If you are seeking private capital from a number of investors then you may be required to use a private placement memorandum. This document, informally known as a PPM, showcases your business, the risks associated with investing in your company, what you intend to do with the money that you are seeking, and other disclosures that are required by law when you are seeking to acquire capital from private accredited investors. One of the primary differences between raising capital from one investor versus a number of investors is that when you use a PPM – you are considered to be selling private securities.
Before we discuss this matter any further, it should be noted that your private placement memorandum should only be drafted by a qualified attorney that is very well versed in securities law. Although their are firms that are not lawyers that offer this service, it is in your best interest to always use an attorney to draft a PPM or any other legal document for this matter. In the event that there is a dispute as it relates to the sale of a private security then the attorney that drafted the document will need to answer why or why not certain provisions were dealt with in the document.
At the time of this writing, only individuals that are considered accredited investors may invest in companies that are offering securities via private placements. However, that will soon change once the Securities and Exchange Commission adopts the new legislation pertaining to the JOBS Act. This new piece of legislation allows any individual to purchase securities of a privately held business. It also allows entrepreneurs to raise capital via private offerings that have a moderate amount of marketing to the general public.
It should be noted that there are number of exemptions that apply to using a private placement memorandum and marketing your capital raising activities to the general public. The regulations primarily are guided by Regulation A, the 504 rule, and the 506 rule. If you are offering your securities specifically within an intrastate capacity then you may be able to openly marketing your securities for sale provided that your state allows it and then all individuals that are acquiring your securities are residents of the state in which you are operating. While this may seem very attractive, in regards to being able to opening market your securities, there are a number of restrictions of the things that you can do when it comes to raising capital in an intrastate capacity. Most importantly, if you are seeking an amount of capital more than $1,000,000 then you are going to be limited.
In regards to other general regulations regarding the usage of a private placement memorandum – you are limited by the number of people that can invest in your business. At the time of this writing, typically you can only raise capital from a maximum of 99 people or entities that qualify as accredited investors.
On a side note, not everyone you solicit capital from needs to meet the accredited investor required. There are some provisions allowed for individuals, who do not meet the safe harbor test, to still invest into private securities. Generally, these individuals have substantial financial acumen and are actively engaged in small business investment. However, these people do fall out of the safe harbor rule, and if you have qualified investors placing capital with your business then you should make sure that you have an extensive questionnaire prepared that makes sure that they fully understand the risks associated with the investment. Your attorney will be able to provide you with a subscription agreement that allows for non-accredited investors to invest in your business, as a private funding source, without meeting the standard.
As it relates to the standard of being an accredited investor, the SEC requires that an individual have a net worth of $1,000,000 or more (excluding a primary residence), an income of $200,000 (with the expectation of earning the same or more income in the next two years, or a bank or investment trust that has investible assets exceeding $5,000,000. If the individual is married, then the combined income of the couple must exceed $300,000 per year. Again, the JOBS Act has drastically changed who can invest in small businesses or private securities. As such, you should consult with your legal counsel as to the current definitions of who can place money in your private venture.
Often featured in your private placement memorandum is your business plan. Although a business plan is not a legal document (as it does not have the necessary risk disclosures), it is often included in the PPM in order to allow investors to see how you intend to market your business to the general public and applicable market research. Typically, it is part of the binder or pitch book that is provided to a potential investors.
Once you have your private placement memorandum drafted, you are now ready to approach investors. However, like many new entrepreneurs, your ability to have access to people that can invest in your business is probably limited. This is you can use an introducing broker or capital introduction firm. For a fee (and a substantial one at that), you can hire a firm that will provide your PPM and business plan to people that are properly qualified to invest in new business ventures. These capital introduction firms or PPM brokers are able to effectively raise capital on behalf of their clients. However, their fees can be extremely expensive. At minimum, you can expect that a private placement broker will want a fee equal to 10% of the total amount that they are able to secure for your business. Most importantly, many of these brokerages work on a best efforts basis. This means that they are not required, unlike investment banks, to guarantee that the total amount of capital you are seeking will be secured. However, most private placement memorandums often contain a clause that allows for a minimum amount of capital to be raised so that anyone that commits to the subscription agreement must provide your business with the capital that you requested. Generally, this amount is usually about 75% of the capital that you are looking to raise. This amount can differ depending on the type of business you are running. For instance, if you are operating a service based business then you will find that the minimum capital threshold can be less. If you are operating a capital intensive business then you may need to raise the entire amount of capital that you are seeking in order to launch your business operations.
As it relates to using private placement brokerage or capital introduction firm, it should be noted that they are not inexpensive. Usually, these companies will charge 10% of the total amount raised. As such, you should build this cost into your capital raising activities. Although these firms are expensive, they are very effective at securing the capital that you are seeking for your business. It should be noted that there may be some modest upfront fees as it relates to distributing your PPM to potential investors. However, a vast majority of these fees should be borne by the private placement broker or capital introduction firm. You should only be responsible for applicable legal costs as it relates to your operations. These companies are charging you a substantial fee for their services, and as such they are taking the risk that they will not be able to raise capital for your new business venture.
As an alternative to using a private placement brokerage, you may want to consider approaching a small business investment company or SBIC, which is licensed by the Small Business Administration to make investments directly into small businesses. These companies raise capital from private investors with the intent to invest in selected types of small businesses. Additionally, they are able to use debt funds – secured by US government guarantees – that allows them to leverage their return on investment. If you decide to go down this route then you will not need a private placement memorandum. All small business investment companies are considered accredited investors and you can approach them directly with your business plan. Additionally, they do not take any fees when they place capital with your business. Most importantly, as they are vested in your business venture they want to make sure that any costs related to you raising capital is kept to an absolute minimum. One of the other benefits of working with a SBIC versus raising capital with a private placement memorandum is that you will be able to have access to extremely knowledgeable entrepreneurs that will provide your business with a wealth of experience. In many instances, these investors will act as mentors for your business as your develop your operations. Generally, people that have invested in your business do not charge for advice that they provide to you and your firm.
In closing, using a private placement memorandum is the proper way for you to legally raise capital from a number of private investors. However, this process can be very expensive and you should be prepared to bear the costs associated with raising capital via this type of avenue. One of the best pieces of advice we can give as it relates to using a private placement is that you should thoroughly discuss your capital raising options with your certified public accountant. Given the large expense of raising capital from private funding sources, it may be in your best interest to see what alternatives may be available to you when you are seeking capital. You may qualify for a SBA loan or conventional business loan, and as such – you may not need to raise capital from private investors. Additionally, if you are a candidate for a business loan then you will not need to give up any equity in your business. For many business owners that have raised private investment capital, they often find that over the long haul, it is difficult to run their business the way they want to given the return on investment demands by the individuals that funded your business. As always, you should think ahead substantially before using a private placement to fund your existing business or new business startup.
Private Placement Memorandum Sample
Sample Company, Inc.
Please note that the sample private placement memorandum in this guide is not to be used as consulting, accounting, or legal advice. The following information is provided with the understanding that this sample is not a substitute for professional advice, and is merely for informational purposes. This website is not responsible for the use of any information contained below or for the factual accuracy of any statements made below. If you are raising capital, we strongly urge you to hire a qualified attorney and a certified public accountant to assist in the process.
Sample Company, Inc.
Offering: 2500 Units
Purchase Price: $1000 Per Unit
Minimum Investment for New Subscriptions: $150,000
Minimum Investment for Additional Subscriptions: $25,000
Total Offering Amount: $2,500,000
Maturity Date of Debt Security: January 31st, 2021
THIS OFFER IS LIMITED TO ACCREDITED AND QUALIFIED INVESTORS. SEE INVESTOR SUITABILITY STANDARDS.
Sample Company Inc, a Delaware corporation (the “Company”), is offering for sale a minimum of 150 units (“Minimum”) and a maximum of 2500 units (“Maximum”). Each Unit represents a structured debt interest in the Company which is referred to as a “debt interest” in the Company which is determined by a fraction, the numerator of which is the amount of the Investor’s (or “Debt Holders” or “Creditors”) Capital Account (as hereinafter defined) and the denominator of which is the aggregate value of all Investors’ Capital Accounts at any given time. All rights as a Investor will be based on the particular Investor’s Percentage Interest. See “Summary of Operating Agreement.”
