NOTICE TO ALL PROSPECTIVE INVESTORS
THIS CONFIDENTIAL PRIVATE PLACEMENT MEMORANDUM ("MEMORANDUM") IS BEING FURNISHED TO ACCREDITED INVESTORS FOR THE PURPOSE OF PROVIDING CERTAIN INFORMATION ABOUT AN INVESTMENT IN LIMITED LIABILITY COMPANY INTERESTS (THE "INTERESTS") IN BSEED 18 LLC (THE "COMPANY"). THE INTERESTS HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION (THE "SEC") OR BY THE SECURITIES REGULATORY AUTHORITY OF ANY STATE OR ANY OTHER JURISDICTION, NOR HAS THE SEC OR ANY SUCH SECURITIES REGULATORY AUTHORITY PASSED UPON THE ACCURACY OR ADEQUACY OF THIS MEMORANDUM. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE INTERESTS HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT"), THE SECURITIES LAWS OF ANY STATE, OR ANY OTHER JURISDICTION, NOR IS SUCH REGISTRATION CONTEMPLATED. THE INTERESTS WILL BE OFFERED AND SOLD UNDER THE EXEMPTION PROVIDED BY SECTION 4(a)(2) OF THE 1933 ACT, RULE 506(c) OF REGULATION D PROMULGATED THEREUNDER, REGULATION S PROMULGATED THEREUNDER, AND OTHER EXEMPTIONS OR EXCLUSIONS OF SIMILAR IMPORT IN THE LAWS OF THE STATES WHERE THIS OFFERING WILL BE MADE. THE INTERESTS MAY NOT BE SOLD OR TRANSFERRED UNLESS THEY ARE REGISTERED UNDER THE 1933 ACT OR AN EXEMPTION FROM SUCH REGISTRATION THEREUNDER AND UNDER ANY OTHER APPLICABLE SECURITIES LAW REGISTRATION REQUIREMENTS IS AVAILABLE. THE COMPANY WILL NOT BE REGISTERED AS AN INVESTMENT COMPANY UNDER THE INVESTMENT COMPANY ACT OF 1940, AS AMENDED (THE "1940 ACT"), PURSUANT TO EXEMPTIONS OR EXCLUSIONS THEREFROM. NEITHER BSEED INVESTMENTS LLC (THE "MANAGING MEMBER") NOR BSEED INVESTMENT GROUP LLC (THE "INVESTMENT MANAGER") INTENDS TO REGISTER WITH THE SEC AS AN INVESTMENT ADVISER UNDER THE INVESTMENT ADVISERS ACT OF 1940, AS AMENDED (THE "ADVISERS ACT") IN RELIANCE ON AN EXEMPTION FROM REGISTRATION UNDER SECTION 203 OF THE ADVISERS ACT, AS AMENDED BY THE DODD-FRANK WALL STREET REFORM AND CONSUMER PROTECTION ACT (THE "DODD-FRANK ACT").
POTENTIAL INVESTORS SHOULD PAY PARTICULAR ATTENTION TO THE INFORMATION UNDER THE CAPTIONS "RISK FACTORS" AND "POTENTIAL CONFLICTS OF INTEREST" IN THIS MEMORANDUM. AN INVESTMENT IN THE COMPANY REQUIRES THE FINANCIAL ABILITY AND WILLINGNESS TO ACCEPT THE HIGH RISKS AND LACK OF LIQUIDITY INHERENT IN AN INVESTMENT IN THE COMPANY. INVESTORS IN THE COMPANY MUST BE PREPARED TO BEAR SUCH RISKS FOR AN INDEFINITE PERIOD OF TIME. THE COMPANY'S INVESTMENT OBJECTIVE MAY NOT BE ACHIEVED AND INVESTORS MAY NOT RECEIVE A RETURN OF THEIR CAPITAL.
IN MAKING AN INVESTMENT DECISION, INVESTORS MUST RELY ON THEIR OWN EXAMINATION OF THE COMPANY AND THE TERMS OF THIS OFFERING, INCLUDING THE MERITS AND RISKS INVOLVED. PROSPECTIVE INVESTORS SHOULD NOT CONSTRUE THE CONTENTS OF THIS MEMORANDUM AS LEGAL, TAX, INVESTMENT, OR ACCOUNTING ADVICE. PROSPECTIVE INVESTORS ARE URGED TO CONSULT WITH THEIR OWN ADVISORS WITH RESPECT TO THE LEGAL, TAX, REGULATORY, FINANCIAL, AND ACCOUNTING CONSEQUENCES OF THEIR INVESTMENT IN THE COMPANY.
IN THE EVENT THAT DESCRIPTIONS OR TERMS IN THIS MEMORANDUM ARE INCONSISTENT WITH OR CONTRARY TO THE DESCRIPTION IN OR TERMS OF THE COMPANY'S LIMITED LIABILITY COMPANY AGREEMENT (A COPY OF WHICH WILL BE FURNISHED TO ANY PROSPECTIVE INVESTOR UPON REQUEST), SUCH LIMITED LIABILITY COMPANY AGREEMENT SHALL CONTROL.
EACH PROSPECTIVE INVESTOR IS INVITED TO MEET WITH A REPRESENTATIVE OF THE COMPANY AND TO DISCUSS WITH, ASK QUESTIONS OF, AND RECEIVE ANSWERS FROM SUCH REPRESENTATIVE CONCERNING THE TERMS AND CONDITIONS OF THIS OFFERING, AND TO OBTAIN ANY ADDITIONAL INFORMATION, TO THE EXTENT THAT SUCH REPRESENTATIVE POSSESSES SUCH INFORMATION OR CAN ACQUIRE IT WITHOUT UNREASONABLE EFFORT OR EXPENSE, NECESSARY TO VERIFY THE INFORMATION CONTAINED HEREIN.
THE INFORMATION CONTAINED HEREIN IS THE CONFIDENTIAL AND PROPRIETARY INFORMATION OF THE INVESTMENT MANAGER OF THE COMPANY AND ITS AFFILIATES. THE INFORMATION CONTAINED HEREIN MAY BE USED SOLELY FOR THE PURPOSE OF THE DECISION OF MAKING AN INVESTMENT IN THE COMPANY AND MAY NOT BE USED OR REPRODUCED IN WHOLE OR IN PART FOR ANY OTHER PURPOSE.
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THIS OFFERING TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATIONS OTHER THAN AS CONTAINED IN THIS MEMORANDUM, AND ANY REPRESENTATION OR INFORMATION NOT CONTAINED HEREIN MUST NOT BE RELIED ON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF ITS MEMBERS OR AFFILIATES. THIS MEMORANDUM DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY IN ANY STATE OR OTHER JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH STATE OR JURISDICTION. THE DELIVERY OF THIS MEMORANDUM DOES NOT IMPLY THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THIS DATE.
THIS OFFERING IS BEING CONDUCTED PURSUANT TO RULE 506(c) OF REGULATION D PROMULGATED UNDER THE 1933 ACT. UNDER RULE 506(c) THE COMPANY IS REQUIRED TO TAKE REASONABLE STEPS TO VERIFY THE ACCREDITED STATUS OF ALL INVESTORS PARTICIPATING IN THE OFFERING. THEREFORE, EACH INVESTOR IN THIS OFFERING SHALL BE REQUIRED TO PROVIDE PROOF OF HIS/HER/ITS ACCREDITED STATUS IN ANY MANNER THE COMPANY MAY DEEM APPROPRIATE AT ITS OWN DISCRETION. NO INVESTOR SHALL BE PERMITTED TO PARTICIPATE IN THIS OFFERING WITHOUT PROOF OF SUCH ACCREDITED STATUS SATISFACTORY TO THE COMPANY. EVEN IF SATISFACTORY PROOF OF ACCREDITED STATUS IS PROVIDED, THE COMPANY STILL RESERVES THE RIGHT TO REJECT INVESTMENTS FOR ANY REASON OR FOR NO REASON AT ALL, IN ITS SOLE DISCRETION.
IN THIS MEMORANDUM, UNLESS THE CONTEXT OTHERWISE REQUIRES, THE TERMS "BSEED," "THE FIRM," "WE," "US," AND "OUR" REFER TO BSEED INVESTMENTS LLC, AND ITS SUBSIDIARIES AND AFFILIATES.
NOTICE TO RESIDENTS OF FLORIDA
The shares being offered have not been registered with the Florida Division of Securities. If sales are made to five or more Florida purchasers, each sale is voidable by the purchaser within three days after the first tender of consideration is made by such purchaser to the issuer, an agent of the issuer or within three days after availability of that privilege is communicated to such purchaser, whichever occurs later.
NOTICE TO RESIDENTS OF ALL U.S. STATES
In making an investment decision, investors must rely on their own examination of the Company, the Investment Manager and the terms of the offering, including the merits and risks involved. These securities are subject to restrictions on transferability and resale and may not be transferred or resold except with the prior written consent of the Investment Manager, which it may withhold as described herein, and as permitted under the Securities Act and the applicable state securities laws, pursuant to registration or exemption therefrom. Investors in the Company should be aware that they may be required to bear the financial risk of this investment for an indefinite period of time.
General inquiries should be directed to:
BSeed Investments LLC
Baruch Eliezer Gross, Managing Member
729 Ocean Parkway
Brooklyn, NY 11230
I. EXECUTIVE SUMMARY
BSeed18 LLC, a Delaware limited liability company (the "Company"), is managed by BSeed Investment Group LLC (the "Investment Manager"). The Investment Manager is controlled by Eliezer Gross (the "Principal"), who also controls The Besadno Group ("Besadno"). The Investment Manager will be responsible for the Company's investment strategy and the management of the Company. The Investment Manager will perform all day-to-day investment and asset management functions for the Company, subject to the supervision and direction of the Company's Managing Member. The Company has been formed to make seed and early-stage investments in the common stock and preferred stock of certain start-up technology ventures located in Israel focusing on cloud-based software to be marketed on a "software-as-a-service" basis for use in the human resources and consumer contexts. The Company is seeking to raise $1 million in equity capitalization.
