AN OFFERING CIRCULAR PURSUANT TO THE REQUIREMENTS OF REGULATION A RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. INFORMATION CONTAINED IN THIS PRELIMINARY OFFERING CIRCULAR IS SUBJECT TO COMPLETION OR AMENDMENT. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED BEFORE THE OFFERING STATEMENT FILED WITH THE COMMISSION IS QUALIFIED. THIS PRELIMINARY OFFERING CIRCULAR SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR ANY SALES OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL BEFORE REGISTRATION OR QUALIFICATION UNDER THE LAWS OF ANY SUCH STATE. WE ELECT TO SATISFY OUR OBLIGATION TO DELIVER A FINAL OFFERING CIRCULAR BY SENDING INVESTORS A NOTICE WITHIN TWO BUSINESS DAYS AFTER THE COMPLETION OF OUR SALE TO YOU THAT CONTAINS THE URL WHERE THE FINAL OFFERING CIRCULAR OR THE OFFERING STATEMENT IN WHICH SUCH FINAL OFFERING CIRCULAR WAS FILED MAY BE OBTAINED.
As filed with the Securities & Exchange Commission on May 31, 2019
OFFERING CIRCULAR
For
CIRCLE OF WEALTH FUND III LLC
an Idaho Limited Liability Company
SECURITIES OFFERED | : | Membership Interests |
MAXIMUM OFFERING AMOUNT | : | $50,000,000 |
MINIMUM INVESTMENT AMOUNT | : | $1,000 |
CONTACT INFORMATION | : | 701 E. Front Avenue, Floor 2 |
Coeur d’Alene, ID 83814 | ||
800-971-5988 |
CIRCLE OF WEALTH FUND III LLC (the “Fund” or “Company”) is an Idaho limited liability company. The Company is offering (the “Offering”) by means of this offering circular (the “Offering Circular”) units of limited liability company membership interests (“Membership Interests”) on a “best efforts” and ongoing basis to investors who meet the Investor Suitability standards as set forth herein. (See “Investor Suitability” below.) The Company will offer Membership Interests through a third party online platform https://invest.securedinvestmentcorp.com (“Platform”), without any brokers or selling commissions. (See “Terms of the Offering” below.)
The minimum investment amount per Investor is One Thousand Dollars ($1,000). Although the Company does not intend to list the Membership Interests for trading on a stock exchange or other trading market, the Company has adopted a redemption plan designed to provide Members with limited liquidity for their investment in the Company’s Membership Interests. (See “Terms of the Offering”.)
The Company will be managed by Secured Investment Corp., a Wyoming corporation (hereinafter referred to as the “Manager”). As further described in the Offering Circular, the Company has been organized to: (i) make, fund, originate, refinance, purchase, sell and/or otherwise acquire loans (“Loans”) secured by first or junior position deeds of trust or mortgages on non-owner occupied residential and commercial properties located throughout the United States; and (ii) acquire, develop, rehabilitate, and/or hold and/or sell non-owner occupied residential real estate located throughout the United States. (See “Lending Standards and Policies” and “General Standards for Purchasing Properties” below).
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The Offering will commence immediately upon qualification of the Offering by the Securities and Exchange Commission (the “Effective Date”) and will terminate at the discretion of the Manager. The maximum amount of the Offering shall not exceed Fifty Million Dollars ($50,000,000) in any Twelve (12) month period (“Maximum Offering Amount”) in accordance with Tier II of Regulation A as set forth under the Securities Act of 1933, as amended, (“Reg A Tier II”). The Company intends to offer the Membership Interests described herein on a continuous and ongoing basis pursuant to Rule 251(d)(3)(i)(f). Further, the acceptance of Investor subscriptions, may be briefly paused at times to allow the Company to effectively and accurately process and settle subscriptions that have been received. (See “Terms of the Offering” below.) The Company may increase the Maximum Offering Amount at its sole and absolute discretion, subject to qualification by the SEC of a post-qualification amendment.
Prior to this Offering, there has been no public market for the Membership Interests, and none is expected to develop. The Offering price is arbitrary and does not bear any relationship to the value of the assets of the Company. The Company does not currently have plans to list any Membership Interests on any securities market. Investing in the Membership Interests involves risk, some of which are set forth below. See the section titled “Risk Factors” to read about the factors an investor should consider prior to purchasing any Membership Interests.
Prospective investors (“Investors”) who execute a subscription agreement (“Subscription Agreement”) to invest in the Company will become a member of the Company (“Member”) once the Manager deposits the investor’s investment into the Company’s main operating bank account and subject to terms and conditions in the Offering Circular and Subscription Agreement.
Generally, no sale may be made in this Offering if the aggregate purchase price paid is more than Ten Percent (10%) of the greater of the investor’s annual income or net worth. Different rules apply to accredited investors and non-natural persons. Before making any representation that the investment does not exceed applicable thresholds, Investors are encouraged to review rule 251(d)(2)(i)(c) of Regulation A. For general information on investing, Investors are encouraged to refer to www.investor.gov.
In addition, an investment in the Company is subject to restrictions on withdrawal (See “Summary of the Operating Agreement – Withdrawal” below.) Subject to the terms and conditions provided herein, Members will have the option to either receive income distributions from the Company or reinvest their distributable share of Company earnings back into the Company. Fractional interests of Membership Interests shall only be permitted for those Investors that have purchased a minimum of One (1) Membership Interest and seek to reinvest distributions received from the Company (See “Preferred Return, Cash Distributions; Election to Reinvest” below.) Reinvestments of distributions will be allowed to the extent that the Offering remains ongoing. Members will be allowed to withdraw and redeem their Membership Interests as set forth below. (See “Terms of the Offering – Member Withdrawal” below.)
The Manager will receive compensation and income from the Company and is subject to certain conflicts of interest. (See “Risk Factors”, “Manager’s Compensation” and “Conflicts of Interest” below.) Investing in the Membership Interests is speculative and involves substantial risks. Prospective Investors should purchase these securities only if they can afford a complete loss of their investment. (See “Risk Factors” below.) There are material income tax risks associated with investing in the Company that prospective investors should consider. (See “Income Tax Considerations” below.)
As of the date of this Offering Circular, the Company has not engaged a transfer agent, and does not intend to engage a transfer agent until such time as the Company is required to do so in order to satisfy the conditional exemption contained in Rule 12g5-1(a)(7) of the Securities Exchange Act of 1934, as applicable, or the Exchange Act.
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The Offering is being conducted on a “best-efforts” basis, which means the principals and officers of the Company will use commercially reasonable best efforts in an attempt to sell the Membership Interests. Such officers will not receive any commission or any other remuneration for these sales. In offering the Membership Interests on behalf of the Company, the principals and officers will rely on the safe harbor from broker-dealer registration set forth in Rule 3a4-1 under the Securities Exchange Act of 1934, as amended.
THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION (“SEC”) DOES NOT PASS UPON THE MERITS OF OR GIVE ITS APPROVAL TO ANY SECURITIES OFFERED OR THE TERMS OF THE OFFERING, NOR DOES IT PASS UPON THE ACCURACY OR COMPLETENESS OF ANY OFFERING CIRCULAR OR OTHER SELLING LITERATURE. THESE SECURITIES ARE OFFERED PURSUANT TO AN EXEMPTION FROM REGISTRATION WITH THE COMMISSION; HOWEVER, THE COMMISSION HAS NOT MADE AN INDEPENDENT DETERMINATION THAT THIS INVESTMENT INVOLVES A DEGREE OF RISK THAT MAY NOT BE SUITABLE FOR ALL PERSONS. ONLY THOSE INVESTORS WHO CAN BEAR THE LOSS OF A SIGNIFICANT PORTION OF THEIR INVESTMENT SHOULD PARTICIPATE IN THE INVESTMENT. (SEE “RISK FACTORS” BELOW.)
THE SECURITIES OFFERED HAVE NOT BEEN APPROVED OR DISAPPROVED BY ANY STATE REGULATORY AUTHORITY NOR HAS ANY STATE REGULATORY AUTHORITY PASSED UPON OR ENDORSED THE MERITS OF THE OFFERING OR THE ACCURACY OR ADEQUACY OF THIS OFFERING CIRCULAR. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
THE SECURITIES OFFERED HEREUNDER ARE EXEMPT FROM REGISTRATION. THIS OFFERING CIRCULAR CONTAINS INFORMATION AND DISCLOSURES IN ACCORDANCE TO THE FORMAT SET FORTH IN SEC FORM S-11.
GENERALLY, NO SALE MAY BE MADE TO INVESTORS IF THE AGGREGATE PURCHASE PRICE BY INVESTORS EXCEEDS FIFTY MILLION DOLLARS ($50,000,000) ANNUALLY, PURSUANT TO THE TERMS OF RULE 251 OF REGULATION A TIER II SET FORTH UNDER THE SECURITIES ACT OF 1933 (THE “ACT”).
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THIS OFFERING TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THAT INFORMATION AND THOSE REPRESENTATIONS SPECIFICALLY CONTAINED IN THIS OFFERING CIRCULAR; ANY OTHER INFORMATION OR REPRESENTATIONS SHOULD NOT BE RELIED UPON. ANY PROSPECTIVE PURCHASER OF THE SECURITIES WHO RECEIVES ANY OTHER INFORMATION OR REPRESENTATIONS SHOULD CONTACT THE COMPANY IMMEDIATELY TO DETERMINE THE ACCURACY OF SUCH INFORMATION AND REPRESENTATIONS. NEITHER THE DELIVERY OF THIS OFFERING CIRCULAR NOR ANY SALES HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR IN THE INFORMATION SET FORTH HEREIN SINCE THE DATE OF THIS OFFERING CIRCULAR SET FORTH ABOVE.
PROSPECTIVE PURCHASERS SHOULD NOT REGARD THE CONTENTS OF THIS OFFERING CIRCULAR OR ANY OTHER COMMUNICATION FROM THE COMPANY AS A SUBSTITUTE FOR CAREFUL AND INDEPENDENT TAX AND FINANCIAL PLANNING. EACH POTENTIAL INVESTOR IS ENCOURAGED TO CONSULT WITH HIS, HER OR ITS OWN INDEPENDENT LEGAL COUNSEL, ACCOUNTANT AND OTHER PROFESSIONALS WITH RESPECT TO THE LEGAL AND TAX ASPECTS OF THIS INVESTMENT AND WITH SPECIFIC REFERENCE TO HIS, HER OR ITS OWN TAX SITUATION, PRIOR TO SUBSCRIBING FOR THE MEMBERSHIP INTERESTS. THE PURCHASE OF MEMBERSHIP INTERESTS BY AN INDIVIDUAL RETIREMENT ACCOUNT, KEOGH PLAN OR OTHER QUALIFIED RETIREMENT PLAN INVOLVES SPECIAL TAX RISKS AND OTHER CONSIDERATIONS THAT SHOULD BE CAREFULLY CONSIDERED. INCOME EARNED BY QUALIFIED PLANS AS A RESULT OF AN INVESTMENT IN THE COMPANY MAY BE SUBJECT TO FEDERAL INCOME TAXES, EVEN THOUGH SUCH PLANS ARE OTHERWISE TAX EXEMPT. (SEE “INCOME TAX CONSIDERATIONS” AND “ERISA CONSIDERATIONS.”)
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THE INFORMATION CONTAINED IN THIS OFFERING CIRCULAR HAS BEEN SUPPLIED BY THE COMPANY. THIS OFFERING CIRCULAR CONTAINS SUMMARIES OF DOCUMENTS NOT CONTAINED IN THIS OFFERING CIRCULAR, BUT ALL SUCH SUMMARIES ARE QUALIFIED IN THEIR ENTIRETY BY REFERENCES TO THE ACTUAL DOCUMENTS. COPIES OF DOCUMENTS REFERRED TO IN THIS OFFERING CIRCULAR, BUT NOT INCLUDED AS AN EXHIBIT, WILL BE MADE AVAILABLE TO QUALIFIED PROSPECTIVE INVESTORS UPON REQUEST.
RULE 251(D)(3)(I)(F) DISCLOSURE. RULE 251(D)(3)(I)((F) PERMITS REGULATION A OFFERINGS TO CONDUCT ONGOING CONTINUOUS OFFERINGS OF SECURITIES FOR MORE THAN THIRTY (30) DAYS AFTER THE QUALIFICATION DATE IF: (1) THE OFFERING WILL COMMENCE WITHIN TWO (2) DAYS AFTER THE QUALIFICATION DATE; (2) THE OFFERING WILL BE MADE ON A CONTINUOUS AND ONGOING BASIS FOR A PERIOD THAT MAY BE IN EXCESS OF THIRTY (30) DAYS OF THE INITIAL QUALIFICATION DATE; (3) THE OFFERING WILL BE IN AN AMOUNT THAT, AT THE TIME THE OFFERING CIRCULAR IS QUALIFIED, IS REASONABLY EXPECTED TO BE OFFERED AND SOLD WITHIN TWO (2) YEARS FROM THE INITIAL QUALIFICATION DATE; AND (4) THE SECURITIES MAY BE OFFERED AND SOLD ONLY IF NOT MORE THAN THREE (3) YEARS HAVE ELAPSED SINCE THE INITIAL QUALIFICATION DATE OF THE OFFERING, UNLESS A NEW OFFERING CIRCULAR IS SUBMITTED AND FILED BY THE COMPANY PURSUANT TO RULE 251(D)(3)(I)((F) WITH THE SEC COVERING THE REMAINING SECURITIES OFFERED UNDER THE PREVIOUS OFFERING; THEN THE SECURITIES MAY CONTINUE TO BE OFFERED AND SOLD UNTIL THE EARLIER OF THE QUALIFICATION DATE OF THE NEW OFFERING CIRCULAR OR THE ONE HUNDRED EIGHTY (180) CALENDAR DAYS AFTER THE THIRD ANNIVERSARY OF THE INITIAL QUALIFICATION DATE OF THE PRIOR OFFERING CIRCULAR.
THE COMPANY INTENDS TO OFFER THE MEMBERSHIP INTERESTS DESCRIBED HEREIN ON A CONTINUOUS AND ONGOING BASIS PURSUANT TO RULE 251(D)(3)(I)(F). PURSUANT TO RULE 251(D)(3)(I)(F), THE COMPANY INTENDS TO COMMENCE THE OFFERING IMMEDIATELY AND NO LATER THAN TWO (2) DAYS FROM THE INITIAL QUALIFICATION DATE. THE COMPANY REASONABLY EXPECTS TO OFFER AND SELL THE SECURITIES STATED IN THIS OFFERING CIRCULAR WITHIN TWO (2) YEARS FROM THE INITIAL QUALIFICATION DATE.
ANY REMAINING SECURITIES THAT ARE NOT SOLD IN THIS OFFERING SHALL BE INCORPORATED INTO A FUTURE OFFERING CIRCULAR AFTER TWO (2) YEARS FROM THE INITIAL QUALIFICATION DATE TO “INCLUDE AS PART OF SUCH NEW OFFERING CIRCULAR ANY UNSOLD SECURITIES COVERED BY THE EARLIER OFFERING CIRCULAR BY IDENTIFYING ON THE COVER PAGE OF THE NEW OFFERING CIRCULAR OF THE LATEST AMENDMENT, THE AMOUNT OF SUCH UNSOLD SECURITIES BEING INCLUDED.”
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Price to Public 1 | Underwriting Discounts and Commissions 2 | Proceeds to the Company 4 | Proceeds to other Persons 3 | |
Amount to be Raised Per Membership Interest | $1,000 | $0 | $1,000 | $0 |
Minimum Investment Amount | $1,000 | $0 | $1,000 | $0 |
Minimum Offering Amount | $1,000 | $0 | $1,000 | $0 |
Maximum Offering Amount 7 | $50,000,000 | $0 | $50,000,000 | $0 |
1. The Offering price to investors was arbitrarily determined by the Manager.
2. The Company will not use an underwriter for the sale of any Membership Interests.
3. Membership Interests will be offered and sold directly by the Company, the Manager and the Company’s and Manager’s respective officers and employees. No commissions for selling Membership Interests will be paid to the Company, the Manager or the Company’s or Manager’s respective officers or employees. While most Membership Interests are expected to be offered and sold directly by the Company, the Manager and their respective officers and employees, the Company or Manager has reserved the right to offer and sell Membership Interests through the services of independent broker/dealers who are member firms of the Financial Industry Regulatory Authority (“FINRA”) and who will be entitled to receive customary and standard commissions of up to Eight Percent (8%) of the proceeds received for the sale of Membership Interests. Notwithstanding the foregoing, the amount and nature of commissions payable to broker/dealers is expected to vary in specific instances and may be lower than the one listed herein. The Investor who is admitted to the Company through such broker/dealer (and not the Company nor the Manager) will be responsible for all such commissions payable to broker/dealers (and such payments may reduce the Investor’s invested capital).
4. Net proceeds to the Company do not reflect the deduction of organization and offering expenses. The Company intends to reimburse the Manager of organization and Offering costs and expenses. Commissions of up to Eight Percent (8%) of the value of Membership Interests sold by FINRA broker/dealers may be paid by Investors who are in admitted to the Company through such broker/dealer. Notwithstanding the foregoing, if an investor seeks to purchase Membership Interests via an individual retirement account, 401(k), Keogh plans, or other similar tax exempt vehicles for a purchase price of less than Fifty Thousand Dollars ($50,000) the Company will charge an additional processing fee of Two Hundred Fifty Dollars ($250). Such investors will be responsible to pay this in addition to their purchase of Membership Interests.
5. The Maximum Offering Amount for the Company is Fifty Million Dollars ($50,000,000) in any Twelve (12) month period. The Company may increase the Maximum Offering Amount at its sole and absolute discretion, subject to qualification by the SEC of a post-qualification amendment.
FOR RESIDENTS OF ALL STATES. THE PRESENCE OF A LEGEND FOR ANY GIVEN STATE REFLECTS ONLY THAT A LEGEND MAY BE REQUIRED BY THAT STATE AND SHOULD NOT BE CONSTRUED TO MEAN AN OFFER OR SALE MAY BE MADE IN ANY PARTICULAR STATE. THIS OFFERING CIRCULAR MAY BE SUPPLEMENTED BY ADDITIONAL STATE LEGENDS. IF YOU ARE UNCERTAIN AS TO WHETHER OR NOT OFFERS OR SALES MAY BE LAWFULLY MADE IN ANY GIVEN STATE, YOU ARE ADVISED TO CONTACT THE COMPANY FOR A CURRENT LIST OF STATES IN WHICH OFFERS OR SALES MAY BE LAWFULLY MADE. AN INVESTMENT IN THIS OFFERING IS SPECULATIVE AND INVOLVES A HIGH DEGREE OF FINANCIAL RISK. ACCORDINGLY, PROSPECTIVE INVESTORS SHOULD CONSIDER ALL OF THE RISK FACTORS DESCRIBED BELOW.
UNITED STATES TERRITORIES AND POSSESSIONS. THESE SECURITIES ARE NOT AUTHORIZED FOR OFFERING OR SALE IN ANY TERRITORY OR POSSESSION OF THE UNITED STATES IN LIEU OF APPLICABLE SECURITIES LAWS TO THE CONTRARY. SECURITIES AND/OR CAPITAL GUARDIANSHIPS ARE NOT AUTHORIZED FOR SALE IN SUCH TERRITORIES OR POSSESSIONS.
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TABLE OF CONTENTS
EXHIBITS
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STATE LAW EXEMPTION AND PURCHASE RESTRICTIONS
The Membership Interests are being offered and sold only to “qualified purchasers” (as defined in Regulation A under the Act). As a Tier 2 Offering pursuant to Regulation A under the Act, this Offering is exempt from state law “Blue Sky” review, subject to meeting certain state filing requirements and complying with certain anti-fraud provisions, to the extent that the Membership Interests offered hereby are offered and sold only to “qualified purchasers” or at a time when the Membership Interests are listed on a national securities exchange, if at all.
“Qualified purchasers” include: (i) “accredited investors” under Rule 501(a) of Regulation D; and (ii) all other non-accredited Investors so long as their investment in the Membership Interests does not represent more than Ten Percent (10%) of the greater of the Investor’s, alone or together with a spouse, annual income or net worth (excluding the value of the Investor’s primary residence and any loans secured by the residence (up to the value of the residence)), or Ten Percent (10% ) of the greater of annual revenue or net assets at fiscal year-end (for non-natural persons).
The Membership Interests are offered hereby and sold to Investors that are within the both categories (i.e., Accredited Investors and non-accredited Investors whose investment in the Membership Interests does not represent more than Ten Percent (10%) of the applicable amount). Accordingly, the Company reserves the right to reject any Investor’s subscription in whole or in part for any reason, including if the Company determines in its sole and absolute discretion that such Investor is not a “qualified purchaser” for purposes of Regulation A.
For purposes of determining whether a potential Investor is a “Qualified purchaser” (who is not an Accredited Investor), annual income and net worth should be calculated as provided in the “accredited investor” definition under Rule 501 of Regulation D. In particular, net worth in all cases should be calculated excluding the value of an Investor’s home, home furnishings and automobiles.
Investors should not rely on forward-looking statements because they are inherently uncertain. Investors should not rely on forward-looking statements in this Offering Circular. This Offering Circular contains forward-looking statements that involve risks and uncertainties. We use words such as “anticipated,” “projected”, “forecasted”, “estimated”, “prospective”, “believes,” “expects,” “plans” “future” “intends,”, “should,” “can”, “could”, “might”, “potential,” “continue,” “may,” “will,” and similar expressions to identify these forward-looking statements. Investors should not place undue reliance on these forward-looking statements, which may apply only as of the date of this Offering Circular.
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The following information is only a brief summary of, and is qualified in its entirety by, the detailed information appearing elsewhere in this Offering. This Offering Circular, together with the exhibits attached including, but not limited to, the Limited Liability Company Operating Agreement of the Company (the “Operating Agreement”), a copy of which is attached hereto as Exhibit A-2, should be carefully read in its entirety before any investment decision is made. If there is a conflict between the terms contained in this Offering Circular and the Operating Agreement, the Operating Agreement shall prevail, and control and no Investor should rely on any reference herein to the Articles or Operating Agreement without consulting the actual underlying documents.
THE COMPANY AND ITS BUSINESS |
Circle of Wealth Fund III LLC is an Idaho limited liability company located at 701 E. Front Avenue, Floor 2, Coeur d’Alene, ID 83814. The Company is offering by means of this Offering Circular limited liability company Membership Interests on a “best efforts” basis to qualified Investors who meet the Investor Suitability standards as set forth herein. (See “Investor Suitability” below.)
As further described in the Offering Circular, the Company has been organized to: (i) make, fund, originate, refinance, purchase, sell and/or otherwise acquire Loans secured by first or junior position deeds of trust or mortgages on non-owner occupied residential and commercial properties located throughout the United States; and (ii) acquire, develop, rehabilitate, and/or hold and/or sell non-owner occupied residential real estate located throughout the United States. (See “Lending Standards and Policies” and “General Standards for Purchasing Properties” below). |
MANAGEMENT | The Company will be managed by Secured Investment Corp., a Wyoming corporation, whose office is located at 701 E. Front Avenue, Floor 2, Coeur d’Alene, ID 83814. |
THE OFFERING |
The Company is hereby offering Membership Interests in the maximum aggregate amount of Fifty Million Dollars ($50,000,000) (the “Maximum Offering Amount”). Notwithstanding the foregoing, the Company reserves the right to increase the Maximum Offering Amount in its sole and absolute discretion, subject to qualification by the SEC of a post-qualification amendment.
The Minimum Investment Amount per Investor is One Thousand Dollars ($1,000); provided, however, that the Manager reserves the right to accept subscriptions in a lesser amount or require a higher amount.
The Company’s Operating Agreement allows the Company issue Membership Interests on an ongoing basis. As of the date of this Offering Circular the Company has issued Membership Interests to the Manager. |
VOTING RIGHTS | Members will have substantially limited control, voting rights or involvement in the business, affairs or governance of the Company. . (See “Exhibit A-2 – Operating Agreement”.) |
COMPENSATION TO MANAGER | The Manager and its affiliates will receive fees for managing the Company. (See “Manager’s Compensation” below.) |
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PRIOR EXPERIENCE | The Manager has prior experience in real estate, mortgage industry and securities transactions. (See “The Manager” below.) |
CAPITALIZATION |
The Company’s Operating Agreement does not restrict the number of Membership Interests that the Company may issue. As of the date of this Offering Circular the Company has issued Membership Interests to the Manager. The Company shall limit the Offering to Fifty Million Dollars ($50,000,000) in any Twelve (12) month period, subject to qualification by the SEC of a post-qualification amendment. The Company may, at its sole and absolute discretion, at any time during the period of the Offering, increase or decrease the Minimum Investment Amount and/or the Maximum Offering Amount.
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INVESTOR SUITABILITY STANDARDS | Membership Interests are offered to “Qualified purchasers”. “Qualified purchasers” include: (i) “accredited investors”, as defined under Rule 501(a) of Regulation D and (ii) all other Investors who meet the investment limitations set forth in Rule 251(d)(2)(C) of Regulation A. Each Investor must execute a Subscription Agreement making certain representations and warranties to the Company, including, but not limited to, such purchaser’s qualifications as an “Accredited Investor”, or as a non-accredited investor who meets the investment limitations set forth in Rule 251(d)(2)(i)(C) of Regulation A. (See “Investor Suitability” below.) |
LIMITATIONS ON INVESTMENT AMOUNT | This Offering is open to all Accredited and non-Accredited investors. Generally, no sale may be made to any non-Accredited Investors in this Offering if the aggregate purchase price purchased by the Investor is more than Ten Percent (10%) of the greater of the Investor’s, alone or together with a spouse, annual income or net worth. Different rules apply to accredited investors and non-natural persons. Each Investor should review to review Rule 251(d)(2)(i)(C) of Regulation A before purchasing the Membership Interests. (See “Investor Suitability” below.) |
COMMISSIONS FOR SELLING MEMBERSHIP INTERESTS | Membership Interests will be offered and sold directly by the Company, the Manager and the Company’s and Manager’s respective officers and employees. No commissions for selling Membership Interests will be paid to the Company, the Manager or the Company’s or Manager’s respective officers or employees. While most Membership Interests are expected to be offered and sold directly by the Company, the Manager and their respective officers and employees, the Company or Manager may also, in limited instances, offer and sell Membership Interests through the services of independent broker/dealers who are member firms of the Financial Industry Regulatory Authority (“FINRA”) and who will be entitled to receive customary and standard commissions of up to Eight Percent (8%) of the gross proceeds received for the sale of Membership Interests. Notwithstanding the foregoing, the amount and nature of commissions payable to broker/dealers is expected to vary in specific instances and may be lower than the one listed herein. The Investor who is admitted to the Company through such broker/dealer (and not the Company nor the Manager) will be responsible for all such commissions payable to broker/dealers (and such payments may reduce the Investor’s invested capital). |
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NO LIQUIDITY | There is no public market for the Membership Interests, and none is expected to develop. Additionally, the Membership Interests will be non-transferable, except as may be required by law, and will not be listed for trading on any exchange or automated quotation system. (See “Risk Factors” below.) The Company will not facilitate or otherwise participate in the secondary transfer of any Membership Interests. However, Members will be allowed to withdraw their investments in accordance with the terms and conditions of the Operating Agreement. Prospective investors are urged to consult their own legal advisors with respect to secondary trading of the Membership Interests. (See “Risk Factors” below.) |
LOAN ORIGINATION AND SERVICING |
Loans funded and/or otherwise acquired by the Company will be originated by the Manager, operating under the fictitious business name of Cogo Capital, in its capacity as originator. In addition, the Manager will also service the Loans (i.e., loan payments collected and other services relating to the loan), operating under the fictious business name of Lake City Servicing, in its capacity as Servicer.
Notwithstanding the foregoing, the Manager may, in its sole and absolute discretion, appoint an Affiliate or third-party loan servicer to service the Loans. The servicer, whether a third party or the Manager or its Affiliate, shall be herein referred to as the “Servicer.” The Servicer will be compensated by the Company and/or borrowers for such loan servicing activities, as is agreed upon by the Manager and Servicer. To the extent applicable, the Manager will oversee the activities and performance of the Servicer. (See “The Manager’s Compensation” below.) |
RECOVERY OF DEFERRED COMPENSATION | If the Manager or Servicer defers or assigns to the Company any of their respective compensation, the Manager and/or Servicer may elect, in the sole and absolute discretion of the Manager, to recover the same at a later time within the same calendar year only. Notwithstanding the foregoing, the Manager and/or Servicer have no obligation to waive, defer, or assign to the Company any portion of such compensation at any time. |
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LEVERAGING THE PORTFOLIO |
The Company may borrow funds from financiers, other lenders, or banks for the purpose of funding the Company’s investments in Loans and properties. In order to obtain such additional capital, the Company may assign part or its entire asset portfolio to the lender or investor. Such a transaction involves certain elements of risk and also entails possible adverse tax consequence as detailed later in this Offering Circular. (See “Risk Factors – Business Risks, Risks of leveraging the Company’s asset portfolio include assigning a portion of or the entire Company’s asset portfolio as security for obtaining additional capital.”, “Income Tax Considerations”, and “ERISA Considerations” below.) The terms and conditions of any credit obtained by the Company shall be negotiated by the Manager in its sole and absolute discretion.