This Offering will continue until the earliest of: (i) the date on which the Maximum has been sold; (ii) January 31, 2015, unless the Offering has been extended by the Company in its sole discretion and without notice to any subscribers (maximum extension to January 31, 2018); and (iii) an earlier termination date determined by the Board of the Directors (the “Final Closing”). The Company will hold an initial closing of the Offering at any time after subscriptions for the Minimum have been received and accepted (the “Initial Closing”). The Company will hold additional interim closings after the Initial Closing (each an “Interim Closing” or a “Closing”). Pending each Closing, each prospective Investor’s payment for Units will be deposited in a segregated account with City Bank Bank, N.A in Delaware City, Delaware. See “Plan of Placement” and “Subscription Procedures.”
(1) The Units offered hereby will be sold to not more than 99 Investors (comprised of “accredited investors,” as that term is defined in Regulation D of the Securities Act of 1933, as amended, and not more than 35 other Investors who satisfy all of the criteria for Qualified Non-Accredited Investors set forth in this Memorandum). See “Investor Suitability Standards” and “Plan of Placement.”
(2) See “Use of Proceeds.”
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS MEMORANDUM. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SECURITIES OFFERED HEREBY ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY WILL BE REQUIRED TO BEAR THE FINANCIAL RISK OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME.
THIS CONFIDENTIAL PRIVATE PLACEMENT MEMORANDUM (“MEMORANDUM”) WAS PREPARED FROM INFORMATION PROVIDED BY THE COMPANY. THE COMPANY’S AGENTS HAVE NOT INDEPENDENTLY VERIFIED THE INFORMATION CONTAINED IN THIS MEMORANDUM OR OTHERWISE MADE AVAILABLE TO PROSPECTIVE INVESTORS IN CONNECTION WITH ANY FURTHER INVESTIGATION OF THE COMPANY, AND THEREFORE, THEY MAKE NO REPRESENTATIONS OR WARRANTIES AS TO THE ACCURACY OR COMPLETENESS OF SUCH INFORMATION. FURTHERMORE, BECAUSE THIS MEMORANDUM REFLECTS THE COMPANY’S CURRENT KNOWLEDGE AND INFORMATION, NOTHING CONTAINED IN THIS MEMORANDUM IS, OR SHOULD BE RELIED ON AS A PROMISE OR REPRESENTATION AS TO THE COMPANY’S FUTURE PERFORMANCE.
THE INFORMATION CONTAINED IN THIS MEMORANDUM IS CONFIDENTIAL, PROPRIETARY TO THE COMPANY AND PROVIDED TO PROSPECTIVE INVESTORS IN THE COMPANY SOLELY FOR SUCH INVESTORS’ CONFIDENTIAL USE IN CONNECTION WITH THE COMPANY’S PRIVATE OFFERING (THE “OFFERING”) OF UNITS. THIS MEMORANDUM IS FURNISHED ON THE EXPRESS UNDERSTANDING THAT WITHOUT THE PRIOR WRITTEN PERMISSION OF THE COMPANY, SUCH PROSPECTIVE INVESTORS WILL NOT RELEASE, COPY, DISCUSS OR USE THIS MEMORANDUM OR THE INFORMATION CONTAINED HEREIN FOR ANY PURPOSE OTHER THAN EVALUATING A POTENTIAL INVESTMENT IN THE UNITS. BY ACCEPTING DELIVERY OF THIS MEMORANDUM, EACH PROSPECTIVE INVESTOR AGREES TO RETURN THIS MEMORANDUM AND ANY OTHER DOCUMENTS OR INFORMATION FURNISHED BY THE COMPANY IF THE PROSPECTIVE INVESTOR DECLINES TO PURCHASE ANY UNITS.
THIS OFFER CAN BE WITHDRAWN AT ANY TIME BEFORE CLOSING AND IS SPECIFICALLY MADE SUBJECT TO THE TERMS DESCRIBED IN THIS MEMORANDUM. THE COMPANY RESERVES THE RIGHT TO REJECT ANY SUBSCRIPTION, IN WHOLE OR IN PART, FOR ANY REASON WHATSOEVER OR TO ALLOT TO ANY PROSPECTIVE INVESTOR LESS THAN THE NUMBER OF UNITS SUBSCRIBED FOR BY SUCH PROSPECTIVE INVESTOR. REJECTED SUBSCRIPTIONS WILL BE PROMPTLY RETURNED TO THE SUBSCRIBER WITH THE AMOUNT OF THE REJECTED SUBSCRIPTION FUNDS.
THIS MEMORANDUM DESCRIBES THE COMPANY, ITS BUSINESS PLAN, AND THIS OFFERING. PROSPECTIVE INVESTORS SHOULD CAREFULLY EVALUATE THE “RISK FACTORS” DESCRIBED IN THIS MEMORANDUM. PRIOR TO THE COMPLETION OF THE OFFERING, THE COMPANY WILL GIVE PROSPECTIVE INVESTORS THE OPPORTUNITY TO ASK QUESTIONS OF AND TO RECEIVE ANSWERS FROM THE COMPANY ABOUT THE TERMS AND CONDITIONS OF THE OFFERING, THE COMPANY OR ANY OTHER RELEVANT MATTERS, AND TO OBTAIN ANY ADDITIONAL INFORMATION TO THE EXTENT THE COMPANY POSSESSES SUCH INFORMATION OR CAN ACQUIRE IT WITHOUT UNREASONABLE EFFORT OR EXPENSE.
THIS MEMORANDUM CONSTITUTES AN OFFER ONLY TO THE OFFEREE WHOSE NAME APPEARS IN THE APPROPRIATE SPACE ON THE COVER PAGE HEREOF AND TO WHOM THIS OFFERING MEMORANDUM IS INITIALLY DISTRIBUTED BY THE COMPANY. THIS MEMORANDUM DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. EXCEPT AS OTHERWISE INDICATED, THIS MEMORANDUM SPEAKS AS OF THE DATE HEREOF. NEITHER THE DELIVERY OF THIS MEMORANDUM NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY AFTER THE DATE HEREOF.
THIS MEMORANDUM CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS OR STATEMENTS WHICH MAY BE DEEMED OR CONSTRUED TO BE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1996 WITH RESPECT TO THE FINANCIAL CONDITION AND BUSINESS OF THE COMPANY. THE WORDS “ESTIMATE,” “PLAN,” “INTEND,” “EXPECT,” “PROPOSED,” AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. THESE FORWARD-LOOKING STATEMENTS INVOLVE AND ARE SUBJECT TO KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH COULD CAUSE THE COMPANY’S ACTUAL RESULTS, PERFORMANCE (FINANCIAL OR OPERATING) OR ACHIEVEMENTS TO DIFFER FROM THE FUTURE RESULTS. INVESTORS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE HEREOF. NEITHER THE COMPANY NOR THE BOARD OF DIRECTORS AND OFFICERS UNDERTAKE ANY OBLIGATION TO PUBLICLY RELEASE ANY REVISIONS TO THESE FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS.
The following summary is qualified in its entirety by detailed information and exhibits appearing elsewhere in this Memorandum. The Units offered hereby involve a high degree of risk. Investors should carefully consider the information set forth under “Risk Factors.”
Sample Company, Inc. (the “Company” or “SC”) is a Delaware corporation. The Company was formed to engage in the business of buying and selling of other companies and other intangible investment instruments, engaging the financing, acquisition, purchase and sale of real estate investments, but not including investment or trading of futures contracts (collectively, “Portfolio Investments”). See “Investment Objectives, Authority and Strategies.” The manager of the investment division of the company is John Smith.. Mr. Smith is the chief executive officer and a director of Sample Company, Inc. All decisions regarding the trading of the Company’s Portfolio Investments will be made by Mr. Smith and Mr. Smith, in their discretion.
The Company’s objective is to achieve capital appreciation in its stockholder’s equity, through active ownership of subsidiary companies, and the financing, acquisition, purchase and sale of varying real estate investments including mortgage backed securities and collateralized debt obligations. See “Investment Objectives, Authority and Strategies.”
Sample Company, Inc. (“Sample Company, Inc or SC”) is a Delaware corporation. The official address of the Company is located at 100 Main Street, # 200, Delaware City, DE 20003.
Summary of the Offering
Issuer: Sample Company, Inc. A Delaware Corporation
Offering Price: $1,000 per Unit
Payment: The purchase price for the Units is payable upon delivery of the Subscription Agreement, in U.S. dollars.