Besadno is the sponsor of the Company and the Investment Manager, and an investor in and a sponsor of other vehicles established or to be established for purposes of investing in start-up ventures. Besadno operates under the guidance of seasoned business professionals whose accomplishments span the globe. Offices in New York and Jerusalem provide resources for both inventors and investors.
Besadno was originally launched to discover, develop and unite innovative ideas with community minded investors. Today the Besadno approach has successfully paired likeminded inventors and investors together in one interconnected hub. Besadno believes that this approach is revolutionizing how people can achieve their short and long term investment goals. At Besadno investors benefit by investing in products that enhance the lives of many people, across the globe.
Besadno and its investment professionals have invested in and founded a variety of start-up enterprises in Israel and elsewhere. The Company and its portfolio companies will have the benefit of Besadno's collective experience as well as access to Besadno's network of inventors, investors and service providers, thereby helping the companies in which the Company invests survive, thrive and grow.
Besadno strongly adheres to the moral standards of the observant Jewish community. These standards and principles rest at the forefront of all operations. At Besadno, we integrate the proverb "With Divine assistance we will succeed and prosper," into every aspect of our operations.
Besadno is managed by a team of Orthodox professionals and operates under the guidance and with the blessing of leading Rabbinic luminaries. Our unwavering commitment to Halacha and Torah values, coupled with our proven business expertise, is the core of our corporate approach.
Corporate Mission Statement
- Give promising entrepreneurs and inventors the tools, knowledge and information necessary for them to take their ideas to the next level, including funding services for potentially promising ventures.
- Offer investors, both large and small-scale, the opportunity to earn profits while providing them with regular updates on the status of their investments.
- Treat every human being, whether they are a supplier, customer, service provider or consumer, fairly, with complete transparency, honesty and integrity in every aspect of a transaction.
- Usage of our team's skills and talents to assist the public in general and the Orthodox Jewish population in particular, while sharing Besadno's resources for the benefit of the community as a whole.
Investments by the Company
The Company intends to invest some of the proceeds of the sale of Interests offered in this Memorandum in the target company described below. In addition, the Company will opportunistically invest (or reinvest proceeds of exited investments) in one or more start-up technology ventures from time to time subject to the availability of resources.
Reference is made to "Risk Factors" and "Conflicts of Interest," which contain important information
pertaining to the descriptions of the Company's investments, below
Founded in January 2014 and headquartered in Tel-Aviv, Israel, Intervyo R&D Ltd. ("Intervyo") is building an online automated job interview simulation tool (the "Interaction Engine") designed to help large business enterprises, recruitment and staffing agencies and video interview vendors improve efficiency in screening candidates for job openings. The Interaction Engine is a cloud-based automated interactive communication system through which a candidate may interact with a number of pre-set video recordings in a simulated interview setting. The Interaction Engine asks the candidate questions using pre-recorded audio and video clips, analyzes the candidate's vocal responses and other contextual input in real time and provides intelligently timed and programmed natural human-like responses using additional pre-recorded audio and video clips. Upon completion of the simulated interview the Interaction Engine produces a report for the client regarding the candidate's personality, technical skills and cognitive abilities based on the candidate's performance during the interview.
Intervyo intends to sell access to the Interaction Engine on a "software-as-a-service" ("SAAS") basis to potential enterprise, government and recruitment agency clients worldwide. Intervyo successfully completed its initial pilot implementation of the Interaction Engine with Digital Bank of Singapore in July 2015 and is in negotiations to enter into additional pilots beginning in November 2016. The Interaction Engine was publicly unveiled in October 2016 at the HR Tech World convention in Paris, France, where Intervyo was one of five finalists in HR Tech World's disruptHR Competition. Intervyo has applied in the United States and globally for patent protection for the Interaction Engine and the patent remains pending as of the date hereof. In addition, Intervyo is an IBM Watson Ecosystem Partner.
An affiliate of the Company, Parnasa B.Sh. 1 Hahadasha Ltd. ("Parnasa 1") entered into an Agreement with Intervyo on April 20, 2015 pursuant to which it will purchase all of the issued and outstanding preferred shares of Intervyo for a price per share of $65.78 and a post-money valuation of $1 million. In a letter dated June 7, 2015 Parnasa 1 instructed Intervyo to issue the preferred shares purchased pursuant to the April 20, 2015 Agreement as follows: 76 to Mr. Ze'ev Hollander and 2,424 to Parnasa BSh. 8 Ltd. ("Parnasa 8"). Parnasa 8 currently owns such 2,424 preferred shares. In the event of a liquidation, merger, change of control, reorganization or sale of a majority of the corporate assets the preferred shareholders are to be paid in full for their investment prior to any distribution. In the event that dividends are paid, the preferred shareholders shall receive the first 75% of the dividends and then the remaining 25% shall split pro rata between preferred and common shareholders. Such dividend preferential treatment shall apply only up to the point that the preferred shareholders have fully recouped their investment amount. Preferred shareholders have no managerial rights.
Parnasa 8 subsequently entered into an agreement with Intervyo on April 6, 2017 (the "Parnasa 8 Investment Agreement"). According to the terms of the Parnasa 8 Investment Agreement Parnasa will invest up to $250,000 in Intervyo in the form of convertible financing. The first $125,000 will be transferred in five monthly installments and the balance of $125,000 will, too, be transferred in five monthly installments, but is subject to the occurrence of certain conditions. The Company intends to use some of the proceeds of the sale of the Interests offered in this Memorandum to purchase up to 50% of Parnasa 8's stake in Intervyo at a valuation of $10 million to Intervyo.
Please see "Potential Conflicts of Interest—Related-Party Transactions" for discussion of the risks associated with transactions between the Company and its related parties.
II. SUMMARY OF PRINCIPAL TERMS
This Summary of Principal Terms summarizes the principal terms of an investment in Bseed 18 LLC, a Delaware limited liability company (the "Company"), and is subject to, and qualified in its entirety by reference to the limited liability company agreement of the Company (the "LLC Agreement"). To the extent that the terms of this summary are inconsistent with the terms of the LLC Agreement, the terms of the LLC Agreement control.
BSeed 18 LLC, a Delaware limited liability company (the "Company").
The Company's investment objective will be to generate superior long-term capital appreciation through private equity investments in early-stage private companies based in the United States and Israel (each such investment, a "Portfolio Investment", and each company in which a Portfolio Investment is made, a "Portfolio Company").
Each investor meeting certain qualifications as set forth below (each, an "Investor" or a "Member" and collectively, the "Investors" or "Members") will irrevocably subscribe for one or more non-voting interests (the "Interests") in the Company. Subscription amounts must be paid in readily available funds by wire transfer or by bank check delivered to the Investment Manager (as defined below) and must be received prior to the Closing Date (as defined below). The subscription for Interest(s) is subject to acceptance or rejection by the Company, in whole or in part in its sole discretion. No Investor will be admitted to the Company unless the Company receives such Investor's entire subscription amount prior to the Closing Date.
BSeed Investments LLC, a newly-formed Delaware limited liability company (the "Managing Member"), is the managing member of the Company. The managing member of the Managing Member is Baruch Eliezer Gross (the "Principal").
BSeed Investment Group LLC, a Delaware limited liability company and an affiliate of the Managing Member (the "Investment Manager"), will act as the investment manager to the Company and will also perform certain administrative functions for the Company.
Only Investors that are "accredited investors", as such term is defined in Rule 501 of Regulation D under the Securities Act of 1933, as amended, may acquire Interests in the Company. The Company reserves the right to reject any subscription for Interests in its sole discretion.
The term of the Company will terminate on the tenth anniversary of the initial Closing Date (as defined below), subject to up to two consecutive one-year extensions in the sole discretion of the Managing Member.
All of each Investor's subscription amount will be drawn down (each such drawdown, a "Capital Contribution", and the aggregate amounts drawn down from all Investors, the "Capital Contributions") as of the closing of each Investor's subscription to the Company (the date of each such closing, a "Closing Date").
Neither the Investment Manager nor the Managing Member will be entitled to receive a management fee from the Company.
The Company has previously incurred and in the future may incur, at the sole discretion of the Managing Member, indebtedness to finance operations of the Company or to make new or follow-on investments in Portfolio Investments. In addition, the Company may enter into short-term indebtedness for the purpose of extending bridge financing to Portfolio Investments (such financing not to exceed 180 days in duration).
Current cash or disposition proceeds received by the Company relating to a Portfolio Investment, net of expenses allocated to such Portfolio Investment ("Distributable Proceeds"), will be distributed to the Investors at least annually, but not later than forty-five (45) days following the end of any fiscal year in which the Distributable Proceeds are received by such Portfolio Investment.
Distributions of Distributable Proceeds relating to a Portfolio Investment will be apportioned and distributed to the Investors pro rata based on their respective Capital Contributions.
Amounts so apportioned to each Investor will be distributed to such Investor, on the one hand, and the Managing Member, on the other hand, as follows:
(i) first, one hundred percent (100%) to such Investor until it has received cumulative distributions pursuant to this clause (i) in an amount equal to its aggregate Capital Contributions;
(ii) second, one hundred percent (100%) to such Investor until it has received cumulative distributions pursuant to this clause (ii) in an amount representing a four percent (4%) return on its aggregate Capital Contribution; and
(iii) third, twenty percent (20%) of the amounts distributable pursuant to this clause (iii) to the Managing Member, and eighty percent (80%) of such distributable amounts to such Investor (the amounts payable to the Managing Member pursuant to this clause (iii), the "Carried Interest").
The Company will bear all costs and expenses incurred in connection with the organization of the Company and the Investment Manager and the offering of the Interests (collectively, the "Offering Expenses").
The Company will be responsible for (a) all expenses relating to its own operations and (b) all expenses relating to Portfolio Investments ("Company Expenses").
Transfer of Interests:
Transfers of Interests shall be subject to approval to do so by the Managing Member of the Company. A request to transfer Interests shall not be unreasonably denied. Each Investor shall be personally responsible to find a buyer for its Interests.
