An investment in the Fund involves a significant amount of risk and is suitable only for sophisticated investors of substantial means who have no immediate need for liquidity in the amount invested, and who understand and can afford a risk of loss of all or a substantial part of the investment. There can be no assurance that any returns will be realized or that a Member will receive a return of its capital. In addition, potential investors should be aware that there will be occasions when the Administrator, the Organizer, and their affiliates may encounter potential conflicts of interest in connection with the structure and operation of the Fund. None of the agreements and arrangements between the Fund and the Administrator, the Organizer, and their affiliates, including the compensation payable by the Fund to the Administrator, the Organizer, or their affiliates, are the result of arm’s-length negotiations. Accordingly, potential investors should carefully consider the following factors and disclosures (this “Memorandum”), among others, before making an investment in the Fund.
Risks Associated with Investment Strategy and Portfolio Company Securities
Generally. While venture capital investments offer the opportunity for significant gains, those investments also involve a high degree of business and financial risk and can result in substantial losses. There generally will be little or no publicly available information regarding the status and prospects of a portfolio company. Many investment decisions by the Administrator, in consultation with the Organizer, will be dependent upon the ability to obtain relevant information from non-public sources, and the Administrator or Organizer may be required to make decisions without complete information or in reliance upon information provided by third parties that is impossible or impracticable to verify. The marketability and value of each investment will depend upon many factors beyond the Administrator’s control. A portfolio company may have substantial variations in operating results from period to period, face intense competition, and experience failures or substantial declines in value at any stage. The public market for technology and other emerging growth companies is extremely volatile. Volatility may adversely affect the development of a portfolio company, the ability of the Fund to dispose of investments and the value of investment securities on the date of sale or distribution by the Fund. In particular, the receptiveness of the public market to initial public offerings by a portfolio company may vary dramatically from period to period. An otherwise successful portfolio company may yield poor investment returns if it is unable to consummate an initial public offering at the proper time. Even if a portfolio company effects a successful public offering, the portfolio company securities may be subject to contractual “lock-up,” securities law or other restrictions which may, for a material period of time, prevent the Fund or the Members from disposing of those securities. Similarly, the receptiveness of potential acquirers to a portfolio company will vary over time and, even if a portfolio company investment is disposed of via a merger, consolidation or similar transaction, the Fund’s stock, security or other interests in the surviving entity may not be marketable. There can be no guarantee that any portfolio company investment will result in a liquidity event via public offering, merger, acquisition or otherwise. Generally, the investments made by the Fund will be illiquid and difficult to value, and there will be little or no collateral to protect an investment once made. At the time of the Fund’s investment, a portfolio company may lack one or more key attributes (g., proven technology, marketable product, complete management team or strategic alliances) necessary for success. In most cases, investments will be long term in nature and may require many years from the date of initial investment before disposition.
Risks Associated with Passive Investments. Although the Fund will be making venture capital investments through a passive strategy, all venture capital investments are speculative in nature, and the possibility of partial or total loss of capital will exist. The Administrator will not have or will have little control over the day-to-day management of a portfolio company.
Reliance on Portfolio Company Management. Although the Fund or the Organizer may seek representation on the Board of Directors of a portfolio company or otherwise provide management and strategic planning assistance, the Fund will not have an active role in the day-to-day management of the companies in which it invests. To the extent that the senior management of a portfolio company performs poorly, or if a key manager of a portfolio company terminates employment, the Fund’s investment in that company could be adversely affected. The returns of the Fund will depend in large part on the performance of these unrelated individuals and could be substantially adversely affected by the unfavorable performance of a small number of those individuals.
Availability of Investment Capital. A portfolio company will likely require several rounds of capital infusions before reaching maturity. The Fund and its co-investors may not provide any or only a portion of the necessary follow-on capital to a portfolio company. Accordingly, third-party sources of financing may be required. There is no assurance that the additional sources of financing will be available, or, if available, will be on terms beneficial to the Fund. Furthermore, the Fund’s capital is limited and may not be adequate to protect the Fund from dilution resulting from multiple rounds of portfolio company financings. If the Fund does not have capital available to participate in subsequent rounds of financing, failure to participate may have a significant negative impact on a portfolio company as well as the value of the Fund’s investment.
Non-controlling Investments. The Fund will typically hold a non-controlling interest in a portfolio company and, will have limited ability to direct the actions of that company’s Board of Directors in order to better protect or manage its investment.