Securities Offered: Each Unit consists of a portion of the total structured debt offer. The maximum amount of capital to be raised is $2,500,000. As stated before, the Board of Directors has the right to expand, extend, reduce, or cancel this offering at anytime. The percentage interest held by an investor for this structured finance debt will be determined by dividing the amount of capital received from an investor by the total amount of capital raised in this offering. This number will then be multiplied by 100 to determine the percentage of interest payments owed to the individual investor. Please refer to the section titled “Operating Agreement – Disbursement and Calculation of Interest Payments Owed to Investors” for more information regarding the exact nature of this structured debt offering.
The Offering: The Company will offer for sale and sell the first Unit on a “best efforts” “all or none” basis. The remaining Units, up to 2,500 ($2,500,000), will be offered for sale on a “best efforts” basis. The Units offered hereby will be sold to not more than 99 Investors (comprised of “accredited investors,” as that term is defined in Regulation D of the Securities Act of 1933, as amended (the “Securities Act”) and not more than 35 other Investors who satisfy all of the criteria for Qualified Non-Accredited Investors set forth in this Memorandum). See “Investor Suitability Standards.”
The Offering will continue until the earliest of: (i) the date on which the Maximum has been sold; (ii) January 31, 2015, unless the Offering has been extended by the Company, in its sole discretion and without notice to any subscribers, with a maximum extension to January 31, 2020; or (iii) an earlier termination date determined by the Board of Directors in its sole discretion (the “Final Closing”).
The Company, the Board of Directors, and its Affiliates reserve the right to purchase any amount of Units for their own accounts. Any such purchases by the aforementioned parties or its Affiliates shall be for the same price and subject to the same terms and conditions as all of the Units sold by the Company pursuant to this Memorandum. As an owner of the Units, the Company or its Affiliates shall be entitled to all allocations of Interest Payments and voting rights attributable to any such Units. See “Plan of Placement.”
After the commencement of business upon the closing of the sale of the Minimum of 150 Units ($150,000), the Company intends to continue offering Units until the Maximum 2,500 Units ($2,500,000) is sold, subject to applicable securities laws (the “Continuous Offering”). During the Continuous Offering, the minimum subscription amount for new subscribers remains at one hundred and fifty thousand dollars ($150,000) (One Hundred and Fifty Units), but additional subscriptions from existing Investors shall be in increments of at least twenty five thousand dollars ($25,000). The foregoing notwithstanding, the Company reserves the right in its sole and exclusive discretion, to accept new and additional subscriptions for lesser amounts. Both new and additional subscriptions must be received at least five (5) business days before the end of the month. See “Summary of the Offering — Withdrawal of Funds and Purchase of Additional Units.” Either subscription will be accepted effective as of the close of business on the last business day of the month in which the subscription is received and until such acceptance, the subscription amount will be held in a segregated interest bearing escrow account. The subscription amount will be disbursed to the Company on the first (1st) business day of the month.
Closings: The Company will hold an Initial Closing of the Offering at any time after
subscriptions for the Minimum have been accepted. The Company will hold additional Interim Closings from time to time after the Initial Closing. Pending each Closing, each prospective Investor’s payment accompanying the Subscription Agreement will be deposited in a
segregated escrow account with Citibank Bank, N.A.. See “Plan of Placement” and “Subscription Procedures.”
Use of Proceeds: All of the proceeds from this Offering will be used to finance the acquisition of debt, equity, and arbitrage investments for the Company. No part of this loan will be used to finance any operating activity of the company. All proceeds must, by virtue of this contract, be used to purchase a resalable investment asset.
Allocation of Interest
Distribution: The Company will maintain a Capital Account for each Investor (a “Capital Account”). Each Investor will receive a credit for his/her/its Capital Contribution (i.e., the amount the Investor paid for the Units purchased) to the Investor’s Capital Account. The proportion of an Investor’s Capital Account to the aggregate value of all Investors’ Capital Accounts shall be the Investor’s Percentage Interest in this structured debt offering. The Company will also maintain Capital Accounts for tax purposes in accordance with the Internal Revenue Code requirements. The Company will allocate its interest payments owed to the investors in a manner similar to the allocation of distributions of available cash.
Withdrawal of Funds
and Purchase of
Additional Units: This Agreement allows Investors to withdraw a portion (maximum amount of withdrawal described below) of the Investor’s Capital Account as set forth below; provided however, the minimum allowed withdrawal shall be not less than $10,000. Investor withdrawals may not be made for thirty six calendar months (Three Years) after investment. Thereafter, an Investor may request to withdraw his/her/its a portion (but not less than $10,000) of his Investor Capital Account balance on the first (1st) or fifteenth (15th) day of each month after the investment is held for three years from the date of purchase. To do so, the Investor must give the Company no less than five (5) business days notice to withdraw the specified amount from the Investor’s Capital Account on the appropriate withdrawal date. Withdrawals of capital and the payment of the value of an Investor’s Capital Account will be made in cash. The Company guarantees that after thirty six calendar months or three years from the date from when the investment was purchased, that an Investor whom purchased this offering will receive, in full, all capital contributions to the Company. This security represents a debt interest in Sample Company, Inc. and therefore at the time when this investment contract expires, the Investor shall be entitled to a payment equal to the aggregate sum of contributions made. However; if the Investor has purchased additional Units after his/hers/its initial purchase, the Investor must wait for those Units to reach a maturity of thirty-six months or three years from the date the additional investment was purchased before the Investor will be permitted to make withdrawals from the original capital contribution for those Units. In addition, the transferability of the Interests and Units will be restricted by the provisions of federal and state securities laws, and transfers are prohibited except with the prior approval of the Board of Directors.
An Investor may purchase additional Interests and new investors may purchase Interests in the Company on the first (1st) day of each month. See “Plan of Placement” and “Summary of the Offering — The Offering.” To purchase additional Units, five (5) days prior to the end of any month, the investor must deliver to the Company a check payable to Sample Company, Inc. Such funds will be held in said bank account until the opening of business on the first business day of the next month at which time, the funds will be disbursed to the Company from said bank account and invested along with the other assets of the Company.
of Debt Interests: As this investment represents a debt interest in Sample Company, Inc and not an equity interest, investors and debt holders will have no voting capacity in regards to all of the operations of the Company. This debt security only entitles the purchaser or holder of the security a stream of interest payments made by the Company on a quarterly basis. See “Interest Payment Calculation and Payment Disbursement” for more details.
To SC: Sample Company, Inc. will receive no compensation relating to this offering. Sample Company, Inc. intends to invest the proceeds – for profit – in real estate investments. Sample Company, Inc. is entitled to all profits after all other liabilities have been paid to the Investors of the Company.
The Units and Interests of this structured finance contract are restricted securities under the Securities Act and applicable state securities laws and, therefore, may only be transferred pursuant to the registration requirements of federal and state securities laws or pursuant to an exemption from such registration requirements. Holders are advised to securities. See “Risk Factors – Withdrawals and Illiquidity of the Investment in the Units.”
An investment in the Company should be viewed as a risky investment. It is not intended as a complete investment program and is designed only for Investors who have adequate means of providing for their needs and accounts, who are financially able to maintain their investment and who can afford a loss of a substantial portion of their investment. There can be no assurance that the Company will achieve any of its objectives. See “Risk Factors.”
Information About the Company
Sample Company, Inc. was organized in December 2005, as a Delaware for Profit Corporation. The company’s official address is located at 100 Main Street, # 200. Delaware City, DE 20003. See “Available Information.”
This Offering involves a high degree of risk. This Memorandum contains certain forward -looking statements. Actual results could differ materially from those projected in the forward-looking statements as a result of certain of the considerations set forth below and elsewhere in this Memorandum. The following risk factors should be considered carefully in addition to the other information contained in this Memorandum before purchasing the Units offered hereby.
Risks of Real Estate Investments. The business of actively managing real estate and investments involves numerous risks. If the Company’s trades are delayed, the Company may be unable to effect the trade at the desired price, if at all. If the broker used by the Company to execute sales does not make fast, timely executions and confirmations of the Company’s trades to the Chief Executive Officer (“CEO”; The CEO of Sample Company, Inc is responsible for the management of the company’s investment portfolio), then the CEO will have no way of knowing if the Company is in or out of a position and this lack of information about a trade can cause a loss to the Company. If the CEO places an order to purchase or sell a particular security or investments “at the market rate” the Company is agreeing to purchase or sell the specific number of shares of that security at the price at which a matching sale or purchase can be found on the exchange at the time that the order is received on the trading floor of the exchange. If the broker used by the Company does not timely place the order and execute the trade, the Company may be purchasing or selling the security at a higher or lower price than the intended purchase or sale. This may result in part because the market price of the security can move quickly. The securities and investments held by the Company will regularly fluctuate in value; therefore, there can be no assurance that the Company will maintain a stable net asset value over a short period of time.