The LLC Agreement will provide that it may be amended by the Managing Member with the consent of the Investors holding a majority of the Interests (a "Majority in Interest"), except that no amendment may (a) materially and adversely affect the rights or obligations of any Investor under the LLC Agreement disproportionately to the effect on other Investors, in each case, without the consent of such Investor; (b) change the Investors' consent threshold necessary for any consent required to the taking of an action without the approval of Investors who then hold Interests equal to or in excess of the consent threshold for the subject of such proposed amendment; or (c) change the amendment provisions without the consent of each Investor.
The Company will indemnify and hold harmless each of the Investment Manager, the Managing Member, their affiliates and their respective members, managers, quotaholders, partners, officers, directors, shareholders, agents, employees and other related parties (each, an "Indemnified Party") in connection with any actions that arise out of or in connection with the affairs of the Company (other than an internal dispute among the interest holders of the Managing Member), but only to the extent that such person's conduct did not constitute fraud, willful misconduct, the commission of a felony, a violation of applicable securities laws or gross negligence.
Expenses incurred by an Indemnified Party in defense or settlement of any claim that will be subject to a right of indemnification may be advanced by the Company prior to the final disposition thereof upon receipt of a written undertaking by or on behalf of the Indemnified Party to repay such amount to the extent that it will be determined ultimately that such Indemnified Party is not entitled to be indemnified, provided that the foregoing advancement of expenses will not be available to any Indemnified Party with respect to a claim filed by a Majority in Interest of the Investors. No advances will be made by the Company without the prior written approval of the Managing Member.
Fiscal Year End:
The Company's first fiscal year ends on December 31..
DLA Piper LLP (US) ("DLA") will act as U.S. counsel to the Company, the Managing Member and the Investment Manager. Please refer to "Risk Factors—Representation by DLA Piper LLP (US)" for additional information.
No independent counsel has been retained to represent Investors.
The Company engaged Weinstein & Co., a U.S. Public Company Accounting Oversight Board (PCAOB) member in good standing. Weinstein & Co. is a member of TIAG – The International Accounting Group, a worldwide network of independent accounting firms. www.wcpa.co.il.
Investor Meetings, Voting and Reports:
There will be no regularly scheduled meetings of Investors holding Interests. Interests purchased by Investors in this offering do not have voting rights.
Investors will receive within 120 days of the end of each fiscal year (subject to reasonable delays in the event of the late receipt of any necessary financial statements from the Portfolio Investment), an annual financial report of the Company audited by the independent auditors. Financial information provided in the audited reports to Investors will include the valuation of illiquid investments based on a generally acceptable method under the standard by which the financial statements of the Company will be audited.
Investors will also receive annual tax information on Internal Revenue Service Schedule K-1, and other information reasonably requested and necessary for completion of tax returns. Investors may not, however, receive such information prior to the due date for their tax returns and should therefore be prepared to file extensions.
Upon liquidation and winding up of the Company, each holder of Interests of the Company shall have the right, after receiving cumulative distributions in an amount equal to the sum of (i) such holder's Capital Contributions and (ii) an amount equal to a four percent (4%) return on such holder's aggregate Capital Contributions, to participate, on a pro rata basis, in 80% of the Company's profits and excess assets distributable upon liquidation of the Company. The balance of 20% will be distributed to the Managing Member.
Eliezer Gross, Founder and Chairman
With over 30 years of experience launching business ventures in Israel, the United States, and Europe, Mr. Gross is a true sales and marketing expert. He was a founding partner of the American GBM Group, and of the largest retail chains in Israel. Active in dozens of startup initiatives and companies worldwide, he knows the U.S market inside and out and has been influential in developing many new products. His keen business acumen has led him through the doors of dozens of leading companies – primarily from the Fortune 100 including: Johnson & Johnson Corporation, CBS Studios, Goodyear Tires, et al.
Oded Eliashiv – Head of Development, Besadno Group
Mr. Eliashiv (LLB) is the Head of Development in the Besadno Group. Oded has vast experience in the Israeli startup industry, having led numerous ventures in leading companies including Excellence Capital Group (Singapore), Excellence AgriTech Solutions (Cambodia), Slyde, ElectroPep, Beyond Interactive and Epos Technologies. Using his strong experience in the startup ecosystem, Oded is now advising early-stage startups and providing them with the mentoring and fundraising assistance.
Gabby Hasson – US Investor Relations Officer, Besadno Group
Mr. Hasson (MBA) is the Head of US investments in the Besadno Group. Gabby is the CEO and Co-Founder of Bseed Investments. Previously, Gabby held management, investment, and business development positions, at CB Alliance (VC), IBM, and HP, as well as Mashik Consulting and CTI. He specialized in uncovering and enhancing solutions for mobile telecom, banking, and online marketing. Gabby gained vast experience with IBM's Global Technology Unit (GTU) that focused on startups and innovations.
IV. RISK FACTORS
An investment in the Company involves a significant amount of risk and is suitable only for investors of substantial means who have no foreseeable need for liquidity in the amount invested and who can afford to lose all or a substantial portion of their investment. An Investor may not receive a return of any of its capital contributions. The risks and uncertainties below are not the only ones we face. In addition, potential Investors should be aware that there will be occasions when the Investment Manager and its affiliates may encounter potential conflicts of interest in connection with the Company. Accordingly, you should carefully consider the following risks before making an investment in the Company.
The following potential risks related to an investment in the Company remain subject to and are qualified in their entirety by the final fund agreements and, as to any Member, any other agreement entered into between the Managing Member and such Member relating to the purchase of Interests, which may include terms that differ materially from the terms contemplated in this Memorandum, and should be reviewed carefully prior to making an investment decision.
Investments in Early-Stage Technology Companies Are High-Risk
The Company generally will invest in smaller, early-stage technology companies although it may also invest in other funds for strategic purposes. Investments in such companies involve greater risk than that generally associated with investments in more established companies. Less established companies tend to have a lower capitalization and fewer resources and, therefore, often are more vulnerable to financial failure. Typically there is an illiquid market for the securities of such companies. Such companies also may have shorter operating histories on which to judge future performance. The Investment Manager may rely on its own or a Portfolio Company's projections concerning such company's future performance as well as certain factors beyond the control of the Investment Manager and the Portfolio Company. A Portfolio Company may fail to manage effectively its own growth. The marketability and value of any such investments will depend on many factors beyond the control of the Investment Manager. These portfolio companies may have new or unproven technologies or business models that ultimately may not be successful. Early-stage technology companies often face intense competition in attracting and retaining talented executives or technologists. These portfolio companies can experience failures or substantial declines in value at any stage and may face intense commercial competition from other companies, including established companies with significantly greater resources. Accordingly, the Company's portfolio companies may not be profitable and may not be able to obtain liquidity for the holders of their securities (including the Company), which may result in no distributions to the Investors as a result of the Company's Portfolio Investments.
Economic and Equities Markets Risks
The public and private equity markets have recently experienced significant volatility in value. There is substantial risk that such volatility may continue and that investment values may decline substantially in the future. Portfolio Companies will be sensitive to general downward swings in the overall economy or in the technology industry, which may in turn negatively affect the Company's Portfolio Investments, reduce or eliminate returns to the Investors, and/or result in a complete loss of an investor's capital contributions. In addition, factors specific to a Portfolio Company may have an adverse effect on the Company's Portfolio Investment. An economic recession or adverse developments in the securities markets, including the volatility of public markets for the securities of technology companies, might have a negative effect on some or all of the Company's Portfolio Companies, including the inability of Portfolio Companies to access additional capital necessary to sustain growth or conduct operations. This would, in turn, negatively affect the Company's investments in such companies, reduce or eliminate returns to the Company's investors, and could result in a complete loss of an investor's capital contributions. The inability to secure additional capital may result in the need for the Company to make larger investments in a particular Portfolio Company than it might otherwise make and to make follow-on investments in a particular company in order to sustain growth or continue operations.
Need for Follow-On Investments
The Investment Manager anticipates that the Company will be called upon frequently to provide additional funds to Portfolio Companies or will have the opportunity to increase its Portfolio Investment in a successful Portfolio Company. As previously stated, an economic recession or adverse developments in the securities markets or technology industry might have a negative effect on the ability of portfolio companies to access additional capital necessary to sustain growth or conduct operations. The Company may not be able or willing to make follow-on investments and has broad discretion not to do so. This may have a substantial negative effect on portfolio companies in need of such an investment, which in turn may negatively affect the Company's Portfolio Investments in such companies, reduce or eliminate returns to the Company's investors, and result in a complete loss of an investor's capital contributions.
Although the Managing Member generally expects to negotiate appropriate shareholder rights as it determines appropriate at the time of the Company's investment, including rights with respect to future financings, liquidity events, and board matters, to protect the Company's interests in a Portfolio Company, such rights may be limited or may not exist at all with respect to certain or any portfolio companies. In addition, the Company may hold a non-controlling interest in any particular Portfolio Company and, therefore, may have a limited ability to direct the actions of such company's board of directors in order to better protect or manage its investment in such a Portfolio Company.
Early-stage technology companies may be highly leveraged, and the Portfolio Investments in such companies may be made at levels in the capital structure subordinate to senior equity or debt securities of such companies. The leveraged capital structure of such portfolio companies will increase the exposure of these companies to adverse economic factors such as rising interest rates, high unemployment rates, difficulty accessing capital or credit, or deterioration in the condition of the Portfolio Company or its industry. In addition, the Company may use short-term leverage (not to exceed 180 days) in an investment in a Portfolio Company, which may further expose such company and the Company to the risks of leverage described above.
Highly Competitive Market for Investment Opportunities
The venture capital business is intensely competitive and involves a high degree of uncertainty. The Company and the Managing Member will be competing with other established investors and funds with substantial resources and experience. The number of appropriate investment opportunities for the Company is limited, and intense competition for such opportunities may result in an increase in the price of such investments for the Company or even the inability of the Company to receive investment opportunities in certain companies. The Company may not be able to identify appropriate investments for all of the Company's committed capital and any or all of such capital may not be invested within a specified period.