In addition, any debt incurred by the Company will be senior in payment to the Members. (See “Lending Standards and Policies”, “Property Acquisition Guidelines and Policies”, “Risk Factors – Business Risks, Risks of leveraging the Company’s asset portfolio include assigning a portion of or the entire Company’s asset portfolio as security for obtaining additional capital.”, “Income Tax Considerations”, and “ERISA Considerations” below.)
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PREFERRED RETURN |
Members will generally be entitled to receive an annualized preferred return (the “Preferred Return”) on their investment, payable monthly (and prorated as applicable for the amount of time that a Member was a member of the Company). This Preferred Return will be payable prior to any profit participation by the Manager (however, all expenses and fees other than profit participation will be paid to the Manager prior to the Preferred Return).
The Preferred Return for any Member shall be equal to a non-cumulative annualized rate of Six Percent (6%), calculated and payable on a monthly basis. (See “Terms of the Offering – Preferred Return; Cash Distributions; Election to Reinvest” below.) |
DISTRIBUTION OF NET PROFITS TO MEMBERS | Members will also be eligible for monthly distributions of the Company’s Net Profits (as defined below). (See “Terms of the Offering – Preferred Return, Cash Distributions; Election to Reinvest” below.) |
REINVESTMENT |
So long as the Offering is ongoing, Members will have the option of receiving their monthly income distributions or having their share of distributions credited to their capital accounts and reinvested in the Company to purchase additional Membership Interests, at the then current price of the Membership Interests. (See “Terms of the Offering – Preferred Return, Cash Distributions; Election to Reinvest” below.) Any Membership Interests purchased through reinvestment will be counted towards the Maximum Offering Amount.
Notwithstanding the forgoing, the Manager reserves the right to commence making cash distributions at any time to any Member(s) in order for the Company to remain exempt from the ERISA plan asset regulations. (See “ERISA Considerations” and “Summary of the Operating Agreement” below.) |
RETURN OF CAPITAL | The Manager reserves the right to return part or all of the Member’s capital investment to the Member at any time during the investment and to expel any Member for cause. (See “Summary of the Operating Agreement – Redemption Policy and Other Events of Disassociation” below.) |
LOSS RESERVE | A loss reserve may be maintained by the Company, as determined by the Manager, in its sole and absolute discretion. The loss reserve is intended to protect Members from potential unrecoverable losses on loans. (See “Risk Factors” below.) |
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RISK FACTORS |
There are a number of risks associated with the purchase of Membership Interests. The risk factors set forth in this Offering Circular, including those in the “Risk Factors” section below, identify important factors that an Investor should consider before investing in the Company. A summary of the some of the risk factors is included below:
1. The Company depends on the Manager to select its investments and conducts its operations. The fees and expenses payable to the Manager were not determined on an arm’s length basis, therefore, there is no benefit of an arm’s length transactions typically conducted between unrelated parties.
2. The Company does not have an operating history. The prior performance for the Manager or its affiliated entities do not predict future results for the Company. Therefore, no assurance can be given that the Company will achieve its investment objectives;
3. National, international and local economic and business conditions that could affect the Company’s business;
4. Industry developments affecting the Company’s business, financial condition and results of operations;
5. Governmental approvals, actions and initiatives and changes in laws and regulations or the interpretation thereof, including without limitation tax laws, regulations and interpretations.
In making an investment decision Investors must rely on their own examination of the Company and the terms of the Offering, including the risks involved. The investment in Membership Interests involves a high degree of risk and Investors should purchase Membership Interests only if they can afford a complete loss of their investment. See the section “Risk Factors” below. |
COMPANY EXPENSES | Except as otherwise provided herein, the Company shall bear all costs and expenses associated with the organization of the Company, costs associated with the Offering, operation of the Company, including, but not limited to, the annual tax preparation of the Company's tax returns, any state and federal income tax due, accounting fees, filing fees, independent audit reports, foreclosure costs and expenses associated with the foreclosing on any Loans, costs associated with force placed insurance, costs and expenses associated with the acquisition, rehabilitation, holding and management of real estate and costs and expenses associated with the disposition of real estate. |
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FUND ADMINISTRATION |
The Company intends to engage CrowdEngine, Inc., PrimeTrust LLC, and other third party service providers (collectively referred to as the “Fund Administrator”) to perform various investor-related services, including, without limitation, onboarding capital contributions from Investors, managing the Member’s investment accounts with the Company, administer distributions of Preferred Return (and/or Net Profits), record keeping, back-office accounting and administrative services for the Company and will pay the Fund Administrator market-rate fees for such services. Notwithstanding the foregoing, the Company reserves the right to retain the services of different Fund administration firms, at its sole and absolute discretion. (See “Exhibit G – Master Servicing Agreement” and “Exhibit H – Escrow Services Agreement”).
In addition, the Fund Administrator will establish an investor online portal where Members will be required to create an account in order to subscribe and access information concerning the financial performance of the Company, their investment, and any other communication directed to the Member. |
WITHDRAWALS/ REDEMPTIONS |
Members will be required to hold their Membership Interests for a minimum of Twelve (12) months before they may request to withdraw from the Company and have their Membership Interests redeemed. Thereafter, a Member may request withdrawal from the Company and give at least Ninety (90) days’ prior written notice prior to the Manager. The Company will use its best efforts to return capital subject to, among other things, the Company’s then cash flow, financial condition, and prospective investments in assets. Furthermore, any Member requesting redemption will be responsible for any third-party costs incurred in effecting such redemption, including but not limited to, bank transaction charges, custody fees, and/or transfer agent charges (as applicable).
A Member's redemption request shall specify the amount the Member requests to withdraw and shall be subject to the Manager's approval. While the Company intends to allow Members to request redemptions on an ongoing basis, the Company has imposed limitations on the amount of individual redemption requests per calendar quarter in order to maintain liquidity to satisfy redemption requests without impacting the Company’s ability to invest in Loans and properties. Accordingly, each request for withdrawal or redemption shall be limited to Twenty-Five Percent (25%) of such Member’s withdrawal request such that it will take at least Four (4) quarters for a Member to withdraw the requested amount; provided, however, that the maximum aggregate amount of capital that the Company will return to the Members each fiscal year is limited to Ten Percent (10%) of the total outstanding capital of the Company. Withdrawal requests will be processed by the Company on a first-come, first-served basis.
The above requirements regarding the withdrawal amount and the timing of any specific withdrawal may be modified by the Manager, in its sole and absolute discretion, based on, amongst other things, the Company's current cash flow, the amount of the Company's reserves, and the Company's then-current financial condition. However, in the event that the Company amends, suspends or terminates withdrawals, the Company will file an offering circular supplement and/or Form 1-U, as necessary, and inform Members of such amendment.
The Manager may at any time suspend the withdrawal of funds from the Company, upon the occurrence of any of the following circumstances: (i) whenever, as a result of events, conditions or circumstances beyond the control or responsibility of the Manager or the Company, disposal of the assets of the Company is not reasonably practicable without being detrimental to the interests of the Company or its Members, determined in the sole and absolute discretion of the Manager; (ii) it is not reasonably practicable to determine the net asset value of the Company on an accurate and timely basis; or (iii) if the Manager has determined to dissolve the Company. Notice of any suspension will be given within Ten (10) business days from the time the decision was made to suspend distributions to any Member who has submitted a withdrawal request and to whom full payment of the redemption proceeds has not yet been remitted. If a redemption request is not rescinded by a Member following notification of a suspension, the redemption will be effected as of the last day of the calendar month in which the suspension is lifted, on the basis of the net asset value of the Company at that time and in the order determined by the Manager in its sole and absolute discretion. |
SUMMARY OF FINANCIAL INFORMATION
The statements of operations data set forth below with respect to the period from December 3, 2018 to December 31, 2018, are derived from, and are qualified by reference to, the audited financial statements included in this Offering Circular and should be read in conjunction with those financial statements and notes thereto.
For the Period of December 3, 2018 through December 31, 2018 | |
Cash and Cash Equivalents | $25,000 |
Prepaid Expenses: | $3,000 |
Total Assets | $28,000 |
The Offering will be made to Investors through general solicitation, direct solicitation, and marketing efforts. The Company will not utilize an underwriter for the sale of the Membership Interests. The Offering is being conducted on a “best-efforts” basis, which means the principals and officers of the Company will use commercially reasonable best efforts in an attempt to sell the Membership Interests. Such officers will not receive any commission or any other remuneration for these sales. In offering the Membership Interests on behalf of the Company, the principals and officers will rely on the safe harbor from broker-dealer registration set forth in Rule 3a4-1 under the Securities Exchange Act of 1934, as amended.
The Company may also sell the Membership Interests through the services of an independent broker – dealers who are members of the Financial Industry Regulatory Authority. FINRA member broker-dealers may be entitled to commissions of up to Eight percent (8%) received for the sale of the Membership Interests. These commissions will be paid by the Investor. Investors understand that these commissions may reduce their capital contribution and reduce the total Membership Interests purchased from the Company. The Membership Interests will be offered on an on-going basis and on an as-needed basis based on the demand of Loans and/or opportunities to purchase real property.
The Minimum Investment Amount is One Thousand Dollars ($1,000) and the Maximum Offering Amount is Fifty Million Dollars ($50,000,000), subject to an increase of the Maximum Offering Amount through a qualification by the SEC of a post-qualification amendment.
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The Company intends to raise Offering proceeds to engage in the following: (i) make, fund, originate, refinance, purchase, sell and/or otherwise acquire Loans secured by first or junior position deeds of trust or mortgages on non-owner occupied residential and commercial properties located throughout the United States; and (ii) acquire, develop, rehabilitate, and/or hold and/or sell non-owner occupied real estate located throughout the United States. (See “Lending Standards and Policies” and “General Standards for Purchasing Properties” below).
The net proceeds from this Offering will not be used to compensate or otherwise make payments to officers, directors or Members of the Company, unless and to the extent it is as otherwise stated below. All Offering proceeds raised by the Company and the Manager will be sourced from business conducted per the Operational Plan set forth below.
MAXIMUM OFFERING AMOUNT | PERCENTAGE OF PROCEEDS | |
Gross Offering Proceeds | $50,000,000 | 100% |
Estimated Commissions 1 | $0 | 0 |
Initial Offering Expenses 2 | $78,000 | $78,000 |
Deployable Proceeds | $49,990,000 | 99% |
1. Membership Interests will be offered and sold directly by the Company, the Manager and the Company’s and Manager’s respective officers and employees. No commissions for selling Membership Interests will be paid to the Company, the Manager or the Company’s or Manager’s respective officers or employees. While most Membership Interests are expected to be offered and sold directly by the Company, the Manager and their respective officers and employees, the Company or Manager may also, in limited instances, offer and sell Membership Interests through the services of independent broker/dealers who are member firms of the Financial Industry Regulatory Authority (“FINRA”) and who will be entitled to receive customary and standard commissions of up to Eight Percent (8%) of the gross proceeds received for the sale of Membership Interests. Notwithstanding the foregoing, the amount and nature of commissions payable to broker/dealers is expected to vary in specific instances and may be lower than the one listed herein. The Investor who is admitted to the Company through such broker/dealer (and not the Company nor the Manager) will be responsible for all such commissions payable to broker/dealers (and such payments may reduce the Investor’s invested capital).
2. The initial expenses associated with this Offering, including legal and accounting expenses, total approximately Seventy Eight Thousand Dollars ($78,000). The Manager has agreed to pay for all legal costs associated with the organization of the Fund. Notwithstanding the foregoing, the Company intends to reimburse the Manager for any non-legal organization and Offering costs and expenses incurred on behalf of the Company, which are approximately Ten Thousand Dollars ($10,000)
3. Net proceeds to the Company only reflect an approximation of the deduction of organization and offering expenses that may be reimbursed to the Manager. Any expenses associated with the Membership Interests, Loans and/or other investments of the Company shall be paid by the Company in accordance with the terms set forth herein and in the Operating Agreement.
The foregoing represents the Company’s best estimate of the allocation of the proceeds of this Offering based on planned use of funds for the Company’s operations and current objectives. The Company will not raise funds from other sources in order to achieve its investments. Notwithstanding the foregoing, the Company may borrow money from financiers, other lenders, or banks to fund its investments, who are not identified at this moment as the Company does not have any agreements with any financers, lender, or banks to borrow money from.
This Offering is made to Qualified purchasers to purchase Membership Interests in the Company. The Minimum Investment Amount per Investor is One Thousand Dollars ($1,000). (See “Investor Suitability” below.) While the Offering is still open, Members that have subscribed for at least the Minimum Investment Amount may purchase additional Membership Interests in increments of One Thousand Dollars ($1,000), provided that such additional purchase of Membership Interests complies with Regulation A, Tier II requirements. The Manager reserves the sole right, but has no obligation, to adjust the price to purchase additional Membership Interests, at any time and for any reason (or no reason) and thereby require either a higher or lesser amount.
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The Offering will continue until the Company has raised the Maximum Offering Amount or is terminated by the Company, in its sole and absolute discretion. At such time, the Offering will be deemed closed. The Company may, at its sole and absolute discretion, at any time during the period of the Offering, increase or decrease the Minimum Investment Amount or the Maximum Offering Amount.
Notwithstanding the foregoing in “Terms of the Offering”, the Company reserves the right, in its sole and absolute discretion to, at any time, and for any reason or no reason, accept subscriptions in a lesser amount or to require a higher amount or to reject any subscription(s) in whole or in part.
The Platform
The Platform will be hosted by CrowdEngine and operated by the Company. The following information shall be available to each Member on the Company’s website and Platform: (i) the Subscription Agreement, Offering Circular, and Operating Agreement. Investors will be required to visit the Company’s online Platform in order to receive, review, execute and deliver the Subscription Agreement electronically.
Investors will be able to transact entirely online, including executing and reviewing digital legal documentation, funds transfer, and ownership recordation. Once accepted by the Company, a Member will be able to manage and view his, her or its account, receive distributions and Company reports (such as a Member’s K-1 Form).
Subscription Agreements; Admission to the Company
To subscribe with the Company and purchase any Membership Interests, an Investor must meet certain eligibility and suitability standards, some of which are set forth below. (See “Investor Suitability” below.) Additionally, an Investor who wishes to become a Member of the Company must sign and execute a subscription agreement (“Subscription Agreement”) in the form attached hereto as Exhibit B (together with a check, or a payment via Automated Clearing House (“ACH”), wire transfer, or a payment card (i.e., credit or debit card), in the amount of the purchase price payable to the Company), which shall be accepted or rejected by the Manager in its sole and absolute discretion. By executing the Subscription Agreement, an Investor makes certain representations and warranties upon which the Manager will rely on in accepting the Investor’s subscription funds. Investors are encouraged to read the Subscription Agreement carefully and in its entirety. INVESTORS SHOULD CAREFULLY READ AND COMPLETE THE SUBSCRIPTION AGREEMENT (WITH POWER OF ATTORNEY AND INVESTOR QUESTIONNAIRE).
Investors will be required to complete a Subscription Agreement on the Company’s Platform, after creating a user account. The Company reserves the sole and absolute right to reject any subscription tendered for any reason or no reason, or to accept it in part only. (See “Use of Proceeds” below.) Investors will be required to fund and receive their Membership Interests through the Platform.
Investors will be required to fund their Platform account via Automated Clearing House system (“ACH”), wire transfer, and card payment. If authorized by the Investor, the Company may also initiate an ACH transaction and draw money from the Investor’s bank account upon admission as a Member, provided the Investor has agreed to such transaction. Investors will need to indicate on the Platform the amount they would like to invest in the Company.
In order to asses each prospective Investor’s suitability as a Member, each Investor’s Subscription Agreement will be accepted or rejected by the Company within Fifteen (15) days or sooner of its receipt. In addition, Subscription Agreements are non-cancelable and irrevocable by the Investor and subscription funds are non-refundable, except with the express written consent of the Company and/or as expressly set forth herein or in the Subscription Agreement. If accepted by the Company, an Investor shall become a Member only when the Company deposits the Investor’s contribution into the Company’s Operating Account.
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The Manager may reject an Investor’s Subscription Agreement for any reason or no reason at all. If accepted by the Manager, an Investor shall become a Member when the Manager deposits the Investor’s contribution into the Company’s main operating bank account (“Operating Account”). Until then, an Investor’s subscription agreement is non-revocable, and subscription funds shall be held by the Manager and may, at the sole discretion of the Manager, be deposited in a call account (the “Subscription Account”).
Notwithstanding the previous paragraph, should the process from depositing an Investor’s funds into the Operating Account and admission as a Member take longer than Fifteen (15) days, the Investor may request in writing to recover his, her or its investment funds. If, upon receipt of such request in writing, the Manager has not yet admitted the Investor as a Member, then Manager will return the Investor’s funds to the investor and revoke the Subscription Agreement within Ten (10) business days of receipt of such request from the Investor.
Subscription Agreements are non-cancelable and irrevocable by the Investor and subscription funds are non-refundable for any reason, except with the express written consent of the Manager or as expressly set forth herein or in the Subscription Agreement.
Preferred Return; Cash Distributions; Election to Reinvest
Preferred Return
Members will generally be entitled to receive an annualized Preferred Return on their investment, payable after the end of each month (and prorated as applicable for the amount of time that a Member was a member of the Company during such month). This Preferred Return will be payable prior to any other distributions to Members or profit participation by the Manager (however, all expenses and fees other than profit participation will be paid to the Manager and any allocation of income for a loan loss reserve will be made prior to the distribution of the Preferred Return). The Preferred Return for any Member shall be equal to a non-cumulative annualized rate of Six Percent (6%), calculated and payable on a monthly basis.
For purposes of illustration only, assume that a Member received the full annualized amount of the Preferred Return for the first monthly distribution of a fiscal year. In the remaining monthly period of such fiscal year, if the Company was unable to return to the Member the full annualized amount of the Preferred Return, such amount would not cumulate and compound into the following fiscal year as a Preferred Return distribution owing or required to be distributed to the Member in the succeeding fiscal year. In addition, in this example, if the Company had posted a substantial loss in the second monthly period, the loss may be large enough such that Members may have received too large a distribution of Preferred Return during the first monthly distribution period of the fiscal year; in such a case, there is no mechanism for the Company to necessarily claw-back or recall excess distributions already made to Members during the earlier part of the fiscal year. All investors should understand that due to differences in timing and amounts of distributions and actual income/losses and profits of the Company, there may be a significant disparity between amounts distributed to Members and their distributable share of income and losses; such amounts and disparities may fluctuate and change from year to year.
Investors should understand that Preferred Returns may necessarily fluctuate in accordance with the business and operations of the Company. At the end of the fiscal year, the Company will review all Preferred Returns paid during the year just ended and make ratable adjustments to the Preferred Return distributions paid or payable to Members in order to ensure that Members receive accurate Preferred Return distributions for the annual year in accordance with the intent and provisions of the Operating Agreement and the Offering Circular.
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DISTRIBUTIONS OF THE PREFERRED RETURN ARE NOT A GUARANTEED DISTRIBUTION AND ARE SUBJECT TO THE CASH AVAILABILITY OF THE COMPANY. THE MANAGER AND THE COMPANY MAKE NO GUARANTEES, ASSURANCES OR COMMITMENTS TO THE DISTRIBUTION OF ANY RETURNS. THE MANAGER WILL ONLY MAKE DISTRIBUTIONS TO THE EXTENT CASH IS AVAILABLE AND, IN THE SOLE AND ABSOLUTE DISCRETION OF THE MANAGER, AND TO THE EXTENT THAT ANY DISTRIBUTIONS WILL NOT IMPACT THE CONTINUING OPERATIONS OF THE COMPANY.
Cash Distributions
Net Profits in excess of the Preferred Return shall be distributed to the Members on a monthly basis as follows: Fifty Percent (50%) of the Net Profits of the Company shall be distributed to the Members on a pro-rata basis, and the remaining Fifty Percent (50%) of the Net Profits shall be distributed to the Manager.
“Net Profits” means the Company’s monthly gross income less (1) the Company’s monthly operating expenses (including payment of outstanding debt (if any), administrative costs, legal expenses and accounting fees) (2) an allocation of income for a loan loss reserve; and (3) payment of the Asset Management Fee and any other fees to the Manager.
All distributions of Net Profits will be made on a monthly basis, in arrears, and distributions to Members shall be prorated as applicable for the amount of time that a Member was a member of the Company during such accounting period.
DISTRIBUTION OF NET PROFITS IS NOT GUARANTEED. NET PROFITS SHALL ONLY BE DISTRIBUTED TO THE EXTENT CASH IS AVAILABLE AND PROVIDED THAT THE MONTHLY NET PROFIT DISTRIBUTIONS WILL NOT IMPACT THE CONTINUING OPERATIONS OF THE COMPANY, SUBJECT TO THE SOLE AND ABSOLUTE DISCRETION OF THE MANAGER.
Election to Reinvest
Each Member has the option of receiving cash distributions for his, her or its share of the earnings of the Company (including any Preferred Return) that is payable to the Member, or having such amount(s) credited to his, her or its capital accounts and reinvested in the Company at the then current price of the Membership Interests. Notwithstanding the foregoing, the Manager reserves the right to commence making cash distributions at any time to any Member(s) in order for the Company to remain exempt from the ERISA plan asset regulations. (See “ERISA Considerations” and “Summary of the Operating Agreement” below)
Members must select at the time of subscription to receive cash or reinvest all of their monthly income distributions including their Preferred Returns. If no election is made, then the monthly income distribution will be automatically reinvested into the Company to purchase additional Membership Interests. No partial reinvestment is permitted.
Reinvestments will be allowed to the extent that the Offering is qualified with the SEC and provided that such reinvestments do not exceed the offering amount that may be sold in any given Twelve (12) month period in accordance with Regulation A, Tier II requirements.
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Members may change their election at any time upon Thirty (30) days written notice to the Company. Upon receipt and after the Thirty (30) day notice has occurred, the Member’s selection shall be changed and reflected on the following first day of the month in which the Member is entitled to receive a distribution. Notwithstanding the preceding sentences, the Manager may at any time immediately commence with income distributions in cash only (hence, suspending the reinvestment option for such Member(s)) to any Member(s) in order for the Company to remain exempt from the ERISA plan asset regulations. (See “ERISA Considerations” and “Summary of the Operating Agreement” below).
This investment is appropriate only for Investors who have no need for immediate liquidity in their investments and who have adequate means of providing for their current financial needs, obligations and contingencies, even if such investment results in a total loss. Investment in the Membership Interests involves a high degree of risk and is suitable only for an investor whose business and investment experience, either alone or together with a purchaser representative, renders the investor capable of evaluating each and every risk of the proposed investment. PROSPECTIVE INVESTORS SHOULD CAREFULLY READ THE ENTIRE “RISK FACTORS” SECTION OF THIS OFFERING CIRCULAR.
Member Withdrawals
Members will be required to hold their Membership Interests for a minimum of Twelve (12) months before they may request to withdraw from the Company and have their Membership Interests redeemed. Thereafter, a Member may request withdrawal from the Company and give at least Ninety (90) days’ prior written notice prior to the Manager. The Company will use its best efforts to return capital subject to, among other things, the Company’s then cash flow, financial condition, and prospective investments in assets. Furthermore, any Member requesting redemption will be responsible for any third-party costs incurred in effecting such redemption, including but not limited to, bank transaction charges, custody fees, and/or transfer agent charges (as applicable).
A Member's redemption request shall specify the amount the Member requests to withdraw and shall be subject to the Manager's approval. While the Company intends to allow Members to request redemptions on an ongoing basis, the Company has imposed limitations on the amount of individual redemption requests per calendar quarter in order to maintain liquidity to satisfy redemption requests without impacting the Company’s ability to invest in Loans and properties. Accordingly, each request for withdrawal or redemption shall be limited to Twenty-Five Percent (25%) of such Member’s withdrawal request such that it will take at least Four (4) quarters for a Member to withdraw the requested amount; provided, however, that the maximum aggregate amount of capital that the Company will return to the Members each fiscal year is limited to Ten Percent (10%) of the total outstanding capital of the Company. Withdrawal requests will be processed by the Company on a first-come, first-served basis.
The above requirements regarding the withdrawal amount and the timing of any specific withdrawal may be modified by the Manager, in its sole and absolute discretion, based on, amongst other things, the Company's current cash flow, the amount of the Company's reserves, and the Company's then-current financial condition. However, in the event that the Company amends, suspends or terminates withdrawals, the Company will file an offering circular supplement and/or Form 1-U, as necessary, and inform Members of such amendment.
The Manager may at any time suspend the withdrawal of funds from the Company, upon the occurrence of any of the following circumstances: (i) whenever, as a result of events, conditions or circumstances beyond the control or responsibility of the Manager or the Company, disposal of the assets of the Company is not reasonably practicable without being detrimental to the interests of the Company or its Members, determined in the sole and absolute discretion of the Manager; (ii) it is not reasonably practicable to determine the net asset value of the Company on an accurate and timely basis; or (iii) if the Manager has determined to dissolve the Company. Notice of any suspension will be given within Ten (10) business days from the time the decision was made to suspend distributions to any Member who has submitted a withdrawal request and to whom full payment of the redemption proceeds has not yet been remitted. If a redemption request is not rescinded by a Member following notification of a suspension, the redemption will be effected as of the last day of the calendar month in which the suspension is lifted, on the basis of the net asset value of the Company at that time and in the order determined by the Manager in its sole and absolute discretion.
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Maximum Offering
The Maximum Offering Amount of this Offering Circular is Fifty Million Dollars ($50,000,000), subject to qualification by the SEC of a post-qualification amendment. The Company may, at its sole and absolute discretion, at any time during the period of the Offering, increase or decrease the Maximum Offering Amount or the Minimum Investment Amount.
Subject to the limitations set forth under Regulation A Tier II, the Maximum Offering Amount will be limited to Fifty Million Dollars ($50,000,000) annually.
The maximum gross proceeds will be the Maximum Offering Amount which will comprise, subject to adjustments as described elsewhere in this Offering Circular, the total equity capitalization of the Company. This Offering may, however, be terminated at the sole option of the Manager at any time and for any reason (or no reason) before the Maximum Offering Amount is received.
Restrictions on Transfer
As a condition to this Offering, restrictions have been placed upon the ability of Members to resell or otherwise transfer any Membership Interests purchased hereunder. Specifically, no Member may resell or otherwise transfer any Membership Interests without the satisfaction of certain conditions designed to ensure compliance with applicable tax and securities laws including, without limitation: (i) the requirement that certain legal opinions be provided to the Company with respect to such matters and the requirement that any transfer of shares to a transferee does not violate any state or federal securities laws; (ii) the limitation set forth under Regulation A Tier 2 limiting secondary sales by security holders who are affiliates of the Company to Fifteen Million Dollars ($15,000,000) and for all security holders to no more than Thirty Percent (30%) of the Maximum Offering Amount for the first Twelve (12) months of the Offering; and (iii) the prior written consent of the Manager, whose consent may be withheld in its sole and absolute discretion. (See “Summary of the Operating Agreement — Transfer Restrictions” below.)
Transfer Agent and Registrar
As of the date of this Offering Circular, the Company has not engaged a transfer agent, and does not intend to engage a transfer agent until such time as the Company is required to do so in order to satisfy the conditional exemption contained in Rule 12g5-1(a)(7) of the Securities Exchange Act of 1934, as applicable, or the Exchange Act.
INVESTOR SUITABILITY AND LIMITATIONS
The Membership Interests are being offered and sold only to “qualified purchasers” (as defined in Regulation A under the Act). “Qualified purchasers” include:
(i) “accredited investors” under Rule 501(a) of Regulation D (as explained below); and
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(ii) all other Investors so long as their investment in the Membership Interests does not represent more than Ten Percent (10%) of the greater of the Investor’s, alone or together with a spouse, annual income or net worth (for natural persons), or Ten Percent (10%) of the greater of annual revenue or net assets at fiscal year-end (for non-natural persons).
The Membership Interests are offered hereby and sold to Investors that meet one of the categories (i.e., Accredited Investors and Investors whose investment in the Membership Interests does not represent more than Ten Percent (10%) of the applicable amount).