The Company plans to make varying real estate investments. These investments include the purchase and financing of whole structures and mortgage interests and mortgage bonds collateralized by real estate. The Company plans to use leverage in conjunction with these investments, which greatly increases the risks associated with these investments. In the event that the market loses value, the Company could sustain losses that exceed the net capital of the Company. There are many risk factors that are faced when investing in real estate including but not exclusive to: interest rate risk, tenant default risk, and market value risk.
Risks Relating to Markets. As the securities, options, investments, etc. in which the Company invests are traded on exchanges or over-the-counter, the value of such investments and the risks associated therewith vary in response to events that affect such markets which are beyond the control of the Company. Market disruptions such as those that occurred during the fourth quarter of 1987 could result in substantial losses to the Company.
Lack of Prolonged Operating History. The Company was formed in 2005 and has no history upon which Investors may evaluate the potential performance and stability of the Company. However, the consulting and accounting portion of the business has been in operation for over one year and has been run profitably. See “Management.”
Potential Lack of Diversification; Industry Concentration. The size of the Company makes it unlikely that the Company will be able to commit its funds to the acquisition of real estate of a large number of markets or that the Company will be able to achieve the same level of diversification as larger entities engaged in similar investment activities. This will be the case in the event that subscriptions are received for the Minimum or slightly more. Additionally, from time to time, the Company’s investments may be concentrated in a particular industry, group of industries or individual issues. In either such event, the Company’s investment portfolio may be subject to greater risk than if its Portfolio Investments remained consistently diversified among various companies, industries and types of investments. Also, if the Portfolio Investments are concentrated in too few real estate investments, the risks will increase because of the reliance on a small number of trades to make a profit. In either such event, the risk of loss would be highly concentrated in that small number of companies, or small number of industries or limited number of securities as opposed to disbursed over a larger number of companies in a larger number of industries and in more varied types of securities. If the Company’s analysis of those companies, industries or securities is flawed, there is a higher risk if the Company’s assets are concentrated than if they were diversified over numerous companies, industries and types of securities.
Reliance on the expertise of the Management: REDACTED
Risks Associated with Strategies and Methodologies. Generally every investment firm has its own strategies and methodologies for trading securities and conducting trades. If the Company’s strategies and methodologies are flawed or become flawed or outdated, there is an increased risk that the use of such strategies and/or methodologies will result in a loss to the Company. The Company, based on its strategies and methodologies, may misjudge the entry point into the market of a certain security. In such event, the Company may choose to initiate the position in a particular security by inaccurately assessing the entry point, which is critical to ensure that there is price movement between purchase and sale. If the Company does not effectively use stop loss placement, which triggers the highest or lowest price at which the Company will buy or sell the securities in question, then this poses a risk of loss to the Company. There is a further risk of loss to the Company if the CEO/Trader does not optimally manage profitable securities transactions by failing to invest enough of the Company’s assets in those types of successful transactions or poorly invests the proceeds from profitable trades. See also “Lack of Operating History.”
Effects of Larger Positions in any Investment. To the extent the Company takes larger positions in the securities of particular companies or real estate investments, it may experience difficulty in making and liquidating its investment without adversely affecting the prices at which it buys and sells the securities.
Conflicts of Interest. REDACTED
Negotiation of the Operating Agreement. The Board of Directors has generally determined the terms of the Company’s Operating Agreement (Use of Funds), which were not negotiated on an arm’s-length basis. In addition, legal counsel for the Company has not acted as counsel for or represented the interests of the Investors. Potential Investors should consult with their own legal counsel with respect to the Company.
Financial Statements. Because the Company is newly formed and will not formally commence operations until the Minimum subscriptions are received and accepted, no financial statements of the Company have been prepared or included in this Memorandum. Accordingly, prospective Investors will be required to make their investment decision without any financial information regarding the Company.
Withdrawals and Illiquidity of the Investment in the Units. Investor withdrawals may not be made for thirty six calendar months after investment or three years from the date from when the investment was purchased, and thereafter may be made only on the 1st and 15th day of a calendar month. See “Repayment of Distributions” and “Summary of the Operating Agreement”. The amount of a withdrawal may also be limited or delayed under certain circumstances and the minimum withdrawal amount is $10,000. In addition, the transferability of Units (and Interests) is restricted by provisions of federal and state securities laws, and transfers are prohibited except with the prior approval of the Board of Directors. There is no public market for the Interests, and none will develop.
Each Investor will be required to represent that he/she/it is purchasing Units for his/hers/its own account for investment purposes and not with a view to resale or distribution. Units and Interests will not be registered under the Securities Act, the Investment Company Act of 1940 or under state securities laws, and are being sold pursuant to specific exemptions under the provisions of such securities laws, which exemptions depend, in part, upon the investment intent of each Investor. An Investor may not transfer his/hers/its Units if the transfer violates federal or state securities laws or affects the status of the Company for federal income tax purposes by terminating the Company or causing it to be classified as a corporation or association taxable as a corporation.
Because of the limitations on withdrawal rights and the fact that the Units are not freely tradable, an investment in the Company is a relatively illiquid investment and involves a high degree of risk. A subscription for Units should be considered only by Investors who have adequate means of providing for their needs and contingencies without expecting distributions or making withdrawals
from the Company, who are financially able to maintain their investment and who can afford a loss of all of such investment.
No Assurance of Interest Payments or Interest Distributions. There is no assurance that future Company investments will be profitable or that any future distribution will be made to the Investors or that Investors will earn a positive return on their investment or that Investors will receive a return of any or all of their initial investment. Any prior successful investment management by Mr. Smith, Mr. Smith and/or their Affiliates, and any future successful Company performance, cannot be relied upon as assuring further successful performance. Any future return on investment to the Investors will depend upon successful investments made for the Company at the direction of the Board of Directors. The value of any such investments will depend upon many factors beyond the control of the Company, and the Board of Directors The expenses of the Company may also exceed its income. The business of actively trading in securities and investing in real estate involves high risk and is subject to losses on a daily basis. Prospective Investors are urged to read this Memorandum and all exhibits hereto carefully and to consult with their personal attorney, accountant and/or business advisor before making an investment decision.
Effects of Withdrawals. Withdrawals by Investors could require the Company to liquidate or close out positions more rapidly than would otherwise be desirable, which could reduce the value of the Company’s assets and cause a resulting reduction the overall capital available to Sample, Inc. These withdrawals may have a significant effect on the ability of SC to continue to pay its interest obligations to other Investors.
Repayment of Distributions. Investors are not personally liable for any debts or losses of the Company beyond the amount of their capital contribution and interest payments received attributable thereto (if any) if the Company is otherwise unable to meet its obligations. However, Investors might be required to repay with interest Company cash or in-kind distributions (including distributions on partial or complete redemption of Investor Interests and distributions deemed a return of capital) received by them to the extent of overpayments, if the Company is insolvent at the time of the payments or if such distributions render the Company insolvent.
Investment Company Act of 1940. The Company intends to avoid becoming subject to the federal Investment Company Act of 1940, as amended. However, it cannot assure Investors that under certain conditions, changing circumstances or changes in the law, it may not become subject to the Investment Company Act of 1940 in the future. Becoming subject to that Act could have a material adverse effect on the Company. It is also probable that the Company would be terminated and liquidated due to the cost of registration and operation under the Act.
Tax Risks. The Federal Income Taxation section, discussed later, describes the Company’s view with regard to certain tax issues that may arise in connection with the Company. The Company cannot guarantee that the Internal Revenue Service (“IRS”) will not take a contrary view with respect to any of such issues. In this section, the Company sets forth certain issues for which the Internal Revenue Service may take a contrary view and the impact on the Investors and Creditors of the Company of such a contrary view. This discussion is not meant to be a discussion of all tax risks facing the Company, and Investors should consult their own tax advisors concerning tax risks involving their own tax situation. In addition, the Company has not received, and does not propose to seek, an opinion of counsel or a ruling from the IRS on any matter set forth herein.
The Board of Directors believes that the Company’s debt should be classified as a bond purchase, and to that end the Board of Directors fully expects that the interest payments and other distributions will be considered ordinary or passive income and subject to the progressive tax system and tax rate that applies to the Investor or Debt Holder. See “Federal Income Taxation.”