No Market for Member Interests
An Investor's investment in the Company will be illiquid and subject to substantial restrictions upon transferability. There is no market for interests in the Company and none is expected to develop. A Member will not be permitted to assign, transfer, pledge, mortgage or otherwise dispose of its interest without the prior written consent of the Managing Member. A Member will generally not be permitted to withdraw from the Company. Consequently, an investor may not be able to fully liquidate its investment prior to the end of the Company's dissolution and winding up following the end of its term.
Illiquid and Long-Term Investments
Although portfolio investments by the Company may generate some current income, the return of capital and the realization of gains, if any, from an investment will generally occur only upon the partial or complete disposition of such investment. While a portfolio investment may be sold at any time, it is not generally expected that this will occur for a number of years after the investment is made. It is unlikely that there will be a public market for the securities held by the Company at the time of their acquisition. The Company generally will not be able to sell its securities publicly unless their sale is registered under applicable securities laws, or unless an exemption from such registration requirements is available. In addition, in some cases the Company may be prohibited by contract from selling securities for a period of time.
Dilution to Existing Members as a Result of Adding Members
The Company may use funds received pursuant to any accepted subscription immediately. Members who invest earlier than other Members may have their economic interest in any investments of the Company diluted as a result of additional Members gaining an interest in the Portfolio Investments at a later time. It is anticipated that Members joining at a later time will receive proportionate interests in any investments made by the Company prior to such Members joining the Company, diluting the existing Members' interests. In addition, there can be no assurance that the amount paid for Shares by Investors joining at a later time will reflect the fair value of the Company's existing investments at the time such additional Investors subscribe for Shares, which may result in further dilution than would otherwise have occurred. Any such dilution may have a negative effect on any returns received by those Members who invested in the Company prior to other Members.
"Down Rounds" and Valuation of Portfolio Companies
As noted above in "—Need for Follow-On Investments" the Investment Manager anticipates that the Company will be called upon frequently to provide additional funds to Portfolio Companies or will have the opportunity to increase its Portfolio Investment in a successful Portfolio Company. If and to the extent the Company is called upon to provide additional funds to a Portfolio Company there can be no assurance that the value of such Portfolio Company will be equal to or greater than the valuation of such Portfolio Company at the time the Company made its initial investment therein (a "down round"). If a down round occurs the value of the Company's Portfolio Investment in such Portfolio Company will decrease. In addition, the Company may experience dilution with respect to its Portfolio Investment in such Portfolio Company in excess of the dilution that would otherwise occur as a result of such financing.
Possible Lack of Diversification
The Company may participate in a limited number of portfolio investments focused on a limited sector of the economy. The Company will focus on seed and early-stage investments in the communications and information technology industries and is not expected to benefit from the reduced risks generally provided by a broadly diversified portfolio. A specific investment focus is inherently more risky and could cause the Company's investment to be more susceptible to particular economic, political, regulatory, technological or industry conditions or occurrences compared with a fund, or a portfolio of funds, that is more diversified or has a broader industry focus.
Reliance on the Managing Member and Key Individuals
The Managing Member will have exclusive responsibility for the Company's activities, and, other than as may be set forth herein, Members will not be permitted to evaluate investment opportunities or relevant business, economic, financial or other information that will be used by the Managing Member in making decisions. The Company will be particularly dependent on the Principal. If the Principal were to resign from the Managing Member or become unable to perform his duties on behalf of the Company, including the ability to identify future investment opportunities for the Company, the Managing Member, the Company and the Company's portfolio companies may be negatively affected, which in turn may have a negative effect on returns to the Members.
Conflicts of Interest
The Principal will continue to devote a portion of his time to the business of activities unrelated to BSeed that are permitted by the LLC Agreement and to successor funds that are authorized to be formed in accordance with the terms of the LLC Agreement. This could create a conflict of interest when allocating time between the Company and the activities unrelated to BSeed and could limit the ability of the Principal to devote adequate time to the Company's affairs. In certain situations, our Principal, Investment Professionals or others affiliated with us may personally invest in portfolio companies, which may create conflicts of interest in allocating time or evaluating investment decisions. Please carefully review the terms of the LLC Agreement for terms addressing potential conflicts of interests that apply to an investment in the Company. Please review carefully the description of certain risks related to conflicts of interest of the Managing Member, Principal and BSeed in the Section of this Memorandum entitled "Potential Conflicts of Interest."
No Prior Company Performance
The Company has not commenced operations and, therefore, has no operating history upon which prospective investors may evaluate its performance. Although the relevant professionals have prior experience, both together and separately, relating to the type of investments the Company will pursue, the Company has no operating history upon which prospective investors may evaluate its likely performance. There can be no assurance that the Company will achieve its investment objectives. Further, prior performance is not indicative of future results. The nature of, and risks associated with, the Company's future investments may differ substantially from those investments and strategies undertaken historically by the Principal. The Portfolio Investments may not perform as well as the past investments of the Principal and The Company may not be able to avoid losses.
In accordance with common industry practice, the Managing Member may, on behalf of the Company, enter into one or more "side letters" or similar agreements with certain Members pursuant to which the Managing Member grants to such Member(s), on behalf of the Company, specific rights, benefits or privileges that may not be made available to other Members. As a result, you may not be in the same position as other Members to protect your investment in the Company and may face a disproportionate risk of loss in comparison to investors granted such rights, benefits, or privileges.
Distributions in Kind
The Managing Member may distribute the proceeds of certain of the Portfolio Investments in securities or other non-cash property. Any such distribution could put downward pressure on the price of the issuer's securities. Such securities also may be subject to restrictions on transfer and the Members may incur costs and delays in converting securities into cash.
THE COMPANY URGES ALL PROSPECTIVE INVESTORS, INCLUDING TAX-EXEMPT INVESTORS, TO CONSULT THEIR TAX ADVISORS WITH RESPECT TO THEIR OWN TAX SITUATIONS AND CONSEQUENCES OF THIS INVESTMENT. Please see Appendix B, "Certain Tax Considerations", for further information..
Service on Boards of Directors
The Company may seek to obtain observation or visitation rights or the right to designate directors to serve on the boards of directors of the Portfolio Companies in which the Company holds Portfolio Investments. The foregoing rights and activities, especially in light of new statutes and regulations relating to corporate governance and increased scrutiny of corporate boards, could expose the Managing Member, its affiliates, and the assets of the Company to regulatory action and/or claims by a Portfolio Company, its security holders and its creditors. In addition, the Company may be prohibited from selling publicly traded securities of a Portfolio Company if the Managing Member is in possession of material non-public information relative to such company. While the Managing Member intends to manage the Company in a way that will minimize exposure to these risks, the possibility of successful claims or adverse regulatory action cannot be eliminated, and such events may have a significant adverse effect on the Company.
Material Non-Public Information
By reason of their responsibilities in connection with their other activities, certain of the Managing Member's and the Investment Manager's personnel may acquire confidential or material non-public information or be otherwise restricted from initiating transactions in certain securities. The Company may not be free to act upon any such information. Due to these restrictions, the Company may not be able to initiate a transaction that it otherwise might have initiated and may not be able to sell an investment that it otherwise might have sold.
The Managing Member, the Investment Manager, and their respective members, partners, officers, directors, shareholders, employees, advisors, agents, affiliates and personnel will be entitled to indemnification from the Company, except in certain limited circumstances. The assets of the Company will be available to satisfy these indemnification obligations.
Company Not Registered
The Company is not registered under the 1940 Act, and neither the Managing Member, the Investment Manager, nor the Principal is expected to be registered as an investment advisor under the Advisers Act. The 1940 Act and the Advisers Act provide certain protection to investors and impose certain restrictions on registered investment companies and registered investment advisers (for example, the 1940 Act requires investment companies that are subject to its provisions have disinterested directors on their boards and regulates the relationships between the adviser and the investment company), none of which will be applicable to the Members, the Company, the Managing Member, or the Principal, respectively. For further information, please refer to the discussions of the 1940 Act and Advisers Act in Appendix A. In addition, neither the Managing Member nor the Principal is registered as a broker/dealer under the Securities Exchange Act of 1934, as amended, or with the Financial Industry Regulatory Authority and, thus, is not subject to the record keeping or specific business practices of such Act and Association.
Legislative and Regulatory Risk
Abuses within the investment management industry have resulted in a number of recent and ongoing legislative and regulatory initiatives affecting such business practices. New or proposed laws and regulations may result in significant and costly burdens being placed on the Company or its portfolio companies, and may impede their ability to go public and/or be acquired by an existing public company.
Certain Litigation Risks
The Company will be subject to a variety of litigation risks, particularly due to the substantial likelihood that one or more portfolio companies will face financial or other difficulties. The Company may also participate in Portfolio Company financings at implicit valuations lower than the valuations implicit in preceding rounds of financing. Legal disputes involving any or all of the Company, the Managing Member, or their affiliates, may arise from the foregoing activities (or any other activities relating to the operation of the Company or the Managing Member) and could have a significant adverse effect on the Company including, for example, occupying the time of the Principal and/or causing the Managing Member, the Investment Manager and/or the Company to owe damages or otherwise incur liability.
Investments in Israeli Companies
Our investments in Israeli, or Israeli-affiliated, companies may involve significant risks in addition to the risks inherent in investments primarily in U.S. companies. We intend to invest most, if not all, of our assets in debt or equity of Israeli or Israeli-affiliated startup companies. Such companies may be directly influenced by the political, economic and security conditions affecting Israel. Any major hostilities involving Israel, the interruption or curtailment of trade between Israel and its trading partners, or a significant downturn in the economic or financial condition of Israel could have a material adverse effect on such companies' business condition or results of operations, which could significantly decrease the value of our investments. There can be no assurance that ongoing or revived hostilities in the Middle East or other factors related to the political or economic status of Israel will not have an adverse effect on our Portfolio Investments in securities of Israeli, or Israeli-affiliated, companies. These companies may also be subject to risks related to other jurisdictions, because their jurisdiction(s) of operation may be other than, or in addition to, Israel. Therefore, our investments in Israeli, or Israeli-affiliated, companies may also be subject to additional risks related to other jurisdictions in which they may operate.