Contingent Liabilities on Disposition of Investments. In connection with the disposition of an investment in a portfolio company, the Fund may be required to make representations about the business and financial affairs of that company typical of those made in connection with the sale of a business. The Fund may be required to indemnify the purchasers of that investment to the extent that any of those representations are inaccurate. These arrangements may result in the incurrence of contingent liabilities for which the Administrator may establish reserves and escrows. In that regard, distributions may be delayed or withheld or, if made, may be subject to recall until that reserve is no longer needed. Furthermore, under the Delaware Limited Liability Company Act (the “Act”), each Member that receives a distribution in violation of the Act will be obligated, under certain circumstances, to re-contribute that distribution to the Fund.
Investments by Administrator in Portfolio Company. The Administrator or its affiliates may hold an interest in a portfolio company including, but not limited to, a direct investment in portfolio company securities. Holding that interest would require the time and attention of the Administrator or its affiliates. In those situations, the interests of the Administrator or its affiliates may conflict with the interests of the Fund, the Members or both.
Investments by Administrator in Other Companies. The Administrator and its affiliates may acquire or possess interests in other companies or business ventures that are competitive with a portfolio company and those interests may be of a different class or type, with different rights and preferences, than those held by the Fund. Likewise, the Administrator and its affiliates may acquire or possess interests in other companies or business ventures that are competitive with a portfolio company or the Fund. Neither the Fund nor any Member will have the right to share or participate in those other investments or activities of the Administrator or to the income derived from those investments.
Risk Inherent in Investing Through a Delaware Master-Series LLC
Under Delaware law, a Limited Liability Company (“LLC”) may be composed of individual series of membership interests. The Fund has been created as a series of the Master LLC. This type of entity is referred to as a Series LLC. Each series effectively is treated as a separate entity, meaning the debts; liabilities, obligations and expenses of one series cannot be enforced against another series of the LLC or against the LLC as a whole. Each series can hold its own assets, have its own members, conduct its own operations and pursue different business objectives, but remain insulated from claims of members, creditors or litigants pursuing the assets of or asserting claims against another series. There is a certain degree of uncertainty surrounding the Series LLC form. For example, the legal separation of the assets and liabilities of each series in a Series LLC has not been tested in court. Although Delaware law clearly provides for legal separation of series, it is unclear whether courts in other states and/or jurisdictions would recognize a legal separation of assets and liabilities within what is technically a single entity. Therefore, even if a Delaware Series LLC were properly operated with distinct records relating to the assets and liabilities of each series, a court in another jurisdiction could determine not to recognize the legal separation afforded under Delaware law. There is also uncertainty as to how the IRS will treat the separation of Series LLCs for tax purposes. The IRS has reserved the right to impose the tax liability of one series onto a master entity or another series under the master entity. The tax treatment of series is also unclear. It is possible that the debts, liabilities, and other obligations of one series of the master entity may lead to action against another series of the master entity. There would be a material effect on the Fund if various series of the Master LLC are not treated as separate entities.
Fund of Funds Risks
Investment in Other Private Funds.
The Fund’s approach to investment in other pooled investment vehicles (“Other Private Funds”) subjects the Fund to risks and expenses of the Other Private Funds. Such risk encompasses the possibility of loss due to the Other Private Funds’ fraud, intentional or inadvertent deviations from a predefined investment strategy (including excessive concentration, directional investing outside of predefined ranges, excessive leverage or new capital markets), or simply poor judgment. The returns of the Other Private Funds are impacted by the ability of the Other Private Funds and their investment managers, in their capacity as the investment manager to the Other Private Funds, to successfully apply their investment techniques to generate profits for the Other Private Funds. The volatility of the Other Private Funds will depend on the nature of their exposure to investments and on each investment manager, in their capacity as the investment manager to the Other Private Funds, ability to reduce risk by trading and hedging techniques. There can be no assurance that the Other Private Funds will achieve their objectives or avoid substantial losses. During the lifetime of the Fund, there could be material changes in the investments or operations of the Other Private Funds. The effect of such changes of the Other Private Funds cannot be predicted but could be material and adverse. Under certain circumstances, the Fund may not be able to quickly alter its portfolio allocation in response to any such changes, which may result in substantial losses from investing in the Other Private Funds.
Undisclosed Strategies and Risk Factors of Other Private Funds.
The risks and conflicts of interest disclosed to the Administrator and/or the Organizer concerning each Other Private Fund are addressed in the offering materials provided to the Administrator and/or the Organizer. These risk factors cannot, and do not attempt to, summarize all of the disclosures, risks and conflicts of interest associated with the Other Private Funds, nor do they address all the potential strategies the Other Private Funds’ managers could pursue.