Potential Investors should also be aware that the Company is not a so-called “tax shelter” investment intended to generate net losses that could be used to offset income from other sources. Temporary Treasury Regulations provide that the activity of trading personal property, such as securities, for the account of owners of interests in the activity is not considered a passive activity that generates “passive” income. It is, therefore, expected that the cash distributions to investors generated from the Company’s activities will not be classified by the IRS as “passive” income, notwithstanding the general rule that income derived by an Investor is passive in nature. As a result, it is expected that a Investor will not be able to use passive losses from other sources to offset Company interest payments.
Federal and state tax laws are changing continuously as a result of new legislation, new regulations, and new administrative and judicial pronouncements. These changes may affect the Company and its Investors. All tax matters affecting the Company and, through it, its Investors, are and will be subject to such change. Potential Investors should discuss the particular tax implications for them of any investment in the Company with their tax advisors. See
“Federal Income Taxation.”
USE OF PROCEEDS
The Company will receive $2,500,000 if subscriptions are received and accepted for the Maximum offering ($150,000 if subscriptions are received and accepted for the Minimum offering). No selling commissions will be paid for or on account of any subscriptions and the Company will bear the costs and expenses relating to the formation of the Company and this Offering. Accordingly, the gross offering proceeds received from the sale of the Units will be used to purchase Portfolio Investments and to pay for the expenses of such investments.
CONFLICTS OF INTEREST
The structure and proposed method of operation of the Company will create certain inherent conflicts of interest between the Company and its structured debt investors:
Conflicts with Respect to Investment Opportunities
The SC or its Affiliates may serve as directors or officers of or perform investment advisory services for other investment entities with investment objectives and policies similar to those of the Company, such as other businesses that, in the future, may be sponsored or managed by SC or its Affiliates. Such entities may compete with the Company for investment opportunities. Furthermore, SC and its Affiliates may invest directly in investments that would be appropriate investments for the Company. In the case of competing funds controlled by SC or its Affiliates, suitable investment opportunities will be allocated among the Company and such competing funds in proportion to their uncommitted capital. The Company may be a co-investor in Portfolio Investments with SC or its Affiliates. SC will endeavor to resolve conflicts with respect to investment opportunities in a manner deemed equitable to all to the extent possible under the prevailing facts and circumstances.
The Company will have independent management or advisors.
SC will receive no compensation beyond the profits after all financial obligations are met and the investors are paid their scheduled interest payments. No owner or officer of SC will be compensated for any activity relating to the sale of these securities.
FIDUCIARY RESPONSIBILITY OF THE COMPANY
The Board of Directors is accountable to the Company as a fiduciary and consequently must exercise good faith and integrity in handling the Company’s affairs. In the event that the company has become delinquent in its payments to its Investors; an Investor may initiate legal action and recourse to recover the assets of the business. Only in the event of default may an investor initiate legal action to forcibly recover assets from the business.
However; Investors may have the right, subject to procedural and jurisdictional requirements, to bring class actions in federal courts to enforce their rights under the federal securities laws. Furthermore, Investors who have suffered losses in connection with the purchase or sale of Units may be able to recover such losses from the Company where the losses result from a violation by the Company of the anti-fraud provisions of the federal securities laws. Since the foregoing summary involves a rapidly developing and changing area of law, Investors and Debt Holders who believe that a breach of fiduciary duty by the Company has occurred should consult with their own counsel.
This Operating Agreement of the Company indemnifies the Company, the Board of Directors, its officers, and its Affiliates and any agent or employees thereof against liability (including attorneys’ fees) from any loss incurred by them or by the Company resulting from errors in judgment or omissions, unless the acts of the aforementioned parties, its Affiliates and any agent or employees thereof involve fraud or willful misconduct. As a result of these provisions, Investors may be entitled to a more limited right of action than they would otherwise have received absent such provisions in the Operating Agreement of the Company. Investors should note that a successful indemnification of the Company or its Affiliates and principals could deplete the assets of the Company.
In the opinion of the Securities and Exchange Commission, indemnification for liabilities arising under the Securities Act of 1933, as amended, is against public policy and therefore unenforceable.
COMPENSATION AND FEES TO THE BOARD OF DIRECTORS AND CORPORATE OFFICERS
Salaries, Bonuses, and Profit Distributions: The Owners of the Company shall be entitled to all net proceeds of the business after all expenses and interest payments are made to the Investors. The Board of Directors, in its sole discretion, will have authority to allocate profits to its owners and officers. No holder of these securities will be entitled to any profits of the business beyond the interest payments that have and will be described in this agreement.
INVESTMENT OBJECTIVES, AUTHORITY AND STRATEGIES
The Company was formed to engage in the business of actively trading real estate of other companies and other intangible investment instruments (respectively, “Portfolio Investments”) and to employ various investment strategies to achieve capital appreciation on a consistent basis, preserve principal and avert uncontrolled risk. Additionally, the Company will make real estate based investments in both ownership of property and in collateralized debt investments such as mortgages. There can be no assurance that the Company will achieve any or all of these objectives.
The Company will strive to satisfy the following investment objectives: (i) to buy and sell real estate and investments so that the Company derives a profit rather than a loss from the transaction; (ii) to make investments in tangible real estate investments, mortgages – both as individual mortgages, pools of mortgages, and other securities representing an interest in mortgages; (iii) to reinvest the funds from the sales of Portfolio Investments into other securities or investments (which will then also be deemed Portfolio Investments.
The Company, its Board of Directors, and authorized traders and Affiliates will have the sole authority to determine whether a prospective investment is reasonable for the Company’s portfolio. No holder of these offered securities will have the right to decide or reject any investment that the Company, its Board of Directors, or authorized personnel feels is a worthy investment.
The Company’s Investment Strategies
General. All investment decisions for the Company will be made by the Board of Directors and the Chief Executive Officer. In pursuit of the Company’s investment objectives, the Company currently anticipates using a number of investment strategies, methodologies and vehicles. The Company’s actual portfolio mix at any given time will be driven by current market conditions and relative risk/reward characteristics of the particular investments. The Company may from time to time use the recommendations of a number of established market analysts and advisers to assist it in its primary investment decisions. Such analysts and advisers use fundamental and/or technical and/or behavioral analyses as the bases for their recommendations. Fundamental analysis generally includes comparisons of price-to earnings ratios versus anticipated growth rates, and current capitalizations versus book values.
The strategies that the Company intends to use include the following:
(i) making investments in tangible real estate investments and mortgages. The Company’s mortgage investments may include, but are not limited to, individual mortgages held on property or other collateral, pools of mortgages arranged or unarranged by the Company, or other securities representing an interest in a pool or mortgages or a single mortgage;
(ii) making investments in privately held companies with both debt and equity investments into these entities.
The Company reserves the right to alter any Company investment policy or strategy as it deems appropriate from time to time in its discretion.
Cash Positions. The Company’s funds (other than those required for immediate operating expenses) may be invested fully in securities and other investment instruments, may be held fully in cash or cash equivalents, may be partially invested and partially held in cash, or may be fully or partly committed to short positions in securities and similar positions in other investment instruments, as the Company believes the circumstances warrant.
Moderate Diversification and Concentration. The Company expects moderate diversification of the Company’s real estate positions, although the Company may determine not to seek moderate diversification from time to time.
The Company may also determine at
times to concentrate Company investments in securities relating to companies engaged in the same industry or group of industries. See “Risk Factors – Possible Lack of Diversification; Industry
The management of Sample Company, Inc. is conducted though its officers, board of directors, and owners. Currently, Mr. Smith and Mr. Smith are the only owners associated with SC. Below is a brief description of each component of the management of SC. A brief biography has been provided for each director and officer of the company.
Description of Officer Duties and Responsibilities
Executive Chairman: The executive chairman will serve as Chairman of the Board of Directors. The role of executive chairman is an active role, and the officer will have daily responsibilities and duties. The primary role of the executive chairman will, in addition to presiding over meetings of the board of directors, be to manage the client oriented affairs of the business. Essentially, the executive chairman will be the public face of the business. He/She will be primarily in charge of the organic expansion of the business.
Chief Executive Officer: The chief executive officer shall be in charge of all of the day to day operations of the business including the oversight, selection, and management of all of the Company’s investment. He/She shall report to the Board of Directors quarterly, and must provide a statement of financial condition, profit and loss statements, and a balance sheet in regards to the Company.