Representation by DLA Piper LLP (US)
DLA Piper LLP (US) ("DLA Piper") has acted as special United States counsel for the Company and the Investment Manager. DLA Piper does not represent and has not represented either the Company or the Investment Manager relating to matters of Israeli law. DLA Piper may also act as counsel to a Portfolio Company in which the Company currently holds a Portfolio Investment, other equity investors in a Portfolio Company, creditors in a Portfolio Company or an agent therefor, a party seeking to acquire some or all of the assets or equity of a Portfolio Company, or a person engaged in litigation with a Portfolio Company. In connection with the Company, DLA Piper will not be representing the investors. No independent counsel has been retained to represent the investors or potential Investors. Representation by DLA Piper of the Company and the Investment Manager is limited to specific matters as to which DLA Piper has been consulted. There may exist other matters which could have a bearing on the Company as to which the Company has not been consulted. In addition, DLA Piper does not undertake to monitor the compliance of the Company and the Investment Manager with the investment objectives, investment strategies, investment restrictions and other guidelines and terms set forth in this Memorandum and in the Company's governing documents, nor does DLA Piper monitor compliance with applicable laws. DLA Piper has not investigated or verified the accuracy and completeness of any information set forth in this Memorandum. Prospective Investors should seek their own legal, tax and financial advice before investing in the Company.
Special Note Regarding Forward-Looking Statements
This Memorandum may contain forward-looking statements relating to future events or the future performance of the Company or its portfolio companies. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "could," "expect," "plan," "intend," "anticipate," "believe," "estimate," "predict," "potential" "project," "seek," and "continue," the negative of such terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially. In evaluating these statements, prospective investors should specifically consider various factors, including the risks outlined in the Risk Factors section above. These factors may cause actual events or results to differ materially from any forward-looking statement.
Although the Managing Member believes that the assumptions, assessments, and expectations reflected in the forward-looking statements are reasonable, future results, levels of activity, performance, developments, business decisions, or achievements cannot be guaranteed. Moreover, neither the Company, the Managing Member, the Principal, nor any of their affiliates assume responsibility for the accuracy and completeness of the forward-looking statements. the Company, the Managing Member, the Principal and their affiliates are under no duty to update any of the forward-looking statements after the date of this Memorandum to conform such statements to actual results or to changes in expectations.
V.POTENTIAL CONFLICTS OF INTEREST
Existing Business activities
The Principal currently manages or performs services for other entities affiliated with Besadno. Investments by the Company in portfolio companies of such other entities may create a conflict of interest for the Principal and the Investment Manager, given their respective duties to each of such other entities.
The Principal Retains Voting Control over the Company
The Principal controls the Investment Manager, which controls the voting interests of the Company. As a result, the Principal effectively controls the Company. This may result in a conflict of interest for the Principal and the Investment Manager, as the Investment Manager will have duties both to the Investors and to the Principal. In addition, the Interests are nonvoting and have no control rights relating to the Company. If the Investment Manager or the Principal elects to take action with which an Investor disagrees the Investor will have no consent right to such action nor will it have any right to replace the Investment Manager.
Payment of Carried Interest
The existence of the Investment Manager's Carried Interest may create an incentive for the Investment Manager to make riskier or more speculative investments on behalf of the Company than would be the case in the absence of this arrangement. If distributions are made of property other than cash, the amount of any such distribution will be accounted for at the fair market value of such property as determined by the Investment Manager in accordance with procedures set forth in the governing documents of the Company. An independent appraisal generally will not be required and is not expected to be obtained. Further, if and to the extent a Portfolio Company is subject to a down round the expected Carried Interest payable to the Investment Manager upon a successful exit will be higher than would have been the case had no down round occurred. Please see "Risk Factors—"Down Rounds" and Valuation of Portfolio Companies" for additional information.
Principal's Commitment to the Company and its Operations
The Managing Member and each Principal will devote such portion of its or his respective time as is necessary and appropriate for managing and liquidating the Company's portfolio securities consistent with his fiduciary obligations to the Company and its investors. Notwithstanding this commitment of time and efforts by the Managing Member and the Principal, the Principal will, during the term of the Company, devote time to one or more of the following activities: (i) membership on any board of directors of, or serving as officers, advisors or agents to, any public or private company, whether or not the Company holds an investment therein, or non-profit institution, provided that with respect to any such membership or services with respect to (x) private companies that are not affiliates of the Principal or (y) any public company, the Principal is serving in such roles as of the initial closing date of this offering or such positions are taken or assumed after the initial closing date; (ii) purchasing, managing and selling, directly or indirectly through investment funds or similar entities, real estate or publicly traded securities as personal investments; (iii) purchasing and selling non-publicly traded securities or other assets as personal investments that are outside the scope of the Company's investment purposes and objectives as provided in this Agreement or that the Principal have determined to be not appropriate for the Company's investment; (iv) other non-profit activities, including, but not limited to, participation on boards of investor organizations, educational institutions or governmental or quasi-governmental entities; (v) the promotion or sponsoring of, or other participation in connection with, foreign investment entities, (vi) the promotion, sponsoring, organization and management of an investment opportunity fund designed to make investments outside of the investment scope and focus of the Company; and (vii) the taking of preparatory steps in connection with the formation of successor funds.
In addition to the foregoing, the Principal, the Managing Member and their Affiliates may be prohibited from taking action for the benefit of the Company (i) due to confidential information acquired or obligations incurred in connection with an outside activity of such party; (ii) due to the fact that the Principal or Affiliate may serve as an officer or director of a Portfolio Company or by being treated as an affiliate or insider of such Portfolio Company; or (iii) in connection with activities undertaken by the Principal or affiliate prior to the initial closing date of the Company.
Other Activities of Principal
The Principal dedicates a portion of his business time to activities outside of BSeed as of the date of this Memorandum and is anticipated to keep allocating a portion of his business time to activities outside of BSeed in the foreseeable future.
The formation and operation of additional investment companies managed by the Principal may conflict with their duties and obligations to the Company and its investors.
Existing Affiliated Entities
Simultaneously with the offering of securities pursuant to this Memorandum and the continued operation of the Company, the Principal, the Investment Manager and the Managing Member are anticipated to continue managing or providing services to other entities affiliated with them and have securities of such other entities offered to potential investors.
The fact that the Investment Manager, Besadno, the Principal or any related persons are directly or indirectly interested in or connected with any company or person with which or with whom the Company may have dealings will not by itself preclude such dealings, and neither the Company nor any of the Investors will have any rights in or to such dealings or any profits derived therefrom. Furthermore, the Company may make investments in companies in which the Investment Manager, the Besadno, the Principal or their affiliates or related persons own investments of greater than $100,000 and they may remain invested after the Company's investment in such companies. In addition, the Company anticipates that it will invest in one or more target companies in which a related person or affiliate of the Company has previously invested and may remain invested after the Company's investment in such target companies. The value of any such target company may increase as a result of the Company's investment therein, which may increase the value of the holdings of such related persons or affiliates of the Company. Neither the Company nor any Investor therein shall have any right to, or any benefit as a result of, any of such resulting increase in value.
The Principal or affiliates of the Managing Member or BSeed may, from time to time, enter into transactions with or be appointed officers or directors of Portfolio Investments; provided, however, that the terms and conditions of such transactions and appointments shall be commercially comparable to those that would be offered to unrelated third parties having similar expertise and experience.
The Managing Member and the Principal shall make all investment opportunities that are within the Company's primary investment objective and that come to their attention available to the Company before the Managing Member or the Principal invests in any such opportunity for its or his own account; provided that the foregoing shall not apply to the following: (a) purchases of securities that are traded on a public securities market, (b) investment opportunities in entities (or successors to such entities) in which the Principal has an existing investment, (c) investments of an amount less than $1,000,000, (d) purchases of securities pursuant to options or warrants received in connection with services rendered, (e) any passive investments in any pooled-investment fund or similar entity that the Managing Member determines, in its sole discretion, would not be consistent with the investment objectives of the Company or would not be likely to further the interests of the Company; (f) any real estate investment; or (g) investment opportunities presented to private or public companies that are not Portfolio Investments and of which the Principal serves as a directors or officer or to which the Principal has preexisting fiduciary duties. For the avoidance of doubt, the Investment Manager and the Principal are not obligated to allocate any investment opportunities to the Company other than as expressly set forth in this Memorandum.
The Investment Manager and the Principal currently manage existing funds, and may manage additional funds and accounts in the future (collectively, "Other Besadno Funds"), that may have investment mandates that overlap with those intended for the Company. In addition, the investment policies, fee arrangements and other circumstances of the Company may vary from those of Other Besadno Funds. While the Investment Manager, the Principal and their affiliates will seek to manage any resulting conflicts of interest in good faith, there may be situations in which the interests of the Company with respect to the allocation of investment opportunities will conflict with the interests of one or more of the Other Besadno Funds. In such circumstances, the Investment Manager and the Principal expect to allocate such opportunities among the Company and such Other Besadno Funds on a basis that the Investment Manager and the Principal determine in good faith is appropriate, taking into consideration such factors as the Investment Manager and the Principal determine, including but not limited to the capital available to the Company and such Other Besadno Funds, any restrictions on investment, fiduciary duties owed to Other Besadno Funds, the sourcing of the transaction, the size of the transaction, the amount of potential follow-on investing that may be required for such investment and the other investments of the Company and such Other Besadno Funds, the relation of such opportunity to the investment strategies of the Fund and such Other Besadno Funds and other considerations deemed relevant by the Investment Manager and the Principal in their discretion.
Investments by the Principal in Other Besadno Funds
The Principal may invest for his own account in one or more Other Besadno Funds, and is not required to invest in the Company in the same amount or at the same time at which the Principal invests in any such Other Besadno Funds.
The Managing Member may, in its discretion, itself invest and offer related parties, including certain Members, the opportunity to invest directly in companies in which the Company has or will make an investment in the event the Managing Member determines that such co-investment is in the best interests of the Company, would be beneficial to the consummation of the investment by the Company and is made on terms no better than those made available to the Company.