Indemnification of Other Private Fund Managers.
The Other Private Funds generally indemnify their corresponding managers and their affiliates from any liability, damage, cost or expense arising out of, among other things, certain acts or omissions. Such managers often have broad limitations on liability and indemnification rights.
Multiple Levels of Expenses; Other Private Funds’ Fees.
The Fund may bear the normal operating fees and expenses when investing in the Other Private Funds. The Fund additionally may bear any management fees or performance allocations with respect to its investment in the Other Private Funds. Such fees and expenses, in addition to the Fund’s fees and expenses, could erode the Fund’s assets over time. The Fund will have to achieve investment returns over and above such fees and expenses in order to be profitable.
Other Private Funds May Not Be Registered.
The Other Private Funds may not be registered as investment companies under the Investment Company Act and, therefore, the Fund may not be entitled to the protections of the Investment Company Act with respect to the Other Private Funds. For example, the Other Private Funds may not be required to, and may not, hold custody of their assets in accordance with the requirements of the Investment Company Act. As a result, bankruptcy or fraud at institutions, such as banks or administrators, into whose custody the Other Private Funds have placed their assets, could impair the operational capabilities or the capital position of the Other Private Funds and may, in turn, have an adverse impact on the Fund. In addition, the investment managers of the Other Private Funds often will not be registered as investment advisers under the Investment Advisers Act. Further, the Other Private Funds in which the Fund invests are not subject to the disclosure and other investor protection requirements that would be applicable if their securities were registered or publicly traded.
Reliance on Managers of Other Private Funds.
Each Other Private Fund the Fund invests in will be subject to the risk that the investment manager of such Other Private Fund will lose key personnel, be engaged in fraud, fail to achieve their investment objectives or be subject to substantial withdrawals. Further, some investment managers may consist of only one or a limited number of principals. If any such person died or became incapacitated, such Other Private Fund with such investment manager might sustain substantial losses.
Limited Access to Information on Other Private Funds’ Investments.
Although the Administrator and/or the Organizer may receive detailed information from each Other Private Fund regarding the Other Private Funds’ historical performance and investment strategy, the Administrator and/or the Organizer generally are not given access to real-time information regarding the actual investments made by the Other Private Funds. At any given time, the Administrator and/or the Organizer may not know the composition of the Other Private Funds’ portfolios with respect to the degree of hedged or directional positions, the extent of concentration risk or exposure to specific markets. In addition, the Administrator and/or the Organizer may not learn of significant structural changes, such as personnel, manager withdrawals or capital growth, until after the fact.
Selection of Other Private Fund Managers.
The decision of the Administrator and/or the Organizer regarding the selection of particular Other Private Fund managers, the timing and size of the Fund’s allocations to particular Other Private Fund managers, the overall mix of investment styles and techniques employed by the Other Private Fund managers used by the Fund at any given time, and when or whether the Fund should withdraw capital from particular Other Private Fund managers, may prove unsuccessful in generating profits or avoiding loss because of, but not limited to, faulty assumptions about market direction, sudden changes in market conditions that impact the profitability of certain strategies, regulatory actions, and incomplete intelligence on and misleading statements from Other Private Fund managers.
Secondaries Risks
Secondary Transactions.
The Fund may participate in secondary investments. The overall performance of the Fund’s secondary investment will depend in large part on the acquisition price paid by the Fund for such secondary investments and on the structure of the acquisitions. Although the acquisition price of the Fund’s secondary investments will likely be the subject of negotiation with the sellers of the investments, the acquisition price is typically determined by reference to the carrying values most recently reported by the underlying portfolio companies (which may be based on interim unaudited financial statements) and other available information. Such portfolio companies are not generally obligated to update any valuations in connection with a transfer of interests on a secondary basis, and such valuations may not be indicative of current or ultimate realizable values. Moreover, there is no established market for secondary investments or for the privately held portfolio companies in general, and there may not be any comparable companies for which public market valuations exist. As a result, the valuation of secondary investments may be based on imperfect information and is subject to inherent uncertainties. As a result, the performance of the Fund will be adversely affected in the event that the valuations assumed by the Administrator and/or the Organizer in the course of negotiating acquisitions of investments prove to have been too high.
Digital Assets Risks
Risks Associated with Digital Assets Investments.
