Update 1: Purism states on their website in a March blog post that there is one production run that covers the entirety of late 2019 – mid 2021. So, it is actually possible to accomplish. https://puri.sm/posts/where-is-my-librem-5-part-3/ This also makes some of the production timing mentioned below much more innocent even if calling it “In Stock” within two months in a pitch to investors seems to be a stretch. If Purism was willing to keep the “52 week lead time” visible to customers out of uncertainty, investors shouldn’t receive much better-looking alternative statements. (This also does not address whether the original 2019, or 2021 sales, were more questionable than the current 2023 sale for what they would be used for.) However, it does not address that the requirement of Accredited Investor status is not a “good faith” requirement as far as I can find, and this still could be an illegal securities sale.
Original article below
I just got this email (and an email like it) for the second time in just over a week from Purism:
Purism Supporter [sic],
5% bonus on any investment into Purism [sic], helping advance our social purpose mission.
We are contacting you either because you have directly asked us about investing in Purism, are on our newsletter, or a customer whom we thought would be interested in hearing about our investment opportunity. If you are not interested and don’t want any more emails from us, please let us know and we will quickly remove you from this private mailing list.
For the next two months you can earn an additional 5% immediate bonus on any investment.
Products in stock with less than 10 day shipping time:
- Librem 14 laptop
- Librem 5 USA phone (with Made in USA Electronics)
- Librem AweSIM cellular service
- Librem Key security token
- Librem Mini mini desktop computer
- Librem Server a 1U rackable server
Products shipping through backorders and in stock in July, 2023:
- Librem 5 phone
Products planned to arrive within the year:
- Librem 16 laptop
- Librem 11 tablet
With this investment opportunity we are accepting increments starting at $1000 and allow for easy cart checkout to invest. We invite you to get more information on this investment round including the immediate 5% bonus. Find out how to invest, where we will use the funds, and our current progress in this round at our private investment page at https://puri.sm/ir/convertible-note/.
CEO and Founder
OK… first off. Going anecdotally from what I’ve heard through the grapevine, claiming that the Librem 5 will be in stock by July seems extremely ambitious, if not impossible. Anecdotes on Hacker News talk about having received orders from 2019 just weeks ago. Heck, the Purism website right now lists it as having a 52 week lead time. So why does the email to their investors say it will be in stock in just 8 weeks, whereas their website says 52 weeks? It can’t be confusion with the USA model either – that has a backlog according to the website of just 10 days.
So, putting that potentially illegally misleading statement to potential investors aside, look at this next bit from their investment page:
Has there been previous investment?
Purism has grown mostly from revenue, however, Purism announced closing $2.5m in notes in December 2019. Purism has raised over $10m in total all under convertible note terms.
That’s… incomplete. Purism also did this in 2021, which they disclose in the actual legal document and earlier on the web page if you have your eyes open, but not the FAQ. And people were (anecdotally) complaining then about having not received four-year-old orders. Why is this such a big deal? Look at what they are going to do with your investment:
What are the funds used for?
As stated above, we will use the investment funds for parts procurement in preparation for large production run of stock, as well as continuing development of all our freedom respecting revolutionary software stack, and for more convergent applications in PureOS for the Librem 5 phone.
Excuse me… does this almost look like some form of Ponzi scheme if the anecdotes are true? Purism raised $2.1 million from orders from the Librem 5. Then they sold this form of “stock” to get more cash in 2019, and 2021, and now 2023. They are openly saying right now the cash raised will go to ordering parts for a large production run, which will complete orders from 2019. As this community shipping date estimation thread on their own forum shows:
Now, I can’t go on anything more than a hunch. But my hunch is that Purism is using investor funds to subsidize orders, and selling “convertible notes” to do the job. Is that illegal? I am not a lawyer, and at least it’s pretty clear if you really go digging, so it probably is legal. But is it shady? Or at least Unsustainable? Plus, if I am an investor… how does it feel, knowing your cash is most likely just going to dig them out of a money pit and not actually work on growing the company otherwise? Is that not just a tiny bit misleading, for being a morally superior “Social Purpose Company”?
But then there’s one more problem. That email I got. Once again in the FAQ:
Am I an Accredited Investor?
