Equity crowdfunding operations involving a liquidation preference clause give access to an investment formula that aims at least at recovering the invested capital and generating the return indicated in the Investment Memorandum, subject, however, to the cases of default of the operation.
Accordingly, an investor is entitled to obtain in the following order of priority: 1) the repayment of the invested capital and 2) the disbursement of the generated return before other shareholders of any other category (for example, Ordinary Units belonging to founding members).
Where to find information about liquidation preference
Liquidation preference does not apply to all projects and can follow different cases. Specific conditions are available in the following documents or sections:
in the Constitutive Act and AoA available in the project page (it is usually named "Constitutive Act and AoA [Company name])”;
in the "Key investment information sheet," available in the project page. Liquidation preference is explained in the "Distribuzione utili e liquidazione" chapter;
within the project page, under the "Safety and requirements" > "Liquidation preference" section;
in any communication related to the operation, such as emails or social media content.
Lending crowdfunding operations also provide for a type of liquidation preference, where the investor's financing takes precedence over the repayment of capital and/or financing by the Issuer Company asking for financing, who will subordinate the sums contributed by them.
However, please note that this casuistry does not apply to all projects, and it is better to check for it within the KIIS.
A practical case
A real estate operation has the following characteristics:
total estimated length: 24 months;
estimated gross annual ROI: 12%;
expected gross profit: €400,000, of which €100,000 is earmarked for investment holders.
The operation ends after 24 months, generating a profit of only € 110,000 (€ 290,000 less than expected). In this case, Wall shareholders are entitled to receive, following the return of capital and subject to having the necessary liquidity, a return corresponding to the € 100,000 initially estimated. Holders of other types of units (such as, for example, founding members) will get, pro rata, the additional profit, which corresponds to the remaining € 10,000.
To this initial assumption, the following cases are added:
Case History A.
The project ends under the same conditions as above but with a one-month delay, reaching a total length of 25 months.
If the above documents specify that the Issuer is required to pay an amount, by way of interest payment, up to a minimum amount "equal to the gross annualized ROI," the following situation will occur: after returning the invested capital and up to available liquidity, the Issuer Company pays € 104,000 in profit to Wall shareholders, given the one-month delay, and no longer just € 100,000.
Case Study B.
The project takes 25 months to be concluded. If the above documents specify that the Issuer is required to pay an amount, by way of interest payment, up to a minimum amount equal to "total gross ROI," the following situation will occur: after returning the invested capital and up to available liquidity, the Issuer Company pays € 100,000 in profit to Wall shareholders. In this case, the month of delay does not affect the total profit distributed.