To qualify as an “Accredited Investor”, for purposes of satisfying one of the tests in the “qualified purchaser” definition, an Investor must meet ONE of the following conditions:
(i) Any natural person who had an individual income in excess of Two Hundred Thousand Dollars ($200,000) in each of the two most recent years or joint income with that person’s spouse in excess of Three Hundred Thousand Dollars ($300,000) in each of those years and who has a reasonable expectation of reaching the same income level in the current year;
(ii) Any natural person whose individual net worth or joint net worth, with that person’s spouse, at the time of their purchase exceeds One Million Dollars ($1,000,000) (excluding the value of such person’s primary residence);
(iii) Any bank as defined in Section 3(a)(2) of the Act, or any savings and loan association or other institution as defined in Section 3(a)(5)(A) of the Securities Act, whether acting in its individual or fiduciary capacity; any broker or dealer registered pursuant to Section 15 of the Securities and Exchange Act of 1934 (the “Exchange Act”); any insurance company as defined in Section 2(13) of the Exchange Act; any investment company registered under the Investment Fund Act of 1940 or a business development company as defined in Section 2(a)(48) of that Act; any Small Business Investment Fund (SBIC) licensed by the U.S. Small Business Administration under Section 301(c) or (d) of the Small Business Investment Act of 1958; any plan established and maintained by a State, its political subdivisions, or any agency or instrumentality of a state or its political subdivisions, for the benefit of its employees, if such plan has total assets in excess of Five Million Dollars ($5,000,000); any employee benefit plan within the meaning of the Employee Retirement Income Security Act of 1974, if the investment decision is made by a plan fiduciary, as defined in Section 3(21) of such Act, which is either a bank, savings and loan association, insurance company, or registered investment advisor, or if the employee benefit plan has total assets in excess of Five Million Dollars ($5,000,000) or, if a self-directed plan, with investment decisions made solely by persons who are Accredited Investors;
(iv) Any private business development company as defined in Section 202(a)(22) of the Investment Advisors Act of 1940;
(v) Any organization described in Section 501(c)(3)(d) of the Internal Revenue Code of 1986, as amended (the “Code”), corporation, Massachusetts or similar business trust, or partnership, not formed for the specific purpose of acquiring the securities offered, with total assets in excess of Five Million Dollars ($5,000,000);
(vi) Any director or executive officer, or Fund of the issuer of the securities being sold, or any director, executive officer, or Fund of a Fund of that issuer;
(vii) Any trust, with total assets in excess of Five Million Dollars ($5,000,000), not formed for the specific purpose of acquiring the securities offered, whose purchase is directed by a sophisticated person as described in Section 506(B)(b)(2)(ii) of the Code; or
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(viii) Any entity in which all the equity owners are accredited investors as defined above.
For Investors who are not Accredited Investors, there are limitations on the aggregate purchase price of Membership Interests that may be paid by the Investor which is not more than Ten percent (10%) of the greater of such Investor’s:
(i) Annual income or net worth if a natural person (with annual income and net worth for such natural person purchaser determined as provided in Rule 501); or
(ii) Revenue or net assets for such purchaser’s most recently completed fiscal year end if a non-natural person.
Annual income and net worth should be calculated as provided in the Accredited Investor definition under Rule 501 of Regulation D, as explained above. In particular, net worth in all cases should be calculated excluding the value of an Investor’s home, home furnishings and automobiles.
DESCRIPTION OF THE BUSINESS OF THE COMPANY
The Company will use the Offering proceeds to fund the Company’s investments in Loans and/or properties. The Company will seek opportunities to fund deals in Loans and properties by advertising its services as a private lender in the market. In the event a Loan is paid off early by a borrower, the Company intends to redeploy those proceeds into funding new Loans or to acquire properties. If a Loan is paid off early and there are no new Loans or properties the Company can redeploy the capital into within a reasonable time period, the Company may redeem Membership Interests, at its discretion. The Company will do this to reduce its expenses when necessary but does not anticipate this happening very often.
The Company will fund a wide variety of Loan products, while many of the products are not of a conventional nature, the Loans must meet the standards set forth in the “Lending Standards and Policies” section below. The Company will primarily fund and/or otherwise acquire Loans secured by non-owner occupied residential and commercial property. (See “Lending Standards and Policies” below.)
Sources of income to the Company will come from the interest and fees charged to borrowers on the Loans, as well as from the sale of any properties acquired by the Company for rehabilitation and/or resale. All Loans will be owned by the Company and all revenue received from the Loans and investments in properties shall be distributed into the Company, less applicable fees to the Manager. (See “Manager’s Compensation” below.)
LENDING STANDARDS AND POLICIES
General Standards for Mortgage Loans
The Company will use the proceeds from this Offering to primarily engage in the funding, originating, acquiring, managing or selling Loans secured by first or junior position deeds of trust or mortgages secured by non-owner occupied and commercial properties located throughout the United States. The value and balance of Loans or properties will not be guaranteed by any governmental agency or private entity but may be guaranteed by affiliates and associates of the underlying borrowers.
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The Company will select Loans according to the standards provided below:
1. Lien Priority. The deeds of trusts and mortgages securing the Company’s loans will be first, junior or subordinated lien positions. The Company will lend money and secure the Loan by such deeds of trusts and mortgages if the Loan-to-Value ratios in Section 8 below are met.
2. Borrowers. The Company will only make loans to borrowers who are properly formed, validly existing U.S. entities. Loans will not be made to individuals or foreign entities. The Company will make Loans to borrowers who seek to purchase and renovate or rehabilitate investment properties for the purpose of selling such properties (or holding and selling such property). The Company will identify these borrowers based on the borrower’s credit history, verifiable income, and real estate experience.
3. Location of Real Property Securing the Loans. Most deeds of trusts and mortgages will be secured by real property across the United States.
4. Loan Types. The Company will arrange business and commercial purpose loans. The Company will not make any consumer loans or transactions (i.e. personal, family or household loans). All properties must be non-owner occupied at the time of funding and for the duration of the Loan. The Company considers the property to be “owner-occupied” if any owner of the borrowing entity or any guarantor resides (or intends to reside) at the property, or if any person who is a close family member of an individual applicant or an owner of the borrowing entity or a guarantor resides (or intends to reside) at the property.
5. Types of Properties Securing the Loans. Investment in Loans may involve underlying assets of real property that will primarily consist of non-owner-occupied residential properties. Investments may also involve underlying assets of real property that will include mixed use properties and commercial properties.
6. Minimum Loan Amount. The Company will make loans with a minimum principal loan amount of Thirty Thousand Dollars ($30,000).
7. State Licensing Requirements. The Company will obtain a mortgage lending license in states where it intends to operate and require a mortgage lending license to originate and/or otherwise fund a Loan. The Company presently intends to obtain lending licenses in California, Arizona, Idaho, Oregon, Nevada, Utah, and Minnesota. Lending licensing requirements will vary from state to state. If required by a state, the Company will obtain all licenses prior to making or funding a Loan. To the extent that the Company is not able to obtain a license, the Company will not make and/or otherwise fund Loans in any states where it is not properly licensed as a mortgage lender (or the state’s equivalent thereof).
8. Loan-to-Value Ratio. A Loan from the Company will generally not exceed the Loan-to-Value percentage ratios set forth below. The Loan-to-Value ratio is calculated by taking the amount of the Company’s loan, dividing that by the value of the real property securing the deed of trust or mortgage and multiplying that figure by One Hundred (100) to come to a percentage. “Value” shall be determined by an independent certified appraiser or non-certified appraiser doing an appraisal on the real property or the Manager or commercial or residential real estate broker giving his, her, or its opinion of value of the real property. Notwithstanding the foregoing, the Company may exceed the below stated Loan-to-Value ratios if the Manager determines in its sole business judgment that a higher Loan amount is warranted by the circumstances of that particular loan, such as being able to secure multiple properties, called “cross-collateralization”, personal guaranties, prior loan history with the borrower, market conditions, if mortgage insurance is obtained, or other compensating factors that would support the Manager in making its decision in the best interest of the Company.
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The Company plans to routinely re-evaluate the portfolio and Loan-to-Value ratio maximums set forth herein and may revise the Loan-to-Value ratio maximums at any time if it considers it to be in its best interests. Subject to the specific ratios set forth below, the Company will maintain a weighted Loan-to-Value ratio of no more than Seventy Percent (70%). The value of the property will be calculated on an “after completion” or post-rehabilitation basis. Prospective investors should carefully evaluate and understand that calculation of the ration using such “after completion” values exposes the Loans to additional risks in the event that the rehabilitation is not completed, or the value of the rehabilitation is not timely or ultimately achieved.
Type of Real Property Securing loan | Target and Maximum LTV Ratios1 |
Non-Owner-Occupied Single Family Residential | Target: 50% to 65%; Maximum: 70% |
Multi-Family Properties | Target: 50% to 65%; Maximum: 70% |
Commercial | Target: 50% to 65%; Maximum: 70% |
Construction loans | Target: 50% to 65%; Maximum: 70% |
Unimproved (but entitled) Land | Target: 45%; Maximum: 55% |
1. Seventy Percent (70%) Loan-to-Value ratio applies to borrowers who have completed the specific real estate education programs (Arnold Programs) offered by the Manager.
In general, the Company will seek to maintain a weighted Loan-to-Value ratio for the Company of approximately Sixty Percent to Sixty Five Percent (60% to 65%); provided that the maximum Loan-to-Value ratio for the Company shall not exceed Seventy Percent (70%), unless the Manager determines in its sole discretion that it is in the best interests of the Company to exceed such ratio in any single or multiple instances.
The foregoing Loan-to-Value ratios do not apply to purchase-money financing offered by the Company. Examples of these types of loans may be, but are not limited to, real estate owned by the Company whereby the Company decides to sell the property and carry back a loan on the property to make it cash flow positive.
9. Loan Programs. The Manager, operating under a fictious business name of The Lee Arnold System of Real Estate Investing, offers educational real estate programs and seminars to private real estate investors (“Arnold Program”). These programs and seminars operate separately and independently from the Company. The Company may make Loans to real estate investors who have attended and/or are part of the Arnold Program and need financing to make investments in real estate. Loans may also be made to borrowers who are not part of the Arnold Program.
The following represents a brief description of the Company’s non-owner occupied residential loan programs.
(a) Purchasers of Master Rehabber Certification Program, Master Lien Abatement Certification Program, Regional Real Estate Clinic, One-on-One Real Estate Mentorship, and/or Lee’s Inner Circle. The Manager has developed various real estate investing training programs under the fictitious business name of the Lee Arnold System of Real Estate Investing, which are offered for a fee. None of the fees received by the Arnold Programs will be payable to the Company.
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Individuals (and entities in which the enrollee owns a majority interest in) who have become certified by the Arnold Program as a Master Rehabber, Master Lien Abatement Specialist, Regional Real Estate Clinic, One-on-One Real Estate Mentorship, or is a member of Lee’s Inner Circle (collectively referred to as the “Arnold Programs”) will receive benefits that uncertified borrowers will not be entitled to, including the following: (i) One Hundred Percent (100%) financing of the property purchase price, closing costs; and rehabilitation costs, and (ii) up to Seventy Percent (70%) of the After Repair Value (“ARV”) of the property. The certified individuals may borrow based on the LTV ratio stated herein for up to Four (4) properties concurrently. To become certified, the individuals must take certain courses offered by the Lee Arnold System of Real Estate Investing and, in certain instances, pass a written examination, as noted below. The Arnold Programs are for borrowers who have built reputational collateral with the Manager by attending advanced real estate education trainings offered by The Lee Arnold System of Real Estate Investing.
A more detailed explanation of the Lee Programs is provided below:
(i) Master Rehabber Certification Program: The Master Rehabber Certificate Program is a four-day training program with a written examination. The program focuses on teaching the fundamentals of identification, budgeting, project management, and marketing “fix-and-flip” investing strategies for real properties.
(ii) Master Lien Abatement Certification Program: The Master Lien Abatement Certification Program is a four-day training program with a written examination. The individuals learn the methods of procurement, market research, and negotiation with the municipalities related to investing in distressed and nuisance properties.
(iii) Regional Real Estate Clinic / One-on-One Real Estate Mentorship. The Regional Real Estate Clinic and One-on-One Real Estate Mentorship programs are each a three-day program, which involves training on how to identify and locate investment properties, marketing techniques, and exit strategies tailored to a specific geographic region.
(iv) Lee’s Inner Circle. Lee’s Inner Circle is a three-day training program held in Spokane, Washington area taught by Lee Arnold, the Manager’s President, Chief Executive Officer, and Director of the Manager. The program offers training and information related to property research, purchase and sale of properties, exit strategies, and implementation of investment strategies.
(b) All other Borrowers. All other borrowers who are not part of or have not been certified by any of the Arnold Programs will not be able to obtain the benefits listed in (a) above.
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10. Terms of Loans. The terms of the Company loans will vary. Loans generally have a term between Three (3) months and Two (2) years. Notwithstanding the foregoing, loans may be shorter or longer in term if the Company decides, in its sole discretion, it is in the best interests of the Company. Many loans that the Company will originate or acquire may provide for interest-only payments followed by a balloon payment at the end of the term. For risk hedging purpose, borrowers may be required to make principal and interest payments. At the end of the term, the Company will require the borrower to pay the loan in full, to refinance the loan, or to sell the real property to pay back the loan. The Company may allow Six to Twelve (6-12) month extensions for a fee paid by Company borrowers. Finally, the Company may also charge exit fees on Loans based on the existing Loan balance at maturity. These exit fees may range from Zero Percent (0%) to Ten Percent (10%) of the remaining Loan balance at maturity.
11. Title Insurance. Satisfactory title insurance coverage will be obtained for all loans and will usually be paid by the borrower. The title insurance policy will name the Company as the insured and provide title insurance in an amount not less than the principal amount of the loan unless there are multiple forms of security for the loan, in which case the Manager shall use its sole business judgment in determining whether and to what extent title insurance shall be required. Title insurance insures only the validity and priority of the Company’s deed of trust or mortgage, and does not insure the Company against loss from other causes, such as diminution in the value of the secured property, loan defaults, and other such losses.
12. Fire and Casualty Insurance. Satisfactory fire and casualty insurance will be obtained for all improved real property loans which insurance will name the Company as its loss payee in the amount equal to the improvements on the real property. (See “Business Risks – Uninsured Losses” below.)
13. Mortgage Insurance. The Manager does not intend to, but may if the property otherwise qualifies, arrange for mortgage insurance, which would afford some protection against loss if the Company foreclosed on a loan and there existed insufficient equity in the security property to repay all sums owed.
14. Acquiring Loans from Third Parties. The Company may acquire Loans and/or notes secured by non-owner occupied real estate that were originated and funded by a third party. In the event the Company acquires loans from other third parties, the Company will receive assignments of all beneficial interest in any Loans purchased.
15. Fractionalized Interests in Loans. The Company may also participate in Loans with other lenders (including other businesses organized by business partners or Affiliates of the Company[1]), by providing funds for or purchasing a fractional undivided interest in a loan meeting the requirements set forth above.
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[1]The Company may participate and co-fund Loans with Secured Investment High Yield Fund II, LLC, an Idaho limited liability company (“SIHYF II”). SIHYF II was organized by the Manager and is currently undergoing an offering of securities exempt from SEC registration requirements under Regulation D of the Securities Act of 1933.
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16. Purchase of Loans from Affiliates. The Company may purchase loans from the Manager or Affiliates so long as it meets the lending requirements set forth above. For the purposes hereof, the term “Affiliates” shall mean any of the following: (1) a Person that, directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with the Manager, (2) a Person who, directly or indirectly, owns or controls at least Ten Percent (10%) of the outstanding voting interests of the Manager, (3) a Person who is an officer, director, manager or member of the Manager, or (4) a Person who is an officer, director, manager, member, general partner, trustee or owns at least Ten Percent (10%) of the outstanding voting interests of a Person described in clauses (1) through (3) of this sentence. The term “Person” shall mean a natural person or Entity. The term “Entity” shall mean an association, relationship or artificial person through or by means of which an enterprise or activity may be lawfully conducted, including, without limitation, a partnership, trust, limited liability company, corporation, joint venture, cooperative or association.
17. Property Acquisition. Properties acquired by the Company will be acquired through the Company’s lending activities, including but not limited to, properties acquired as a result of a borrower defaulting on a Loan. The Company may establish limited liability companies that are wholly owned subsidiaries of the Company to own and hold title of a property which the Company has acquired and intends to improve, rent, and/or sell. These wholly owned subsidiaries will be single purpose entities (“SPE”) created solely for the purpose of owning, improving, renting and/or selling the properties the Company acquires. The Manager shall serve as the sole manager of these SPEs.
18. Foreclosure. Statutory guidelines for foreclosures in each state are to be followed by the Manager until the underlying property is liquidated and/or the account is brought current. Any costs of this process are to be posted to the borrower’s account for reimbursement to Company. If a Loan is completely foreclosed upon and the property reverts back to the Company, the Company will be responsible for paying the costs and fees associated with the foreclosure process, maintenance and repair of the property, service of senior liens and resale expenses.
Credit Evaluations
The Manager will consider the income level and general creditworthiness of a borrower to determine his, her or its ability to repay the Loan according to its terms in addition to considering the Loan-to-value ratios described above and secondary sources of security for repayment. The Company may acquire loans made to borrowers who are in default under other obligations (e.g., to consolidate their debts) or who do not have sources of income that would be sufficient to qualify for loans from other lenders such as banks or savings and loan associations.
Loan Application Process
Loans funded and/or otherwise acquired by the Company will be originated by the Manager, operating under the fictitious business name of Cogo Capital. Loan application will be reviewed on a continuous basis and may be submitted by borrowers via e-mail to a loan officer or via web based portal operated by Liquid Logics. Potential borrowers will be required to submit a completed Loan application and provide the required documents necessary to determine eligibility for a Loan. A loan officer will conduct an initial evaluation of the Loan package and potential borrowers against the guidelines set forth herein and Exhibit F (as applicable),and ensure that the Loan package and application are not subject to any disqualifying factors. Disqualifying factor may include, without limitation, a potential borrower’s adverse credit history, such as foreclosure, bankruptcy within the last Twelve (12) months, and/or unpaid tax lien or child support lien. Once a Loan is approved or denied by the Manager’s underwriting department, the loan officer will notify the potential borrower of the decision.
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Loan Committee
A loan committee (“Loan Committee”) has been formed by the Manager. The Loan Committee consists of at least Five (5) individual members within the Manager, who shall review loan applications that fall outside the Company’s lending standards set forth herein, but are in the best interests of the Company to fund. If approved by the Loan Committee, the Company may participate in funding the Loan. Notwithstanding the foregoing, the majority of instances these loans will be funded by third parties and the Manager may be entitled to receive a fee for originating the loan. Any fees earned by the Manager will not be payable to the Company. Accordingly, conflict of interest exists in connection with originating certain loans that do not qualify within the Company’s lending standards as the Manager may earn fees for such transactions. (See “Conflicts of Interest” below.)
Loan Servicing
It is presently anticipated that all Company Loans will be serviced (i.e., loan payments collected and other services relating to the loan) by the Manager operating under the fictious business name of Lake City Servicing (in its capacity as Servicer). Notwithstanding the foregoing, the Manager may, at its sole and absolute discretion, appoint an Affiliate or third party loan servicer to service the Company Loans. The servicer, whether a third party or the Manager or its Affiliate, shall be herein referred to as the “Servicer.” The Servicer will be compensated by the Company and/or borrowers for such loan servicing activities, as is agreed upon by the Manager and Servicer. (See “Manager’s Compensation” below.) To the extent applicable, the Manager will oversee the activities and performance of the Servicer. (See “The Manager and Affiliates” below.)
Borrowers will make Loan payments in arrears (i.e. with respect to the preceding month) and will be instructed to send their loan payments either to the Manager or to the Servicer (as applicable) for deposit in the respective party’s trust account.
Sale of Loans
The Company plans on investing in mortgage Loans for the primary purpose of reselling such Loans in the course of business. The Company may sell mortgage Loans, or fractional interests in such Loans, when the Manager determines (in its sole and absolute discretion) that it appears to be advantageous for the Company to do so, based upon then current interest rates, the length of time that the loan has been held by the Company, the Company’s investment portfolio, and the overall investment objectives of the Company.
Borrowing/Note Hypothecation
The Company will borrow funds for the purpose of making and purchasing Loans and may assign all or a portion of its Loan portfolio as security for such loan(s). The Company anticipates engaging in this type of transaction when the interest rate at which the Company can borrow funds is significantly less than the rate that can be earned by the Company on its loans, giving the Company the opportunity to earn a profit as a “spread.” Such a transaction involves certain elements of risk and also entails possible adverse tax consequences. (See herein “Risk Factors”, “Income Tax Considerations”, and “ERISA Considerations” below.) The Company may also in its sole discretion elect to finance the Company's investments with borrowed funds.
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Leveraging the Company
The Company may borrow funds from a third party lender to fund investments in loans. These loans would be secured by the Loans held by the Company. Leveraging involves additional risks that are detailed later in this Offering Circular. (See “Risk Factors – Business Risks – Risks of Leveraging the Company” below.)
GENERAL STANDARDS FOR PURCHASING PROPERTIES
The Company will also invest, on an opportunistic basis, in the following business: acquiring, managing, remodeling, developing, repairing, leasing and/or selling non-owner occupied residential real estate located throughout the United States. Properties may be acquired from (without limitation) individuals, entities, institutional investors, financial institutions, governmental agencies and other sellers of real or personal property and may put properties into special purpose entities for the benefit of the Company. Unless the Manager decides in its sole and absolute discretion that it is in the best interests of the Company to do otherwise, the Company intends to generally acquire, and purchase Properties based on the following criteria:
1. Location of Real Property. Properties will be located across the United States.
2. Distressed Properties. The Company will acquire distressed properties. The Company intends to acquire and otherwise invest in distressed properties for purposes of holding, developing, remodeling, rehabilitating, improving, renting and selling the associated and secured properties. Distressed properties are typically properties secured by non-performing notes, or properties impacted by specific issues such as, but not limited to, dilapidation, physical damage, devaluation caused by rezoning, and environmental contamination. The primary intent of the Company is to purchase, invest, or otherwise acquire the distressed properties and properties tied to nonperforming notes and remodel, improve, develop, rehabilitate, hold and rent, and subsequently sell the properties for profit. The Company will use an opportunistic investment strategy to identify and invest in distressed properties, unless the Manager, in its sole and absolute discretion, determines it is no longer in the best interests of the Company.
3. Remodeling Timeline. The average time it takes to remodel a property, from purchase to finished, is anticipated to last between Five (5) to Twelve (12) months. Notwithstanding the foregoing, these estimates are not guaranteed, and certain properties may take longer to remodel due to, without limitation, the following: construction issues, unexpected environmental conditions, changes in supply and demand, governmental regulations, zoning restrictions, changes in material and labor shortages, increases in the costs of labor and materials, and changes in construction plans and specifications. (See “Business Risks” below.)
4. Fire and Casualty Insurance. Satisfactory fire and casualty insurance will be obtained for all properties and will name the Company as its loss payee. (See “Business Risks – Uninsured Losses”).
5. Title Insurance. Satisfactory title insurance coverage will be obtained for all properties. The title insurance policy will name the Company as the insured and provide title insurance in an amount not less than the principal amount of the value of the property.
6. Environmental Reports. Environmental reports will not typically be ordered on properties purchased or otherwise acquired by the Company. It is presently anticipated that all Company properties will be managed by the Servicer. The Servicer will be compensated by the Company for such property management activities.
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7. Property Rental. Additional sources of income to the Company may be from the potential purchase, rehabilitation and resale of Company owned properties. The Company will purchase properties that can be rehabilitated and resold for profit. The Company intends to purchase properties and distressed properties at a discount to current (or projected) fair market value and subsequently seek to sell these properties for profit. The Company will purchase and otherwise invest in distressed properties and properties in order to remodel, improve, develop, rehabilitate these properties and either (1) hold and sell the property, or (2) sell the property for profit.
MANAGER’S ANALYSIS AND DISCUSSION OF THE FINANCIAL CONDITION AND PLAN OF OPERATIONS
The Manager’s Discussion and Analysis may contain forward-looking statements. Investors should not place undue reliance on forward-looking statements, and should consider carefully the statements made in “Risk Factors” and elsewhere in this Offering Circular that identify important factors that could cause actual outcomes to differ from those expressed or implied in the Company’s forward-looking statements, and that could materially and adversely affect the Company’s business, operating results and financial condition.
The Manager’s Discussion and Analysis should be read together with the financial statements and notes thereto, included elsewhere in this Offering Circular.
Overview
The Company is a newly formed company formed on November 26, 2018 and has a limited operating history. The Company’s current cash balance is Twenty Five Thousand Dollars ($25,000) as of December 31, 2018. The cash balance is not sufficient to fund the limited levels of operations for any period of time. In order to execute the plan of operations, the Company will require varying amounts of capital based on the Loans and/or properties the Company intends to fund or acquire. The Company intends to continuously offer Membership Interests to Investors on an ongoing basis to operate is business plan. (See “Lending Standards” above.)
Operating History of the Company
The Company has limited operating history and has not yet earned any revenues, which may make it difficult for potential Investors to evaluate the Company’s business and assess the future viability and prospects of the Company. The Company, at this time, has limited assets and resources. In addition, the Manager provides the Company with management and administrative services, as well as services relating to other support operations, administration, and accounting.
Results of Operations
As of the date of this Offering Circular, the Company has not commenced operations. Having not commenced active operations, the Manager is not aware of any material trends or uncertainties, favorable or unfavorable, other than economic conditions affecting the commercial and residential real estate industry and real estate generally, which may be reasonably anticipated to have a material impact on the capital resources and the revenue or income to be derived from the operation of our assets.
Liquidity and Capital Resources
As of the date of this Offering Circular, the Company is in the earliest stages of development and its cash balance is Twenty Five Thousand Dollars ($25,000). The Company will likely have liquidity problems if it cannot raise sufficient funds to operate. In addition, in order to execute the plan of operations, the Company will require varying amounts of capital based on the Loans and/or properties the Company intends to fund or acquire. The Company intends to continuously offer Membership Interests to Investors on an as needed basis to operate its business plan.
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The Company will receive income from the Loans it makes in the form of interest, fee and points and in some situations profit sharing in certain equity transactions. A loss reserve may be maintained by the Company, as determined by the Manager, in its sole and absolute discretion.
Off-balance Sheet Arrangements
None.
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN SECURITYHOLDERS
As of the date of this Offering Circular Membership Interests have only been issued to the Manager. Upon admission of additional Members, the Manager may withdraw as a Member of the Company, but shall continue to serve as Manager.
The Manager of the Company is Secured Investment Corp., a Wyoming corporation. The Manager was formed under the laws of Wyoming on December 9, 2011. The Manager will manage and direct the affairs of the Company. The principals, officers, and directors of the Manager, and their biographies, are as follows:
Mr. Lee Aaron Arnold, President and CEO, and Director of the Manager
Lee Arnold is the founder and Chief Executive Officer of the Manager and has served as a Director since its inception on December 9, 2011. Mr. Arnold is an international speaker, trainer, author and licensed real estate broker who has spent many years perfecting the real estate and private money mortgage lending process through thousands of transactions. Lee is a leading expert on private money mortgages and has been featured as an investment strategy expert by Forbes, the Boston Globe, Market Watch, Reuters and Business Week. Since January 2006, Mr. Arnold is also the owner and Chief Executive Officer of Arnold Professional Holdings. Mr. Arnold has led Arnold Professional Holdings in providing variety of real estate related services, including repairing, renovation, or improvement of property. He has also consulted and taught for a number of national financial literacy companies.
Mr. Jaclyn Genemarie Olsen-Arnold, Chief Financial Officer and Director of the Manager
Jaclyn Olsen is the Chief Financial Officer and a Director of the Manager since January 2012. However, Ms. Olsen started with the Manager’s predecessor from 2007 until January 2012 as a tax and financial accounting consultant in Olsen Financial Consulting. During her service as a consultant it was immediately realized that she would bring great value and strength to the real estate investment and private mortgage loan firm. Ms. Olsen has been serving as Chief Financial Officer for the Manager. Ms. Olsen holds her BS in Accounting and her MBA in Finance and Investments. Ms. Olsen brings experience from both public and private accounting in tax, auditing, financial reporting, financial analysis and strategy. She has worked with start-ups to mature companies where her expertise guided growth and manageable, scalable, accounting infrastructure.
Mr. John Kane, Chief Operating Officer and Director of the Manager
John Kane joined the Manager as its Chief Operations Officer and has served as a Director since May 2014. With 30 years’ experience in leading real estate education companies, starting financial services and software companies, Mr. Kane lends his hand to the technology, marketing, operational and educational aspects of the Manager. Mr. Kane formerly led a publicly traded company — Whitney Information Network, now Legacy Education — to create Rich Dad Education with Robert Kiyosaki, and under his leadership grew revenues to over $250,000,000. Mr. Kane left in 2008 and has since served as a Senior Vice President and consultant in various companies. For example, from August 2012 to December 2013, he was a Senior Vice President and a consultant with Manhattan Professional Group, where he guided the company to higher revenue and overall profits. After his brief retirement in early 2014, he joined the Manager as the Chief Operations Officer.
