In previous newsletters, we discussed the advantages of an LLC. Now we will discuss how an LLC is used in conjunction with the Fund structure and the pooling of multiple investors’ capital to participate with financial institutions on a different level than individual investors.
Generally, Companies are organized under the Limited Liability Company laws in the state in which it resides. Some prefer Delaware or Nevada. We have organized in both, and have determined that the expenses of maintaining an LLC in these two “friendly states” outweigh the gains of keeping the LLC local. In either case, we do not allow personal guarantees. This means the investor has “limited liability,” (or the amount of their investment), as the name states. Furthermore, as the Manager of the LLC, we specialize in the compliance of the Operating Agreement to prevent issues. Should a problem ever arise, the defense is less expensive in the state where the Fund resides.
The Fund structure offers Investors the opportunity to pool their funds together with other Investors so that larger packages of assets may be purchased. The Fund will have a Private Placement Memorandum (PPM) prepared or already registered with the Security and Exchange Commission (SEC). This is the legal document, much like a Stock Prospectus that allows more than two investors to pool their funds together in a private company account.
The contents of the PPM will include:
- Term Sheet or Summary which details the specific terms of the investment
- Legal Disclaimers which explain the specifics of how the Private Placement works
- Section on General Risks that details the specific and general risks with the business
- Financial projections, both current and potential
- Limited Liability Company (LLC) Operating Agreement which defines how the Company will be maintained and investments will be managed, usually by a third party Manager. This is a very defined document that shows how the Manager will operate the Company on behalf of the Investors
- Business Plan will also be included for the Company, providing potential financial returns along with all the legal disclaimers that come with any investment document
- Subscription Agreement that is in the signing documents
There are multiple types of PPM’s but primarily they are either:
- Debt and Equity
In our next newsletter, we will detail some of the main ways to invest in Private Placements.