Chief Financial Officer: The chief financial officer shall preside over all matters relating to the Company’s financial condition. This role also includes the complete oversight of all accounting procedures, and reporting to necessary government agencies. The CFO shall also oversee and direct the disbursement of investor payments. In the event that the company wishes to obtain financing for a specified investment project, the chief financial officer will oversee the negotiation and completion of any and all financing agreements. In the event that the office of chief financial officer is vacant, the chief executive officer will assume the aforementioned duties and responsibilities.
Director: A director of Sample Company, Inc. will be responsible for providing independent and objective oversight of the affairs of the Company. Each director must attend the quarterly and annual Board of Directors meetings, unless prior arrangements to vote on the matters to be presented have been made.
Current Officers/Directors and Their Biographies:
SUMMARY OF THE OPERATING AGREEMENT AND THE CALCULATION OF INTEREST PAYMENTS OWED TO INVESTORS
The following is a brief description of certain provisions of the Operating Agreement of the Company and is qualified by reference to the full text of this agreement, attached as Appendix A.
No Voting Rights for Investors – Creditors: No investors, owners, holders, trustees, benefactors, or beneficiaries of these securities may vote on matters concerning the affairs of the business. All Corporate and investment matters will be decided by the Board of Directors and the officers of Sample Company, Inc.
Assignability of Investor Units and Interests: No investor that participates in this offering may sell these securities. This debt investment is a restricted security, and resale is prohibited.
Other Management Activities. The Operating Agreement (Use of Proceeds and Loan Covenants) recognizes that the Company, Mr. Smith, Mr. Smith and their Affiliates and associates invest for their own accounts, may be associated with other investment entities, engage in investment management for others, engage in the finding of capital for third parties and engage in other business enterprises. The Company and such other persons are not limited or restricted from engaging in or devoting time and attention to the management of any other business, whether of a similar or dissimilar nature, taking advantage of investment and business opportunities without offering the Company an opportunity to participate, or rendering services of any kind to any other corporation, partner, firm, individual or association. In no event shall the Company or any such other persons be required to account to the Company or an Investor for the profits generated by any such business, opportunity or service or through their own investments. The Company, such other persons and clients may hold positions in securities from time to time both that the Company owns and that it does not own.
Limited Liability of the Investors. Investors, as creditors in the company, will not be liable for any debts of the Company beyond the amount of their respective Capital Contributions and, in certain circumstances, Distributions. See, “Risk Factors – Repayment of Distributions.”
Liability and Indemnification of the Management and Others. The Company, its Board of Directors, and its owners, are not liable, responsible or accountable in damages or otherwise to the Company or any of the Investors for any acts performed or omitted within the scope of his/her/its authority, including the results of any investment made by the management on behalf of the Company, provided that the management shall have acted in good faith. The Company will, to the fullest extent legally permissible under the laws of the State of Delaware, indemnify the management and any persons designated to wind up the affairs of the Company pursuant to the Operating Agreement against any loss, liability, damage, cost or expense reasonably incurred or suffered in connection with the performance by the Company or other persons having responsibilities for the Company.
Admission of Investors and Additional Capital Contributions. The Company may admit Additional Investor to the Offering, or accept additional capital contributions from existing Investors, on the first (1st) business day of any month, provided that such additional capital contribution be delivered five (5) business days prior to the end of the preceding month. Capital contributions must be made only in cash. See “-Withdrawal of Funds and Purchase of Additional Units.
Capital Accounts. An individual Capital Account is maintained for each Investor to which is added (i) the Investor’s initial capital contribution, (ii) any additional capital contribution by the Investor, and (iii) any interest payments allocable to the Investor and from which is deducted (w) any distribution made to the Investor(whether or not at his request).
Determination of Payments and Disbursements Owed to Investor:
This private offering represents the purchase of a structured debt security. The purchase of these securities represents no ownership or equity interest in Sample Company, Inc, and careful consideration should be made before purchasing these securities.
The purpose of this structured finance note is to offer to Investors a series of interest payments that increase as the security is held for a longer period of time. The rate of Interest paid will be set at 10% for the first year, and will continue to increase by a rate of 9% per year until the fifteenth year of the security.
Below is the schedule of payments that would be made on a $1,000,000 placement made to the Company:
|Structured Finance IGN
|Principal Capital Amount
|Starting Interest Rate
|Yearly Increase of Interest Rate
|Total Amount of Payments
||Interest Paid Yearly
||Interest Paid Monthly
||Effective Interest Rate
|Interest Rate Cap
This corresponds to an interest rate that increases over the life of the security. Below is a table of the average interest payments received by an Investor as a function of time:
|20 Average Yearly Interest Rate
|15 Year Average Interest Rate
|10 Year Average Interest Rate
|5 Year Average Interest Rate
|3 Year Average Interest Rate
In the event that the company is unable to make these payments in a timely manner, the Company will be considered in a state of default and at that point the owners of these securities may begin the legal process of reclaiming the assets of the business to satisfy the obligations undertaken by Sample Company.
This structured finance security, will mature on January 31st, 2021. Upon the purchase of the structured finance note, a one month moratorium on payments will be enacted for the new subscriber. The first payment an investor will receive from the Company will be made three months and three weeks after the purchase of this security.
Although the maturity of this structured finance note will occur on January 31st, 2021; the Investor may call the structured debt note starting three years or thirty six calendar months from the date of purchase according the following guidelines:
(i) An Investor may withdrawal up to 50% of the amount of capital contributed to the Company within the forth year from the date from when the securities were initially purchased;
(ii) after forty eight calendar months or four years from the date when the securities were purchased have passed, an Investor may withdrawal the entire amount of capital contributed to the Company at anytime;
(iii) in the event that the Investor has subscribed to additional securities beyond the initial purchase of securities, those additional securities must wait three years or thirty six calendar months before a withdrawal of any funds can occur. For all intents and purposes in regards to the additional purchase of securities, when an Investor purchases additional securities after their initial or first subscription those securities will be treated as “initial” subscriptions and will be subject to the outlined procedures described above and hereafter regarding the withdrawal, removal, or call of loan proceeds.
Allocation of Interest Payments and Disbursements: A capital account for each Investor will be maintained in a segregated account designated for interest payment disbursements. Three weeks after the close of Each Period (as described in the section above), a payment of the interest payment owed to the Investors’ capital accounts will be made. After the funds from this disbursement are made, a check in the amount of which each investor is owed will be ordered and sent to a mailing address designated by the Investor or his/her agent. The capital account will not accrue interest owed to the investor. At the end of Each Period, payments from the capital account of each Investor will be disbursed so that the capital account returns to having a balance equal to capital contributions made to the Company from the Investor.
Withdrawal of Funds and Purchase of Additional Interests. The Operating Agreement allows Investors to withdraw a portion of the Investor’s original principal investment (with a minimum withdrawal of $10,000); however, Investor withdrawals may not be made for thirty-six calendar months after investment. The Company cannot guarantee the complete return of the principal investment until the three year mark is reached, and therefore no withdrawals or calls of the loan may be made before such time has passed. In the event that an investor must have the capital returned to them before thirty six months or three calendar years from the date that the investment was purchased, Sample Company, in its sole discretion, may loan up to 30% of the initial investment back to the investor at an interest rate equal to the thirty year U.S. Treasury interest rate. The interest rate shall be set at the aforementioned benchmark on the date that the loan funds are disbursed to the Investor.
An Investor may purchase additional Interests and new investors may purchase Interests in the Company as follows. After the commencement of trading upon the closing of the sale of the minimum of 150 Units ($150,000), the Company intends to continue offering Units until the Maximum ($2,500,000) is sold, subject to applicable securities laws (the “Continuous Offering”) or January 31, 2015, whichever is sooner. During the Continuous Offering, the minimum subscription amount for new subscribers remains at fifty thousand dollars ($150,000) (One Hundred and Fifty Units), but additional subscriptions from existing Members shall be in increments of twenty five thousand dollars ($25,000 or 25 Units), and must be received at least five (5) business days before the end of the month. The foregoing notwithstanding, the Company reserves the right, in its sole and exclusive discretion, to accept new and additional subscriptions for lesser amounts. Either subscription will be accepted effective as of the close of business on the last business day of the month in which the subscription is received and until such acceptance, the subscription amount will be held in a segregated interest bearing escrow account. The subscription amount will be disbursed to the Company on the first (1st) business day of the month. See also “Plan of Placement.”