A portion of the Fund’s assets may be invested in blockchain-based assets, crypto assets, cryptocurrencies, decentralized application tokens and protocol tokens, smart contracts, other cryptofinance and digital assets, and instruments for the purchase of such, whether issued in a private or public transaction (collectively, “Digital Assets”). A portion of the Fund’s assets may also be invested in companies in the Digital Assets space. In some cases, the Fund may receive distributions from portfolio companies in the form of Digital Assets. Investments in Digital Assets, as well as investments in companies in the Digital Assets industry, are subject to many specialized risks and considerations, including risks relating to technology, security, regulation, user/market acceptance, volatility and timing. The promulgation of any U.S. or international laws or rules, an adverse change in applicable legal or regulatory requirements, or an adverse review by an applicable judicial authority of any such law or regulation, could have a material adverse effect of the price of cryptocurrency and on the operations and/or financial performance of portfolio companies with exposure to Digital Assets.
The Administrator and/or the Organizer may maintain custody of some or all of the Fund’s Digital Assets by generating the private keys that control movement of the various Digital Assets. In addition to maintaining custody of the Fund’s Digital Assets in a “cold wallet,” the Administrator and/or the Organizer may store the Fund’s Digital Assets on various Digital Asset exchanges. Digital Asset exchanges may also require the Administrator and/or the Organizer to provide control of the private keys when the exchange is utilized by the Fund. The foregoing, however, shall not limit the Administrator and/or the Organizer in any way from utilizing Digital Asset custody standards and practices that may exist in the future. The Administrator and/or the Organizer retains the right to use any third-party Digital Asset custodian in the future as firms and Digital Asset custody standards begin to develop. The Administrator and/or the Organizer is responsible for taking such steps as it determines, in its sole judgment, to be required to maintain access to these keys, and prevent their exposure from hacking, malware and general security threats.
The theft, loss or destructions of a private key required to access a Digital Asset is irreversible, and such private keys would not be capable of being restored by the Fund. Any loss of private keys relating to digital wallets used to store the Fund’s Digital Assets could result in the loss of the Digital Assets and the Fund could incur substantial, or even total, loss of capital in that event.
No Financials
The Fund will not provide any financials to the Members.
No Assurance of Profit or Distributions
The Fund’s follow-on investment strategy in startups, ideas, technologies and generally unproven companies, managing those investments, and realizing a significant return for investors is uncertain and unlikely. Many organizations operated by persons of competence and integrity have been unable to make, manage and realize these investments successfully. There is no assurance that the Fund’s investments will be profitable or that any distributions will be made to the Members. The marketability and value of any investment will depend upon many factors beyond the control of the Fund. The expenses of the Fund may exceed its income, and the Members could lose the entire amount of their contributed capital.
Long-Term Investment
An investment in the Fund is a long-term commitment and there is no assurance of any distribution to the Members. There is not now and there is not expected to be a public market for the Interests. The Interests may not be assigned, transferred or encumbered without the prior written consent of the Administrator. Accordingly, a Member may not be able to liquidate its investment and must be prepared to bear the risks of owning its Interest for an extended period of time. The Interests will not be registered under the Securities Act, or under the various “Blue Sky” or securities laws of the state or jurisdiction of residence of any Member. The inability to transfer Interests in the Fund may limit the availability of estate planning strategies.
Management of the Fund
The Members have no right or power to take part in the management of the Fund. Accordingly, the Members will have no opportunity to control the day-to-day operations, including investment and disposition decisions, of the Fund. The Members will not receive the detailed financial information issued by a Portfolio Company that is typically available to the Administrator. Accordingly, no person should purchase Interests unless that person is willing to entrust all aspects of the management of the Fund to the Administrator. The Administrator may be removed and/or replaced as provided in the LLC Agreement.
Risk Inherent in Reliance on the Organizer
The Administrator will rely heavily on the advice of the Organizer when making decisions on what Portfolio Company Securities to purchase or dispose of at certain prices on behalf of the Fund. The Organizer may make recommendations which result in a loss for the Fund. There can be no assurance that the Organizer will make good recommendations that result in profitable investments of the Fund.
Limited Information
Only limited information has been or will be made available to Members, the Fund, the Administrator and its affiliates regarding the Portfolio Company Securities (as defined in the LLC Agreement) and the Organizer. Neither the Fund, the Administrator nor any of their affiliates is able to verify the veracity of any information of the Portfolio Company Securities and the Organizer that is publicly available, and neither the Fund, the Administrator nor any of their affiliates makes any representation or warranty that the data or information is complete, correct or accurately reflective of the Portfolio Company Securities and the Organizer.