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Managers / Directors / Executive Officers / Significant Employees Information
Name | Position | Age | Term of Office | Approximate Hours Per Week |
John Kane | Chief Operating Officer of the Manager | 65 | May 2014 | 70 |
Lee Aaron Arnold | President and Director of Manager | 41 | December 2011 | 70 |
Jaclyn Genemarie Olsen-Arnold | Chief Financial Officer and Director of Manager | 42 | December 2011 | 70 |
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
Name | Capacities in which Compensation was Received 1 | Cash Compensation | Other Compensation | Total Compensation 2 |
John Kane | Chief Operating Officer of the Manager | $179,188.51 | N/A | $179,188.51 |
Jaclyn Genemarie Olsen-Arnold | Chief Financial Officer and Director of Manager | $287,354.01 | N/A | $287,354.01 |
Lee Aaron Arnold | President and Director of Manager | $253,351.79 | N/A | $253,351.79 |
1 .The Company has no officers or directors. It is managed solely by Secured Investment Corp., a Wyoming corporation. The Company is a newly formed entity with no operating history. For these reasons, the Manager has yet to receive any compensation.
2 No portion of the officer’s compensation was paid from or will be paid from the income generated by the Company. The Company will not directly pay any compensation to the officers of the Manager.
PRIOR PERFORMANCE SUMMARY
The information presented in this section, and the Index to Financial Statements below, represents the historical operating results for the Company’s Manager and sponsor, Secured Investment Corp., an Idaho corporation. The Manager has prior experience in managing SIHYF and SIHYF II (collectively, “SIHYF Funds”), both of which are real estate companies with similar investment objectives with that of the Company. Investors in the Company should not assume that they will experience returns, if any, comparable to those experienced by the investors in the SIHYF Funds. Members of the Company will not acquire any ownership interests in any of the SIHYF Funds from this Offering.
As stated above, the Members will receive their returns on their investments derived from the Company’s business operations. Although SIHYF Funds’ business objectives may be similar to that of the Company’s objectives, the Company’s portfolio may not mirror the portfolios of SIHYF Funds. Investors should also acknowledge that any past performance of the sponsor or SIHYF Funds described below will be indicative of any of the Company’s future performances.
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Overview of the Manager and SIHYF Funds
The Manager (as a sponsor of SIHYF Funds) was formed under the laws of Wyoming on December 9, 2011, that manages and sponsors the SIHYF Funds. The SIHYF Funds rely on Rule 506(c) of Regulation D of the Securities Act in order to raise capital from Accredited Investors only.
The SIHYF Funds have similar investment objectives to that of the Company’s objectives. The SIHYF Funds were formed in order to acquire, own, develop, hold, manage, sell, transfer or otherwise dispose of real estate assets, primarily loans secured by real property. As of March 31, 2019, the total offering raise for the SIHYF Funds are $11,352,597 with a total number of accredited investors at 63. The sponsor and/or its affiliates are responsible for origination, due diligence, structuring, closing, acquiring, and asset management of all real property acquisition and loans made under the SIHYF Funds.
As of December 31, 2018, our sponsor had acquired, facilitated or originated approximately 1,140 real estate loans and/or real property acquisition with aggregate asset value of approximately $96 million, consisting primarily of loans secured by non-owner occupied single family residential or multi-family properties. The portfolios included in SIHYF Funds are diversified by investment size, property type and geographic region.
Please see the tables under “Prior Performance Tables” in Index to Financial Statements.
The following discussion summarizes some important areas of compensation to be received by the Manager operating under the fictious business names of Lake City Servicing (in its capacity as Servicer), Cogo Capital (in its capacity as Loan originator, and/for managing the Company, and in certain instances, its Affiliates). If the Manager defers or assigns to the Company any of their respective compensation, the Manager will be entitled to recover same at a later time within the same calendar year only. Notwithstanding the foregoing, the Manager has no obligation to waive, defer, or assign to the Company any portion of such compensation at any time.
Form of Compensation | Estimated Amount or Method of Compensation |
ASSET MANAGEMENT FEE |
The Manager shall earn an asset management fee (“Asset Management Fee”) equal to One and Three-Quarters of One Percent (1.75%) of the Net Assets Under Management, calculated and payable monthly.
As used herein, “Net Assets Under Management” means the total Fund assets, including notes (at book value), real estate owned (at the lower of cost or fair market value), accounts receivable, advances made to protect loan security, unamortized organizational expenses, cash and any other Fund assets, less Fund liabilities. The Asset Management Fee will typically be paid on the last day of each calendar month with respect to the Net Assets Under Management as of last day of such month. |
PROFIT PARTICIPATION | After distribution of the Preferred Return to the Members, the Manager shall participate in the distribution of Net Profits as follows: The Manager shall receive Fifty Percent (50%) of the Net Profits. Net Profits shall be distributed on a monthly basis. |
ORIGINATION AND LENDER DISCOUNT POINTS |
Origination and lender discount points (“Origination Fees”) are generally collected from borrowers by the Manager, as Cogo Capital on behalf of the Company. At closing of the Loan Origination Fee are collected from borrowers by the Manager in the amount of Nine Hundred and Ninety-seven Dollars ($997) for every Three Hundred Thousand Dollars ($300,000) principal Loan amount.
Origination Fees shall be shared between the Manager and Fund as follows: Eighty Percent (80%) of Origination Fees will be payable to the Manager and Twenty Percent (20%) of the fees will be payable to the Company.
Origination Fees consist of loan processing fees, underwriting fees, document preparation fees, escrow fees, disbursement fees, warehousing fees, administration fees and other similar charges. In addition, the Manager reserves the right to modify the Origination Fee at any time for any reason (or no reason), without Members’ consent, based upon changes in prevailing market rates charged by the Company’s competitors. |
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PURCHASE OF EXISTING LOANS | When the Company purchases an existing loan (or pool of loans) from a third party, the Manager or Affiliate will be paid a fee comparable to a loan Origination Fee. |
LOAN SERVICING FEE |
The Manager (doing business as Lake City Servicing) will be entitled to a fee for servicing the Loans (the “Loan Servicing Fee”):
At closing of the Loan the borrower will pay directly to the Manager as a closing cost: Two Hundred Dollars ($200) servicing set-up fee (one-time fee) and a non-refundable fee equal to Fifteen Dollars ($15) multiplied by the number of months of the term of the Loan. The Company will not receive any of the servicing fees paid by borrowers at closing.
The Company will pay Manager the following loan servicing fee to service the loan during the life of the loan:
· Twenty Dollars ($20), payable monthly, if the principal amount of the Loan is less than $500,000.00; or
· Thirty Dollars ($30), payable monthly, if the principal amount of the Loan is equal to or greater than $500,000.00.
While the aggregate fee payable by the Company is listed above, this fee may vary from loan to loan. In addition, if the Manager decides to retain the services of a third-party loan servicing company, the loan servicing fee may vary from the one listed herein. |
LOAN EXTENSION AND MODIFICATION FEES | Loan extension and modification fees (collectively referred to as “Extension Fees”) are collected from borrowers and payable to the Manager. Extension Fees are charged to borrower in the following amounts: Two Hundred and Fifty Dollars ($250) for a three-month extension of the Loan term; Five Hundred Dollars ($500) for a six-month extension of the Loan term; and One Thousand Dollars ($1,000) for One (1) year extension. Notwithstanding the foregoing, Extension Fees could be higher or lower depending on market rates and conditions. |
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LOAN PROCESSING, LOAN DOCUMENTATION AND OTHER SIMILAR FEES | Loan processing, documentation and other similar fees are collected from the borrower and payable to the Manager at prevailing industry rates as part of the Manager’s Compensation. |
DEFAULT FEES | Default fees in the amount of Five Hundred Dollars ($500) paid by borrowers will be payable to the Manager in its capacity as Servicer. |
LATE FEES AND LATE CHARGES | Late fees and late charges paid by borrowers will be shared between the Company and the Manager as follows: Fifty Percent (50%) of the late fees and charges will be payable to the Company and Fifty Percent (50%) of the late fees and charges will be payable to the Manager. |
OTHER LOAN FEES |
All other fees paid by borrowers on account of the Loans will be payable to the Manager doing business as Lake City Servicing, including, but not limited to, all forbearance fees, collection fees, prepayment penalties, default interest, and all other similarly related fees incurred by borrowers (including, but not limited to, other fees authorized by loan documents for work performed regarding the subject Loan).
In addition, beneficiary statements and pay-off demands (Fifty Dollars ($50) per request), overnight charges, non-sufficient funds (“NSF”) fees of One Hundred Dollars ($100), reconveyance fees of Thirty Five Dollars ($35), advancing fees, demand fees, and other similarly related fees incurred by borrowers will also be payable to the Manager under the fictious business name of Lake City Servicing. |
REHABILITATION FEES | In the event the Company acquires ownership of distressed real property, the Company may decide to rehabilitate the property to lease and/or sell. To rehabilitate the property, the Company will primarily retain the services of Arnold Professional Holdings, Inc., an Idaho corporation (“Arnold Professional Holdings”). Arnold Professional Holdings is an Affiliate of the Manager, and is licensed, bonded, and insured as a general contractor in Washington. Arnold Professional Holdings will provide general construction services to the Company, including repairing, renovation, or improvement of the property, and shall be entitled to a fee based on the prevailing industry rate, as agreed between the Manager and Arnold Professional Holdings. Notwithstanding the foregoing, the Company may, at its sole discretion, retain the services of a third-party general contractor, and such cost of rehabilitation will be an expense to the Company. |
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REAL ESTATE COMMISSIONS | The Manager or its Affiliates may earn real estate commissions (“Real Estate Commissions”) to list and sell real estate that the Company has acquired through foreclosure or otherwise. The Manager or its Affiliates, including The Lee Arnold Team, LLC, may generally earn up to Six percent (6%) of such a sale. In addition, the Manager may pay a referral fee ranging from Twenty Percent (20%) to Forty Percent (40%) of the Real Estate Commissions paid to the Manager to third party sales agents for properties located in states where the Manager does not presently operate in. |
PROPERTY MANAGEMENT FEE | The Manager may cause the Company to engage a third party to provide property management services with respect to properties acquired by the Company, or may elect to provide such services itself (or through an Affiliate of the Manager). In the event that the Manager (or an Affiliate thereof) provides any such property management services, the Company shall pay the Manager or its applicable Affiliate a market-rate property management fee. |
OPERATING EXPENSES | The Company shall pay its own general administrative and operating expenses, which may include, without limitation, legal expenses, accounting costs for the Company, and/or marketing expenses. It shall reimburse the Manager for any expenses incurred by the Manager that are properly considered ordinary and reasonable business expenses of the Company. The Manager shall not seek reimbursement from the Company for the salaries, benefits or expenses associated with its executives, officers or employees of the Manager. |
PROCESSING FEES |
If an investor seeks to purchase Membership Interests via an individual retirement account, 401(k), Keogh plans, or other similar tax exempt vehicles for a purchase price of less than Fifty Thousand Dollars ($50,000) the Company will charge an additional processing fee of Two Hundred Fifty Dollars ($250). Such investors will be responsible to pay this in addition to their purchase of Membership Interests. |
PRINCIPAL SHAREHOLDERS
The following table sets forth the beneficial ownership of Membership Interests as of the date of this Offering Circular for each person or group that holds more than Five Percent (5%) of the Membership Interests, for each director and executive officer of our Manager and for the directors and executive officers of our Manager as a group. To our knowledge, each person that beneficially owns Membership Interests has sole voting and disposition power with regard to such shares. Unless otherwise indicated below, each person or entity has an address in care of the principal executive offices of the Company at 701 E. Front Avenue, Floor 2 Coeur D’alene, Id 83814.
Number of Membership Interests | Percent of | |||||||
Name of Beneficial Owner(1) | Beneficially Owned | All Shares | ||||||
Secured Investment Corp. | 25 | 100 | % | |||||
All directors and executive officers of the Manager | 0 | 0 | % |
(1) | Under SEC rules, a person is deemed to be a “beneficial owner” of a security if that person has or shares “voting power,” which includes the power to dispose of or to direct the disposition of such security. A person also is deemed to be a beneficial owner of any securities which that person has a right to acquire within 60 days. Under these rules, more than one person may be deemed to be a beneficial owner of the same securities and a person may be deemed to be a beneficial owner of securities as to which he or she has no economic or pecuniary interest. As of the date of this Offering Circular, Secured Investment Corp. owns all of our issued and outstanding Membership Interests. |
All voting and investment decisions with respect to the Manager are held by Secured Investment Corp. are controlled by the board of directors of Secured Investment Corp. The board is comprised of three (3) members. As of the date of this Offering Circular, the members of the board of directors of Secured Investment Corporation are (i) Lee Arnold (who is also the President of Secured Investment Corporation); (ii) Jaclyn Olsen-Arnold (who is also the Chief Financial Officer of Secured Investment Corporation); and (iii) John Kane (who is also the Chief Operating Officer of Secured Investment Corporation). As of the date of this Offering Circular, the following persons own capital stock of Secured Investment Corp.: - Jaclyn Genemarie Olsen-Arnold, Chief Financial Officer and Director of Secured Investment Corp., beneficially owns One Hundred_Percent (100%) of the common stock of Secured Investment Corp., that entitle her to approximately One Hundred Percent (100%) of the vote of the common stockholders and approximately One Hundred Percent (100%) of the vote of all stockholders in election of board members.
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As of the date of this Offering Circular, other than the persons listed above, no other stockholder of Secured Investment Corp. beneficially owns shares of capital stock that entitle such stockholder to more than 5% of the voting power held by the common stockholders, the preferred stockholders, or all the stockholders voting as a single class. All of the foregoing stockholders, directors and executive officers disclaim beneficial ownership of our common shares that are owned by Secured Investment Corp.
FIDUCIARY RESPONSIBILITY OF THE MANAGEMENT COMPANY
Under applicable Idaho law, the Manager is generally accountable to the Company as a fiduciary, which means that the Manager is required to exercise good faith and integrity with respect to Company affairs and sound business judgment. This is a rapidly developing and changing area of the law, and Members should consult with their own legal counsel in this regard. The fiduciary duty of the Manager is in addition to the other duties and obligations of, and limitations on, the Manager set forth in the Operating Agreement of the Company. Investors should consult with their own independent counsel in this regard.
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The Company has not been separately represented by independent legal counsel in its formation or in the dealings with the Manager, and Members must rely on the good faith and integrity of the Manager to act in accordance with the terms and conditions of this Offering.
The Operating Agreement provides that the Manager will not have any liability to the Company for losses resulting from errors in judgment or other acts or omissions unless the Manager is guilty of fraud, bad faith or willful misconduct. The Operating Agreement also provides that the Company will indemnify the Manager against liability and related expenses (including, without limitation, legal fees and costs) incurred in dealing with the Company, Members, or third parties as long as no fraud, bad faith, or willful misconduct on the part of the Manager is involved. Therefore, Members may have a more limited right of action than they would have absent these provisions in the Operating Agreement. A successful indemnification of the Manager or any litigation that may arise in connection with the Manager’s indemnification could deplete the assets of the Company. Members who believe that a breach of the Manager’s fiduciary duty has occurred should consult with their own legal counsel in the event of fraud, willful misconduct or bad faith.
It is the position of the U.S. Securities and Exchange Commission that indemnification for liabilities arising from, or out of, a violation of federal securities law is void as contrary to public policy. However, indemnification will be available for settlements and related expenses of lawsuits alleging securities law violations if a court approves the settlement and indemnification, and also for expenses incurred in successfully defending such lawsuits if a court approves such indemnification.
Although the Company will attempt (in its sole and absolute discretion) to comply with requests for the early withdrawal of the Membership Interests if the financial position of the Company can accommodate it (See “Summary of the Operating Agreement – Withdrawal” below). Any investment in the Membership Interests involves a significant degree of risk and is suitable only for investors who have NO NEED FOR LIQUIDITY in their investments. When analyzing this Offering, prospective investors should carefully consider each of the following risks.
The Offering Price and Minimum Investment Amount have been arbitrarily determined by the Company and do not reflect the value of the assets that have been or will be acquired by the Company.
The Offering amount and Minimum Investment Amount have been arbitrarily determined by the Company and does not bear any relationship to the assets that have been or are to be acquired by the Company or any other established criteria or indicia for valuing a business. The Manager may, at its sole and absolute discretion, accept or require a lesser or greater Minimum Investment Amount. In addition, the assets that are to be acquired by the Company could have a higher or lower value than the Offering price, which may result in the valuation of the Company being lower of higher than the Offering price.
Investment in the Membership Interests is speculative, and each Investor assumes the risk of losing his, her, or its entire investment.
Investment in these Membership Interests is speculative and, by investing, each Investor assumes the risk of losing the entire investment. The Company has limited operations as of the date of this Offering Circular and will be solely dependent upon the efforts of its officers and employees the loan and asset portfolio that is developed, all of which are subject to the risks described herein. Accordingly, only investors who are able to bear the loss of their entire investment and who otherwise meet the investor suitability standards should consider purchasing these Membership Interests. (See “Investor Suitability” above.)
The Company’s ability to commence operations is dependent on its ability to raise funds.
The Company has been utilizing and may utilize funds from the Manager, which has agreed to advance funds to allow the Company to operate its business including paying for Offering costs, filing fees and professional fees. In order to execute the plan of operations, the Company will require varying amounts of capital based on the Loans and/or properties the Company intends to fund or acquire. The Company’s ability to commence operations is largely dependent on its ability to raise funds through this Offering and thereby securing Loan and property investments. Prospective Investors should be aware that there is no assurance that the Company will obtain capital investments necessary to commence operations and become profitable. In addition, receipt of capital investments of less than the Maximum Offering Amount will reduce the ability of the Company to spread investment risks through diversification of its loan portfolio.
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Conflicts of interest may arise as a result of the Company primarily funding loans brokered by the Manager, who is the parent company and an affiliate of the Company.
There are important areas in which the interests of the Company and each of its principals, directors, officers and/or affiliates may conflict with one another. To see the potential conflicts of interests that may arise please refer to “Conflicts of Interest” section below. The Company will primarily fund Loans originated by the Manager and the Manager will receive compensation as a result. This represents a conflict of interest between the Manager and the Company since the principals who own and manage the Manager also indirectly manage the Company. Specifically, the Company may be conducting business primarily with the Manager by funding, acquiring, and/or purchasing loans originated by the Manager. These will be affiliate transactions and therefore, the terms of the loans may not be the same as if it were agreed upon via a third-party transaction. Notwithstanding the foregoing, the Company will only invest in those Loans that are in best interests of the Company and said loans will have terms that are commercially reasonable. It is expected that numerous transactions will occur between the Company and its principals, directors, officers and/or affiliates, and no outside or independent review of these transactions will be performed.
In addition, conflicts of interest may pose a risk to Members due to the fact that the Company and each of its principals, directors, officer, and/or affiliates may be involved in other investments or business similar to the Offering and as a result, may not always act in a manner that is advantageous to the Company and Offering if presented with similar investment or business opportunities.
There is no Federal Registration therefore there is Limited Governmental Review.
This Offering has not been registered with the U.S. Securities and Exchange Commission or with any state regulators. Although certain states require notice filing pursuant to pertinent state securities laws, the Offering is largely subject to limited governmental review.
There is Limited Transferability of Membership Interests and No Public Market for the Membership Interests.
Although the Company may attempt to redeem Membership Interests (when possible, in the Company’s sole and absolute discretion), there is no public market for the Membership Interests, and none is expected to develop in the future. Even if a potential buyer could be found, the transferability of these Membership Interests may be limited. Any sale or transfer of these Membership Interests also requires the prior written consent of the Company. Investors must be capable of bearing the economic risks of this investment with the understanding that these Membership Interests may not be liquidated by resale or redemption and should expect to hold their Membership Interests as a long-term investment.
There is No Guarantee of Reaching Maximum Offering Amount.
There is no assurance that the Company will obtain capital investments equal to the amount required to close the Offering. In addition, receipt of capital investments of less than the Maximum Offering Amount will reduce the ability of the Company to spread investment risks through diversification of its loan portfolio.
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There may be Investment Company Act Risks which may result in the Company acquiring legal fees.
The Company intends to avoid becoming subject to the Investment Company Act of 1940, as amended (the “1940 Act”); however, the Company cannot assure prospective investors that under certain conditions, changing circumstances or changes in the law, the Company may not become subject to the 1940 Act in the future as a result of the determination that the Company is an “investment company” within the meaning of the 1940 Act that does not qualify for an exemption as set forth below. Becoming subject to the 1940 Act could have a material adverse effect on the Company. Additionally, the Company could be terminated and liquidated due to the cost of registration under the 1940 Act. In general, the 1940 Act provides that if there are 100 or more investors in a securities offering, then the 1940 Act could apply unless there is an exemption; however, the 1940 Act generally is intended to regulate entities that raise monies where the entity itself “holds itself out as being engaged primarily, or purposes to engage primarily, in the business of investing, reinvesting or trading in securities” (Section 3(a)(1)(A) of the 1940 Act).
The second key definition of an “investment company” under the 1940 Act considers the nature of an entity’s assets. Section 3(a)(1)(C) of the 1940 Act defines “investment company” as any issuer that: “...is engaged or proposes to engage in the business of investing, reinvesting, owning, holding, or trading in securities, and owns or proposes to acquire investment securities having a value exceeding 40% of the value of such issuer’s total assets (exclusive of Government securities and cash items) on an unconsolidated basis.” Section 3(b)(1) of the 1940 Act provides that a company is not an “investment company” within the meaning of the 1940 Act if it is: “[An] issuer primarily engaged, directly or through a wholly-owned subsidiary or subsidiaries, in a business or businesses other than that of investing, reinvesting, owning, holding, or trading in securities...”
Section 3(c) of the 1940 Act provides for the following relevant exemptions: “Notwithstanding subsection (a), none of the following persons is an investment company within the meaning of this title: (1) Any issuer whose outstanding securities (other than short- term paper) are beneficially owned by not more than one hundred persons [emphasis added] and which is not making and does not presently propose to make a public offering of its securities. Such issuer shall be deemed to be an investment company for purposes of the limitations set forth in subparagraphs (A)(i) and (B)(i) of section 12(d)(1) governing the purchase or other acquisition by such issuer of any security issued by any registered investment company and the sale of any security issued by any registered open-end investment company to any such issuer. For purposes of this paragraph: (A) Beneficial ownership by a company shall be deemed to be beneficial ownership by one person, except that, if the company owns 10 per centum or more of the outstanding voting securities of the issuer, and is or, but for the exception provided for in this paragraph or paragraph (7), would be an investment company, the beneficial ownership shall be deemed to be that of the holders of such company’s outstanding securities (other than short-term paper). (B) Beneficial ownership by any person who acquires securities or interests in securities of an issuer described in the first sentence of this paragraph shall be deemed to be beneficial ownership by the person from whom such transfer was made, pursuant to such rules and regulations as the Commission shall prescribe as necessary or appropriate in the public interest and consistent with the protection of investors and the purposes fairly intended by the policy and provisions of this title, where the transfer was caused by legal separation, divorce, death, or other involuntary event. (5) Any person who is not engaged in the business of issuing redeemable securities, face-amount certificates of the installment type or periodic payment plan certificates, and who is primarily engaged in one or more of the following businesses: (A) Purchasing or otherwise acquiring notes, drafts, acceptances, open accounts receivable, and other obligations representing part or all of the sales price of merchandise, insurance, and services; (B) making loans to manufacturers, wholesalers, and retailers of, and to prospective purchasers of, specified merchandise, insurance, and services; and (C) purchasing or otherwise acquiring mortgages and other liens on and interests in real estate [emphasis added].”
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This is due to the fact that the Company does not hold itself out as an investment company and is not in the business of issuing redeemable securities, face-amount certificates or period plan certificates and will be primarily engaged in the business of purchasing, making, funding or otherwise acquiring loans secured by real property and/or personal property. Notwithstanding the foregoing, there are no assurances that this will ultimately be the case. In the event the Company becomes subject to the registration requirements of the 1940 Act, the Company may incur substantial legal fees. This may adversely affect Members in the sense that if the Company does not have funds to pay said legal fees, it may be unable to distribute income to the Members.
Investors Are Not Independently Represented by the Company’s Attorneys and should seek their own independent counsel.
The Members in the Company have not been represented by independent counsel with respect to this Offering. Attorneys assisting in the formation of the Company and the preparation of this Offering Circular have represented only the Company and its principals and affiliates. (See “Conflicts of Interest” below.)
No Assurance can be provided that the Maximum Offering Amount will be adequate working capital and/or will absolve the need for additional financing.
In the opinion of the Company, if the maximum number of Membership Interests being offered is sold, the Company may have sufficient working capital to achieve its planned operations. However, there can be no assurance that even if the maximum number of Membership Interests is sold that the Company would not be required to seek alternative or additional sources of financing. The Company is not restricted in the application of the funds as provided within this Offering Circular under the caption “Use of Proceeds”.
Terms of the Membership Interests may not be favorable to prospective Investors.
The Company has set the terms of the Membership Interests in a manner which is favorable to the Company and has not made an attempt to consider the favorability or suitability of such terms for any prospective Investors.
The Company may employ leverage, resulting in the Membership Interests being subordinate to any debt incurred by the Company.
Any indebtedness incurred by the Company (e.g. through a credit line, borrowing from a financer, etc.) may expose the Members to substantially greater risk. Any debt incurred by the Company will be senior to the Members and will have priority of payment. If there are no sufficient cash flows generated from the operations of the Company and the Company has to pay Members, it may affect the Company’s ability to make distribution to Members. In addition, leverage may involve restrictive covenants, interest obligations and other risks that are customary to organizations that employ leverage in financing their investments.
The Company will invest in assets that have not been identified, therefore, potential Investors will be unable to evaluate the Company’s loan portfolio prior to making their investment.
None of the specific assets in which the Company will invest in are identified at this time. Therefore, any potential investor is unable to evaluate the Loans portfolio to determine whether to invest in the Company. However, the general business goals of the Company are to make Loans as further described herein. The Company may later have specific, identifiable portfolio data which Members may review upon their prior written request to the Company.
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The Company has the right to change and mix its investment profile, there is no guarantee that the investment profile will not change substantially over time.
The Company reserves the right, in its sole and absolute discretion, to modify, change or revise its typical investment profile and the mix of Loans that it invests or otherwise participates in, and accordingly, Members have no guarantee, and should not assume that the investment mix and profile of the Company will not change substantially over time.
The Loan Loss Reserve may be insufficient to cover Loan losses, which may ultimately cause the Company to be unable to distribute income to Members.
The purpose of the Loan Loss Reserve is to help insulate the Members from loss. Although the Loan Loss Reserve will help reduce the impact of Loan defaults temporarily, ultimate repayment/resale of the Loans will be jeopardized if any Loans in default are not eventually repaid or resold, whether by the applicable borrower or by the Company, which may affect available collateral. In addition, the Loan Loss Reserve may vary and will be based on reserve overages and the weighted risk levels of the Loan portfolio. This may cause reserve amounts to be reduced, eliminated or increased accordingly in the sole and absolute discretion of the Manager. Members should understand that a Loan Loss Reserve does not guarantee the Company will not incur a loss if a Loan or Loans result in default, which may ultimately cause the Company to sustain a loss and unable to distribute income to the Members.
No Escrow
The proceeds of this offering will not be placed into an escrow account.
There is reliance on Key Personnel to make all decisions with respect to the management of the Company, therefore, Members will have very limited choice in the management decisions.
The key personnel of the Company will make virtually all decisions with respect to the management of the Company including, without limitation, the determination as to which loans to make and the terms thereof. The Members will have very limited voice in the management decisions of the Company, and can exercise only a limited (if any) amount of control over the Company. The Company gives no assurance that the Company will operate at a profit or positive cash flow. The Company is dependent to a substantial degree on the continued services of its key personnel. In the event of the death, incapacity or other termination of key personnel, the business and operations of the Company may be adversely affected. Furthermore, all investments related to specific Loans will be undertaken by the Company without the Members having any ability to directly affect such transactions.
Competition with other lenders may affect the Company’s profitability.
Because of the nature of the Company's business, the Company's profitability will depend to a large degree on the future availability of capital. In particular, the Company will compete with private lenders, institutional lenders and others engaged in the mortgage lending business, many of whom have greater financial resources and experience than the Company.
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The competitive conditions of private lending may affect the Company’s profitability and business.