For US Citizens, this is a good faith requirement, since there is no way for Purism to validate your accredited investor status, by investing you are stating you are an accredited investor that is defined as meeting any one of the following: earned income that exceeded $200,000 (or $300,000 together with a spouse or spousal equivalent) in each of the prior two years, and reasonably expects the same for the current year; OR has a net worth over $1 million, either alone or together with a spouse or spousal equivalent (excluding the value of the person’s primary residence); OR holds in good standing a Series 7, 65 or 82 license; OR any trust, with total assets in excess of $5 million, not formed specifically to purchase the subject securities, whose purchase is directed by a sophisticated person; OR certain entity with total investments in excess of $5 million, not formed to specifically purchase the subject securities; OR any entity in which all of the equity owners are accredited investors.
Purism, there’s no way for me to invest legally, even if I wanted to. So why are you emailing me soliciting investment? Why don’t your emails clearly say “US Citizens who make under $200K yearly cannot invest”? How does that even jam with the SEC rules on soliciting as this helpful Reddit thread points out?
It’s my understanding that if Purism offers/advertises the investment in a public manner (a “general solicitation” … and I think that this counts as a general solicitation https://puri.sm/ir/convertible-note/ ), they must satisfy Rule 506c or Rule 506b and must take reasonable steps to verify the “accredited investor” status ( https://www.sec.gov/smallbusiness/exemptofferings/rule506c ):
Some requirements of Rule 506c:
all purchasers in the offering are accredited investors
the issuer takes reasonable steps to verify purchasers’ accredited investor status and
While Rule 506b doesn’t require everyone to be an accredited investor, they can only have up to 35 investors (in a calendar year), but Purism “must reasonably believe” the non-accredited investors have “such knowledge and experience in financial and business matters that he is capable of evaluating the merits and risks of the prospective investment”
(Here is the text for Rule 506: https://www.law.cornell.edu/cfr/text/17/230.506 ).
My guess, though, is that they might be trying to fall under Rule 504 … where the disclosure and verification rules are more lax. However you can’t fall under Rule 504 if the offer is public … and I think that having the offer on a publicly accessible website is a violation. That said, I’m not 100% sure about what counts as a “general solicitation”. See: https://kkoslawyers.com/what-to-be-aware-of-in-the-friends-and-family-round-of-financing/ . The actual rule is https://www.law.cornell.edu/cfr/text/17/230.504
So, let’s say I could get past all of that. Let’s say I could get past all these red flags and questions, and the fact that the solicitation might be illegal, and the lack of actual checking who the buyers are may also be illegal. The elephant in the room:
What is my note worth?
The note is worth the amount you invested, it is debt owed to you. It also earns 3% annually, and upon conversion will earn an additional 8%, at which point you will be a shareholder of Purism, SPC.
There are a lot better ways to make 3% interest. My bank account with Discover gets 3.75%. I could do an 18-month CD with them to get 4.75%. I will get 8% when my note converts… in stock for the company, if I’m understanding it correctly; so I’d have my $1000 investment in Purism become worth $1,080 of stock at an unclear valuation. However, if all investments are just going to fill a backlog, how much is the company actually worth? Is my $1,080 stock going to be calculated based on how much other people invested, resulting in (arguably) a very inflated valuation?
Consider this thought experiment. Not being an economist or lawyer myself, just doing my best to understand, consider a company named X. X is worth, normally, $1 million. X sells $5 million worth of product for $2 million by mistake. X sells $3 million worth of stock to cover the gap, and convinces everyone that the company is now worth $4 million because of the prior $1 million valuation + $3 million worth of stock sold, even though basically nothing changed with the company’s actual value from before once the orders are finished. If there was a free market, that would quickly be discovered and tank the valuation back to being much closer to $1 million and shred the equity value. Which might be why Purism really doesn’t want you selling your notes:
Can I sell my note?
Not easily. The best way to look at convertible notes is to consider them long term investment in the future growth of a social purpose company you desire to see grow and reap the future benefits from its success. It is possible to transfer (e.g. sell) the note to other parties but that would be done separately and independently by you, notifying Purism of the legal transfer of ownership.
Now, is this all of this combined illegal? I don’t know. But icky? Definitely feels like it. Directly going to people trying to sell “convertible notes” with a misleading statement about your ludicrous backlog, and no notice in the solicitation that US individuals cannot buy them, and open admission that they do not themselves check if their buyers are from the US despite what the SEC rules appear to be (almost begging for people to ignore the notice if they read it), all looks as sketchy as heck to me.
And so, while this is not financial advice, and I know that saying I am not a financial advisor has very little legal merit, I would advise that anyone investing in Purism view it equivalently as a Moody’s C or an S&P D. View it as a donation, not a investment.