In addition, neither the Fund, the Administrator nor any of their affiliates has conducted any diligence on the Organizer or the Portfolio Company Securities. Accordingly, an investment decision to purchase the Interests must be made based solely on the investor’s own assessment of the Portfolio Company Securities and the Organizer based on the information publicly available, which may not include information (or any) that in the context of other investment decisions might be a necessary part of an investor’s appraisal of the investment’s advisability. Investors considering an investment in the Fund must be aware that there is a risk that: (i) there are facts or circumstances pertaining to the Organizer and Portfolio Company Securities that the public (including the Administrator) and the investor are not aware of; and (ii) publicly available information concerning the Portfolio Company Securities and the Organizer upon which the investor relies may prove to be inaccurate, and, as a result of (i) or (ii), the investor may suffer a partial or complete loss on its investment. The Administrator does not assume any responsibility for the accuracy or completeness of any information provided by the Organizer or in respect of the Portfolio Company Securities.
Fund Not Registered
The Fund is not expected to be registered under the Investment Company Act pursuant to an exemption set forth in Section 3(c)(1) and/or Section 3(c)(7) of the Investment Company Act. The Investment Company Act provides certain protection to investors and imposes certain restrictions on registered investment companies (including, for example, limitations on the ability of registered investment companies to incur debt), none of which will be applicable to the Fund. The Administrator is not registered as a broker/dealer under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or with the Financial Industry Regulatory Authority (“FINRA”) and is consequently not subject to the record keeping and specific business practice provisions of the Exchange Act and the rules of FINRA. Neither the Fund nor its counsel can assure investors that, under certain conditions, changed circumstances, or changes in the law, the Fund may not become subject to the Investment Company Act or other burdensome regulation.
The Administrator and Organizer are Not Registered as an Investment Advisor
Neither the Administrator, nor the Organizer nor any of their respective affiliates are a state or SEC registered investment adviser under the U.S. Investment Advisers Act of 1940, although the Administrator or the Organizer may become required to register in the future.
The foregoing discussion is not intended to be a substitute for tax planning or professional tax advice. Accordingly, Investors are strongly urged to consult their tax advisers prior to subscribing to purchase an interest in any Fund.
Taxation Associated Risks
Generally.
An investment in the Fund may involve complex U.S. federal income tax considerations that will differ for each Member. Under certain circumstances, the Members could be required to recognize taxable income in a taxable year for U.S. federal income tax purposes, even if the Fund either has no net profits in that year or has an amount of net profits in that year that is less than that amount of taxable income. Furthermore, the Members could incur U.S. federal income tax liabilities without receiving from the Fund sufficient distributions to defray those tax liabilities. Members subject to taxes associated with the Fund’s activities will be liable to pay taxes on their allocable shares of the Fund’s taxable income. There can be no assurances the Fund will have available cash or that timely Fund distributions will be made to cover those taxes. Accordingly, a Member may be required to use cash from sources other than the Fund to pay that Member’s allocable share of the Fund’s taxable income. The Fund will file an annual information return on IRS Form 1065 and will provide information on Schedule K-1 to each Member following the close of the Fund’s taxable year if deemed necessary by the Administrator. In the likely event that the Fund does not receive all of the underlying tax information necessary to prepare the Form 1065 and Schedule K-1 on a timely basis, the Fund will be unable to provide timely final tax information to the Members. Each Member will be responsible for the preparation and filing of that Member’s own income tax returns, and Members should expect to file for extensions for the completions of their U.S. federal, state, local, non-U.S. and other income tax returns.
The Administrator does not provide legal or tax advice to investors, nor does the Administrator represent the investors.
While the Administrator has consulted with counsel, accountants and other experts regarding the structure, terms, and operations of the Fund, the Administrator does not represent potential or actual members of the Fund. Each investor must consult its own legal, tax and financial advisers regarding the desirability and appropriateness of purchasing and owning member interests.
The nature of the Fund’s investment may be more beneficial to some Investors than others.
The Fund is likely to have a diverse range of Investors that may have conflicting differences in investment preferences, tax status, and regulatory status. The conflicting differences may influence the decisions made by the Organizer to acquire or dispose of investments, or structuring of the investments, that may be more beneficial for some Investors than for others, particularly with respect to individual tax situations. In selecting and structuring investments for the Fund, the Organizer will consider the investment and tax objective of the Fund and the Investors as a whole.