Some of the general competitive conditions in private lending include competing with other lenders with regards to fees, interest rates, reputation and/or quality of service. These conditions may affect the Company’s profitability and ability to make, fund, originate, acquire and/or purchase loans. Furthermore, other private lenders, institutional lenders and others engaged in the mortgage lending business may differ in their loan to value guidelines and criteria, which may affect the Company’s competitiveness with regards to its ability to make, fund, originate and/or acquire certain loans or the geographic area where it makes, funds, originates or acquires a loan, or the value and type of underlying property it is able to secure as collateral for a loan.
The key personnel not required to devote full-time to the business of the Company.
The Company’s key personnel and its officers and directors are not required to devote their respective individual capacities full time to the Company's affairs, but only such time as the affairs of the Company may reasonably require.
No restriction preventing the Company or its affiliates from competing with one another by investing or sponsoring investments similar to those of the Company.
Though they currently have no intention to do so, there is no restriction preventing the Company or any of its affiliates, principals, officers, directors or management from competing with one another by investing in collateral liens or sponsoring the formation of other investment groups like the Company. The Company may make decisions that may at times favor persons other than the Company. Unless otherwise mandatorily required to the contrary by applicable law, the Company and its affiliates, principals and management are exonerated from any liability for investment opportunities given to other persons, including (without limitation) affiliates.
Delays in the participation in the investment yield by Investors may occur.
There may be a delay between the time subscription funds are accepted from Investors and the time when such funds are deposited into the Company and begin to participate in the investment yield offered herein. Such delays may result from the Company having to verify an Investor’s suitability and admissibility as a Member, delays while the Company raises the Minimum Offering Amount, and/or delays in depositing an Investor’s contribution into the Company’s main operating account as a result of lack of availability of Loans to fund by the Company immediately upon an Investor making a contribution to the Company. After the Minimum Offering Amount has been raised, any delays between the time subscription funds are accepted and the time when such funds are deposited into the Company shall not be longer than Fifteen (15) days.
Management and investment practices of the Company are not regulated by Federal or State authorities.
The management and investments of the Company are not supervised or regulated by any Federal or State legal or regulatory authority, except to the extent that the Offering will be qualified by the SEC. In addition, the Company’s lending activities and investments in properties are generally not regulated and supervised by state authorities in at least the states where the Company will not obtain a mortgage lending license. The Company will not be required to obtain a consumer lending license since it will not make any consumer purpose loans. Lending licensing requirements will vary from state to state. Notwithstanding the foregoing, if required by a state, the Company will obtain all licenses prior to making or funding a Loan.
While the Company will use its best efforts to comply with all laws, including federal, state and local laws and regulations, there is a possibility of governmental action to enforce any alleged violations of lending laws which may result in legal fees and damage awards that would adversely affect the Company and its ability to distribute income to Members.
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Investment in the Company involves certain tax and ERISA risks Investors should be aware of.
An investment in the Company involves certain tax risks of general application to all investors and certain other risks specifically applicable to Keogh accounts, Individual Retirement Accounts and other tax-exempt investors. (See “Income Tax Considerations” and “ERISA Considerations” below).
Loan defaults and foreclosures may occur which could potentially adversely affect the profitability of the Company its ability to distribute income to Members.
The Company will invest in Loans and take the risk that borrowers will default on those loans and other risks that lenders typically face, some of which are detailed in this Offering. Loans may be made to borrowers who do not qualify for loans from more traditional sources of financing, such as (without limitation) borrowers who are in default under other obligations or in bankruptcy or who not have sources of income that would be sufficient to qualify for loans from other lenders (including but not limited to, banks and savings and loans associations). Loans may generally provide for a monthly payment from the borrower followed by a “balloon” payment at the loan’s maturity. Borrowers may be unable to pay such a balloon payment and are compelled to refinance the balloon amount into a new loan. Fluctuations in the interest rates, unavailability of mortgage funds, and a decrease in the value of the real property securing the loan could adversely affect the borrower’s ability to refinance their loans at maturity.
The Company will generally look to the underlying property securing the loan to determine whether to make the loan to the borrower and, to a lesser extent, the credit rating a borrower has. Nonetheless, borrowers will need to demonstrate adequate ability to meet its financial obligations under the terms of any loan which the Company originates or purchases.
To determine the fair market value of the property securing the loan, the Company will primarily rely on an appraisal, the Company’s opinion of value of the property, or other similar opinion. Appraisals are a judgment of an individual appraiser’s interpretation of a property’s value. Due to the differences in individual opinions, values may vary from one appraiser to another. Furthermore, the appraisal is merely the value of the real property at the time the loan is originated. Market fluctuations and other conditions could cause the value of real property to decline over time.
If the borrower defaults on the loan, the Company may take the deed in lieu of foreclosure or be forced to purchase the property at a foreclosure sale. If the Company cannot quickly sell the real property and the property does not produce significant income, the profitability and ability to repay the Company will be adversely affected.
Due to certain provisions of State law that may be applicable to all real estate loans, if real property security proves insufficient to repay amounts owing to the Company, it is unlikely that the Company will be able to recover any deficiency from the borrower.
Finally, the recovery of sums advanced by the Company in making or investing in mortgage loans and protecting its security may also be delayed or impaired by the operation of the federal bankruptcy laws or by irregularities in the manner in which the loan was made. Any borrower has the ability to delay a foreclosure sale for a period ranging from several months to several years by filing a petition in bankruptcy which automatically stays any actions to enforce the terms of the loan. It can be assumed that such delays and the costs associated therewith will reduce the profitability of the Company.
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The possible repeal of state usury limits could affect the Company’s profitability and cash flow.
To the extent that any Loans are arranged by or through a mortgage lending license and are therefore generally exempt from the otherwise applicable state’s usury limitation, should this exemption be repealed, the Company may no longer be able to originate loans in excess of the usury limit, potentially reducing its return on investment or forcing it to limit its lending activities or otherwise burdening its profitability and cash flow.
Certain real estate properties may be at risk as a result of certain losses being uninsured, underinsured or not insurable.
The Company intends to maintain comprehensive insurance coverage of the type and amount it believes is customarily obtained by any lender of real estate. There are, however, certain types of losses, generally of a catastrophic nature, such as earthquakes, war and floods, that may be uninsurable or not economically insurable from which the real estate properties may be at risk. In addition, because of coverage limits and deductibles, insurance coverage in the event of a substantial loss may not be sufficient to pay the full current market value or current replacement cost of the underlying investment. Inflation, changes in building codes and ordinances, environmental considerations and other factors also might make it unfeasible to use insurance proceeds to replace a property after it has been damaged or destroyed. Under such circumstances, the insurance proceeds received by the Company might not be adequate to restore its economic position with respect to its real estate properties. Additionally, the Company does not intend to require mortgage insurance on Loans, which would protect the Company from losses due to defaults by borrowers.
Fluctuations in interest rates may affect the profitability of the Company and may not be able to liquidate their investment to take advantage of higher available returns.
Mortgage interest rates are subject to abrupt and substantial fluctuations and the purchase of Membership Interests are a relatively illiquid investment. If prevailing interest rates rise above the average interest rate being earned by the Company’s portfolio, Members may wish to liquidate their investment to take advantage of higher available returns but may be unable to do so due to restrictions on transfer and withdrawal.
The Company, as a lender, may be exposed to the risks of litigation by a borrower, tenant, or other counter-party as a result of the Loan.
The Company will act in good faith and use reasonable judgment in selecting borrowers and making, purchasing, and managing the Loans. However, as a lender the Company is exposed to the risk of litigation by a borrower, tenant or other counter-party for any warranted or unwarranted allegations regarding the terms of any transaction or the actions or representations of the Company in making, managing or foreclosing on Loans. It is impossible to foresee the allegations that a party will bring against the Company, but the Company will use its best efforts to avoid litigation if, in its sole and absolute discretion, it is in the best interests of the Company. If the Company is required to incur legal fees and costs to respond to any lawsuit, the costs and fees could have an adverse impact on the Company’s cash flow and profitability.
Participation with other parties in a Loan may result in lack of control as to when and how to enforce a loan default.
While the Company does not expect to participate in transactions with other parties, there is a possibility that it may do so. When participating in Loans with other lenders the Company may not have control over the determination of when and how to enforce a default, depending on the terms of any participation agreement with the other lenders or owners, other lenders or owners may have varied amounts of input into such decision-making process, including (without limitation) the ultimate decision-making power on if and when to enforce a default. There is no certainty as to who will be a lead lender or lead investor (as applicable) in a situation where the Company participates in ownership of a Loan with another entity.
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There are risks of government actions against the Company for alleged violations of lending laws (and other law) which may result in high legal fees and damage awards.
While the Company will use its best efforts to comply with all laws, including federal, state and local laws and regulations, there is a possibility of governmental action to enforce any alleged violations of (without limitation) mortgage lending laws which may result in legal fees and damage awards that would adversely affect the applicable entity.
Risks of leveraging the Company’s asset portfolio include assigning a portion of or the entire Company’s asset portfolio as security for obtaining additional capital.
The Company may borrow funds from any third party sources (including, but not limited to, lenders and investors) to fund investments in Loans and properties. These additional sources of capital may be secured by Loans and assets held by the Company. In order to obtain such additional capital, the Company may assign part or its entire asset portfolio to the lender or investor. Such money may bear interest at a variable rate, whereas the Company may be making fixed rate loans. Therefore, if prevailing interest rates rise, the cost of money could exceed the income earned from that money, thus reducing the Company’s profitability or causing losses.
Risks of real estate ownership that could affect the marketability and profitability of the properties.
There is no assurance that the Company’s owned properties will be profitable or that cash from operations will be available for distribution to the Members. Because real estate, like many other types of long-term investments, historically has experienced significant fluctuations and cycles in value, specific market conditions may result in occasional or permanent reductions in the value of property interests. The marketability and value of the properties will depend upon many factors beyond the control of the Company, including (without limitation):
· | changes in general or local economic conditions; |
· | changes in supply of or demand for competing properties in an area (e.g., as a result of over-building); |
· | changes in interest rates; |
· | the promulgation and enforcement of governmental regulations relating to land use and zoning restrictions, environmental protection and occupational safety; |
· | condemnation and other taking of property by the government; |
· | unavailability of mortgage funds that may increase borrowing costs and/or render the sale of a property difficult; |
· | unexpected environmental conditions; |
· | the financial condition of tenants, ground lessees, ground lessors, buyers and sellers of properties; |
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· | changes in real estate taxes and any other operating expenses; |
· | energy and supply shortages and resulting increases in operating costs or the costs of materials and construction; |
· | various uninsured, underinsurance or uninsurable risks (such as losses from terrorist acts), including risks for which insurance is unavailable at reasonable rates or with reasonable deductibles; and |
· | imposition of rent controls. |
There are a number of risks involved in investing in development, redevelopment and undeveloped properties.
The Company anticipates that it will invest in existing properties that require varying degrees of development. In addition, some properties may be under construction or under contract to be developed or redeveloped. Properties that involve development or redevelopment will be subject to the general real estate risks described above and will also be subject to additional risks, such as unanticipated delays or excess costs due to factors beyond the control of the Company. These factors may include (without limitation):
· | strikes; |
· | adverse weather; |
· | earthquakes and other "force majeure" events; |
· | changes in building plans and specifications; |
· | zoning, entitlement and regulatory concerns, including changes in laws, regulations, elected officials and government staff; |
· | material and labor shortages; |
· | increases in the costs of labor and materials; |
· | changes in construction plans and specifications; |
· | rising energy costs; and |
· | delays caused by the foregoing (which could result in unanticipated inflation, the expiration of permits, unforeseen changes in laws, regulations, elected officials and government staff, and losses due to market timing of any sale that is delayed). |
Delays in completing any development or renovation project will cause corresponding delays in the receipt of operating income and, consequently, the distribution of any cash flow by the Company with respect to such property.
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There are risks associated with buying contaminated Properties.
The Company may acquire or invest in properties with known environmental conditions for the purpose of remediating the contamination. Following completion of the remediation, such properties would generally be resold to a developer. Such investments would generally be made only in conjunction with an operating partner with specific expertise in such properties and only where the Company believes that the liabilities associated with owning an interest in such a property can be appropriately protected against through insurance, indemnification or otherwise.
Although not likely, properties invested in by the Company that may not comply with the Americans with Disabilities Act and other changes in governmental rules and regulations could have adverse consequences to the Company’s profitability.
Under the Americans with Disabilities Act of 1990 (the "ADA"), all public properties are required to meet certain federal requirements related to access and use by disabled persons. Properties acquired by the Company or in which it makes a property investment may not be in compliance with the ADA. If a property is not in compliance with the ADA, then the Company may be required to make modifications to such property to bring it into compliance, or face the possibility of imposition, or an award, of damages to private litigants. In addition, changes in governmental rules and regulations or enforcement policies affecting the use or operation of the properties, including changes to building, fire and life-safety codes, may occur which could have adverse consequences to the Company.
Unforeseen Changes
While the Company has enumerated certain material risk factors herein, it is impossible to know all risks which may arise in the future. In particular, Members may be negatively affected by changes in any of the following: (i) laws, rules and regulations; (ii) regional, national and/or global economic factors and/or real estate trends; (iii) the capacity, circumstances and relationships of partners of Affiliates, the Company or the Manager; (iv) general changes in financial or capital markets, including (without limitations) changes in interest rates, investment demand, valuations or prevailing equity or bond market conditions; or (v) the presence, availability or discontinuation of real estate and/or housing incentives.
The Company continuously encounters changes in its operating environment, and the Company may have fewer resources than many of its competitors to continue to adjust to those changes. The operating environment of the Company is undergoing rapid changes, with frequent introductions of laws, regulations, competitors, market approaches, and economic impacts. Future success will depend, in part, upon the ability of the Company to address the needs of its borrowers, sponsors and clients by adapting to those changes and providing products and services that will satisfy the demands of their respective businesses and projects. Many of the competitors have substantially greater resources to adapt to those changes. The Company may not be able to effectively react to all of the changes in its operating environment or be successful in adapting its products, services and approach.
By purchasing shares in this Offering, Members are bound by the arbitration provisions contained in the Subscription Agreement and the Operating Agreement which limit a Member’s ability to bring class action lawsuits or seek remedy on a class basis, including with respect to securities law claims.
By purchasing shares in this Offering, Members agree to be bound by the arbitration provisions contained in our subscription agreement and our operating agreement (each an “Arbitration Provision” and collectively, the “Arbitration Provisions”). Such Arbitration Provisions apply to claims under the U.S. federal securities laws and to all claims that are related to the Company, including with respect to this Offering, the Company’s holdings, its Membership Interests, ongoing operations and the management of the Company’s investments, among other matters and limit the ability of Members to bring class action lawsuits or similarly seek remedy on a class basis. Furthermore, because the Arbitration Provision is contained in the Operating Agreement, such Arbitration Provision will also apply to any purchasers of shares in a secondary transaction.
By agreeing to be subject to the Arbitration Provisions, Members are severely limiting their rights to seek redress against the Company in court. For example, a Member may not be able to pursue litigation for any claim in state or federal courts against the Company, the Manager, or their respective directors, managers, officers, and employees including with respect to securities law claims, and any awards or remedies determined by the arbitrators may not be appealed. In addition, arbitration rules generally limit discovery, which could impede a Member’s ability to bring or sustain claims, and the ability to collect attorneys' fees or other damages may be limited in the arbitration, which may discourage attorneys from agreeing to represent parties wishing to commence such a proceeding.
Specifically, the Arbitration Provisions provide that either party may, at its sole election, require that the sole and exclusive forum and remedy for resolution of a claim be final and binding arbitration. The Company has not determined whether it will exercise its right to demand arbitration but reserve the right to make that determination on a case by case basis as claims arise. In this regard, the Arbitration Provision is similar to a binding arbitration provision as the Company is likely to invoke the Arbitration Provision to the fullest extent permissible.
Any arbitration brought pursuant to the Arbitration Provisions must be conducted in the State of Idaho, in Coeur D’Alene area. The term “Claim” as used in the Arbitration Provisions is very broad and includes any past, present, or future claim, dispute, or controversy involving a Member (or persons claiming through or connected with the Member), on the one hand, and the Company (or persons claiming through or connected with the Company), on the other hand, relating to or arising out of the Member’s subscription agreement, the Company and/or the activities or relationships that involve, lead to, or result from any of the foregoing, including (except an individual Claim that Member may bring in Small Claims Court or an equivalent court, if any, so long as the Claim is pending only in that court) the validity or enforceability of the Arbitration Provisions, any part thereof, or the entire subscription agreement. Claims are subject to arbitration regardless of whether they arise from contract; tort (intentional or otherwise); a constitution, statute, common law, or principles of equity; or otherwise. Claims include (without limitation) matters arising as initial claims, counter-claims, cross-claims, third-party claims, or otherwise. The scope of the Arbitration Provisions is to be given the broadest possible interpretation that will permit it to be enforceable. Based on discussions with and research performed by the Company’s counsel, the Company believes that the Arbitration Provisions are enforceable under federal law, the laws of the State of Idaho, or under any other applicable laws or regulations. However, the issue of enforceability is not free from doubt and to the extent that one or more of the provisions in the Subscription Agreement or the Operating Agreement with respect to the Arbitration Provisions or otherwise requiring Members to waive certain rights were to be found by a court to be unenforceable, the Company would abide by such decision.
Further, potential Members should consider that Subscription Agreement and the Operating Agreement restricts the ability of the Members to bring class action lawsuits or to similarly seek remedy on a class basis, unless otherwise consented to by the Company or its Manager. These restrictions on the ability to bring a class action lawsuit are likely to result in increased costs, both in terms of time and money, to individual Members who wish to pursue claims against the Company.
BY AGREEING TO BE SUBJECT TO THE ARBITRATION PROVISIONS, MEMBERS WILL NOT BE DEEMED TO WAIVE THE COMPANY’S COMPLIANCE WITH THE FEDERAL SECURITIES LAWS AND THE RULES AND REGULATIONS PROMULGATED THEREUNDER.
INTEREST OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS
Management Fee and Expenses
The Company anticipates conducting various transactions with the Manager, a related party, including but not limited to those specified in this Offering Circular. The Company will pay the Manager a Management Fee and other fees, and the Manager is entitled to reimbursement for any Company expenses paid for by the Manager. (See “Manager’s Compensation” above and “Conflicts of Interest”.)
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The following is a list of all presently known potential conflicts of interest between Company and each of its principals, directors, officers and/or affiliates. More specifically, conflicts of interest may arise in the following situations: (1) loan Origination Fees and Company profitability, (2) loan servicing and origination by the Manager, (3) allocation of management time, services, and functions between various existing Affiliates of the Company and/or Manager, (4) potential purchase, sale, hypothecation of Loans between the Company and its Affiliates (including SIHYF II ), (5) conflicts with entities organized for similar purposes as the Company, (6) competition with Affiliates, (7) sale of properties to Affiliates, and (8) those resulting from the relationship between the principals of the Company and its Affiliates.
The Members must rely on the general fiduciary standards (as and if applicable) and other duties which may apply to such principals, directors, officers and affiliates to prevent unfairness by any of the aforementioned in a transaction with consequences for the Members. It is expected that numerous transactions will occur between the Company and its principals, directors, officers and/or affiliates, and no outside or independent review of these transactions will be performed. ALL PROSPECTIVE INVESTORS SHOULD UNDERSTAND THAT MEMBERS WILL HAVE SUBSTANTIALLY LIMITED CONTROL, VOTING RIGHTS OR INVOLVEMENT IN THE BUSINESS, AFFAIRS OR GOVERNANCE OF THE COMPANY. EACH PROSPECTIVE INVESTOR SHOULD UNDERSTAND THAT SELF-DEALING AND AFFILIATE-AFFILIATE TRANSACTIONS WILL ROUTINELY OCCUR AS A RESULT OF THE MATTERS CONTEMPLATED HEREIN. ALL PROSPECTIVE INVESTORS ARE STRONGLY ENCOURAGED TO CONSULT THEIR OWN INDEPENDENT LEGAL COUNSEL TO REVIEW AND ADVISE THEM WITH RESPECT TO THIS OFFERING AND OFFERING CIRCULAR. (See “Fiduciary Responsibility of the Manager” above.)
Conflicts of Interest arising from doing business with Affiliates.
Currently the Company intends to conduct most of its business of funding, making, acquiring, and/or purchasing Loans from loans that are brokered by the Manager. The Manager currently manages two separate offerings of membership interests, similar to this Offering. The Manager is raising capital on behalf of SIHYF II in order to invest in loans and acquire properties or portfolios of properties. SIHYF II’s offering is exempt from registration under Rule 506 of Regulation D of the Act. Since the Company may solely be funding Loans that are originated by the Manager, this may result in the principals of the Company engaging in transactions that are not to the best advantage of the Company and could be perceived as more financially advantageous to the Manager. Notwithstanding the foregoing, the Company intends to invest in Loans that are in best interests of the Company and the Loans will have terms that are commercially reasonable and advantageous to the Company. The Manager also manages Secured Investment High Yield Fund, LLC, a Washington limited liability company (“SIHYF”). SIHYF is also exempt from registration under Rule 506 of Regulation D of the Act. SIHYF is currently winding down its operations and is not raising any capital, or conducting any lending or acquisition activities.
The majority of the conflicts of interest may largely result from the Manager having to allocate management time, services and functions between the Company and other funds as well as deciding which business will be engaged by Manager or the Company, and not necessarily from one transaction being more advantageous to the Manager and not the Company.
Loan Fees were not determined through arm’s-length negotiations.
None of the compensation set forth under “Manager’s Compensation” was determined through arm's-length negotiations. Any change in such fees may have a direct, adverse effect upon the fees that borrowers will pay to the Company, and thus, may reduce the overall profitability and cash flow of the Company. This conflict of interest will exist in connection with every Loan the Company makes.
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The Company will receive compensation for servicing the Loans, but may use a third party as a loan servicer which may result in higher servicing fees.
As set forth below under “Manager’s Compensation”, the Manager and/or its Affiliates may receive compensation for servicing the Loans. The Company has reserved the right to retain other firms in addition to, or in lieu of, the Manager to perform the various brokerage services, loan servicing and other activities in connection with the Loans. Such other firms may or may not be affiliated with the Company. Loan servicing firms not affiliated with the Company may or may not provide comparable services on terms more favorable to the Company.
The Company and each of its principals, directors, officers or affiliates, may engage, for their own account or for the account of others, in other business ventures similar to that of the Company.
The Company and each of its principals, directors, officers or affiliates, may engage, for their own account or for the account of others, in other business ventures similar to that of the Company. Neither the Company nor any Member shall be entitled to any interest therein or therefrom.
The Company may have conflicts of interest in allocating management time, services and functions between various existing companies, the Company and any future companies which it may organize as well as other business ventures in which it or its managers, principals, directors, officers and/or affiliates may be or become involved.
The Company and each of its principals, directors, officers or affiliates, may sell, buy or hypothecate loans (use loans as collateral for another loan) to each other and make a profit without the assistance of independent review or assessment.
The Company and each of its principals, directors, officers or affiliates, may sell, buy or hypothecate loans (use loans as collateral for another loan) to each other, provided that such loans meet the underwriting criteria set forth above. The Company or any of its managers, principals, directors, officers and/or affiliates, may make a profit on the sale of an existing Loan to an affiliated individual or entity. There will be no independent review or assessment of the value of such Loans.
The Company, Manager and their affiliates, may join with other entities in joint venture or co-ownership in certain loans or in the ownership of real property.
The Company and its principals, directors, officers or affiliates, may join with other entities organized for similar purposes as partners, joint venturers or co-owners under some form of ownership in certain loans or in the ownership of real property. The interests such other individuals/entities may conflict, and all such individuals/entities may not be able to resolve such conflicts in a manner that serves the best interests of the Company and/or Members.
The Company or any of its Affiliates are not restricted from competing with the Company and may freely compete with the Company.
There is no restriction preventing the Company or any of its Affiliates, officers, directors or management from competing with the Company by investing in collateral liens or sponsoring the formation of other investment groups like the Company to invest or otherwise participate in similar areas. Subject only to limitations mandatorily imposed by corporate law, the Company and its affiliates, officers, directors and/or management may freely compete with or against the Company.
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The Company may sell foreclosed properties to Affiliates and the transaction will be subject to conflicts of interest since the Company will have an interest in both parties to the transaction.
In the event that the Company becomes the owner of any real property by reason of foreclosure, the first priority will be to arrange for the sale of the property for a price that will permit the recovery of the full amount of invested capital plus accrued but unpaid interest and other charges, or so much thereof as can reasonably be obtained in light of current market conditions. In order to facilitate such a sale, the Company may, but is not required to, arrange a sale to persons or entities affiliated with it or controlled by it, (e.g. to a limited liability company formed by the Company). The Company will be subject to conflicts of interest in arranging such sales since it will represent or have an interest in both parties to the transaction. There will not be any independent review by any outside parties of such transactions. No assurance can be given that the sale price for property would be fair, reasonable or negotiated at ‘arms-length’.
CERTAIN LEGAL ASPECTS OF THE COMPANY LOANS
Each of the Company’s loans will be secured by, among other things, a deed of trust, mortgage, leasehold deed of trust or leasehold mortgage, or security agreement. The deed of trust and the mortgage are the most commonly used real property security devices. A deed of trust has three parties: a debtor, referred to as the “trustor”; a third party, referred to as the “trustee”; and the lender, referred to as the “beneficiary.” The trustor irrevocably grants the property until the debt is paid, “in trust, with power of sale” to the trustee to secure payment of the obligation. The trustee’s authority is governed by law, the express provisions of the deed of trust and the directions of the beneficiary. The Company will be the beneficiary under all deeds of trust securing Company loans. In a mortgage loan, there are only two parties: the mortgagor (borrower) and the mortgagee (lender).
In the United States, each individual State law determines how a mortgage is foreclosed. The route usually requires a judicial process, but varies from state to state. For properties located in the United States, some States have a statute known as the “one form of action” rule, which requires the beneficiary of a collateral lien to exhaust the security under the security lien (i.e., foreclose on the property) before any personal action may be brought against the borrower. Foreclosure statutes vary from State to State. Loans by the Company secured by mortgages will be foreclosed in compliance with the laws of the State where the real property collateral is located.
Special Considerations in Connection with Junior Encumbrances
In addition to the general considerations concerning trust deeds discussed above, there are certain additional considerations applicable to second and more junior deeds of trust (“junior encumbrances”). By its very nature, a junior encumbrance is less secure than a more senior lien. If a senior lien holder forecloses on its loan, unless the amount of the bid exceeds the senior encumbrances, the junior lien holder will receive nothing. Because of the limited notice and attention given to foreclosure sales, it is possible for a junior lien holder to be sold out, receiving nothing from the foreclosure sale, although all legal methods of recouping the Company’s investment will be exhausted. By virtue of anti-deficiency legislation, discussed above, a junior lien holder may be totally precluded from any further remedies.
Accordingly, a junior lien holder (such as the Company in certain cases) may find that the only method of protecting its security interest in the property is to take over all obligations of the trustor with respect to senior encumbrances while the junior lien holder commences its own foreclosure, making adequate arrangements either to (1) find a purchaser for the property at a price which will recoup the junior lien holder’s interest, or (2) to pay off the senior encumbrances so that the junior lien holder’s encumbrance achieves first priority. Either alternative may require the Company to make substantial cash expenditures to protect its interest. (See “Business Risks” above.)
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The Company may also make wrap-around mortgage loans (sometimes called “all-inclusive loans”), which are junior encumbrances to which all the considerations discussed above will apply. A wrap-around loan is made when the borrower desires to refinance his, her, or its property but does not wish to retire the existing indebtedness for any reason, e.g., a favorable interest rate or a large prepayment penalty. A wrap-around loan will have a principal amount equal to the outstanding principal balance of the existing secured loans plus the amount actually to be advanced by the Company. The borrower will then make all payments directly to the Company, and the Company in turn will pay the holder of the senior encumbrance. The actual ultimate yield to the Company under a wrap-around mortgage loan will likely exceed the stated interest rate on the underlying senior loan, since the full principal amount of the wrap-around loan will not actually be advanced by the Company. State laws generally require that the Company be notified when any senior lien holder initiates foreclosure.
If the borrower defaults solely upon his, her or its debt to the Company while continuing to perform with regard to the senior lien, the Company (as junior lien holder) will foreclose upon its security interest in the manner discussed above in connection with deeds of trust generally. Upon foreclosure by a junior lien, the property remains subject to all liens senior to the foreclosed lien. Thus, if the Company were to purchase the security property at its own foreclosure sale, it would acquire the property subject to all senior encumbrances.
