A Review of Netcapital and a Look at GenesisAI
Some credit Churchill with saying “the fascists of the future will call themselves anti-fascists.” He didn’t actually say that, but it’s interesting to ponder in much the same way we’re being told that special purpose acquisition companies (SPACs) are here to “democratize access to IPOs.” Whenever a firm says they’re democratizing access to wealth, they’re most likely taking it from you. The epitome of this idea is the free stock/crypto trading app – Robinhood.
That’s why we stopped running ads on Nanalyze. The amount of “the best 5G stock to invest in” drivel that was being peddled to our lovely readers was overwhelming. It used to be that over-the-counter (OTC) stocks were the most dangerous thing out there, but these days there are pitfalls aplenty. And the SEC isn’t helping when they recently laxed regulations even more on private companies raising money from non-accredited investors. Today, we’re going to talk about a fintech crowdfunding platform called Netcapital (NCPL) which also happens to be an over-the-counter (OTC) stock. It all started with an ad that popped up in one of the most intimate places imaginable – our Gmail account.
Whenever someone stands outside a restaurant beckoning you to go inside, there’s a reason for that. Crowdfunding is like a tourist trap that doesn’t really care if you’re going to be a repeat customer. But at least in a tourist trap, you can always find an exit.
Almost one year ago to the day, we wrote about The Problem with Equity Crowdfunding Platforms, noting the many reasons why you should never place any capital on an equity crowdfunding platform. There are no venture capitalists investing alongside you, no subject matter experts asking the hard questions. The company can take your money and spend it on what they like. There is no oversight, no pressure from investors to exit, no market for your worthless shares. Equity crowdfunding should be avoided like the plague, even if the company is a notable brand. Just ask all those poor shareholders at High Times how things are working out for them. It’s a good thing then, that Netcapital isn’t an equity crowdfunding platform.
Netcapital is neither a funding portal nor a broker-dealer, they’re a software development company, and one that doesn’t appear to have raised much money (that’s not necessarily a bad thing). Crunchbase says they raised about $120,000 back in 2017, with one of those investors being Techstars. In order to conduct equity crowdfunding, there needs to be a financial firm behind the scenes that acts as the broker-dealer, a role that’s required by the SEC for crowdfunded offerings (also referred to as Regulation D.) The man behind the firm that backs Netcapital is some sort of nano guru, and one who doesn’t appear to have updated his profile since the days of Josh Wolfe’s nano newsletter.
The founder of Netcapital is – as one would expect – out there spreading the word to the Jim Cramers of the world about democratizing access to angel investing. That’s his job. The software platform he built needs to be used in order to create value for his business and investors. It’s a nice platform, and he’s done a great job building it. What we don’t care for are the companies that grace his platform, one of these being GenesisAI.
As we said earlier, we weren’t seeking out this “investment opportunity,” it came to us. And when you start filling our inboxes and social media accounts with ads promoting your “pre-IPO investment opportunity,” we’re going to have a good look around.
“Now is an early opportunity to invest before we sell out,” says someone who thinks they’re selling shoes.
Raising two million in seed money is a respectable feat, so we decided to poke around the GenesisAI offering. The first sign things are amiss is the technical paper they provide which reeks of that whole “my white paper is my company” ICO era (this is when people were asked to crowdfund without receiving any equity, and they couldn’t get enough of it.) The paper cites two authors, one of whom no longer has anything to do with the company. You can read all about that ordeal in the GenesisAI discussion thread on Netcapital where the CEO tries to defend the company against a bunch of disgruntled individuals who are raising some very critical questions about the offering. It could be that all these people raising hell are “competitors,” or “disgruntled ex-employees,” but who wants to get involved in all this drama? Is this what investors want the CEO – and only employee of the company – spending his time on?
The latest offering statement GenesisAI filed with the SEC several days ago makes you realize how little you need to have in order to raise some very meaningful funding. The company has been raising money from Regulation D offerings for years now, the annual amounts of which can be seen below.