The Fund’s investments may create exposure to UBTI
Generally, qualifying tax-exempt organizations are exempt from U.S. federal income taxation. The Organizer, in their discretion as to which investments to make, may create a situation whereby the general exemption may not apply to UBTI of a tax-exempt organization. UBTI arises from debt-financed income due to income and gains derived by a tax-exempt organization from disposition of property acquired with borrowed money. Except where the Organizer discloses that a portfolio company is taxed as a disregarded entity or partnership for U.S. federal income tax purposes, the Fund does not anticipate generating UBTI.
The Fund’s investment may expose Investors to Effectively Connected Income (ECI)
An investment in the Fund should not, by itself, create a situation that would be deemed as engaging in U.S. trade or business (“effectively connected income” or “ECI”). The Fund’s U.S. business activities (if any) consist solely of investing in and/or trading stocks and securities. If the entity in which the Fund invests is treated as a disregarded entity or partnership for U.S. federal tax purposes and deemed to be engaged in a U.S. trade or business, then the members of the Fund are by definition would also be deemed to be engaged in a U.S. trade or business by virtue of their ownership of the membership interests.
Investments by the Fund in Controlled Foreign Corporations (CFC)
From time to time, the Fund may invest in a non-United States corporation. The corporation is classified as a controlled foreign corporation (“CFC”) if five or fewer 10% United States shareholders own in the aggregate more than 50% of the voting power or value of the corporation’s stock. As such, every 10% United States shareholder must report their pro-rata share of the corporation’s Subpart F income (passive income and certain other income). Further, each holder may recognize ordinary income on all or a portion of the gain from the sale of stock of a CFC.
Investments by the Fund in Passive Foreign Investment Companies (PFIC)
Similar to CFC, if a Fund invests in a non-U.S. corporation and the corporation is classified as a Passive Foreign Investment Company (“PFIC”) then some or all gains from the sale of the corporation’s stock may be treated as ordinary income for tax purposes. In general, a foreign corporation is considered a PFIC if (i) at least 75% of its gross income for the tax year is passive or (ii) at least 50% of the assets held by the corporation produces passive income.
Non-U.S. Partners
In general, non-U.S. members in the Fund should not be subject to taxation by the United States (other than certain withholding taxes), so long as the member does not spend more than 182 days in the United States during its taxable year. Any non-U.S. investor invested in the Fund will be subject to 30% U.S. withholding tax on the gross amount of their allocable share of Fund capital gains unless the investor has claimed an exemption through a tax treaty.
Classification and Status
The Fund will classified as a partnership for U.S. federal income tax purposes. The Fund does not expect to be a publicly traded partnership taxable as a corporation. Each Investor will be treated as a member in the Fund. Treatment of the Fund as a Partnership for U.S. federal income tax purposes may give rise to tax considerations for which each Investor should seek advise from an independent tax advisor based on its particular circumstances.
Taxation of Partners on Profits and Losses of a Partnership
Partnerships are not subject to U.S. federal income tax at the entity level. Each member in a partnership is responsible for documenting its distributive share of all items of income, gain, loss, and deduction for each taxable year of the partnership. Even if the Fund does not distribute of cash or other property during the year, the member may be liable for federal and state income taxes associated with their investment in the Fund.
Character and Timing of Profits and Losses
In general, gains and losses are not taken into account until the investment is realized. Depending on the type of investor and the character of the income or gain, your investment may be subject to tax on short-term or long-term capital gains, net investment income, dividend or interest income, ordinary income, or a combination of these types. You should consult with your independent tax adviser to understand the nature of these outcomes for tax planning purposes.
Qualified Small Business Stock
A Fund that purchases and holds “small business stock” (“QSBS”) and holds that investment for more than 5 years, non-corporate Investors in the Fund are permitted to exclude 100% of any gain recognized upon a sale or exchange of the investment. To be treated as eligible for QSBS exclusion, the portfolio company stock must have been acquired at original issue from a qualified small business domestic “C” corporation with less than $50 million in gross assets, and satisfies other requirements which may need to continue after issuance of the stock. There can be no assurance that a company will continue to qualify as QSBS due to events occurring after the issue date.
Tax Laws
No assurance can be given that current tax laws, rulings and regulations will not be changed during the life of the Fund. Subscribers should consult their tax advisors for further information about the tax consequences of purchasing an Interest.