The standard form of deed of trust used by most institutional lenders, like the one that will be used by the Company or its affiliates, confers on the beneficiary the right both to receive all proceeds collected under any hazard insurance policy and all awards made in connection with any condemnation proceedings, and to apply such proceeds and awards to any indebtedness secured by the deed of trust in such order as the beneficiary may determine. Thus, in the event improvements on the property are damaged or destroyed by fire or other casualty, or in the event the property is taken by condemnation, the beneficiary under the underlying first deed of trust will have the prior right to collect any insurance proceeds payable under a hazards insurance policy and any award of damages in connection with the condemnation, and to apply the same to the indebtedness secured by the first deed of trust before any such proceeds are applied to repay the loan in respect of the Company. The amount of such proceeds may be insufficient to pay the balance due to the Company, while the debtor may fail or refuse to make further payments on the damaged or condemned property, leaving the Company with no feasible means to obtain payment of the balance due under its junior deed of trust. In addition, the borrower may have a right to require the lender to allow the borrower to use the proceeds of such insurance for restoration of the insured property.
“Due-on-Sale” Clauses
The Company’s forms of promissory notes and deeds of trust, like those of many lenders, contain “due-on-sale” clauses, which permits the Company to accelerate the maturity of a loan if the borrower sells, conveys or transfers all or any portion of the property, but may or may not contain “due-on-encumbrance” clauses which would permit the same action if the borrower further encumbers the property (i.e., executes further deeds of trust). The enforceability of these types of clauses has been the subject of several major court decisions and legislation in recent years.
(1) Due-on-Sale: Federal law now provides that, notwithstanding any contrary pre-existing state law, due-on-sale clauses contained in mortgage loan documents are enforceable in accordance with their terms by any lender after October 15, 1985. On the other hand, acquisition of a property by the Company by foreclosure on one of its loans may also constitute a “sale” of the property, and would entitle a senior lien holder to accelerate its loan against the Company. This would be likely to occur if then prevailing interest rates were substantially higher than the rate provided for under the accelerated loan. In that event, the Company may be compelled to sell or refinance the property within a short period of time, notwithstanding that it may not be an opportune time to do so.
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(2) Due-on-Encumbrance: With respect to mortgage loans on residential property containing four or less units, federal law prohibits acceleration of the loan merely by reason of the further encumbering of the property (e.g., execution of a junior deed of trust). This prohibition does not apply to mortgage loans on other types of property. Although many of the Company’s junior lien mortgages will be on properties that qualify for the protection afforded by federal law, some loans will be secured by properties that do not qualify for the protection, including (without limitation) small apartment buildings or commercial properties. Junior lien mortgage loans made by the Company may trigger acceleration of senior loans on properties if the senior loans contain valid due-on-encumbrance clauses, although both the number of such instances and the actual likelihood of acceleration are anticipated to be minor. Failure of a borrower to pay off the senior loan would be an event of default and subject the Company (as junior lien holder) to the risks attendant thereto. It will not be customary practice of the Company to make loans on non-residential property where the senior encumbrance contains a due-on-encumbrance clause. (See “Special Considerations in Connection with Junior Encumbrances.”)
Prepayment Charges
Loans may provide for certain prepayment charges to be imposed on the borrowers in the event of certain early payments on the loan. The Manager reserves the right, but has no obligation, at its business judgment to waive collection of prepayment penalties. Applicable federal and state laws may limit the prepayment charge on residential loans. For commercial or multi-family loans there is no federal law that limits the prepayment amount charge, but applicable state laws may vary.
Bankruptcy Laws
If a borrower files for protection under the federal bankruptcy statutes, the Company will be initially barred from taking any foreclosure action on its real property security by an “automatic stay order” that goes into effect upon the borrower's filing of a bankruptcy petition. Thereafter, the Company would be required to incur the time, delay and expense of filing a motion with the bankruptcy court for permission to foreclose on the real property security (“relief from the automatic stay order”). Such permission is granted only in limited circumstances. If permission is denied, the Company will likely be unable to foreclose on its security for the duration of the bankruptcy, which could be a period of years. During such delay, the borrower may or may not be required to pay current interest on the Company loan. The Company would therefore lack the cash flow it anticipated from the loan, and the total indebtedness secured by the security property would increase by the amount of the defaulted payments, perhaps reaching a total that would exceed the market value of the property.
In addition, bankruptcy courts have broad powers to permit a sale of the real property free of the Company's lien, to compel the Company to accept an amount less than the balance due under the loan and to permit the borrower to repay the loan over a term which may be substantially longer than the original term of the loan.
The Company has not been involved in any material litigation or arbitration within the past Five (5) years. Neither the Manager nor any of its managers, principals, directors or officers of the Company or Manager are now, or within the past Five (5) years have been, involved in any material litigation or arbitration, except for the following:
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· | Secured Investment Corp. has been contacted by counsel for the various bankruptcy estates of William Jordan and Associates regarding an outstanding $1 million promissory note made in favor of one of the William Jordan entities. No default under the promissory note has been formally declared, and the Manager is cooperating with the counsel to produce discovery and exchange information regarding the amounts remaining due under the promissory note. The Manager expects to negotiate a resolution with the William Jordan entity for final payment under the promissory note upon terms agreeable to both parties. |
The following discussion generally summarizes the material federal income tax consequences of an investment in the Company based upon the existing provisions of the Internal Revenue Code of 1986, as amended (the “Code”), and applicable Treasury regulations thereunder, current administrative rulings and procedures and applicable judicial decisions. However, it is not intended to be a complete description of all tax consequences to prospective Investors with respect to their investment in the Company. No assurance can be given that the Internal Revenue Service (the “IRS”) or any applicable State taxing authority will agree with the interpretation of the current federal income tax laws and regulations summarized below. In addition, the Company or the Investors may be subject to state and local taxes in jurisdictions in which the Company may be deemed to be doing business.
ACCORDINGLY, ALL PROSPECTIVE INVESTORS SHOULD INDEPENDENTLY SATISFY THEMSELVES REGARDING THE POTENTIAL FEDERAL AND STATE TAX CONSEQUENCES OF PARTICIPATION IN THE COMPANY AND ARE URGED TO CONSULT WITH THEIR OWN TAX ADVISORS, ATTORNEYS OR ACCOUNTANTS IN CONNECTION WITH ANY INTEREST IN THE COMPANY. EACH PROSPECTIVE INVESTOR/SHAREHOLDER SHOULD SEEK, AND RELY UPON, THE ADVICE OF THEIR OWN TAX ADVISORS IN EVALUATING THE SUITABILITY OF AN INVESTMENT IN THE COMPANY IN LIGHT OF THEIR PARTICULAR INVESTMENT AND TAX SITUATION.
Tax Law Subject to Change
Frequent and substantial changes have been made, and will likely continue to be made, to the federal and state income tax laws. The changes made to the tax laws by legislation are pervasive, and in many cases, have yet to be interpreted by the IRS or the courts.
State and Local Taxes
A description or analysis of the State and local tax consequences of an investment in the Company is beyond the scope of this discussion. Prospective Members are advised to consult their own tax counsel and advisors regarding these consequences and the preparation of any state or local tax returns that an Investor may be required to file. The discussion of tax consequences herein is general in nature, and then only concerns federal tax consequences, to the limited extent discussed in this Offering Circular.
Federal Partnership Treatment
The Company is likely to be treated as a partnership under the Internal Revenue Code of 1986 (the “Code”). Assuming that the Company has been properly formed under Idaho law, is operated in accordance with applicable Idaho corporate and business law and the terms of the Operating Agreement, it is the Company’s opinion (subject to the discussion regarding “Taxable Mortgage Pools” below) that, if the matter were litigated, it is more likely than not that the Company would prevail as to its classification and would be taxed as a partnership for federal income tax purposes. If the Internal Revenue Service (“the IRS”) determined that the Company was an association taxable as a corporation for federal income tax purposes, there would be significant adverse tax consequences to the Company and possibly to its investors, including (without limitation) the Company would have to pay tax on its net income and then the investor would have to pay tax on any distributions as dividends as opposed to interest income.
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IRS Audits
Informational returns filed by the Company are subject to audit by the IRS. The IRS devotes considerable attention to the proper application of the tax laws to partnerships. An audit of the Company’s return may lead to adjustments which adversely affect the federal income tax treatment of Membership Interests and cause Members to be liable for tax deficiencies, interest thereon and penalties for underpayment. An audit of the Company’s tax return could also lead to an audit of their individual tax return that may not otherwise have occurred, and to the adjustment of items unrelated to the Company. Prospective investors should make their determination to invest based on the economic considerations of the Company rather than any anticipated tax benefits. Furthermore, the IRS has taken the position in Temp. Reg. 1.163-9T that any interest on income taxes owed by an individual is personal interest, subject to limitations on deduction, regardless of the nature of the activity that produced the income that was the source of the tax.
Profit Objective of the Company
Deductions will be disallowed if they result from activities not entered into for profit to the extent that such deductions exceed an amount equal to the greater of: (a) the gross income derived from the activity; or (b) deductions (such as interest and taxes) that are allowable in any event.
The applicable Treasury Department regulations indicate a transaction will be considered as entered into for profit where there is an expectation of profit in the future, either of a recurring type or from the disposition of property. In addition, the Code provides, among other things, an activity is presumed to be engaged for profit if the gross income from such activity for Three (3) of the Five (5) taxable years ending with the taxable year in question exceeds the deductions attributable to such activity. It is anticipated that the Company will satisfy this test.
Property Held Primarily for Sale: Potential Dealer Status
The Company has been organized to invest in loans and notes primarily secured by deeds of trust or mortgages on real property and to acquire real estate properties. However, if the Company were at any time deemed for federal tax purposes to be holding one or more Company loans, notes or properties primarily for sale to customers in the ordinary course of business (a “dealer”), any gain or loss realized upon the disposition of such loans, notes or properties would be taxable as ordinary gain or loss rather than as capital gain or loss. The federal income tax rates for ordinary income are currently higher than those for capital gains. In addition, income from sales of loans, notes and properties to customers in the ordinary course of business would also constitute unrelated business taxable income to any Members which are tax-exempt entities. Under existing law, whether or not real property is held primarily for sale to customers in the ordinary course of business must be determined from all the relevant facts and circumstances. The Company intends to make and hold the Company loans, notes and properties for investment purposes only, and to dispose of Company loans, notes and properties, by sale or otherwise, at the discretion of the Manager and as consistent with the Company’s investment objectives. It is possible that, in so doing, the Company will be treated as a “dealer” in mortgage loans, notes and properties, and that profits realized from such sales will be considered unrelated business taxable income to otherwise tax-exempt Investors in the Company.
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Taxable Mortgage Pool Rules
Notwithstanding the check-the-box provisions, the IRS may still reclassify certain partnerships as corporations for federal income tax purposes, if they meet the definition of a “taxable mortgage pool” under Internal Revenue Code Section 7701(i)(2)(A)(ii). A taxable mortgage pool is any entity whose assets consist substantially of debt instruments, who is the obligor under debt obligations with two (2) or more maturities, and where there is a relationship between the debt instruments and the debt obligations of the entity. The issue of what constitutes debt obligations with Two (2) or more maturities is unclear. The regulations state that “[T]he purpose of section 7701(i) is to prevent income generated by a pool of real estate mortgages from escaping Federal income taxation when the pool is used to issue multiple class mortgage-backed securities.” The Company has only one class of Membership Interests. A literal reading of this provision could lead to the conclusion that the Company would not be reclassified as a taxable mortgage pool and taxed as a corporation. In order to further explain any such interpretation, the Manager has committed that to the extent it leverages the Company assets (i.e., borrows funds from another lender for purpose of making loans and pledges one or more loans of the Company as collateral for such borrowing), the Company will only have one line of credit at a time so that the IRS would find it difficult to make the argument that the Company has debt obligations with Two (2) or more maturities. However, due to the lack of clarity with respect to this provision, there is no assurance (and no opinion of any kind can be given) that the IRS would not attempt to tax the Company as a corporation and not a partnership. Any such taxation would have an adverse effect on the Company and the return an Investor would receive on their investment in the Company.
Portfolio Income
A primary source of Company income will be interest, which is ordinarily considered “portfolio income” under the Code. Similarly, Temporary Regulations issued by the Internal Revenue Service in 1988 (Temp. Reg. Section 1.469-2T(f)(4)(ii)) confirmed that net interest income from an equity-financed lending activity such as the Company will be treated as portfolio income, not as passive income, to Members. Therefore, Members will not be entitled to treat their proportionate share of Company income as passive income, against which passive losses (such as deductions from unrelated real estate investments) may be offset.
Understatement Penalties
The Company will be subject to substantial understatement penalty in the event that it understates its income tax. The IRS imposes a penalty of Twenty Percent (20%) on any substantial understatement of income tax. Furthermore, the IRS can charge interest on underpayments of income tax exceeding One Hundred Thousand Dollars ($100,000) for any tax year owing by certain corporations at a rate that is higher than the normal interest rate. The Manager strongly advises prospective investors to consult with their own tax advisor to be sure that they fully evaluate the proposed tax treatment of Company as described herein.
Unrelated Business Taxable Income
The Company may generate unrelated business taxable income for Members that are qualified plans such as self-directed IRA’s, or tax exempt organizations such as pension/benefit plan investors, colleges, universities, private foundations and charitable remainder trusts. Particularly if the Company pursues a credit facility or leverage, it is highly likely that the Company may generate unrelated business taxable income for such Members. Investors should be aware also that the issue of how the unrelated business taxable income of a qualified plan or exempt organization should be taxed is regularly under discussion by one or more committees of Congress. The Company advises that all Members, particularly Members with qualified plans or exempt organizations, consult with their own tax advisor to be sure they fully evaluate the impact of unrelated business taxable income for Members.
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The following is a discussion of how certain requirements of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) and the Code relating to Employee Benefit Plans and certain Other Benefit Arrangements (each as defined below) may affect an investment in the Membership Interests. It is not, however, a complete or comprehensive discussion of all employee benefits aspects of such an investment. If the Investors are trustees or other fiduciaries of an Employee Benefit Plan or Other Benefit Arrangement, before purchasing Membership Interests, they should consult with their own independent legal counsel to assure that the investment does not violate any of the applicable requirements of ERISA or the Code, including, without limitation, the ERISA fiduciary rules and the prohibited transaction requirements of ERISA and the Code.
ERISA Fiduciary Duties
Under ERISA, persons who serve as trustees or other fiduciaries of an Employee Benefit Plan have certain duties, obligations and responsibilities with respect to the participants and beneficiaries of such plans. Among the ERISA fiduciary duties are the duty to invest the assets of the plan prudently, and the duty to diversify the investment of plan assets so as to minimize the risk of large losses. An “Employee Benefit Plan” is a plan subject to ERISA that is an employee pension benefit plan (such as a defined benefit pension plan or a section 401(k) or 403(b) plan) or any employee welfare benefit plan (such as an employee group health plan).
Prohibited Transaction Requirements
Section 406 of ERISA and Section 4975 of the Code proscribe certain dealings between Employee Benefit Plans or Other Benefit Arrangements, on the one hand, and “parties-in interest” or “disqualified persons” with respect to those plans or arrangements on the other. An “Other Benefit Arrangement” is a benefit arrangement described in Section 4975(e)(1) of the Code (such as a self-directed individual retirement account (“IRA”), other than an Employee Benefit Plan.
Prohibited transactions include, directly or indirectly, any of the following transactions between an Employee Benefit Plan or Other Benefit Arrangement and a party in interest or disqualified person:
(a) | sales or exchanges of property; | |
(b) | lending of money or other extension of credit; | |
(c) | furnishing of goods, services or facilities; and | |
(d) | transfers to, or use by or for the benefit of, a party in interest or disqualified person of any assets of the Employee Benefit Plan or Other Benefit Arrangement. |
In addition, prohibited transactions include any transaction where a trustee or other fiduciary of an Employee Benefit Plan or Other Benefit Arrangement:
(a) | deals with plan assets for his own account, |
(b) | acts on the behalf of parties whose interests are adverse to the interest of the plan, or |
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(c) | receives consideration for his own personal account from any party dealing with the plan with respect to plan assets. |
The terms “party in interest” under ERISA and “disqualified person” under the Code have similar definitions. The terms include persons who have particular relationships with respect to an Employee Benefit Plan or Other Benefit Arrangement, such as:
(a) | fiduciaries; |
(b) | persons rendering services of any nature to the plan; |
(c) | employers any of whose employees are participants in the plan, as well as owners of 50% or more of the equity interests of such employers; |
(d) | spouses, lineal ascendants, lineal descendants, and spouses of such ascendants or descendents of any of the above persons; | |
(e) | employees, officers, directors and 10% or more owners of such fiduciaries, service providers, employers or owners; | |
(f) | entities in which any of the above-described parties hold interests of 50% or more; and | |
(g) | Ten Percent (10%) or more joint venturers or partners of certain of the parties described above. |
Certain transactions between Employee Benefit Plans or Other Benefit Arrangements and parties in interest or disqualified persons that would otherwise be prohibited transactions are exempt from the prohibited transaction rules due to the application of certain statutory or regulatory exemptions. In addition, the United States Department of Labor (the “DOL”) has issued class exemptions and individual exemptions for certain types of transactions. Violations of the prohibited transaction rules may require the prohibited transactions to be rescinded and will cause the parties in interest or disqualified persons to be subject to excise taxes under Section 4975 of the Code.
Investments in the Company
If any Investor is a fiduciary of an Employee Benefit Plan, the investor must act prudently and ensure that the plan’s assets are adequately diversified to satisfy the ERISA fiduciary duty requirements. Whether an investment in the Company is prudent and whether an Employee Benefit Plan’s investments are adequately diversified must be determined by the plan’s fiduciaries in light of all of the relevant facts and circumstances. A fiduciary should consider, among other factors, the limited marketability of the Membership Interests.
Investors also should be aware that under certain circumstances the DOL may view the underlying assets of the Company as “plan assets” for purposes of the ERISA fiduciary rules and the ERISA and Internal Revenue Code prohibited transaction rules. DOL regulations indicate that Fund assets will not be considered plan assets if less than Twenty Five Percent (25%) of the value of the Membership Interests is held by Employee Benefit Plans and Other Benefit Arrangements.
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The Company anticipates that if any Investor is an Employee Benefit Plan subject to ERISA, the Company will limit the investments by all Employee Benefit Plans and Other Benefit Arrangements to ensure that the Twenty Five Percent (25%) limit is not exceeded. Because the Twenty Five Percent (25%) limit is determined after every subscription or redemption, the Company has the authority to require the redemption of all or some of the Interests held by any Member that is an Employee Benefit Plan or Other Benefit Arrangement if the continued holding of such Interests, in the sole opinion of the Company, could result in the Company being subject to the ERISA fiduciary rules.
If there are no Employee Benefit Plan investors in the Company, the Company anticipates that investments by Other Benefit Arrangements (such as self-directed IRAs) may exceed the Twenty Five Percent (25%) limit. This situation may cause the underlying assets of the Company to be considered plan assets for purposes of the Code prohibited transaction rules. In such a case, the Other Benefit Arrangement investors must ensure that their investments do not constitute prohibited transactions under Section 4975 of the Code. Such investors should consult with independent legal counsel on these issues.
Special Limitations
The discussion of the ERISA fiduciary aspects and the ERISA and Code prohibited transaction rules contained in this Offering Circular is not intended as a substitute for careful planning. The applicability of ERISA fiduciary rules and the ERISA or Code prohibited transaction rules to Investors may vary from one Investor to another, depending upon that Investor’s situation. Accordingly, Investors should consult with their own attorneys, accountants and other personal advisors as to the effect of ERISA and the Code on their situation of a purchase and ownership of the Membership Interests and as to potential changes in the applicable law.
SUMMARY OF THE OPERATING AGREEMENT
The following is a summary of the Operating Agreement, and is qualified in its entirety by the terms of the Operating Agreement itself. In the event of any conflict, misunderstanding or ambivalence between, or resulting from, the summary below and the actual terms of the Operating Agreement, the latter shall govern. Potential investors are urged to carefully read the entire Operating Agreement, which is set forth as Exhibit A to this Offering Circular.
Accounting and Reports
Annual reports concerning the Company’s business affairs, including the Company’s annual income tax return, will be provided to Members who request them in writing. Each Member will receive his, her, or its respective K-1 Form as required by applicable law. The Manager may, at its sole and absolute discretion, designate any person or entity to outside provide tax and accounting advice to the Company, at any time and for any reason.
The Manager presently intends to maintain the Company’s books and records on the accrual basis for bookkeeping and accounting purposes, and also intends to use the accrual basis method of reporting income and losses for federal income tax purposes. The Manager reserves the right to change such methods of accounting upon written notice to Members. Any Member may inspect the books and records of the Company at reasonable times.
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Membership Interests
As set forth in the Operating Agreement, “Membership Interests” represent a Member’s interests in the Company. Membership Interests do not represent any fixed or absolute percentage interest representing ownership in the Company, but instead Membership Interests represent a fluctuating percentage interest in the Company. The amount of any Member’s actual percentage interest at any time representing ownership in the Company shall generally be determined at such time by the amount of such Member’s capital account balance divided by the total amount of all Members’ capital account balances outstanding (it being understood that each Member’s Membership Interests (and corresponding percentage interest in the Company) outstanding may fluctuate and change from time to time)
Allocations of profit, gain and loss in the Company are made, as required by law, in proportion to the Members’ respective capital accounts. Voting rights are based upon the number of Membership Interests each Member owns.
Voting Rights
Members will have very limited voting rights. Members do not elect or vote on the Manager, except as otherwise set forth in the Operating Agreement, and not have any voting rights on matters affecting the Company’s business, and therefore limited ability to influence decisions regarding the Company’s business.
Other Governance Matters
The Operating Agreement vests most other decisions relating to the assets and to the business the Company, including decisions relating to acquisitions, originations and dispositions, the issuance of additional Membership Interests, and other decisions relating to the Company’s business, in the Manager.
Compensation to Manager and Affiliates
The Company will compensate the Manager and Affiliates as described in “Manager’s Compensation” herein above.
Manager’s Tenure
The Manager may withdraw from the management of the Company at any time upon Thirty (30) days’ written notice to all Members. However, a successor manager of the Company may only be elected by the Members. The Members may also remove the Manager if: (1) the Manager commits an act of fraud or willful misconduct which materially adversely damages the Company, and (2) the holders of at least a majority of the outstanding Membership Interests vote in favor of such removal.
Distributions
The Company will make distributions of income as described in the “Terms of the Offering – Preferred Return, Cash Distributions, Election to Reinvest”.
Operating Expenses
The Company shall pay its own general administrative and operating expenses, which may include, without limitation, legal expenses, accounting costs for the Company, and/or marketing expenses. It shall reimburse the Manager for any expenses incurred by the Manager that are properly considered ordinary and reasonable business expenses of the Company (and the Manager’s administrative and/or operating expenses). This operating expense reimbursement fee will be calculated as of the first day of the month with regards to the aggregate capital in the Company as of that day and paid out as of the first day of the following month.
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Profits and Losses
The Company’s profit or loss for any taxable year, including the taxable year in which the Company is dissolved, will be allocated among the Members in proportion to their capital account balances that they held during the applicable tax reporting period.
Restrictions on Transfer
The Operating Agreement places limitations upon transferability of Membership Interests. Any transferee must be a person that would have been qualified to purchase a Membership Interests in this Offering. No Membership Interests may be transferred if, in the sole judgment of the Manager, a transfer would jeopardize the availability of exemptions from the registration requirements of federal securities laws, jeopardize the tax status of the Company as a limited liability company taxed as a partnership, or cause a termination of the Company for federal income tax purposes.
A transferee may not become a substitute Member without the consent of the Manager. Such consent may not be unreasonably withheld if the transferor and the transferee comply with all the provisions of the Operating Agreement and applicable law. A transferee who does not become a substitute Member has no right to vote in matters brought to a vote of the Members, or to receive any information regarding the Company or to inspect the Company books, but is entitled only to the share of income or return of capital to which the transferor would be entitled.
Rights and Liabilities of Members
The rights, duties and powers of Members are governed by the Operating Agreement and applicable Idaho corporate and business law, and the discussion herein of such rights, duties and powers is qualified in its entirety by reference to them.
Investors who become Members in the manner set forth herein will not be responsible for the obligations of the Company. They may be liable to repay capital returned to them plus interest if necessary, to discharge liabilities existing at the time of such return. Any cash distributed to Members may constitute, wholly or in part, return of capital.
Rights, Powers and Duties of Manager
Subject to the right of the Members to vote on specific matters, the Manager will have complete charge of the business of the Company. The Manager is not required to devote itself full-time to Company affairs but only such time as is required for the conduct of the business of the Company. The Manager has the power and authority to act for and bind the Company. The Manager is granted the special power of attorney of each Member for the purpose of executing any document which the Members have agreed to execute and deliver.
Company Brought to Close
The Company will not cease to exist immediately upon the occurrence of an event of dissolution, but will continue to exist until its affairs have been brought to a close. Upon dissolution of the Company, the Manager will bring to a close the Company’s affair by liquidating the Company’s assets as promptly as is consistent with obtaining the fair market value thereof, either by sale to third parties or by collecting loan payments under the terms of the loan(s) until a suitable sale can be arranged. All funds received by the Company shall be applied to satisfy or provide for Company debts and liabilities and the balance, if any, shall be distributed to Members on a pro-rata basis.
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Redemption Policy and Other Events of Disassociation
The Manager may, at its sole and absolute discretion, cause the Company to repurchase Membership Interests from Members desiring to resign from membership or as a part of a plan to reduce the outstanding capital of the Company. There is no guarantee that the Company will have sufficient funds to cause the redemption of any Membership Interests. Therefore, any investment in the Company should be considered illiquid.
The Company may also expel a Member for cause if the Member has materially breached or is unable to perform the Member’s material obligations under the Operating Agreement. A Member’s expulsion from the Company will be effective upon the Member’s receipt of written notice of the expulsion by the Company.
Upon any expulsion, transfer of all of Membership Interests, withdrawal or resignation of any Member, an event of disassociation shall have occurred and (a) the Member’s right to participate in the Company’s governance, receive information concerning the Company’s affairs and inspect the Company’s books and records will terminate and (b) unless such disassociation resulted from the transfer of the Member’s Membership Interests, the Member will be entitled to receive the distributions to which the Member would have been entitled as of the effective date of the dissociation had the dissociation not occurred. The Member will remain liable for any obligation to the Company that existed prior to the effective date of the dissociation, including, without limitation, any costs or damages resulting from the Member’s breach of the Operating Agreement. Under most circumstances, the Member will have no right to any return of his or her capital prior to the termination of the Company unless the Manager elects, at its sole and absolute discretion, to return capital to a Member.
The effect of redemption or disassociation on Members who do not sell or return their Membership Interests will be an increase in each Member’s respective percentage interest in the Company and therefore an increase in each Member’s respective proportionate interest in the future earnings, losses and distributions of the Company and an increase in the respective relative voting power of each remaining Member. Notwithstanding anything to the contrary herein, redemption shall be at the sole and absolute discretion of the Manager and the Manager shall not be compelled to redeem or repurchase Membership Interests at any time or for any reason.
The redemption of Membership Interests shall be subject to the Company’s availability of sufficient cash to pay the expenses of the Company, maintain any loan loss reserve and pay the redemption or withdrawal amounts to other Members who requested withdrawal or redemption in the order of the request. No redemption may be made that would render the Company unable to pay its obligations as they become due. The Company shall not be required to sell its assets to raise cash to effectuate any redemption.
A redeeming Member shall have the rights of a transferee until such time as the Company has actually redeemed those Membership Interests, that is, the Member shall be entitled to receive distributions, but shall not be entitled to vote. Redeemed Membership Interests revert to authorized but unissued Membership Interests and the former holder retains no interest of any kind in such Membership Interests.
The Manager has retained Geraci Law Firm of Irvine, California to advise it in connection with the preparation of this Offering, the Operating Agreement, the Subscription Agreement and any other documents related thereto. Geraci Law Firm has not been retained to represent the interests of any Investors or Members in connection with this Offering. Investors that are evaluating or purchasing Membership Interests should retain their own independent legal counsel to review this Offering, the Offering Circular, the Operating Agreement, the Subscription Agreement and any other documents related to this Offering, and to advise them accordingly.
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ADDITIONAL INFORMATION AND UNDERTAKINGS
The Company and Manager undertake to make available to each Investor every opportunity to obtain any additional information from them necessary to verify the accuracy of the information contained in this Offering Circular, to the extent that they possess such information or can acquire it without unreasonable effort or expense. This additional information includes all the organizational documents of the Company, recent financial statements for the Company and all other documents or instruments relating to the operation and business of the Company that are material to this Offering and the transactions described in this Offering Circular.
Pursuant to the requirements of Regulation A, as amended, the Company certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form 1-A and has duly caused this Offering Circular and the correlating Offering Statement to be signed on its behalf, by the undersigned, thereunto duly authorized, in the city of Irvine, California.
