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.

Credit: A Google ad in one of our Gmail accounts

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.

About Crowdfunding

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.

About Netcapital

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.

About 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.

Credit: A Facebook ad served to one of our social accounts

“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.

Credit: Netcapital

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.

Credit: Screenshots from Netcapital website

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.

Credit: Netcapital

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.

Conclusion

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.

20 thoughts on “A Review of Netcapital and a Look at GenesisAI
  1. Great post! Only thing I’d add is that NetCapital makes money on both ends: once from the convenience fee, then taking a cut of funds raised. Note that ~50% of all money raised is spent on advertising *to investors.*

    If you’re the canonical “little guy,” half your dollar goes to recruiting others to invest after you (at a steeper “valuation”!), 10% goes to Netcapital, leaving only 40% to go towards product development etc. Not a great deal!

    1. Cheers for the feedback Carla B!

      {Start rant} We write these pieces because we cannot fathom how the SEC lets stuff like this fly. Sure, people should take more accountability for their own financial fortunes, but many people don’t have a clue. Especially the elderly. Every time you turn around, someone’s bemoaning how “disadvantage category X” is being mistreated and we all hang our heads in shame (well, not us) and promise to “do better.” What about starting with problems that affect the people who made today’s fruitful societies a reality – the elder generation? We see “the little guy” fleeced on a regular basis. Where’s the outrage? {End rant}

      We’re not sure in what capacity you know this information about Netcapital’s spending habits but it would hardly come as a surprise. That’s what Netcapital needs to do, attract more investors, otherwise they don’t have a platform. The whole thing stinks to high heaven.

  2. Thank you for the open and honest estimation. I’ll be honest, they piqued my curiosity – I am a sucker for this kind of “future tech” investment… and my investments actually have worked out a couple times… but mostly they haven’t. And I’ll be honest, I don’t know where to look to figure out whether a company is worth investing in, so I rely on articles like this to give me the straight dope. All the other articles about this company are pie-in-the-sky, “everyone is about to make a ton of money!” Nonsense, which made my alarm bells go off. Once bitten… twice bitten… thrice kinda shy??? Lol

    1. You’re quite welcome.

      If you follow a simple rule and ignore anything that’s not traded on a major exchange, you’ll avoid a large majority of pitfalls such as this one. When you talk about “your alarm bells going off,” that’s exactly what you need to pay close attention to. Thank you for the comment.

  3. Well… you just end up making your own promotion in this post. So yeah, criticizing someones crowdfunding when you’re directing at the same time to some other. No trust on both

    1. We’re not promoting anything in the article. There’s an ad at the end which highlights our Nanalyze Premium offering. Notice how there’s no ads on our site except our own? That’s because bullshit companies were advertising garbage to our readers, like “become an angel investor.” Crowdfunding should be avoided at all costs. Period. We’re not a crowdfunding site, we’re a research site, with a very large audience of readers – both paid and non-paid. We’re read by a large number of institutional investors because we publish competent, insightful research. Don’t just come by here and take a pot shot at us without digging in to learn more about who we are.

  4. I am bombarded with advertising on my phone from GenesisAI. I never considered investing in crowdfunding until I seen these adverts, but I decided to look for a few reviews before doing it. My problem is that most of the reviews these days are fake, but this article looks honest.
    Thanks guys for writing this.
    I will not invest.

    1. You are quite welcome. We wrote this piece because we were absolutely inundated with GenesisAI ads. Just how much of this company’s precious funding is being spent on ads? Biggest takeaway here is that you should NEVER get involved in equity crowdfunding.

      This article is one of several thousand we’ve written about topics other than GenesisAI and crowdfunding. You’ll find nothing but honesty around here which is why we’ve amassed the following we have today. Without our integrity intact, we have nothing.

  5. Today I commited a small amount for GenesisAI investment (after seeing ad on FB), but then after reading this article (especially the part about CEO salary) I decided to cancel my pending payment.

    1. Good call Stan. You’re smarter than that man. Stop paying so much attention to great stories and start being more critical of what companies are promising. Traction is underrated. Never get involved in equity crowdfunding.

  6. I found article on Nasdaq about GenesisAI from July 2020, so it was a year ago:
    “Why Futurists May Want to Invest in GenesisAI Stock”
    It says GenesisAI share price is $3.11, minimum investment is $99.52 and deadline 1 Oct 2020.

    Compare that to the current offer:
    Minimum investment: $497.70, Deadline: 9 July 2021, Share Price $11.06, Total Raised $2,745,557, Valuation $47,643,848
    Deadline: 9 July.

    In your article written just a month ago the offer was:
    Minimum investment: $409.22, Share Price: $11.06, Deadline: 30 June 2021.

    I think most people who decide to invest in it do not realize GenesisAI keeps raising money on a continuous basis – when they finish one round they soon start another round. Deadlines are close to encourage people to make a quick decision.
    But as we see 30 June deadline ended and then we have a new deadline: 9 July.

    The main question is if they actually use significant part of the money to genuinly develop real business.
    The promise is: the management wants to create an Amazon of AI.

    But if in reality the money is just spent on CEO salary and marketing then it would be similar to a Ponzi scheme.
    As they raise more and more money there will be more scrutiny about their activities. There will be more articles discusing their business and eventually the truth will come out.

    1. Good point on the constantly moving “deadline.” The whole thing stinks to high heavens. And why do they keep increasing the value of the firm between “rounds?” It’s as if to suggest that these shares people are buying are increasing in value when they’re worth absolutely nothing unless they’re traded on a public market. The SEC should be policing stuff like this and they’re not. It’s a crying shame.

  7. The Million dollar question is what you said “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”
    Is it the attractive idea of AI for all? or the misconception that any AI startup will eventually be a winner?
    It would be really enlightening to know how/why

    1. Anytime a company says they’re trying to democratize something for investors they’re usually trying to jack you. Last time we checked there were over 3,600 AI startups out there, at least a dozen publicly traded AI stocks, and countless companies using AI to do things more efficiently. This one doesn’t past the sniff test in any way shape or form. When that happens you just move on.

    1. If an investment is a scam or simply fails due to incompetent management, the end result is still the same for the investor. That said, this thing is waving more red flags than a Chinese military parade.

  8. As an investor on Netcapital I do accept some of what you say and of course, as with any of these kind of start ups you do have to be prepared to lose all your money! Genesis AI does seem a bit dodgy and seems to spend more time raising money and promoting themselves than actually doing anything but I do think there are some genuine companies on there with some very interesting and promising ideas, so I wouldn’t write off the platform completely. For example, have a look at EnergyX or BNNano (who won a fairly prestigious ‘most fundable company’ award). These two companies have both received VC investment alongside the crowdfunding and having spent some time researching them, I do think they have good ideas and are working hard to make a success of their companies. Of course – this might not translate into anything and there may be no return for early investors, but they are definitely not just running off with investors money and in both of these cases they have a potentially very promising product.

    1. You certainly do need to prepare your money because that’s likely what will happen. If something seems “a bit dodgy” then you walk away, you don’t “invest” in it.

      They all have great stories. Does it really matter if the management team can’t make things happen or if it was a scam? The outcome is the same either way.

      As we said numerous times, do not get involved in this rubbish. Go use a real platform that lets you invest alongside VCs like Alumni Group: https://www.nanalyze.com/2020/07/how-to-invest-in-startups/

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