Withholding and Other Taxes
The Administrator intends to structure the Fund’s investments in a manner that is intended to achieve the Fund’s investment objectives. Notwithstanding anything contained in this Memorandum to the contrary, there can be no assurance that the structure of any investment will be tax efficient for any particular investor or that any particular tax result will be achieved. In addition, tax reporting requirements may be imposed on Members under the laws of the jurisdictions in which Members are liable for taxation or in which the Fund makes investments of Portfolio Company Securities. Subscribers should consult their own professional advisors with respect to the tax consequences to them of an investment in the Fund. Furthermore, the Fund’s returns in respect of its investments may be reduced by withholding or other taxes. In addition, the Fund may invest in securities of corporations and other entities organized outside the United States. Income from those investments included in a Member’s distributive share of Fund income related to those investments may be subject to non-U.S. withholding taxes, which may or may not be reduced or eliminated by an income tax treaty.
Confidential Information
The LLC Agreement will contain confidentiality provisions intended to protect proprietary and other information relating to the Fund. To the extent that the information is publicly disclosed, competitors of the Fund or competitors of its portfolio companies, and others, may benefit from that information, thereby adversely affecting the Fund and the Administrator, and the economic interests of Members.
Litigation Risks
The Fund will be subject to a variety of litigation risks. In the event of a dispute arising from any of the activities relating to the operation of the Fund or the Administrator, it is possible that the Fund, the Administrator or its members may be named as defendants. Under most circumstances, the Fund will indemnify the Administrator and its members for any costs they incur in connection with those disputes. Beyond direct costs, those disputes may adversely affect the Fund in a variety of ways.
Recourse to the Fund’s Assets
The Fund’s assets, including any investments made by the Fund , are available to satisfy all liabilities and other obligations of the Fund. If the Fund becomes subject to a liability, parties seeking to have the liability satisfied may have recourse to the Fund’s assets generally and will not be limited to any particular assets, such as the asset representing the investment giving rise to the liability. Accordingly, Members could find their interest in the Fund’s assets adversely affected by a liability arising out of an investment of the Fund.
Factual Statements
Certain of the factual statements made in this Memorandum are based upon information from various sources believed by the Administrator to be reliable. The Administrator and the Fund have not independently verified any of the information and will have no liability for any inaccuracy or inadequacy of the information. In particular, neither legal counsel nor any other party has been engaged to verify any statements relating to the experience, track record, skills, contacts or other attributes of the Administrator or to the anticipated future performance of the Fund.
While all the information in this Memorandum is presented by the Administrator in good faith, there can be no assurance that explicit or implicit valuations of any securities reflect true fair market value. Similar considerations apply to securities that are otherwise marketable, but held in such large amounts that they could not be sold without overwhelming market demand or otherwise influencing market prices.
During the term of the Fund, the Administrator will provide to the Members reports and other information regarding the condition and prospects of the Fund and its portfolio companies. The Administrator’s duties, obligations and liability to the Members with respect to the content, completeness and accuracy of the information will be determined solely under the LLC Agreement.
Uncertainty of Future Results
This Memorandum may contain certain financial projections, estimates and other forward-looking information. This information was prepared by the Administrator based on its experience in the industry and on assumptions of fact and opinion as to future events which the Administrator believed to be reasonable when made. There can be no assurance, however, that assumptions made are accurate, that the financial and other results projected or estimated will be achieved or that similar results will be attainable by the Fund. Prior investment returns are not indicative of future success.
Allocation of Management Resources
Although the Administrator has agreed under the terms of the LLC Agreement to devote sufficient time (in their discretion) to the business and affairs of the Administrator, the Fund, its other respective business commitments, any parallel fund, and any Subsequent Fund, conflicts may arise in the allocation of management resources.
Other Investment Funds
The Administrator may create and manage other investment funds that have similar investment strategies and objectives. Those activities would require the time and attention of the Administrator. Any new investment fund created by the Administrator may focus on the same investments as those on which the Fund anticipates focusing and may compete with the Fund for investment opportunities. In that event, the Administrator, in its sole discretion, will allocate those opportunities between the Fund and those other funds on a basis the Administrator believes, in good faith, to be fair and reasonable. Those funds also may compete with the Fund for Capital Commitments from potential investors. In those situations, the interests of the Administrator may conflict with the interests of the Fund, the Members or both.