APPENDIX A: CERTAIN U.S. REGULATORY CONSIDERATIONS
Investment Company Act of 1940
the Company will not be subject to the provisions of the Investment Company Act of 1940, as amended (the "1940 Act"), in reliance upon Section 3(c)(1) of the 1940 Act, which excludes from the definition of "Investment Company" issuers whose outstanding securities are beneficially owned by not more than 100 persons who meet the conditions with respect to "beneficial ownership" contained in Section 3(c)(1).
With respect to the determination of beneficial ownership and accredited investor status, the Company will obtain appropriate representations and undertakings from purchasers in order to ensure that such purchasers meet the conditions of the exemption on an ongoing basis.
Investment Advisers Act of 1940
Neither the Managing Member or the Investment Manager intends to register with the SEC as an investment adviser under the Investment Advisers Act of 1940, as amended (the "Advisers Act") in reliance on an exemption from registration under Section 203 of the Advisers Act, as amended by The Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act").
An entity such as the Managing Member or the Investment Manager, advising a pooled investment vehicle, such as the Company, in the absence of an applicable exemption, would need to register as an investment adviser under the Advisers Act. An exemption that may apply to the Managing Member and the Investment Manager is the exemption available to an adviser solely to one or more venture capital funds under Section 203(l) of the Advisers Act (commonly referred to as the "venture capital fund exemption").
The Managing Member believes that it and its affiliates will be eligible to rely on the venture capital fund exemption as of the initial closing. No assurance can be given, however, that the Managing Member and its affiliates will be able to rely on the exemption on an ongoing basis, as the exemption requires continuous re-evaluations. Moreover, reliance on this exemption may necessitate the Managing Member or its affiliates changing the operations of its business or the investment activities of the pooled vehicles advised by the Managing Member or its affiliates or changing the terms of the Company (in accordance with the LLC Agreement). If the Managing Member and its affiliates are able to rely on such an exemption, investors in the Company will not be entitled to the benefits of certain protections under the Advisers Act.
Even if the Managing Member and its affiliates are able to rely on the venture capital fund exemption, they will nonetheless be required to provide the SEC with some information as an exempt reporting adviser. That information will be made publicly available by the SEC. In addition, the Managing Member, its affiliates and the Company may be subject to SEC examination authority, certain other Advisers Act compliance obligations, and may nonetheless be required to register with a state agency.
If the Managing Member and its affiliates cannot qualify under an exemption from Advisers Act registration, they may need to register with the SEC as an investment adviser. Registration under, and compliance with, the Advisers Act would be costly. Such a registration obligation also would require the Managing Member and its affiliates to report to the SEC detailed information regarding the Managing Member, its affiliates, and the Company. The additional time required to comply with Advisers Act obligations could divert attention of the Company's management team from Company operations. The Managing Member also may determine that it needs to change the terms of the Company (in accordance with the LLC Agreement), to reflect such registration.
To ensure compliance with the Advisers Act in the event the Managing Member and its affiliates are no longer exempt from registration, the Company may only accept subscriptions for Interests from investors that are "qualified clients" as that term is defined in the SEC's rules promulgated pursuant to the Advisers Act. Generally, individual investors need to have a $2.1 million net worth exclusive of any equity in their personal residence or invest $1 million in the Company in order to be considered a "qualified client."
Securities Act of 1933
The offer and sale of the Member interests will not be registered under the Securities Act of 1933, as amended (the "1933 Act") in reliance upon the exemption from registration provided by Section 4(2) and Regulation D promulgated thereunder and/or Regulation S promulgated under the 1933 Act. Each purchaser must be a U.S. person that is an "accredited investor" (as defined in Regulation D) or a non-U.S. person that meets the requirements of Regulation S. Each respective investor will be required to represent, among other customary private placement representations, that he, she or it is acquiring his, her or its Interest for investment purposes only and not with a view to resale or distribution.
Prior to the sale of a Member's Interest, investors and their advisors are invited to ask questions of and obtain additional information concerning the Interest described herein, the terms and conditions of the offering and any other relevant matters (including, but not limited to, additional information to verify the accuracy of the information set forth herein).
APPENDIX B: CERTAIN TAX CONSIDERATIONS
The following is a general summary of certain U.S. federal income tax consequences relating to the acquisition, ownership and disposition of interests in the Company. This summary is based on existing provisions of the Code, existing and proposed regulations promulgated thereunder, and current administrative rulings and court decisions, all of which are subject to changes that could be applied retroactively.
This summary does not address all of the U.S. federal income tax consequences that may be relevant to a particular investor in view of such Investor's particular circumstances. For example, this summary generally does not discuss the special tax rules applicable to banks, thrifts, securities dealers, insurance companies and certain other financial institutions. The discussion deals only with investors who invest in connection with this offering and does not address any aspect of state, local, estate or non-U.S. tax law. This discussion assumes that (i) each Investor (and each of its beneficial owners, as necessary under U.S. federal income tax withholding rules) will provide all appropriate certifications to the Company in a timely fashion to minimize withholding (or backup withholding) on each Member's distributive share of the Company's gross income and (ii) the Investors will hold their interests in the Company as capital assets for U.S. federal income tax purposes. For purposes of this discussion, a "U.S. person" means an individual citizen or resident of the U.S., a corporation, limited liability company or partnership created or organized under the laws of the U.S. or any state thereof or the District of Columbia, any estate (other than an estate the income of which, from sources outside the U.S. that are not effectively connected with a trade or business within the U.S., is not includible in its gross income for U.S. federal income tax purposes) or a trust if a court within the U.S. is able to exercise primary supervision over the administration of such trust and one or more U.S. persons have the authority to control all substantial decisions of the trust. For purposes of this discussion, a "U.S. Investor" means any investor that is a U.S. person and a "Non-U.S. Investor" means any investor that is not a U.S. person.
For Investors who own their interests in the Company through a partnership or an entity treated as a partnership for U.S. federal income tax purposes, the U.S. federal income tax consequences relating to the acquisition, ownership and disposition of interests in the Company will generally depend upon the status of the partner and the activities of the partnership. Such Investors should consult their own tax adviser as to their particular tax consequences.
No advance rulings have been or will be sought from the U.S. Internal Revenue Service ("IRS") regarding any matter discussed in this Memorandum. Each prospective investor should also note that, except as otherwise provided herein, this summary does not address the interaction of U.S. federal tax laws and any income or estate tax treaties between the U.S. and any other jurisdiction. Except as indicated in "Classification of the Company" below, counsel to the Company has not rendered and will not render any legal opinions with respect to any U.S. federal income tax consequences relating to the Company or an investment therein. None of the Managing Member, the Manager, or their respective partners, members, directors, officers, employees, agents, representatives, legal counsel, auditors or associates or affiliates of any of the foregoing assume any responsibility for the tax consequences of an investment by a Member in the Company. Accordingly, prospective investors are urged to consult their tax advisors to determine the federal, state, local and foreign income and other tax consequences to them of acquiring, holding and disposing of interests in the Company, including the application of the U.S. federal alternative minimum tax.
Classification of the Company
The Company has been advised by counsel that, under applicable U.S. Treasury Regulations, the Company will be treated as a partnership, rather than a corporation, for U.S. federal income tax purposes. In certain cases under Section 7704 of the Code, a partnership which is classified as a "publicly traded partnership" may be taxed as a corporation for U.S. federal income tax purposes. The Managing Member, in reliance on representations provided by investors in the Company and by transferors and transferees of interests in the Company, intends to conduct the activities of the Company so as to ensure that the Company will not be treated as a "publicly traded partnership."
Taxation of Fund Operations Generally
As a partnership, the Company will not pay U.S. federal income taxes, but each U.S. Investor will be required to report its distributive share (whether or not distributed) of the Company's income, gains, losses, deductions and credits of the character specified in Section 702 of the Code. It is possible that investors could incur U.S. federal income tax liabilities without receiving from the Company sufficient distributions to defray such tax liabilities. The Company's taxable year will be the calendar year, or such other period as required by the Code.
Election to Adjust Basis of Fund Assets
The Managing Member will have the authority to cause the Company to elect under Section 754 of the Code to adjust the basis of the Company's assets ("tax basis adjustments") in connection with certain distributions to Members or certain transfers of interests in the Company. Although the Managing Member has no present intention of making an election under Section 754, tax basis adjustments to the Company's assets may be mandatory under certain circumstances. These tax basis adjustments could affect the allocation of the Company's income, gain, loss or deduction among the Members for federal income tax purposes, with the result that some taxable Members might incur greater tax liability as a result of the tax basis adjustments.
The Managing Member will also have the authority to cause the Company to elect to be treated as an "electing investment partnership" under Section 743 of the Code. If such election is made, tax basis adjustments that would otherwise be mandatory will not be required. As a consequence of the election, however, Members who acquire their interests in the Company by transfer from an existing Partner who recognized a tax loss on the transfer will be limited in their ability to deduct their shares of any future losses allocated to them by the Company. There is no assurance that the Company will satisfy the requirements for electing to be an electing investment partnership.
Under the LLC Agreement, the Managing Member may require transferors (and, in some cases, transferees) of interests in the Company to bear the Company's expenses resulting from the transfer, including any incremental accounting and administrative expenses related to current and future tax basis adjustments resulting from the transfer. These costs, which could be significant, may be incurred without regard to whether the Company has made either of the elections described above. Furthermore, each Partner will be required to cooperate reasonably with the Managing Member and to provide the Company with any information necessary to allow the Company to comply with its obligations to make tax basis adjustments or its obligations as an electing investment partnership.
Sale or Taxable Exchange of Interests
Upon the sale or taxable exchange of a U.S. Investor's interest in the Company or a complete withdrawal from the Company, a selling or withdrawing U.S. Investor generally will recognize gain or loss in an amount equal to the difference between the amount of the consideration received and the U.S. Investor's allocable adjusted tax basis for its interest in the Company. Such U.S. Investor's adjusted tax basis will be adjusted for this purpose by its allocable share of the Company's taxable income or loss for the year of such sale or withdrawal. Subject to the discussion under "—Investments in Non-United States Companies" below, any gain or loss recognized with respect to such a sale, exchange or withdrawal (or, as discussed in "—Treatment of Cash Distributions; Withdrawals; Liquidations" below, upon certain distributions), generally will be treated as a long-term or short-term capital gain or loss, depending upon the U.S. Investor's holding period.