Dissolution of the Company. The Operating Agreement (Use of Loan Proceeds and Covenants) provides that the Company may be dissolved at any time by the Board of Directors without the approval of the Investors, whereupon the Company’s affairs shall be wound up by the Board of Directors. The Operating Agreement also provides that, the Board of Directors has the right, in its sole discretion, to dissolve the Company if the value of an original investment (i.e., $150,000) ever declines by seventy-five percent (75%) or more based on a calculation of an Investor’s Capital Account. If the Company is dissolved, the Board of Directors, its designee or another person or entity designated by a majority in interest of the Investors will take all steps necessary or appropriate to wind up the affairs of the Company.
Term of the Company. The Company is a regular corporation domiciled in the State of Delware. By virtue of its incorporation, the Company shall be run in perpetuity or until such time that the Board of Directors may decide to cease the business operations of The Company; and additionally; this Operating Agreement provides that the Company will continue in perpetuity, or until an event set forth in the Operating Agreement which causes a termination of the Company or business. See “-Dissolution of the Company.”
Amendment of the Operating Agreement. The Operating Agreement may be amended by the Company acting alone in any manner that does not adversely affect any Investor and under certain other circumstances. Any material change to this operating agreement must be furnished to the investor or acting agent for his/her approval.
See also, “Summary of Offering – Resale Restrictions,” “Risk Factors – Withdrawals and Illiquidity of the Investment in Units” and “Conflicts of Interest.”
REPORTS TO INVESTORS
The Company, within two months after December 31st of each year, the Company will provide to its Investors a statement of account that describes the amount of payments paid to the Investor from the Company over the last fiscal year. This report will assist investors in planning for their tax liabilities. This will be in addition to the reports outlined in the section titled “Determination of Payments and Disbursements Owed to Investor”
PLAN OF PLACEMENT
Units are being offered and sold directly by the Company (through Mr. Smith, and the Board of Directors) on behalf of the Company. The address and telephone number of the Company is 100 Main Street, #200, Delaware City, DE 20003 Neither Mr. Smith nor the Board of the Directors nor any other officers, directors or employees that it may have from time to time will be entitled to any compensation from the Company for their services in offering and selling interests. However, the Company may direct or allocate Company brokerage business to brokers who refer prospective Investors to the Company or otherwise assist the Company in raising capital. The Company may also determine in the future to pay cash commissions or referral fees or to allow participation in Administrative Fees for Investor referrals, subject to compliance with applicable securities laws.
The Interests offered hereby will be sold to not more than 99 Investors comprised of “accredited investors” as that term is defined in Regulation D of the Securities Act, and not more than 35 other Investors who satisfy all of the criteria for Qualified Non-Accredited investors set forth in this Memorandum. See “Investor Suitability Standards.”
After the commencement of trading upon the closing of the sale of the minimum of Units (150 Interests or $150,000), the Company intends to continue offering Units until the Maximum 2,500 Units ($2,500,000) is sold, subject to applicable securities laws (the “Continuous Offering”). During the Continuous Offering, the minimum subscription amount for new subscribers shall remain at one hundred and fifty thousand dollars ($150,000) (One Hundred and Fifty Units) and additional subscriptions from existing Investors shall be in increments of $25,000 (Twenty Five Units). The foregoing notwithstanding, the Company reserves the right, in its sole and exclusive discretion, to accept new and additional subscriptions for lesser amounts. Both new and additional subscriptions must be received at least five (5) business days before the end of the month. Either subscription will be accepted effective as of the close of business on the last business day of the month in which the subscription is received and until such acceptance, the subscription amount will be held in a segregated interest bearing bank account. The subscription amount will be disbursed to the Company on the first (1st) business day of the month.
The Company, the Board of Directors, and its Affiliates reserve the right to purchase any amount of Units for their own accounts. Any such purchases by the Board of Directors, the Company or its Affiliates shall be for the same price and subject to the same terms and conditions as all of the Interests sold by the Company pursuant to this Memorandum. As an owner of Units or Interests, the Company, the Board of Directors, or its Affiliates shall be entitled to all allocations of interest payments.
In addition, the Company may, in its sole discretion, establish an arrangement with one or more securities broker-dealer firms to assist in the offer and sale of the Units for which services such firm(s) would be paid , by the Company, commissions and/or receive other compensation.
RESTRICTIONS ON TRANSFER
The Units and Interests being offered hereunder are being offered pursuant to exemptions from the registration requirements under the Securities Act, as amended, and applicable state securities laws. Further, the Units and Interests are not transferable or assignable by their express terms. As a consequence, Investors in the Units (Interests) will not be able to subsequently sell their Units or Interests. Accordingly, any purchaser of Units and Interests must bear the economic risk of his investment in the Units and Interests for an indefinite period of time.
Specifically, a legend will be placed on any certificate(s) which may be issued representing Units (and Interests) sold hereunder that states:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”) OR ANY STATE SECURITIES LAWS. THESE SECURITIES ARE NOT TRANSFERABLE, AND PURCHASERS WILL BE UNABLE TO RESELL THESE SECURITIES UNLESS SUCH SECURITIES ARE REGISTERED UNDER THE SECURITIES ACT AND APPLICABLE STATE LAWS OR AN EXEMPTION THEREFROM IS AVAILABLE.
FEDERAL INCOME TAXATION CONSIDERATIONS
The following is a summary of certain federal income tax consequences of an investment in the Company. This summary is limited to the consequences to an Investor that is a U.S. Person (as defined below) and focuses primarily on the consequences to Investors that are individuals or trusts. The summary does not address all aspects of taxation that may be relevant to a particular Investor in light of the Investor’s particular tax circumstances or to certain types of investors subject to special rules under the federal income tax laws, such as regulated investment companies, banks, insurance companies, personal holding companies, tax-exempt entities, charitable remainder trusts, charitable lead trusts, and dealers in securities. Each prospective Investor should consult such person’s own tax advisor as to the specific tax consequences of an investment in the Company, including the application and effect of state and local income and other tax laws.
A “U.S. Person” means an Investor who or that is, for federal income tax purposes, a citizen or resident of the United States, a corporation organized in or under the laws of the United States, any state or the District of Columbia, or any other person subject to federal income taxation on a net basis with respect to Interests of the Company.
The following summary is based on existing provisions of the Internal Revenue Code (“Code”), existing and proposed Treasury Regulations, and existing administrative interpretations and court decisions. Future legislation, Treasury Regulations, administrative interpretations or court decisions could significantly change the treatment of the items discussed. Any such change could have retroactive application and, therefore, could alter the tax consequences to an Investor of his or her investment in the Company.
The Code contains a number of ambiguities that will be resolved only by future legislative, administrative or court action. In addition, on certain questions there are not relevant Treasury Regulations, administrative interpretations or controlling court decisions. Accordingly, no assurance can be given that the Internal Revenue Service (the “IRS”) will not challenge the tax treatment of certain matters discussed herein or, if it does, that it will not be successful. No rulings have been requested or received from the IRS as to any of the matters discussed herein.
THIS SUMMARY IS NOT INTENDED AS A SUBSTITUTE FOR CAREFUL TAX PLANNING. NONE OF THE COMPANY, THE BOARD OF DIRECTORS, OR ANY OF THEIR COUNSEL OR CONSULTANTS ASSUMES ANY RESPONSIBILITY FOR THE TAX CONSEQUENCES OF THIS TRANSACTION TO ANY INVESTOR. EACH SUBSCRIBER WILL BE REQUIRED TO REPRESENT IN THE SUBSCRIBER’S SUBSCRIPTION AGREEMENT THAT SUCH SUBSCRIBER HAS RELIED ONLY ON THE SUBSCRIBER’S OWN TAX ADVISOR WITH RESPECT TO THE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES ARISING FROM THE PURCHASE.
Capital Accounts; Tax Basis in the Interests
The Company will maintain a Capital Account for each Unit. The initial balance of each Capital Account will equal the amount of cash the Investor or Debt Holder contributes to the Company. Thereafter, each Investor’s Capital Account will be increased to reflect the amount of such Investor’s share of the Company’s interest payments or the amount of any additional cash contributed by such Investor.
An Investor’s initial tax basis in his or her Interests will equal the cash contributed by such Investor to the Company, plus the Investor’s share of the Company’s nonrecourse liabilities, if any. An Investor’s tax basis in his or her Interests will not be increased by the amount of interest payments made by the Company to the investor as all interest payments will be disbursed on a quarterly basis. The Capital Account for the Investor will not decrease below the amount of capital distributed to the Company unless, at the time of note expiration, the Company has failed to return the principal investment in the Company; in which instance the Company will be in a state of default and the Investors in this security may take the proper legal recourse to claim the assets of the Company.