Waiver of Fiduciary Duties; Exculpation and Indemnification
Members will be relying on the good-faith integrity of the Administrator in all of their dealings with the Fund. The LLC Agreement grants the Administrator broad discretion as to many matters and contains provisions that relieve the Administrator and its members of liability for certain improper acts or omissions. The Administrator does not, and will not, owe any fiduciary duties of any kind whatsoever to the Fund, or to any of the Members, by virtue of its role as the Administrator, including, but not limited to, the duties of due care and loyalty, whether those duties were established as of the date of this Agreement or any time in future, and whether established under common law, at equity or legislatively defined. For example, the Administrator and its members generally will not be liable to the Members or the Fund for acts or omissions that constitute ordinary negligence, for conflicts of interest or for engaging in related transactions. Moreover, the Fund will defend, indemnify and hold harmless the Administrator from and against virtually all liabilities other than those arising out of acts or omissions made in fraud or constituting gross negligence or willful misconduct. Under certain circumstances, the Fund may even indemnify the Administrator and its members against liability to third parties resulting from those improper acts or omissions. By signing the Subscription Agreement and entering into the LLC Agreement, each Member acknowledges and consents to the exercise of the Administrator’s discretion, including when the Administrator has a conflict of interest.
Return of Distributions
Members may be required to return amounts distributed to them to finance the Fund’s indemnity obligations, subject to certain limitations set forth in the LLC Agreement. Furthermore, under the Act, each Member that receives a distribution in violation of such Act will, under certain circumstances, be obligated to re-contribute that distribution to the Fund.
Definitive Terms and Conditions
Portions of this Memorandum describe specific terms and conditions expected to be set forth in the Fund’s LLC Agreement. The actual terms and conditions set forth in the LLC Agreement may vary materially from those described in this Memorandum for a variety of reasons, including negotiations between the Administrator and prospective investors prior to the Fund’s Initial Closing as well as formal amendments to the LLC Agreement following that closing. Moreover, the LLC Agreement will contain highly detailed terms and conditions, many of which are not described fully (or at all) in this Memorandum. In all cases, the Fund’s LLC Agreement will supersede this Memorandum. Subscribers are urged to carefully review the Fund’s LLC Agreement, and must also be aware that, pursuant to the rules governing amendments set forth in the LLC Agreement, certain types of amendments to the LLC Agreement may be adopted with the consent of less than all Members or at the Administrator’s discretion.
Conflicts of Interest
The Fund is subject to various conflicts of interest arising out of its relationship with the Administrator and their respective affiliates. None of the agreements and arrangements between the Fund and those parties, including the compensation payable by the Fund to the Administrator (or other entity designated by the Administrator), are the result of arm’s-length negotiations. Members ultimately will be heavily dependent upon the good faith of the Administrator. This Memorandum does not purport to identify all conflicts of interest. The Fund, from time to time, may enter into other transactions not specifically described in this Memorandum with affiliates, officers, managers, members, employees, agents and representatives of the Administrator. The Fund will not make loans to or investments in the Administrator or its affiliates and will not sell securities to the Administrator other than Interests on the terms described in this Memorandum. In addition, the Administrator will not borrow from the Fund and will not use the Fund’s funds as compensating balances for its own benefit but may commingle those funds with the funds of any other Person. If applicable, all funds of the Fund will be deposited with banks or other financial institutions in that account or accounts of the Master LLC as may be determined by the Administrator who will ensure records are maintained for the Fund assets associated with the Fund separately from the assets of any other Person. The Administrator or its affiliates may perform services with respect to the transactions in which the Fund invests. The Administrator and its affiliates may acquire or possess interests in other companies or business ventures that are competitive with a portfolio company or the Fund. Neither the Fund nor any Member will have the right, by virtue of the LLC Agreement, to share or participate in those other investments or activities of the Administrator or to the income derived from those investments. The Administrator and its affiliates may engage in or possess any interest in other business ventures of any kind, nature or description, independently or with others, whether those ventures are competitive with the Fund or otherwise. The Administrators may provide active, part-time direct operating, management or advisory services to a Portfolio Company and may receive salaries, wages or fees for those services in accordance with the LLC Agreement, and those fees will be retained by Administrator and will not offset fees or other expenses of the Fund.
ERISA Considerations
Each Subscriber is urged to consult with its own legal counsel regarding ERISA matters. Without limitation, a Subscriber that is a fiduciary under ERISA should carefully consider whether an investment in the Fund would be consistent with its fiduciary duties. It is not expected that the Fund will qualify as a venture capital operating company (“VCOC”) within the meaning of ERISA. Among other consequences, this will cause the Administrator to limit the percentage of Interests that may be held by “benefit plan investors” or entities regulated under ERISA and may make it impracticable for a Member to transfer its Interest to that entity.
THE FOREGOING LIST OF RISK FACTORS DOES NOT PURPORT TO BE A COMPLETE EXPLANATION OF THE RISKS INVOLVED IN THIS OFFERING. PROSPECTIVE INVESTORS ARE URGED TO READ THIS ENTIRE MEMORANDUM BEFORE DETERMINING TO INVEST IN THE FUND.