- 2018: $102,875
- 2019: $180,000
- 2020: $625,390
- 2021: $1,314,075
In 2020, GenesisAI spent $724,839, of which $200,000 went to paying the salary of the company’s only employee – the CEO – who is now on a $350,000 salary for 2021. (He also took a $65,000 loan from the company, something that just looks tacky.) Around 45% of all costs GenesisAI incurred in 2020 were “marketing & advertising.” As for valuation, the SEC filing states “at issuer’s discretion” which is as follows:
Our last funding round had a valuation cap of $12.5 million. Taking into account the progress that has been made in terms of business and product development and additional capital injection, we believe the current valuation which is $49 million is appropriate.
The more we read the offering document and ongoing online discussions, the more we wonder how this company managed to raise any money at all. It’s precisely why we don’t invest pre-revenue. We’re sure the ambitious individual running this firm will go places in life, we just don’t want anything to do with his current venture which is waving more red flags than a Chinese military parade. Not everyone thinks so, as the current GenesisAI crowdfunding round has raised more than $679,000 so far.
Investing in Startups With Netcapital
Getting back to Netcapital, they clearly spell out the risks stating, “you must rely on your own examination of the company, the terms of the offering, and the risks involved to make your investment decision.” And they’re absolutely right. Their expertise is in software development, not vetting business plans. The investor is solely responsible for evaluating the investments on the platform. Unfortunately, most don’t, and we were surprised at how easy it is to invest in these offerings. You can thank the SEC for that, since they allow non-accredited investors to invest the greater of 5% of your income or $2,200.
We clicked the “Invest’ button and quickly worked our way through some forms. When it came to the income form, we said our net worth was “less than $40,000” with a $50,000 a year salary, and about 5 minutes we were inputting our credit card number to invest up to $2,500 in GenesisAI.
Yes, that’s right. People who make minimum wage can use credit cards to buy shares in these companies. These transactions come with a hefty “convenience fee” which – in our case – represented 3% of the transaction.
Being poor is expensive, and there’s no better evidence than these platforms that allow
the poor the economically disadvantaged to “invest” in questionable ventures using a credit card. It’s not Netcapital’s fault that this is allowed, it’s the SEC’s. Netcapital is simply running a business that helps startups raise money via crowdfunding. They’ve dotted their i’s and crossed their t’s. All the risks are clearly spelled out.
The Dangers of Crowdfunding
As the SEC continues to relax the rules around crowdfunding, companies like Netcapital will continue to help startups like GenesisAI. That’s to be expected. Both of these parties win, regardless of how many companies go bust in the process. And let’s address the elephant in the room here. The most competent entrepreneurs out there aren’t defending their spending habits in public discussion forums to raise a few million over four years, they’re spending time pitching their businesses to some of the world’s most competent investors who bring a lot more to the table than just money.
You are throwing your hard-earned dollars away by investing in startups that are not traded on a notable secondary market with adequate liquidity. It’s only $409.22, some will say, and they’re right. Go spend that $409.22 on a gram of coke and a couple of twins in Pattaya. At least then, your bad decisions will make for some great stories.
We’re not just picking on Netcapital and their affiliates. Any platform that solicits money for equity crowdfunding ventures should be avoided like the plague. These are usually teams-with-dreams who don’t have many other options. The failure rate of companies backed by some of the most sophisticated institutional investors on this planet is already abysmal – somewhere around 90% of startups fail. Why would you invest in any company that hasn’t gone through the rigor of raising money from people whose sole job is to find successful businesses?
Want to invest in startups? Go use a firm like Alumni Group, or buy shares of startups on secondary markets like Carta. But only do so with a small percentage of your wealth, because investing in startups is extremely risky. When Netcapital says, “Be an angel investor. Private jet not required,” they’re right. You don’t need access to your own personal aircraft to piss money away.
Take a look at NFTs and you’ll realize that today’s investor will invest in just about anything, except what will actually make them wealthy. The key takeaway here is simply this. Never get involved in any equity crowdfunding ventures of any kind. And when someone tells you they’re here to democratize access to some wealth creation machine, they may have good intentions, but those intentions and $3 won’t get you a Starbucks coffee.
We sold our Global X Fintech ETF holding and used the proceeds to purchase a legaltech stock with a 70% market share. A $50 billion opportunity awaits, and they've only achieved about 3% penetration – plenty of room to run. Become a Nanalyze Premium annual subscriber and we'll show you our entire portfolio of more than 30 tech stocks.