Allocation of Taxable Income from Interest Payment on These Securities:
It will be the sole responsibility of the Investor to allocate the portion of their interest payments paid to them for tax purposes. The Company will not withhold any funds on behalf of the Investor for tax purposes.
Gift of an Interest
Generally, no gain or loss is recognized for income tax purposes as a result of a gift of a Unit. If an Investor makes a gift of an Interest at a time when his or her allocable share of the
Company’s indebtedness exceeds the Investor’s adjusted basis of the Unit, however, an Investor may realize gain for income tax purposes to the extent of such excess. Such gain generally should be treated as capital gain, except to the extent it is attributable to any unrealized receivables or inventory items of the Company which generally will be treated as ordinary income. Gifts of Units also may be subject to a gift tax.
Transfers of Interests at Death
The estate or heirs of a deceased Investor will have a tax basis in the Interests owned by the deceased Investor equal to the value of such Units on the date of death (or the alternate valuation date in the event an alternate valuation date election is made under Section 2032 of the Code). The estate or executor of the estate must provide a written request to the Company’s mailing address in order to receive a report that show the deceased Investor’s tax basis in the Company. As this investment is a debt, the tax basis will most likely be equal to the amount of capital placed with the Company from the Investor.
Passive Activity Income
Interest paid by the Company to the Investors or Debt Holders may be classified as passive income for Federal or State tax purposes. Investors and Debt Holders are strongly advised to consult a tax professional before investing in this Company.
Organization and Syndication Expenses
Any expenses relating to the organization of the Company or syndication of the Company’s attempt to raise capital will be fully absorbed by the Company. No Investor or Creditor shall be liable for expenses directly relating to this investment in the Company.
Tax Treatment of Interest Payments to Investors
The Company fully expects that the interest payments made by the Company to its Creditors, Debt Holders, and Investors will be treated as ordinary or passive income. As stated before, the Investor will be solely responsible for determining their tax liability. It is strongly advised that any potential investor consult a tax professional to properly plan the tax consequences associated with this investment.
Tax Reporting by the Company
The Company will provide, within one month after December 31st of each year that the investment is held, a summary of all payments made to the Investor’s Capital Account for the prior year.
Tax Exempt Organizations
Organizations generally exempt from federal income taxation under Section 501(a) of the Code (including qualified pension, profit-sharing and stock-bonus plans, Keogh plans and individual retirement accounts (“IRAs”) may, nevertheless, be taxable on their allocable share of income to the extent such income constitutes “unrelated business taxable income” (“UBTI”). A charitable remainder trust, although not a tax-exempt organization, is also subject to income taxation on UBTI.
Generally, interest income of the Company allocated to Investors whom are subject to the UBTI rules should not be subject to such tax.
STATE AND LOCAL TAX CONSIDERATIONS
The Company and its Investors will be subject to state and local income, estate, gift, inheritance and other taxes, the consequences of which may differ significantly from federal taxes. The impact of such laws, as well as the impact of federal, state, local and foreign estate or inheritance tax laws, should be discussed with each Investor’s own tax counsel or other advisor.
THE FOREGOING ANALYSIS OF THE FEDERAL AND STATE CONSIDERATIONS IS NOT INTENDED AS A SUBSTITUTE FOR INDIVIDUAL TAX PLANNING. ACCORDINGLY, PERSONS CONTEMPLATING AN INVESTMENT IN THE COMPANY SHOULD CONSULT THEIR TAX COUNSEL OR OTHER ADVISORS WITH SPECIFIC REFERENCE TO THEIR OWN TAX SITUATIONS.
The Employee Retirement Income Security Act of 1974, as amended (“ERISA”), imposes certain fiduciary and prohibited transaction restrictions on fiduciaries and other “parties in interest” to employee pension and welfare benefit plans subject to ERISA (“ERISA Plans”). Section 4975 of the Code imposes similar prohibited transaction restrictions for tax-qualified retirement or annuity plans described in Section 401(a) or 403(a) of the Code and on individual retirement accounts described in Section 408 of the Code (“Code Plans”; collectively, Code Plans and ERISA Plans are hereafter referred to as “Qualified Plans”).
Generally, any person who has discretionary authority or control respecting the management or disposition of “plan assets” of any Qualified Plan, and any person who provides investment advice with respect to such assets for a fee, is a fiduciary of the Qualified Plan involved. A “party in interest” is generally a person or entity who is related to the Qualified Plan fiduciary or the Qualified Plan’s sponsoring employer or a person or entity that provides services to the
A discussion of the general duties and restrictions imposed by ERISA such as the duties of investment prudence, diversifying the investments of a Qualified Plan, and investing Qualified Plan assets in accordance with the documents governing the Qualified Plan, is beyond the scope of this discussion, this material being limited to those prohibited transaction rules under ERISA and the Code which most likely would bear upon the holding of Interests by Qualified Plans. Therefore, trustees or other fiduciaries of Qualified Plans, before purchasing Interests, should seek legal counsel regarding ERISA and Code considerations applicable to the investment by a Qualified Plan.
FISCAL YEARS AND INTERIM PERIODS
The Company has adopted a fiscal year ending on December 31. As Investors may be admitted or may withdraw and additional capital contributions may be made during the course of a fiscal year, the Operating Agreement provides for interim fiscal periods that are portions of a fiscal year for the purpose of allocating net interest payments due to changes occurring in Capital Accounts at such times.
In order to become an Investor, a prospective Investor should follow the instructions set forth in the Subscription Documents included as Appendix D to this Memorandum.
In addition to all other materials referred to in this Memorandum, prospective Investors are invited to review prior to investing, any materials available to the Company relating to the Company, the operations of the Company, including, but not limited to the Company’s Certificate of Incorporation, as filed with the Secretary of State of New York on September 7, 2005, and any other matters relating to this Memorandum. All such materials will be made available at the offices of the Company, located at Main Street , Delaware City, DE 20003, Attention: John Smith, (or at some other mutually convenient location) at any reasonable hour after reasonable prior notice.
The Company will also afford prospective Investors the opportunity to ask questions of and receive answers from its officers concerning the terms and conditions of the offering and to obtain any additional information to the extent that the Management or the Company possesses such information or can acquire it without unreasonable effort or expense.
This Memorandum sets forth the investment objectives, method of operation and certain other pertinent information relating to the Company. However, this Memorandum does not set forth all of the terms and provisions of the Company’s Operating Agreement and By-Laws (the “Operating Agreement”) that may be significant to a particular prospective Investor. A copy of the Operating Agreement is attached as Appendix A to this Memorandum. Each prospective Investor should examine this Memorandum, the Operating Agreement and the Subscription Agreement contained in the Subscription Documents included as Appendix D to this Memorandum in order to assure himself or herself that the terms of the Operating Agreement of the Company’s investment objectives and method of operation are satisfactory to him or her.
INVESTOR SUITABILITY STANDARDS
The purchase of Units in the Company should be deemed to be a speculative investment and is not intended as a complete investment program and admission as an Investor in the Company is not open to the general public. Investment in the Company is designed for sophisticated persons and entities that: have adequate means of providing for their needs and contingencies without relying on distributions or withdrawals from the Company; are financially able to maintain their investment; are able to afford the loss of all or a substantial portion of their investment; and either are sophisticated regarding financial and business matters or are represented by such a person in connection with their investment in the Company.
The Units offered hereby will be sold to not more than 99 Investors, comprised of the following:
(i)“accredited investors,” as that term is defined in Regulation D of the Securities Act (see Appendix C to this Memorandum); and
(ii) not more than 35 “Qualified Non-Accredited” Investors, who (either alone or together with their spouse) meet all of the following criteria: (a) have a minimum net worth of at least $500,000 (exclusive of home, home furnishings and automobiles); and (b) are able to bear the economic
risk of the investment in the Company; (c) are either sophisticated regarding financial and business matters or are represented by such a person in connection with their investment in the Company; (d) have no need for liquidity with respect to their investment in the Company; and (e) the total proposed investment in the Units does NOT represent more than 35% of their net worth. Additional or higher requirements may be imposed for residents of certain states, and the amount of an Investor’s contribution to the Company may also be limited to a percentage of the Investor’s net worth.
Prospective Investors should read carefully this entire Memorandum, the Operating Agreement attached to this Memorandum as Appendix A and the Subscription Agreement included in the Subscription Documents included as Appendix D to this Memorandum. The Operating Agreement sets forth the specific provisions relating to the operation of the Company.