Treatment of Cash Distributions; Withdrawals; Liquidation
Cash distributions, to the extent they do not exceed a U.S. Investor's adjusted tax basis in such U.S. Investor's interest in the Company, will not result in taxable income to such U.S. Investor but will reduce (but not below zero) such U.S. Investor's adjusted tax basis in such U.S. Investor's interest in the Company. Subject to the discussion under "—Investments in Non-United States Companies" below, cash distributions in excess of a U.S. Investor's adjusted tax basis in such U.S. Investor's interest in the Company immediately prior thereto will result in the recognition of gain to the extent of such excess and generally will be treated as gain from a sale of a capital asset. A U.S. Investor will recognize a loss only to the extent of the excess of its adjusted tax basis over the amount of cash distributions received following the complete withdrawal of its interest in the Company. A complete withdrawal of a U.S. Investor's interest in the Company will generally be treated as if the U.S. Investor sold his interest in the Company. See also "—Sale or Taxable Exchange of Interests" above.
Tax-Exempt U.S. Investors
Unrelated Business Taxable Income
Income of an otherwise tax-exempt entity will be subject to federal income tax to the extent that it constitutes "unrelated business taxable income" ("UBTI") within the meaning of Section 512 of the Code. UBTI generally is defined as income from a trade or business regularly carried on by a tax-exempt entity that is unrelated to its exempt purpose, or income from such a trade or business that is regularly carried on by a partnership of which the entity is a partner. Although passive investment income, such as interest, dividends and capital gains, generally is excluded from the definition of UBTI, such passive investment income will be taxable as UBTI if the investment that gives rise to the income is "debt-financed." An investment generally will be "debt-financed" in proportion to the amount of debt that was used to acquire the investment. Thus, if a tax-exempt investor in the Company uses debt to finance its investment in the Company, or if the Company uses debt to finance its portfolio investments, the tax-exempt investor could realize UBTI, depending on the circumstances.
It is possible that, as a result of these activities or arrangements or otherwise, the Company will realize income which would constitute UBTI and, in that event, each tax-exempt Partner would be subject to U.S. federal income tax on its share of such income and could be required to file a U.S. federal income tax return with respect to such income.
Tax Shelters and Similar Transactions
Under Section 4965 of the Code, certain tax-exempt entities may be required to pay an excise tax if they participate (e.g., as a partner in a partnership) in a "prohibited tax shelter transaction" or a "subsequently listed transaction" as defined in that section. Also, tax-exempt entities and their managers may be subject to reporting requirements and special penalties for noncompliance in connection with such transactions. the Company does not intend to participate in any such transactions. However, the rules regarding participation in these transactions are complex and only limited guidance is available as to their interpretation. Accordingly, tax-exempt investors are urged to consult with their own tax advisors in connection with these provisions.
Taxable U.S. Investors
Limitations on Allowable Deductions
Under Section 67 of the Code, U.S. taxpayers who are individuals may deduct certain miscellaneous expenses only to the extent that such deductions exceed, in the aggregate, 2% of the taxpayer's adjusted gross income. Further, Section 68 of the Code separately disallows certain itemized deductions otherwise allowable to taxpayers who are individuals; the amount disallowed varies based on the taxpayer's adjusted gross income. Part or all of the Company's expenses allocated to a Member who is an individual (including that Member's share of the Management Fee) may be disallowed as deductions under these provisions. Moreover, if an Investor is subject to the alternative minimum tax, such deductions will not be deductible in determining the Investor's "alternative minimum taxable income" that is subject to the alternative minimum tax.
Investors in the Company may be subject to limitations on the deductibility of their shares of any losses generated by the Company. For example, an Investor generally will not be able to deduct losses in excess of its tax basis for its interest in the Company. In addition, losses of individuals and certain other taxpayers may be subject to disallowance (or deferral) under the "at-risk" rules or other loss limitation rules. The deductibility of net capital losses is also subject to limitations.
The organizational expenses of the Company are not currently deductible for federal income tax purposes, but the Company expects to take advantage of an election to deduct such expenses over a 180-month period. the Company's syndication expenses, i.e., the expenses incurred in connection with the offer and sale of interests in the Company, including the fees and expenses of placement agents, are not deductible by the Company or any Partner.
Rollover of Qualified Small Business Stock
Section 1045 of the Code permits individual taxpayers to defer or "roll over" taxable gain realized on the sale of certain qualified small business stock. Generally, individual taxpayers that purchase qualified small business stock and hold the stock for at least six months may defer recognition of all or a part of the taxable gain arising from the sale of such stock ifthe taxpayer acquires other qualified small business stock within 60 days after the date of sale. Gain will be recognized on the sale of qualified small business stock only to the extent the amount of sale proceeds exceeds that amount reinvested by the taxpayer within such 60-day period. Qualified small business stock is generally defined as any stock acquired by the investor at original issue in a C corporation that has gross assets at and prior to the date of issuance of less than $50 million. Stock of corporations engaged in certain businesses, however, is not eligible for rollover treatment under Section 1045.
The rollover benefits of Section 1045 also apply to gains realized by partnerships and other non-corporate taxpayers on qualified small business stock. Thus, the benefit of a tax-free rollover with respect to the small business stock by the Company will flow through to an individual or other non-corporate Member (an "eligible Member") if the Member holds its Fund interest at all times that the Company held the qualified small business stock. Under recently issued Treasury Regulations, if the Company disposes of small business stock at a gain, an eligible Member will qualify for rollover benefits if such Member makes a timely qualifying investment in other small business stock either directly or through the Company or another partnership in which such Member is a partner. Also, an eligible Member who sells small business stock directly will qualify for rollover benefits it such Member makes a timely qualifying investment in other small business stock through the Company or through another partnership. In addition, if the Company sells small business stock and reinvests in other small business stock, an eligible Member may elect not to participate in the Company's rollover. In that case, the Member would recognize the Member's share of the gain realized by the Company. Under the Treasury Regulations, the amount of a partnership's gain that can be rolled over by a partner in a partnership is subject to a non-recognition limitation, as follows: The portion of the partnership's gain that any partner may roll over (through any method described above) may not exceed such partner's "smallest percentage interest in partnership capital," determined by taking into account certain changes in such partner's interest in capital since the partnership's acquisition of the small business stock, but not taking into account changes in the partner's interest in capital due to income and loss allocations. This limitation could reduce the benefit of the rollover if Members' interests in capital change during the time the Company holds small business stock
Under Section 1202 of the Code, an individual taxpayer may exclude 50% of the gain realized upon the disposition of qualified small business stock that has been held for more than five years. However, a higher capital gains tax rate applies to this gain, and a portion of the gain is added back for purposes of the alternative minimum tax, with the result that the effective federal income tax rate on such gains may be only slightly lower than the tax rate that would otherwise apply. Temporary increases in the exclusion percentage under this section (including an increase to a 100% exclusion) expired at the end of 2014. There can be no assurance that any such increases in the exclusion will be enacted for the current year or any future year.
The Company may acquire small business stock that is eligible for the foregoing tax benefits. However, the Company is not obligated to seek out or otherwise make these tax benefits available to the Members. As a result, there can be no assurance, that the Company will acquire small business stock or that these tax benefits will be available to Members.
Medicare Tax on Investment Income
U.S. individuals, estates and trusts may be required to pay a 3.8% Medicare tax on their net investment income, or in the case of estates and trusts, on their net investment income that is not distributed. For purposes of this tax, net investment income will include any interest, dividends and capital gains attributable to an investment in the Company. This new tax will apply, however, only to the extent that a U.S. person's total adjusted gross income exceeds certain income thresholds.
Investments in Non-United States Companies
The following sections describe certain tax issues that may arise if the Company invests in a portfolio corporation organized outside the United States.
A portfolio investment by the Company in the stock of a non-U.S. corporation that is classified as a passive foreign investment company ("PFIC"), because it has excessive passive assets or passive income, will cause U.S. Investors to be subject to a special tax regime. Under the PFIC tax regime, gain attributable to a disposition of PFIC stock by a U.S. shareholder, as well as income attributed to certain "excess distributions" with respect to PFIC stock, will be subject to tax in the year of the disposition (or the year of the excess distribution) as ordinary income. Such gain will also be subject to an interest-like charge on the tax liability over the period the stock was owned by the U.S. shareholder. Under certain circumstances, a U.S. shareholder in a PFIC may make a "qualifying electing fund" election (a "QEF Election") to be taxed currently on income and gain of the PFIC, but without being subject to the special PFIC tax regime described above. A U.S. Investor in the Company will be treated as a U.S. shareholder with respect to its proportionate share of any PFIC stock owned by the Company. the Company cannot predict with any certainty at this time whether any Portfolio Company in which the Company invests may be subject to the PFIC regime or whether it will be possible to make a QEF Election or any other election to minimize the tax consequences of PFIC status. Thus, it is possible that U.S. Investors may be subject to tax currently under the PFIC regime on their proportionate shares of certain earnings of a non-U.S. corporation in which the Company holds stock and/or may incur nondeductible interest-like charges on tax liability deferred under the PFIC regime without receiving distributions from the Company sufficient to satisfy such obligations.
Special tax rules apply to U.S. persons who own, directly or indirectly, 10% or more of the total combined voting power of all classes of stock of a non-U.S. corporation (each, a "United States Shareholder") that is a "controlled foreign corporation" ("CFC"). A non-U.S. corporation generally will be a CFC for a taxable year if United States Shareholders collectively own more than 50% of the total combined voting power or total value of the corporation's stock during the taxable year. United States Shareholders of a CFC generally must include in their gross income for U.S. federal income tax purposes their pro rata shares of certain earnings and profits of the CFC. Further, if a U.S. person sells or exchanges stock in a non-U.S. corporation and that person is or was a United States Shareholder at any time during the five-year period ending on the date of such sale or exchange during which the non-U.S. corporation was a CFC, that shareholder generally will be required to treat a portion of the gain recognized upon such sale or exchange as a dividend (treated for U.S. tax purposes as ordinary income rather than capital gain) to the extent of the earnings and profits of the CFC attributable to such stock. Under U.S. tax rules, the Company itself is a U.S. person and, if the Company becomes a United States Shareholder of a Portfolio Company that is a CFC, the Company's taxable U.S. Investors could be subjected to tax under the CFC rules. The rules applicable to CFCs are complex, and the foregoing summary of the U.S. federal income taxation of U.S. Investors indirectly owning an interest in a CFC is general in nature. The Managing Member cannot provide any assurance that the Company's non-United States portfolio companies (if any) will not be CFCs.