CIRCLE OF WEALTH FUND III LLC | ||
By: | /s/ Lee Aaron Arnold | |
Lee Aaron Arnold, President and CEO of Secured Investment Corp., | ||
Manager |
Date: May 15, 2019
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PART III - Exhibit List
Contents
INDEX TO FINANCIAL STATEMENTS | F-1 |
INDEPENDENT AUDITOR'S REPORT | F-2 |
BALANCE SHEET AS OF DECEMBER 31, 2018 | F-3 |
NOTES TO BALANCE SHEET | F-4 |
APPENDIX A: PAST PERFORMANCE TABLES | F-5 |
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INDEPENDENT AUDITOR'S REPORT
Financial statements for Circle of Wealth Fund III LLC were audited by Armanino LLP as of and for the period ended December 31, 2018. The Independent Auditors’ Report is available for review on Page 3 of Audited Financials in Exhibit C.
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BALANCE SHEET AS OF DECEMBER 31, 2018
Financial statements for Circle of Wealth Fund III LLC were audited by Armanino LLP as of and for the period ended December 31, 2018. The balance sheet for Circle of Wealth Fund III LLC are incorporated on page 4 of the Audited Financial included herein as Exhibit C.
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NOTES TO FINANCIAL STATEMENTS
Financial statements for Circle of Wealth Fund III LLC were audited by Armanino LLP as of and for the period ended December 31, 2018. The notes to financial statements for Circle of Wealth Fund III LLC are incorporated from pages 7-12 of the Audited Financial included herein as Exhibit C.
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APPENDIX A: PAST PERFORMANCE TABLES
The following prior performance tables provide information relating to the SIHYF Funds managed by Secured Investment Corp.. The SIHYF Funds are Two (2) separate and independent real estate companies that have been raising capital pursuant to Rule 506(c) of Regulation D of the Securities Act of 1933, as amended. The SIHYF Funds have similar investment objectives as that of the Company, in that, SIHYF Funds were formed in order to acquire, own, develop, hold, manage, sell, transfer or otherwise dispose of real estate assets, primarily loans secured by real property.
As of March 31, 2019, the total assets under management for the SIHYF Funds are $11,352,597 with a total number of accredited investors at 63. The sponsor and its affiliates are responsible for loan origination, due diligence, structuring, closing, acquiring, and asset management of all real property acquisition and loans made by the SIHYF Funds.
As of December 31, 2018, SIHYF Funds have originated approximately 1,140 real estate loans and/or real property acquisition with aggregate asset values of approximately $96 million, consisting primarily of non-owner occupied single family residential or multi-family properties secured loans.
This information should be read together with the summary information included in the “Prior Performance Summary” section of the Offering Circular.
Investors should not construe inclusion of the following tables as implying, in any manner, that we will have results comparable to those reflected in such tables. Distributions made by the Company, federal income tax deductions or other factors could be substantially different. Investors should note that by acquiring the Company’s Membership Interests, they will not be acquiring any interest in any prior program.
Description of the Tables
The information contained in Tables I and II in this Index are as of March 31, 2019. The rest of the information contained in Tables III through V in this Index are as of December 31, 2018. The following tables are included herein:
Table I — Experience in Raising and Investing Funds
Table II — Compensation to Sponsor
Table III — Operating Results of Prior Programs
Table VI — Table of Acquisition
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TABLE I
EXPERIENCE IN RAISING AND INVESTING FUNDS
(UNAUDITED)
Table I presents information showing the experience of the Sponsor in raising and investing funds for the prior as of March 31, 2019.
Secured Investment High Yield Fund, LLC |
Secured Investment High Yield Fund II, LLC | |||||||
Dollar Amount Offered [a] | $ | 10,000,000 | $ | 10,000,000 | ||||
Amount Raised as of 12/31/17 [b] | $ | 3,217,600 | $ | 8,134,997 | ||||
Date Original Offering Began | 04/25/2013 | 10/01/2014 | ||||||
Length of Offering (In Months) [c] | 13 | [d] | ongoing |
[a] The amount represents the maximum amount offered to the accredited investors pursuant to Rule 506(c) of Regulation D.
[b] Represents the dollar amount raised in private placements.
[c] Represents the shorter of (i) number of months the offering had been available as of 03/31/2019 or (ii) number of months that the offering was available before concluding upon completion.
[d] SIHYF had ceased raising capital in 2014, and the figure presented represents the length of the capital raise. SIHYF is currently undergoing dissolution and has ceased its business operations.
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TABLE II
COMPENSATION TO SPONSOR
(UNAUDITED)
Table II presents information showing the compensation paid to the Sponsor by the SIHYF and SIHYF II as of March 31, 2019.
Secured Investment High Yield Fund, LLC | Secured Investment High Yield Fund II, LLC | ||||||
Date original offering commenced | 04/25/2013 | 10/01/2014 | |||||
Dollar amount raised | 3,217,600 | 8,134,997 | |||||
Amount paid to sponsor from proceeds of offering: | |||||||
Underwriting fees | 0 | 0 | |||||
Acquisition fees | 0 | 0 | |||||
Real estate commissions | 0 | 0 | |||||
Advisory fees | 0 | 0 | |||||
Other | 0 | 0 | |||||
Other | 0 | 0 | |||||
Amounts paid to sponsor from operations: | |||||||
Origination fees [a] | 1,407,733 | 2,119,550 | |||||
Asset management fees | 222,082 | 311,114 | |||||
Selling Expenses [b] | 24,716 | 154,613 | |||||
Property management fees [c] | 98,576 | 321,968 | |||||
Reimbursements | 36,597 | 26,700 | |||||
Profits (performance fees) | 301,252 | 513,002 | |||||
Loan servicing fees [d] | 11,112 | 19,028 | |||||
Other | 0 | 0 | |||||
Dollar amount of property sales and refinancing before deducting payments to sponsor | |||||||
Cash | 0 | 0 | |||||
Notes | 0 | 0 | |||||
Amount paid to sponsor from property sales and refinancing: | |||||||
Real estate commissions | 0 | 0 | |||||
Incentive fees | 0 | 0 | |||||
Other | 0 | 0 |
[a] This number is comprised of total origination fees paid by third party borrowers to Manager as of March 31, 2019.
[b] This number is comprised of expenses and fees for listing properties for sale by an Affiliate and/or the Manager as of March 31, 2019.
[c] This number is comprised of total property management fee paid to an Affiliate and/or the Manager as of March 31, 2019.
[d] This number is comprised of total loan servicing fees that have been paid to the Manager under the fictitious business name of Lake City Servicing as of March 31, 2019.
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TABLE III
OPERATING RESULTS OF PRIOR PROGRAMS
(AUDITED)
Table III sets forth the operating results of the SIHYF Funds for the years ending in December 31, 2018, 2017, and 2016. SIHYF is currently undergoing liquidation event. Statement of Net Assets in Liquidation of Prior Programs ending in December 31, 2018, is stated below.
Secured Investment High Yield Fund, LLC (Audited) | |||||||||
2017 | 2016 | ||||||||
SUMMARY BALANCE SHEET | |||||||||
Total assets | $ | 2,418,701 | $ | 2,535,816 | |||||
Total liabilities | 36,110 | 83,724 | |||||||
Total members' equity | 2,382,591 | 2,452,092 | |||||||
SUMMARY OPERATING RESULTS | |||||||||
Total revenues | 348,650 | 445,348 | |||||||
Operating expense | 300,312 | 339,489 | |||||||
Operating income | 48,338 | 105,859 | |||||||
Other income (expense)[a] | (31,322 | ) | 9,541 | ||||||
Net income (GAAP Basis) | 17,016 | 115,400 | |||||||
SUMMARY STATEMENTS OF CASH FLOWS | |||||||||
Net cash provided by (used in) operating activities | (28,506 | ) | 295,991 | ||||||
Net cash provided by (used in) investing activities | (316,178 | ) | 325,549 | ||||||
Net cash provided by (used in) financing activities[b] | (86,517 | ) | (278,724 | ) | |||||
AMOUNT AND SOURCE OF DISTRIBUTIONS | |||||||||
Total cash distributions paid and distributions reinvested | — | ||||||||
Distribution Data | |||||||||
Total Distributions paid to investors | $ | — | $ | — | |||||
From operations | $ | — | $ | — | |||||
From all other sources (financing or offering proceeds) | $ | — | $ | — | |||||
Estimated value per share | N/A | N/A | |||||||
[a] Other income (expense) from loss on sales of real estate owned (“REO”).
[b] Net cash provided by (used in) financing activities are Members’ earnings distributions.
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STATEMENT OF NET ASSETS IN LIQUIDATION OF PRIOR PROGRAMS
(AUDITED)
Secured Investment High Yield Fund, LLC 2018 | ||||
STATEMENT OF NET ASSETS IN LIQUIDATION | ||||
Total assets | $ | 565,852 | ||
Total liabilities | 116,807 | |||
Net assets in liquidation | 449,045 | |||
STATEMENT OF LIQUIDATING ACTIVITIES | ||||
Total sources of cash | 280,607 | |||
Total uses of cash | 354,915 | |||
Total other gains (losses) [a] | (94,272 | ) | ||
Decrease in net assets in liquidation before adjustments | (168,580 | ) | ||
Total adjustments to net realizable values [b] | (259,078 | ) | ||
Members’ liquidating distributions | ||||
Decrease in net assets in liquidation | (427,658 | ) | ||
Beginning net assets in liquidation | 2,382,591 | |||
Members’ liquidating distributions | (1,505,888 | ) | ||
Net Assets in liquidation | 449,045 | |||
[a] Other income (expense) includes gain on sales of REO properties or loss on sale of mortgage loan receivables.
[b] Total adjustments to net realizable values includes adjustments to mortgage loans receivable and real estate owned for sale.
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Secured Investment High Yield Fund II, LLC (Audited) | |||||||||||||
2018 | 2017 | 2016 | |||||||||||
SUMMARY BALANCE SHEET | |||||||||||||
Total assets | $ | 7,192,555 | $ | 6,272,736 | $ | 3,828,880 | |||||||
Total liabilities | 571,658 | 713,084 | 381,764 | ||||||||||
Total members' equity | 6,620,897 | 5,559,652 | 3,447,116 | ||||||||||
SUMMARY OPERATING RESULTS | |||||||||||||
Total revenues | 1,302,048 | 845,350 | 581,492 | ||||||||||
Operating expense | 519,211 | 328,589 | 235,681 | ||||||||||
Operating income (loss) | - | - | - | ||||||||||
Other income (expense) [a] | - | - | - | ||||||||||
Net income (loss) (GAAP Basis) | 782,837 | 516,761 | 345,811 | ||||||||||
SUMMARY STATEMENTS OF CASH FLOWS | |||||||||||||
Net cash provided by (used in) operating activities | 574,258 | 99,568 | 257,730 | ||||||||||
Net cash provided by (used in) investing activities | (153,755) | (2,838,267) | (1,288,855) | ||||||||||
Net cash provided by (used in) financing activities [b] | 79,314 | 1,959,821 | 1,776,588 | ||||||||||
AMOUNT AND SOURCE OF DISTRIBUTIONS | |||||||||||||
Total cash distributions paid and distributions reinvested | (677,248) | (463,679) | (273,412) | ||||||||||
Distribution Data | |||||||||||||
Total Distributions paid to investors | $ | $ | $ | - | |||||||||
From operations | $ | - | $ | - | $ | - | |||||||
From all other sources (financing or offering proceeds) | $ | (667,248) | $ | (463,679) | $ | (273,412) | |||||||
Estimated value per share | $ | N/A | $ | N/A | N/A |
[a] Other income (expense) from loss on sales of real estate owned (“REO”).
[b] Net cash provided by (used in) financing activities are Members’ earnings distributions, Member contributions, net borrowings (payments) on line of credit, and Member withdrawals.
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TABLE VI
ACQUISITION OF ASSETS
(UNAUDITED)
Table VI sets forth summary information on the properties held by the prior SIHYF Funds as of March 31, 2019.
Property Location | Fund Name | Property Type | Date of Purchase |
Date Paid Off or Sold |
# of Units |
Mortgage Financing at Date of Purchase* (USD$) |
Washington | SIHYF II | SFR | 04/24/2015 | 1 | 33,733.50 | |
Washington | SIHYF II | SFR | 10/02/2015 | 1 | 85,500 | |
Washington | SIHYF II | SFR | 10/02/2015 | 6/14/2016 | 1 | 140,000 |
Washington | SIHYF II | SFR | 11/6/2015 | 2/22/2016 | 1 | 135,000 |
Washington | SIHYF II | SFR | 11/30/2015 | 6/28/2016 | 1 | 74,600 |
Washington | SIHYF II | SFR | 12/11/2015 | 2/1/2016 | 1 | 46,001 |
Washington | SIHYF II | SFR | 3/11/2016 | 8/5/2016 | 1 | 61,996 |
Washington | SIHYF II | SFR | 3/11/2016 | 7/13/2016 | 1 | 130,000 |
Washington | SIHYF II | SFR | 3/11/2016 | 4/22/2016 | 1 | 60,800 |
Washington | SIHYF II | SFR | 4/22/2016 | 9/16/2016 | 1 | 158,000 |
Washington | SIHYF II | SFR | 7/1/2016 | 8/23/2016 | 1 | 197,800 |
Washington | SIHYF II | SFR | 8/26/2016 | 11/21/2016 | 1 | 74,000 |
Washington | SIHYF II | SFR | 9/2/2016 | 2/23/2017 | 1 | 130,200 |
Washington | SIHYF II | SFR | 9/23/2016 | 06/16/2017 | 1 | 100,001 |
Washington | SIHYF II | SFR | 10/14/2016 | 04/20/2018 | 1 | 54,500 |
Washington | SIHYF II | SFR | 10/14/2016 | 12/22/2016 | 1 | 62,000 |
Washington | SIHYF II | SFR | 11/4/2016 | 05/25/2017 | 1 | 175,600 |
Washington | SIHYF II | SFR | 11/4/2016 | 1/30/2018 | 1 | 159,696 |
Washington | SIHYF II | SFR | 1/6/2017 | 03/28/2017 | 1 | 25,216 |
Washington | SIHYF II | SFR | 1/13/2017 | 06/23/2017 | 1 | 110,000 |
Washington | SIHYF II | SFR | 1/13/2017 | 10/25/2018 | 1 | 130,000 |
Washington | SIHYF II | SFR | 1/27/2017 | 05/12/2017 | 1 | 119,200 |
Washington | SIHYF II | SFR | 2/3/2017 | 3/17/2017 | 1 | 106,000 |
Washington | SIHYF II | SFR | 2/16/2017 | 7/28/2017 | 1 | 151,000 |
Washington | SIHYF II | SFR | 2/24/2017 | 9/18/2018 | 1 | 136,500 |
Washington | SIHYF II | SFR | 3/3/2017 | 2/15/2018 | 1 | 64,000 |
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Washington | SIHYF II | SFR | 4/21/2017 | 11/16/2017 | 1 | 117,400 |
Washington | SIHYF II | SFR | 4/21/2017 | 6/22/2017 | 1 | 80,300 |
Washington | SIHYF II | SFR | 4/21/2017 | 6/6/2018 | 1 | 139.100 |
Pennsylvania | SIHYF | SFR | 4/21/2017 | 8/14/2018 | 1 | 88.346 |
Washington | SIHYF II | SFR | 6/2/2017 | 1/17/2018 | 1 | 169,801 |
Washington | SIHYF II | SFR | 6/23/2017 | 3/6/2018 | 1 | 137,500 |
Washington | SIHYF II | SFR | 8/25/2017 | 10/27/2017 | 1 | 157,300 |
Washington | SIHYF | SFR | 9/22/2017 | 4/13/2018 | 1 | 124,782 |
Washington | SIHYF | SFR | 1/19/2018 | 2/22/2018 | 1 | 70,570 |
Washington | SIHYF | SFR | 1/19/2018 | 1/19/2018 | 1 | 58,375 |
Washington | SIHYF | SFR | 2/23/2018 | 3/29/2018 | 1 | 135,300 |
Washington | SIHYF | SFR | 3/9/2018 | 7/16/2018 | 1 | 152,967.65 |
Washington | SIHYF II | SFR | 4/13/2018 | 8/1/2018 | 1 | 120,500 |
Washington | SIHYF II | SFR | 4/13/2018 | 7/2/2018 | 1 | 142,600 |
Washington | SIHYF | SFR | 4/13/2018 | 5/8/2018 | 1 | 68,001 |
Washington | SIHYF II | SFR | 5/11/2018 | 5/18/2018 | 1 | 53,601 |
Washington | SIHYF | SFR | 5/16/2018 | 5/31/2018 | 1 | 125,000 |
Washington | SIHYF II | SFR | 6/1/2018 | 11/1/2018 | 1 | 95,100 |
Washington | SIHYF II | SFR | 6/15/2018 | 2/28/2019 | 1 | 130,500 |
Washington | SIHYF II | SFR | 6/29/2018 | 12/11/2018 | 1 | 120,001 |
Washington | SIHYF II | SFR | 7/25/2018 | 12/14/2018 | 1 | 117,500 |
Washington | SIHYF II | SFR | 8/27/2018 | 9/5/2018 | 1 | 40,001 |
Washington | SIHYF II | SFR | 9/5/2018 | 11/9/2018 | 1 | 103,616 |
Washington | SIHYF II | SFR | 10/19/2018 | 12/14/2018 | 1 | 147,603 |
Washington | SIHYF II | SFR | 10/26/2018 | 1 | 77,185 | |
Washington | SIHYF II | SFR | 11/2/2018 | 12/31/2018 | 1 | 87,001 |
Washington | SIHYF II | SFR | 11/2/2018 | 1 | 55,001 | |
Washington | SIHYF II | SFR | 11/20/2018 | 1/11/2019 | 1 | 101,447 |
Washington | SIHYF II | SFR | 11/26/2018 | 2/28/2019 | 1 | 105,652 |
Washington | SIHYF II | SFR | 12/13/2018 | 1 | 123,864 | |
Washington | SIHYF II | SFR | 12/21/2018 | 1 | 126,400 | |
Washington | SIHYF II | SFR | 1/17/2019 | 1 | 85,797 | |
Washington | SIHYF II | SFR | 1/25/2019 | 2/27/2019 | 1 | 75,601 |
Washington | SIHYF II | SFR | 2/8/2019 | 1 | 188,203 | |
Washington | SIHYF II | SFR | 2/15/2019 | 1 | 107,000 | |
Washington | SIHYF II | SFR | 2/22/2019 | 3/1/2019 | 1 | 187,000 |
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Washington | SIHYF II | SFR | 2/22/2019 | 1 | 93,000 | |
Washington | SIHYF II | SFR | 3/1/2019 | 1 | 128,001 | |
Washington | SIHYF II | SFR | 3/8/2019 | 1 | 67,900 | |
Washington | SIHYF II | SFR | 3/8/2019 | 1 | 140,500 | |
Washington | SIHYF II | SFR | 3/8/2019 | 1 | 191,600 | |
Washington | SIHYF II | SFR | 3/15/2019 | 1 | 134,000 | |
Washington | SIHYF II | SFR | 3/29/2019 | 1 | 180,000 | |
Washington | SIHYF II | SFR | 1 | 111,998 |
* Originated investment represents a senior secured loan.
* Originated investment represents a senior secured loan.
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Exhibit A-1
Exhibit A-2
LIMITED LIABILITY COMPANY OPERATING AGREEMENT
of
CIRCLE OF WEALTH FUND III LLC
An Idaho limited liability company
This Limited Liability Company Operating Agreement (the “Agreement”) of CIRCLE OF WEALTH FUND III LLC, an Idaho limited liability company (the “Company” or “Fund”), is by and among Secured Investment Corp., a Wyoming corporation (the “Initial Member” or “Manager”), and each additional Person who becomes a Member in accordance with the provisions of this Agreement. Any capitalized terms used herein but not defined herein shall have the meaning ascribed to them in the Offering Circular dated February 12, 2019, as amended from time to time (the "Offering Circular").
RECITALS |
The Company is a limited liability company formed under the Idaho Uniform Limited Liability Company Act, Tit. 30, Ch. 25, et seq., as amended. The parties to this Agreement are the Initial Member and those additional Persons who are subsequently admitted as Members in accordance with the provisions of this Agreement. The parties intend by this Agreement to define their rights and obligations with respect to the Company’s governance and financial affairs and to adopt regulations and procedures for the conduct of the Company’s activities. Accordingly, for good and valuable consideration, the receipt and sufficiency of which is mutually acknowledged, the parties agree as follows:
ARTICLE 1: DEFINITIONS
1.1Scope. For purposes of this Agreement, unless the language or context clearly indicates that a different meaning is expressed or intended, all capitalized terms used herein have the meanings specified in this Article 1.
1.2Defined Terms.
(a) “Act” means the Idaho Uniform Limited Liability Company Act, Tit. 30, Ch. 25, et seq., as amended.
(b) “Affiliate,” with respect to a Person, means (1) a Person that, directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with the Affiliate, (2) a Person who owns or controls at least Ten Percent (10%) of the outstanding voting interests of the Affiliate, (3) a Person who is an officer, director, manager or general partner of the Affiliate, or (4) a Person who is an officer, director, manager, general partner, trustee or owner of at least Ten Percent (10%) of the outstanding voting interests of an Affiliate described in clauses (1) through (3) of this sentence.
(c) “Agreement” means this Agreement, including any subsequent amendments thereto.
(d) “Bankruptcy” means the filing of a petition seeking liquidation, reorganization, arrangement, readjustment, protection, relief or composition in any state or federal bankruptcy, insolvency, reorganization or receivership proceeding.
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(e) “Capital Account” of a Member means the capital account maintained for such Member. The balance of the Capital Account of a Member, determined as set forth in Section 4.6 below, shall herein be referred to as the “Capital Account Balance.”
(f) “Certificate” means the Certificate of Formation filed with the Secretary of State to organize the Company as a limited liability company, including any subsequent amendments thereto.
(g) “Code” means the Internal Revenue Code of 1986, as amended from time to time.
(h) “Contribution” means anything of value that a Member contributes to the Company as a prerequisite for, or in connection with, membership including (without limitation) any combination of cash, property, services rendered, a promissory note or any other obligation to contribute cash or property or render services.
(i) “Dissociation” means a complete termination of a Member’s membership in the Company due to an event described in Article 3 hereof.
(j) “Distribution” means the Company’s direct or indirect transfer of money or other property to a Member with respect to a Membership Interest.
(k) “Effective Date” means the date on which the Company’s existence as a limited liability company begins, as prescribed by the Act.
(l) “Entity” means an association, relationship or artificial person through or by means of which an enterprise or activity may be lawfully conducted, including, without limitation, a partnership, trust, limited liability company, corporation, joint venture, cooperative or association.
(m) “ERISA” means the Employee Retirement Income Security Act of 1974, as amended from time to time, and any successor thereto.
(n) “Family,” with respect to a Member, means any individual(s) who are related to the Member by blood, marriage or adoption. For the purposes of this definition, an individual is related to the Member by marriage if the person is related by blood or adoption to the Member’s current spouse.
(o) “Initial Member” means the persons identified above as the Initial Member.
(p) “Majority” means more than Fifty Percent (50%) of the outstanding Membership Interests in the Company.
(q) “Manager” means a Person who is vested with authority to manage the Company in accordance with Article 5 hereof.
(r) “Member” means any Initial Member or any Person who is admitted as an additional or a substitute Member after the Effective Date, in accordance with Article 3 hereof.
(s) “Membership Interest” means a Member’s percentage interest in the Company. A Member’s ownership percentage in the Company, which consists of the Member’s right to share in profits, receive Distributions, participate in the Company’s governance and approve the Company’s acts under Article 5.4 hereof, participate in the designation and removal of the Manager and receive information pertaining to the Company’s affairs. A Member’s ownership percentage in the Company shall equal to a Member’s Capital Account balance divided by the aggregate Capital Account balance of all Members (it being understood that such ownership percentage may fluctuate and change from time to time). Changes in Membership Interests after the Effective Date, including, but not limited to, those changes necessitated by the admission and Dissociation of Members, will be reflected in the Company’s records. The allocation of Membership Interests as reflected in the Company’s records from time to time is presumed to be correct for purposes of this Agreement and the Act.
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(t) “Minimum Gain” means minimum gain as defined in Sections 1.704-2(b)(2) and 1.704-2(d) of the Regulations.
(u) “Net Profits” means the Company’s monthly gross income less (1) the Company’s monthly operating expenses (including payment of outstanding debt (if any), administrative costs, legal expenses and accounting fees) (2) an allocation of income for a loan loss reserve; and (3) payment of the Asset Management Fee and any other fees to the Manager.
(v) “Net Assets Under Management” means the total Company assets, including notes (at book value), real estate owned (at the lower of cost or fair market value), accounts receivable, advances made to protect loan security, unamortized organizational expenses, cash and any other Company assets, less Company liabilities. The Asset Management Fee will typically be paid on the last day of each calendar month with respect to the Net Assets Under Management as of last day of such monthly.
(w) “Offering Circular” shall mean the Offering Circular of the Company, dated as of February 12, 2019, as amended from time to time.
(x) “Permitted Transferee,” with respect to a Member, means another Member, a member of the Member’s Family, or a trust for the benefit of the Member or a member of the Member’s Family.
(y) “Person” means a natural person or an Entity.
(z) “Profit,” as to a positive amount, and “Loss,” as to a negative amount, mean, for a Taxable Year, the Company’s income or loss for the Taxable Year, as determined in accordance with accounting principles appropriate to the Company’s method of accounting and consistently applied.
(aa) “Regulations” means proposed, temporary or final regulations promulgated under the Code by the U.S. Department of the Treasury, as amended from time to time.
(bb) “Servicer” refers to the servicer of the Company Loans.
(cc) “Subscription Agreement” means the Subscription Agreement included as Exhibit B to the Offering Circular.
(dd) "Taxable Year” means the Company’s taxable year as determined in Article 6 hereof.
(ee) “Transfer,” as a noun, means a transaction or event by which ownership of any Membership Interest is changed or encumbered, including, without limitation, a sale, exchange, abandonment, gift, pledge or foreclosure. “Transfer,” as a verb, means to affect a Transfer.
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(ff) “Transferee” means a Person who acquires any Membership Interest by Transfer from a Member or another Transferee not admitted as a Member in accordance with Article 3 hereof.
ARTICLE 2: THE COMPANY
2.1Status. The Company is a limited liability company organized in the State of Idaho under the Act.
2.2 Name. The name of the Company is CIRCLE OF WEALTH FUND III LLC.
2.3 Term. The Company’s existence as a limited liability company will commence on the Effective Date and continue until dissolved herein pursuant to Article 7 below, unless sooner dissolved or terminated under the Act or as described herein.
2.4Purpose. The purpose of the Company is to engage in any lawful act or activity for which a limited liability company may be organized under the Act; provided that, subject to the foregoing, the Company presently intends to raise money through the offering of Membership Interests (the “Offering”) in order to: (i) make, fund, originate, refinance, purchase, sell and/or otherwise acquire loans (“Loans”) secured by first or junior position deeds of trust or mortgages on non-owner occupied residential and commercial properties located throughout the United States; and (ii) acquire, develop, rehabilitate, and/or hold and/or sell non-owner occupied residential real estate located throughout the United States.
2.5Principal Place of Business. The Company’s principal place of business is located at: 701 E. Front Avenue, Floor 2, Coeur d’Alene, ID 83814.
2.6Registered Agent and Registered Office. The Company’s registered office in the State of Idaho is located at: 701 E. Front Avenue, Floor 2, Coeur d’Alene, ID 83814, and its registered agent at that location is Daniel L. Wise. The Company may change its registered agent or registered office at any time for any reason (or no reason).
2.7Qualification in Other Jurisdictions. The Manager may cause the Company to be qualified or registered in any jurisdiction in which the Company transacts business and shall be authorized to execute, deliver and file any certificates and documents necessary to effect such qualification or registration.
ARTICLE 3: MEMBERSHIP
3.1Identification.
(a) Members. A Person shall be admitted as a Member and shall become bound by the terms of this Agreement if such Person purchases or otherwise lawfully acquires Membership Interests in accordance with the provisions of this Agreement and the Offering Circular. A Person may become a Member only with the consent and approval of the Manager, whose consent may be denied or withheld in its sole and absolute discretion. The Manager will be the Initial Member of the Company. Upon admission of additional Members, the Manager may withdraw as a Member of the Company, but shall continue to serve as Manager. in addition, nothing contained herein shall be deemed to prohibit the Manager from increasing its interest in the Company on the same basis as any other Person. The Company is authorized to issue an unlimited number of Membership Interests, all of which shall be issued in accordance with the provisions of the Offering Circular and Article 3 of this Agreement.
