantees of any repayment. It is possible that the security interest may not be sufficient to pay you back fully. Preferred equity investments are not guaranteed or secured by any assets of the business.
NextSeed businesses offering debt investments are contractually required to make monthly payments to investors under the investment agreement. Debt investments require “borrower” businesses to make regular payments. Debtors are also paid before equity holders in case of bankruptcy if any assets are available. This is why debt investments are considered less risky than equity investments. Even if debt investments may be considered less risky, there is no guarantee that a business will be able to make any or all payments.
Term notes require businesses to make set monthly payments, and if a business misses a payment, it would be in default. Revenue sharing notes do not require businesses to make set monthly payments, and a business could potentially make no payments at all until it starts generating revenues. This means if a business makes zero payments because it generates $0 in reevnue, it is not in default, even if it failes to open at all. Full payment for a revenue sharing note is due at the maturity date, at which point a business would be in default if it fails to make one lump sum payment to pay investors in full.
NextSeed businesses offering preferred equity investments may make dividend payments to investors under the investment agreement. Please refer to the investment agreement of each offering for the exact terms.
You may not be able to transfer your securities.
Unlike the public stock market, you may not be able to easily sell the securities that you purchase on NextSeed. There is no public market for the securities and none is expected to develop.
If there’s only 48 hours left until the close of an offering, your investment becomes binding, and you cannot back out of an investment after that point if the business is able to raise the minimum fundraise amount. Even if you wanted to sell your securities at a later time, it is possible that you may not be able to identify any buyers, leaving you with very little recourse.
You only have a few potential avenues for financial return.
Your only source of payment is from the business, as laid out in the investment agreement. If your investment hits the maturity date and you are still not paid in full, the business owes you one lump-sum payment to complete your investment. If the business is unable to make a payment or goes bankrupt, the business is in default.
While NextSeed will take commercially reasonable steps on behalf of investors to facilitate the collection of outstanding payment from the business, it is possible that there is little recourse left for investors if a business is in default. In such event, it is possible that there may not be any valuable assets left in the business to make the investor whole.
For preferred equity investments, there are no set maturity dates. These are long-term investments where preferred equity holders may receive dividends. Any increase in the valuation of preferred equity shares may be realized by selling those shares, however, there is no secondary market for those shares and you may not be able to find a buyer.