If the Company invests outside the United States, foreign countries may impose taxes on the income or activities of the Company. A taxable U.S. Investor may be entitled to a tax credit or a tax deduction for foreign taxes withheld or otherwise paid on foreign income. However, limitations may apply to reduce or eliminate the availability or use of foreign tax credits and deductions for foreign taxes. Since the availability of a credit or deduction for foreign taxes depends on the particular circumstances of each investor, investors are advised to consult their own tax advisors.
U.S. tax rules impose information reporting requirements on U.S. persons that own, either directly or indirectly, more than certain threshold amounts of stock in a non-U.S. corporation. These persons must disclose, among other things, various transactions between themselves and those non-U.S. corporations. For purposes of these information reporting requirements, each U.S. Investor will be treated as owning part or all of the stock owned directly or indirectly by the Company. In certain circumstances, U.S. Investors in the Company may be subject to these reporting requirements. Each investor should consult with its own tax advisors regarding compliance with these requirements.
The Managing Member will use commercially reasonable efforts to ensure that the Company does not engage in transactions that are expected to cause the Company to be engaged in the conduct of a U.S. trade or business for U.S. federal income tax purposes. This commercially reasonable efforts undertaking does not apply to the realization by the Company of income attributable to certain fee reductions or offsets. The Managing Member may satisfy its commercially reasonable efforts undertaking with respect to a portfolio investment if the Managing Member offers Non-U.S. Investors the opportunity to invest in the portfolio investment through a Blocker Corporation. the Company's activities will consist primarily of investing in stocks and securities of U.S. portfolio companies for capital appreciation and ancillary activities (such as making short-term investments in or loans to portfolio companies until permanent financing can be obtained), and it is intended that any income attributable to such ancillary activities will constitute investment income. Under the decided cases, investing in corporate stocks and securities for capital appreciation and receiving returns solely in the form of interest, dividends and capital gains attributable to enhancements in the value of those investments generally should not constitute engaging in a trade or business for U.S. tax purposes.
Provided that the Company is not engaged in the conduct of a U.S. trade or business, and subject to any withholding taxes that may be imposed under FATCA (as described below),the U.S. tax liability of a Non-U.S. Investor with respect to the investor's interest in the Company generally will be limited to withholding tax on certain gross income from U.S. sources generated by the Company as long as the Non-U.S. Investor undertakes no activities in the U.S. (determined without regard to its investment in the Company) that would cause that investor to be engaged in a U.S. trade or business. Further, if the Company withholds and pays over the proper amounts of tax to the U.S. government, Non-U.S. Investors that are individuals or corporations will not be required to file U.S. tax returns or pay additional U.S. taxes solely as a result of their investment in the Company. Non-U.S. Investors treated as trusts for U.S. federal income tax purposes are subject to special rules. If neither the Company nor its Non-U.S. Investors are engaged in a U.S. trade or business, those investors' shares of income and gains from sources other than the U.S. (generally, interest or dividends paid by non-U.S. portfolio companies and gains realized on the disposition of securities of those companies) will not be subject to U.S. federal income tax.
Interest and dividends from U.S. sources realized by the Company generally will be subject to U.S. income tax, collected by withholding, at a 30% rate on the gross amount of that income, when included in the distributive shares of Non-U.S. Investors. A Non-U.S. Investor whose distributive share of such income is subject to U.S. tax withholding may be able to claim an exemption or a reduced rate of withholding under a tax treaty between the U.S. and that investor's country of residence. However, there can be no assurance that a tax treaty will be available or that a treaty will be applicable to reduce or eliminate tax in the case of any particular Non-U.S. Investor. Notwithstanding the foregoing, certain interest income realized by the Company may be exempt from withholding as "portfolio interest," and other exemptions from withholding may be available.
Capital gains attributable to sales by the Company of the securities of U.S. corporations generally will not be subject to U.S. taxation or tax withholding when allocated to a Non-U.S. Investor unless that investor is an individual who is present in the U.S. for 183 days or more during the taxable year in which such gains are realized and certain other conditions are satisfied. This general rule of non-taxability of capital gains of non-residents does not apply to gains attributable to a U.S. trade or business conducted in the U.S. Also, this general rule of non-taxability does not apply or gains attributable to dispositions of securities of any "United States real property holding corporation" ("USRPHC"), defined as, in general, a company with 50% or more of the fair market value of its business assets consisting of interests in U.S. real estate and related assets. Capital gains attributable to sales by the Company of the securities of a USRPHC (other than debt securities with no equity component) may be subject to U.S. federal income tax, collected initially by withholding, when allocated to a Non-U.S. Investor. Non-U.S. Investors would also be required to file U.S. federal income tax returns, and might be liable for U.S. federal income tax in excess of the amount collected by withholding. Similarly, Non-U.S. Investors may become subject to U.S. federal income tax, and tax return filing obligations, as a result of transfers of their interests in the Company at a time when the Company owns stock of any USRPHC, unless an exception applies.
The discussion above of the U.S. tax treatment of Non-U.S. Investors is based on the assumption that neither the Company nor any Non-U.S. Investor will be treated as engaged in the conduct of a trade or business in the U.S. Notwithstanding the Managing Member's undertaking with regard to the trade or business issue, however, it is possible that the Company could undertake activities that would be regarded as engaging in conduct of a U.S. trade or business. If it were ultimately established that the Company is engaged in a U.S. trade or business, the Company generally would be required to withhold and pay over to the U.S. government a percentage of the Company's net income and gains that are both effectively connected with that trade or business and allocated to Non-U.S. Investors, and would be liable for interest and penalties with respect to any amounts which were not so withheld. The relevant withholding percentage is the maximum applicable U.S. federal income tax rate, currently 39.6% for individuals and 35.0% for corporations. In addition, Non-U.S. Investors generally would be (i) required to file U.S. tax returns and pay tax in respect of their shares of the Company's effectively connected income including capital gains and (ii) would be allowed a credit against U.S. tax liability for amounts of U.S. tax withheld by the Company on their behalf. Non-U.S. Investors that are foreign corporations might also be subject to an additional "branch profits" tax on certain earnings of the Company deemed to have been repatriated to those investors.
Withholding and Information Reporting Under FATCA Legislation
Prospective investors that are non-United States entities may be subject to additional information reporting requirements and, possibly, special withholding taxes under a recently enacted law. Legislation originally referred to as the Foreign Account Tax Compliance Act of 2009 ("FATCA"), which was enacted as part of the Hiring Incentives to Restore Employment Act of 2010. Under FATCA as enacted, each foreign financial institution ("FFI") that receives payments from a U.S. payor such as the Company is required to enter into an agreement with the Internal Revenue Service to provide detailed information regarding its United States accounts (including the accounts of U.S.-owned non-U.S. entities), or it will be subject to a 30% withholding tax on all payments made to it by from U.S. payors. Similarly, each non-financial foreign entity ("NFFE") that receives payments from a U.S. payor is required to provide information to the U.S. payor regarding its substantial United States owners (if any), or it will be subject to 30% withholding. If this 30% withholding tax on U.S. source income is triggered, it will apply not only to dividends but also to interest, including interest that would otherwise be exempt as portfolio interest, and to the proceeds of sales of securities, the gains on which would otherwise be exempt from U.S. taxation.
Alternatively, an FFI may be exempt from withholding under FATCA if (x) the country in which the FFI is organized has entered into an intergovernmental agreement (an "IGA") with the U.S. Treasury Department and (y) the FFI complies with the host-country reporting and disclosure requirements implemented under the IGA. Under FATCA or an IGA, non-U.S. investors may be required to provide detailed information, including possibly documentation, regarding their direct and indirect owners and their tax status, and such information will be reported to the IRS.
Prospective investors that are non-U.S. entities are urged to consult with their own advisers regarding the effect of FATCA on an investment in the Company.
Tax Information and Audits
the Company will file an annual information U.S. federal income tax return with the IRS. the Company will provide the Members with Schedules K-1 setting forth the U.S. federal income tax information necessary for them to file their tax returns.
the Company's information tax returns are subject to audit by the IRS or state or local authorities. An adjustment in any item at the partnership level may result in an adjustment in the tax liability of the Members.
Certain State and Local Tax Consequences
State and local taxing jurisdictions may impose income taxes and estate, inheritance and intangible property taxes on income from, or an investment in, the Company. These tax laws may differ substantially from the U.S. federal tax laws. As a result of participating in the Company, a Partner may be required to file tax returns with, and pay taxes to, any state or local jurisdiction in which the Company conducts its activities. In addition, a Partner's distributive share of the Company's taxable income, gain, loss, deduction and credit is normally included in the income reported to the state and local jurisdiction(s) in which the Partner is a resident or does business. Investors should consult their own tax advisors about state and local taxes.
Basis for Description of Tax Consequences
The U.S. federal income tax consequences described above are based on current U.S. federal income tax law, the provisions of the LLC Agreement, existing provisions of the Code, existing and proposed Treasury Regulations, existing administrative interpretations and court decisions, and certain assumptions. Future legislation, Treasury Regulations, administrative interpretations or court decisions could significantly change these authorities. Any such change could have retroactive application. In addition, some of the issues discussed above have not been addressed by administrative authorities or resolved by the courts. Accordingly, no assurance can be given that the IRS will not challenge the tax treatment of certain matters discussed herein or, if it does, that it will not be successful. Furthermore, any changes in the LLC Agreement or the operations of the Company could affect the tax consequences described above.
APPENDIX C: 2016 FINANCIAL STATEMENTS