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(b) Additional and Substitute Members. The Company may admit additional or substitute Members with the sole approval of the Manager. Except as set forth herein, the Manager may withhold approval of the admission of any Person for any or no reason. The Manager will not permit any person to become a member until such person has agreed to be bound by all the provisions of this Operating Agreement as amended as of the date of the proposed admission, and the terms of the Offering Circular, and has delivered to the Company a completed Subscription Agreement along with payment in the amount of such investment.
(c) Rights of Additional or Substitute Members. A Person admitted as an additional or substitute Member has all the rights and powers, and is subject to all the restrictions and obligations of a Member under this Agreement and the Act.
(d)General Rights of Members. Except to the extent expressly provided in this Agreement: (i) no Member shall be entitled to the withdrawal or return of its Capital Contribution, except to the extent, if any, that distributions made pursuant to this Agreement or upon dissolution or termination of the Company may be considered as such by law and then only to the extent provided for in this Agreement; (ii) no Member shall have priority over any other Member as to the return of Capital Contributions or as to distributions, unless as set forth in this Agreement; and (iii) no Member, in its capacity as such, shall participate in the operation or management of the business of the Company, transact any business in the Company’s name or have the power to sign documents for or otherwise bind the Company by reason of being a Member.
3.2Restrictions on Transfer.
(a) Restrictions on Transfer. A Member may Transfer his, her or its Membership Interest only in compliance with this Article 3. Restrictions have been placed upon the ability of all Members to resell or otherwise dispose of any Membership Interest obtained or acquired hereunder including, without limitation, the following:
(1)The Membership Interests have not been registered with the Securities and Exchange Commission under the Securities Act of 1933, as amended (the "Act"), in reliance upon the exemptions provided under Regulation A Tier II promulgated thereunder.
(2)There is no public market for the Membership Interests and none is expected to develop in the future. Even if a potential buyer could be found, Membership Interests may not be resold or transferred without satisfying certain conditions designed to comply with applicable tax and securities laws. A transferee must meet the same investor qualifications as the Members admitted during the Offering. Any potential buyer must be capable of bearing the economic risks of this investment with the understanding that Membership Interests may not be liquidated by resale or redemption and should expect to hold their Membership Interests as a long-term investment.
(b) Null and Void. An attempted Transfer of all or a portion of a Membership Interest that is not in compliance with this Article will be null and void. No Membership Interest may be transferred if, in the judgment of the Manager, a transfer would jeopardize the availability of exemptions from the registration requirements of federal securities laws, jeopardize the tax status of the Company as a limited liability company or, cause a termination of the Company for federal income tax purposes.
(c) Permitted Transfers. A Member may at any time Transfer one or more Membership Interests to a Permitted Transferee if, as of the date the Transfer takes effect, the Company is reasonably satisfied that all of the following conditions are met:
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(1) The Member has obtained the prior written consent of the Manager; whose consent may be denied or withheld, in its sole and absolute discretion;
(2) the conditions listed above have been met;
(3) the Transferee is a person with the same qualifications as the original Member;
(4) the Transfer, alone or in combination with other Transfers, will not result in the Company's termination for federal income tax purposes;
(5) the Transfer is the subject of an effective registration under, or exempt from the registration requirements of, applicable state and federal securities laws;
(6) the Company receives from the Transferee the information and agreements reasonably required to permit it to file federal and state income tax returns and reports; and
(d) Transferor’s Membership Status. If a Member Transfers less than all of his, her, or its Membership Interest, the Member’s rights with respect to the transferred portion of the Membership Interest, including the right to vote or otherwise participate in the Company’s governance and the right to receive Distributions, will terminate as of the effective date of the Transfer. However, the Member will remain liable for any obligation with respect to the transferred portion that existed prior to the effective date of the Transfer, including (without limitation) any costs or damages resulting from the Member’s breach of this Agreement. If the Member Transfers all of his, her or its Membership Interest, the Transfer will constitute an event of Dissociation.
(e) Transferee’s Status.
(1) Admission as a Member. A Member who Transfers one or more Membership Interests has no power to confer on the Transferee the status of a Member. A Transferee may be admitted as a Member only in accordance with the provisions of this Article. A Transferee who wishes to become a Member must make application in writing to the Company and provide evidence, as requested by the Company, of compliance with all conditions to admission, as set forth above. Prior to admission, each proposed member must execute and deliver a counterpart of this Agreement, as amended to date, or a separate written agreement to be bound hereby.
(2) Rights of Non-Member Transferee. A Transferee who is not admitted as a Member in accordance with the provisions of this Article: (i) has no right to vote or otherwise participate in the Company's governance; (ii) is not entitled to receive information concerning the Company's affairs or inspect the Company's books and records; (iii) with respect to the transferred Membership Interests, is entitled to receive the Distributions to which the Member would have been entitled had the Transfer not occurred; and (iv) is subject to the restrictions imposed by this Article to the same extent as a Member. Any provision of the Agreement permitting or requiring the Members to take action by vote or written approval of a specified percentage of the Membership Interests shall be deemed to mean only Membership Interests then owned by Members.
3.3Redemptions and Withdrawals. Members will be required to hold their Membership Interests for a minimum of Twelve (12) months before they may request to withdraw from the Company and have their Membership Interests redeemed. Thereafter, a Member may request withdrawal from the Company and give at least Ninety (90) days’ prior written notice prior to the Manager. The Company will use its best efforts to return capital subject to, among other things, the Company’s then cash flow, financial condition, and prospective investments in assets. Furthermore, any Member requesting redemption will be responsible for any third-party costs incurred in effecting such redemption, including but not limited to, bank transaction charges, custody fees, and/or transfer agent charges (as applicable).
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A Member's redemption request shall specify the amount the Member requests to withdraw and shall be subject to the Manager's approval. While the Company intends to allow Members to request redemptions on an ongoing basis, the Company has imposed limitations on the amount of individual redemption requests per calendar quarter in order to maintain liquidity to satisfy redemption requests without impacting the Company’s ability to invest in Loans and properties. Accordingly, each request for withdrawal or redemption shall be limited to Twenty-Five Percent (25%) of such Member’s withdrawal request such that it will take at least Four (4) quarters for a Member to withdraw the requested amount; provided, however, that the maximum aggregate amount of capital that the Company will return to the Members each fiscal year is limited to Ten Percent (10%) of the total outstanding capital of the Company. Withdrawal requests will be processed by the Company on a first-come, first-served basis.
The above requirements regarding the withdrawal amount and the timing of any specific withdrawal may be modified by the Manager, in its sole and absolute discretion, based on, amongst other things, the Company's current cash flow, the amount of the Company's reserves, and the Company's then-current financial condition.
The Manager may at any time suspend the withdrawal of funds from the Company, upon the occurrence of any of the following circumstances: (i) whenever, as a result of events, conditions or circumstances beyond the control or responsibility of the Manager or the Company, disposal of the assets of the Company is not reasonably practicable without being detrimental to the interests of the Company or its Members, determined in the sole and absolute discretion of the Manager; (ii) it is not reasonably practicable to determine the net asset value of the Company on an accurate and timely basis; or (iii) if the Manager has determined to dissolve the Company. Notice of any suspension will be given within Ten (10) business days from the time the decision was made to suspend distributions to any Member who has submitted a withdrawal request and to whom full payment of the redemption proceeds has not yet been remitted. If a redemption request is not rescinded by a Member following notification of a suspension, the redemption will be effected as of the last day of the calendar month in which the suspension is lifted, on the basis of the net asset value of the Company at that time and in the order determined by the Manager in its sole and absolute discretion
3.4 Expulsion of a Member. At any time there are more than Two (2) Members, the Company may expel a Member, but only for cause. Cause for expulsion exists if the Member has materially breached this Agreement, is unable to perform the Member's material obligations under this Agreement, or if the Manager suspects the Member has violated federal or state law, rules, and regulations or the Member is under investigation by the federal, state, and/or local authorities, subject to the sole and absolute discretion and notwithstanding any of the withdrawal restrictions described herein. If a Member is expelled, that Member forfeits any and all rights to any accrued distribution during the interim quarter whether or not the withdrawal is partial or total. A Member's expulsion from the Company will be effective upon the Member's receipt of written notice of the expulsion.
3.5Return of Capital. Subject to the terms contained herein, the Company may return all or a portion of a Member's capital at the Manager's discretion. Any such return of capital would not be considered a Distribution and would not be included in the determination of such Member's return on investment. However, any such return of capital would reduce the Member’s Membership Interest in the Company. Thus, if Manager elects to return all of Member’s capital, Member shall no longer be a Member in the Company and the Member would be considered to have withdrawn or to have elected redemption from the Company.
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3.6Upon Dissociation. Dissociation from the Company occurs upon a Member’s expulsion, transfer or redemption of all of the Member’s Membership Interests, withdrawal or resignation (an “Event of Dissociation”). Upon the occurrence of an Event of Dissociation: (1) the Member's right to participate in the Company's governance, receive information concerning the Company's affairs and inspect the Company's books and records will terminate; and (2) unless the Dissociation resulted from the Transfer of the Member's Membership Interests, the Member will be entitled to receive the Distributions to which the Member would have been entitled as of the effective date of the Dissociation had the Dissociation not occurred. The Member will remain liable for any obligation to the Company that existed prior to the effective date of the Dissociation, including any costs or damages resulting from the Member's breach of this Agreement. Under most circumstances, the Member will have no right to any return of his or her capital prior to the termination of the Company unless the Manager elects to return capital to a Member. The effect of such Dissociation on the remaining Members who do not sell will be to increase their percentage share of the remaining assets of the Company, and thus their proportionate share of its future earnings, losses and Distributions. The reduction in the outstanding Membership Interests will also increase the relative voting power of remaining Members.
3.7Verification of Membership Interest. Within Thirty (30) days after receipt of a Member's written request, the Company will provide such Member with a statement evidencing his, her, or its Membership Interest in the Company.
3.8Manner of Action by Members.
(a)Meetings.
(1) Right to Call. The Manager, or any combination of Members holding in the aggregate more than Seventy-Five Percent (75%) of the total outstanding Membership Interest, may call a meeting of Members by giving written notice to all Members and the Manager not less than Thirty (30), or more than Sixty (60) days prior to the date of the meeting. The notice must specify the date, time and place of the meeting and the nature of any business to be transacted. A Member may waive notice of a meeting of Members orally, in writing, or by attendance at the meeting.
(2) Time and Place. Unless otherwise specified in the notice of meeting, all meetings shall be held at 2:00 p.m. on a regular business day of the Company, at the Company's principal place of business. No meeting may be held on a Sunday or legal holiday; at a time that is before 7:30 a.m. or after 9:00 p.m.; or at a place more than Sixty (60) miles from the Company's principal place of business.
(3) Proxy Voting. A Member may act at a meeting of Members through a Person authorized by signed proxy.
(4) Quorum. Members whose aggregate holdings exceed a Majority of the outstanding Membership Interest will constitute a quorum at a meeting of Members. No action may be taken in the absence of a quorum.
(5) Required Vote. Except with respect to matters for which a greater minimum vote is required by the Act or this Agreement, the vote of Members present whose aggregate holdings exceed a Majority of the outstanding Membership Interests will constitute the act of the Members at a meeting of Members.
(b) Written Consent. The Members may act without a meeting by written consent describing the action and signed by Members whose aggregate holdings of the Membership Interest equal or exceed the minimum that would be necessary to take the action at a meeting at which all Members were present.
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3.9Limitation on Individual Authority. A Member who is not also the Manager has no authority to bind the Company. A Member whose unauthorized act obligates the Company to a third party will indemnify the Company for any costs or damages the Company incurs as a result of the unauthorized act.
3.10Negation of Fiduciary Duties. A Member who is not also the Manager owes no fiduciary duties to the Company or to the other Members solely by reason of being a Member.
3.11Obligations and Liabilities of the Company. Excepted as otherwise provided in the Act, the debts, obligations, and liabilities of the Company, whether arising in tort, contract, or otherwise, shall be solely the debts, obligations and liabilities of the Company, and the Members shall not be obligated personally for any such debt, obligations, or lability of the Company solely by reason of being a Member.
3.12ERISA Considerations. The Manager intends to limit the equity participation by “benefit plan investors” (as defined in Section 3(42) of ERISA) in the Company to less than Twenty-Five Percent (25%) of Membership Interests in the Company, to the extent required.
3.13Redemptions in Connection with ERISA. Notwithstanding any provision contained herein to the contrary, upon demand by the Manager, the Company shall redeem any or all of the Membership Interests held any by Member in order for the Company to remain exempt from the ERISA plan asset regulations.
ARTICLE 4: FINANCE
4.1Contributions.
(a) Initial Member. The Manager will be the Initial Member of the Company. The Capital Contributions made to the Company by the Members are set forth on Schedule 1 to this Agreement. The Company will amend Schedule 1 from time to time to reflect additional Capital Contributions made to the Company.
(b) Additional Members. The Company may admit additional or substitute Members with the sole approval of the Manager. Except as set forth herein, the Manager may withhold approval of the admission of any Person for any or no reason. The Manager will not permit any person to become a member until such person has agreed to be bound by all the provisions of this Agreement as amended as of the date of the proposed admission, and the terms of the Offering Circular, and has delivered to the Company a completed Subscription Agreement along with payment in the amount of such investment. Members’ subscription funds will be deposited to the operating bank account of the Company and Membership Interests will be issued to such Members.
(c) Additional Contributions. The Company may authorize additional Contributions at such times and on such terms and conditions as it determines to be in its best interest. Absent the Company's authorization, no Member is permitted to make additional Contributions.
(d)Contributions Not Interest Bearing. A Member is not entitled to interest or other compensation with respect to any cash or property the Member contributes to the Company.
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4.2Allocation of Profit and Loss. After giving effect to special allocations, if any, the Company's Profit or Loss for a Taxable Year, including the Taxable Year in which the Company is dissolved, will be allocated among the Members in proportion to their Capital Account Balances during the applicable tax reporting period.
4.3 Tax Allocations. For federal income tax purposes, unless the Code otherwise requires, each item of the Company's income, gain, loss or deduction will be allocated to the Members in proportion to their allocations of the Company's Profit or Loss.
4.4Distributions.
(a)The Preferred Return. Members will generally be eligible to receive a non-cumulative annualized preferred return (the “Preferred Return”) on their investment, calculated and payable at the end of each month (and prorated as applicable for the amount of time that a Member was a member of the Company during such month). The Preferred Return will be payable prior to any profit participation by the Manager (however, all expenses and fees other than profit participation will be paid to the Manager and any allocation of income for a loan loss reserve will be made prior to the distribution of the Preferred Return). The Preferred Return for any Member shall be equal to an annualized rate of Six Percent (6%), calculated and payable on a monthly basis. All Preferred Returns shall be distributed after payment of all expenses and fees and to the extent that cash is available, and provided that such distribution will not impact the continuing operations of the Company, as determined by the Manager in its sole and absolute discretion. If the Company is unable to pay to Members the full Preferred Return in any accounting period, the shortfall shall neither cumulate nor compound into the following accounting period, and the Company shall not be required to pay the shortfall in any succeeding accounting period.
In addition, in the event that the Company does not have funds available to pay the Preferred Return, the payment of the Preferred Return may be delayed until such funds are available, at the sole and absolute discretion of the Manager.
(b)Distribution of Net Profits. Any Net Profits in excess of the Preferred Return shall be distributed to Members on a monthly basis (and pro-rated for the amount of time that a Member was a member of the Company) as follows: Fifty Percent (50%) of the Net Profits of the Company shall be distributed to the Members on a pro-rata basis, and the remaining Fifty Percent (50%) of the Net Profits of the Company shall be distributed to the Manager. Net Profits shall only be distributed to the extent cash is available and provided that said distributions will not impact the continuing operation of the Company, subject to the sole and absolute discretion of the Manager.
(c)Each Member has the option of receiving cash distributions for his, her or its share of the earnings of the Company that is payable to the Member, or having such amount(s) credited to his, her or its Capital Account and reinvested in the Company to increase such Member’s Membership Interest. However, notwithstanding the foregoing, the Manager reserves the right to commence making cash distributions at any time to any Member(s) in order for the Company to remain exempt from the ERISA plan asset regulations.
(d)By the end of the Company's fiscal year, the Manager will make every effort to have distributed to each Member the amount of Profit or Loss that will be allocated to that Member on the Schedule K-1 that he, she, or it receives for income tax reporting. However, the amount of income reported to each Member on his, her, or its Schedule K-1 may differ somewhat from the actual cash Distributions made during the fiscal year covered by the Schedule K-1 due to, among other things the loan loss reserve and factors unique to the tax accounting of limited liability companies, such as the treatment of investment expense.
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4.5 Reinvestment Election. Members must elect to (a) receive cash with respect to the monthly income distributions from the Company in the amount of that Member’s share of cash available for distribution, including the Preferred Return due to the Member, or (b) allow the reinvestment through purchase of additional Membership Interests with respect to the monthly income distributions from the Company in the amount of that Member’s share of cash available for distribution, including the Preferred Return due to the Member. Members must elect to receive cash or reinvest all of their monthly income distributions, including their Preferred Returns. No partial reinvestment is permitted. If no election is made, then the monthly income distribution and a Preferred Return will be automatically reinvested into the Company to purchase additional Membership Interests.
Notwithstanding the foregoing, reinvestments will be allowed to the extent that the Offering is qualified with the SEC and provided that such reinvestments do not exceed the offering amount that may be sold in any given Twelve (12) month period in accordance with Regulation A, Tier II requirements.
Members may change their election at any time upon Thirty (30) days written notice to the Company. Upon receipt and after the Thirty (30) day notice has occurred, the Member’s election shall be changed and reflected on the following first day of the month in which the Member is entitled to receive a distribution. Notwithstanding the preceding sentences, the Manager may at any time immediately commence with income distributions in cash only (hence, suspending the reinvestment option for such Member(s)) to any Member(s) in order for the Company to remain exempt from the ERISA plan asset regulations.
4.6Capital Accounts.
(a) General Maintenance. The Company will establish and maintain a Capital Account for each Member. A Member's Capital Account Balance will be:
(1) increased by: (i) the amount of any money the Member contributes to the Company's capital; and (ii) the Member's share of the Company’s Profits and any separately stated items of income or gain; and
(2) decreased by: (i) the amount of any money the Company distributes to the Member; and (ii) the Member's share of the Company’s Losses and any separately stated items of deduction or loss.
(b) Transfer of Capital Account. A Transferee of Membership Interests succeeds to the portion of the transferor's Capital Account that corresponds to the portion of the Membership Interest that is the subject of the Transfer.
(c) Compliance with Code. The requirements of this Article are intended and will be construed to ensure that the allocations of the Company's income, gain, losses, deductions and credits have substantial economic effect under the Regulations promulgated under Section 704(b) of the Code.
ARTICLE 5: MANAGEMENT
5.1 Representative Management. The Company will be managed by One (1) Manager. By execution of this Agreement, and without prejudice to the right of the Members to remove the Manager as set forth in Article 5, the Initial Members and each Person hereafter admitted as a Member, other than Transferees, shall be deemed to have elected such Manager. The initial manager of the Company shall be: Secured Investment Corp., a Wyoming corporation.
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5.2Time Devoted to Business. The Manager will devote to the Company’s activities the amount of time reasonably necessary to discharge the Manager’s responsibilities.
5.3Powers and Authority.
(a) General Scope. Except for matters on which the Members’ approval is required by the Act or this Agreement, the Manager has full power, authority and discretion to manage and direct the Company’s business, affairs and properties, including the specific powers referred to in paragraph (b), below.
(b) Specific Powers.
(1) The Manager is authorized on the Company's behalf to make all decisions as to (i) the development, sale, lease or other disposition of the Company's assets; (ii) the origination and purchase of loans or any other assets of all kinds; (iii) the acquisition, purchase, leasing, and/or sale of properties or any other assets of all kinds; (iv) the management of all or any part of the Company's assets and business; (v) the borrowing of money and the granting of security interests in the Company's assets (including loans from Members) as, and only if, provided for in the Offering Circular; (vi) the prepayment, refinancing or extension of any mortgage affecting the Company's assets; (vii) the compromise or release of any of the Company's claims or debts; (viii) the employment of Persons for the operation and management of the Company's business; and (ix) all elections available to the Company under any federal or state tax law or regulation.
(2) The Manager on the Company's behalf may execute and deliver (i) all contracts, conveyances, assignments, leases, subleases, franchise agreements, licensing agreements, management contracts and maintenance contracts covering or affecting the Company's assets; (ii) all checks, drafts and other orders for the payment of the Company's funds; (iii) all loan documents including, without limitation, promissory notes, mortgages, deeds of trust, security agreements and other similar documents; (iv) all articles, certificates and reports pertaining to the Company's organization, qualification and dissolution; (v) all tax returns and reports; and (vi) all other instruments of any kind or character relating to the Company's affairs.
5.4Required Member Approval. Except as specifically provided herein, without the approval of the Members holding a Majority of the issued and outstanding Membership Interests, the Company may not take any action with respect to: (a) the Company's merger with or conversion into another Entity; (b) causing the Company to incur debt which would exceed the amount provided for in the Offering Circular; or (c) a transaction, not expressly permitted by this Agreement or Offering Circular, involving a conflict of interest between the Manager and the Company
5.5Duties of Manager.
(a) Fiduciary Duty. The Manager shall have fiduciary responsibility for the safekeeping and use of all funds and assets of the Company, whether or not in the Manager's possession or control. Except as expressly permitted herein, or by subsequent approval of the Members, the Manager shall not employ, or permit another to employ Company funds or assets in any manner except for the exclusive benefit of the Company.
(b) Standard of Care.
(1) Exculpation. The Manager will not be liable to the Company or any Member for an act or omission done in good faith to promote the Company's best interests, unless the act or omission constitutes gross negligence, fraud, bad faith, intentional misconduct, or a knowing violation of law.
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(2) Justifiable Reliance. The Manager may rely on the Company's records maintained in good faith and on information, opinions, reports or statements received from any Person pertaining to matters the Manager reasonably believes to be within the Person's expertise or competence.
(c)Competing Activities. The Manager may participate in any business or activity without accounting to the Company or the Members. Each Member waives the benefit of the corporate opportunity doctrine, on his or her own behalf and on behalf of the Company, and agrees that the Manager may deal in other real estate transactions for its own account and/or for the accounts of others without any requirement to account to the Company for such dealings.
(d)Self-Dealing. In addition to the transactions expressly permitted by this Agreement, the Manager may enter into business transactions with the Company if the terms of the transaction are no less favorable to the Company than those of a similar transaction with an independent third party, including without limitation selling loans to, and buying loans from, the Company.
(e)Specific Transactions. Without limiting the generality of the foregoing, it is hereby acknowledged and agreed that the Manager shall be permitted to bargain for and accept the following transactions connected with the business of the Company, subject to the terms of any other agreement among the Members.
(1)Loan Origination Fees and Lender Discount Points. Origination and lender discount points (“Origination Fees”) are generally collected from borrowers by the Manager, as Cogo Capital on behalf of the Fund. Origination Fee will be shared between the Manager and the Company, as further outlined below. Origination Fees consist of loan processing fees, underwriting fees, document preparation fees, escrow fees, disbursement fees, warehousing fees, administration fees and other similar charges. In addition, the Manager reserves the right to modify the Origination Fee at any time for any reason (or no reason), without Members’ consent, based upon changes in prevailing market rates charged by the Company’s competitors.
(2) Loan Servicing. The Company presently anticipates that all Company Loans will be serviced (i.e., loan payments collected and other services relating to the loan) by the Manager operating under the fictitious business name of Lake City Servicing (in its capacity as Servicer), who shall be entitled to a fee for servicing the Company Loans. Notwithstanding the foregoing, the Manager may, at its sole and absolute discretion, appoint an Affiliate or third-party loan servicer to service the Company Loans. To the extent that it is applicable, the Manager will oversee the activities and performance of the Servicer.
(3) Purchase of Existing Loans. When the Company purchases an existing loan (or pool of loans) from a third party, the Manager or Affiliate will be paid a fee comparable to a loan Origination Fee.
(4) Loan Extension and Modification Fees. Loan extension and modification fees (collectively referred to as “Extension Fees”) are collected from borrower and payable to the Manager, as part of the Manager’s compensation, as outlined below.
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(5) Loan Processing, Loan Documentation, and Other Similar Fees. Loan processing, documentation and other similar fees are collected from the borrower and payable to the Manager at prevailing industry rates as part of the Manager’s compensation.
(6) Default Fees. Default fees in the amount of Five Hundred Dollars ($500) paid by borrowers will be payable to the Manager in its capacity as Servicer.
(7) Late Fees and Late Charges. Late fees and late charges paid by borrowers will be shared between the Company and the Manager, as outlined below.
(8) Other Loan Fees. All fees paid by borrowers on account of the Loans will be payable to the Manager doing business as Lake City Servicing, including, but not limited to, all forbearance fees, collection fees, prepayment penalties, default interest, and all other similarly related fees incurred by borrowers (including, but not limited to, other fees authorized by loan documents for work performed regarding the subject Loan). In addition, beneficiary statements and pay-off demands, overnight charges, non-sufficient funds (“NSF”) fees, reconveyance fees, advancing fees, demand fees, and other similarly related fees incurred by borrowers will also be payable to the Manager under the fictious business name of Lake City Servicing, as set forth in Section 5.7 below.
(9) Rehabilitation Fees. In the event the Company acquires ownership of distressed real property, whether through foreclosure or otherwise, the Company may decide to rehabilitate the property to lease and/or sell. To rehabilitate the property, the Company will primarily retain the services of Arnold Professional Holdings, Inc., an Idaho corporation (“Arnold Professional Holdings”). Arnold Professional Holdings is an Affiliate of the Manager, and is licensed, bonded, and insured as a general contractor in Washington. Notwithstanding the foregoing, the Company may, at its sole discretion, retain the services of a third-party general contractor, and such cost of rehabilitation will be an expense to the Company.
(10) Real Estate Commissions. In the event the Company acquires ownership of any real property, whether by foreclosure or otherwise, and the Manager decides to sell it, the Manager or its Affiliates, including The Lee Arnold Tea, LLC, shall be allowed to broker the sale and receive real estate commissions (“Real Estate Commissions”) from the Company. In addition, the Manager may pay a referral fee ranging from Twenty Percent (20%) to Forty Percent (40%) of the Real Estate Commissions paid to the Manager to third party sales agents for properties where the Manager does not presently operate in.
(11) Property Management. In the event that the Company acquires any real property, the Manager may cause the Company to engage a third party to provide property management services with respect to such real property, or may elect to provide such services itself (or through an Affiliate of the Manager).
(12) Reimbursement of Business Expenses. The Company shall pay its own general administrative and operating expenses, which may include, without limitation, legal expenses, accounting costs for the Company, and/or marketing expenses. It shall reimburse the Manager for any expenses incurred by the Manager that are properly considered ordinary and reasonable business expenses of the Company (and the Manager’s administrative and/or operating expenses). This operating expense reimbursement fee will be calculated as of the first day of the month with regards to the aggregate capital in the Fund as of that day and paid out as of the first day of the following month.
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5.6Indemnification of Manager. Except as limited by law, the Company shall indemnify the Manager for all expenses (including, without limitation, legal fees and costs), losses, liabilities and damages the Manager actually and reasonably incurs in connection with the defense or settlement of any action arising out of or relating to the conduct of the Company's activities, except an action with respect to which the Manager is adjudged to be liable for fraud, bad faith, willful misconduct, and/or breach of a fiduciary duty owed to the Company or the Members under the Act or this Agreement. Therefore, Members may have a more limited right of action than they would have absent these provisions in the Operating Agreement. The Company shall advance the costs and expenses of defending actions against the Manager arising out of or relating to the management of the Company, provided it first receives the written undertaking of the Manager to reimburse the Company if ultimately found not to be entitled to indemnification. A successful indemnification of the Manager or any litigation that may arise in connection with the Manager’s indemnification could deplete the assets of the Company. Members who believe the Manager has engaged in conduct resulting in fraud, willful misconduct, bad faith, or breach of the Manager’s fiduciary duty, should consult with their own legal counsel.
5.7Compensation to Manager and Affiliates. The Company will compensate the Manager as follows for services rendered to or on behalf of the Company:
(a) Asset Management Fee. The Manager shall earn an annual asset management fee (“Asset Management Fee”) of One and Three-Quarters of One Percent (1.75%) of Net Assets Under Management, calculated and payable monthly. The Asset Management Fee will typically be paid on the last day of each calendar month with respect to the Net Assets Under Management as of last day of such month.
(b) Profit Participation. The Manager shall participate in the distribution of any excess Net Profits as follows: after distribution of the Preferred Return to the Members, the Manager shall receive Fifty Percent (50%) of all Net Profits on a monthly basis.
(c) Loan Origination Fees and Lender Discount Points. At closing of the Loan Origination Fee are collected from borrowers by the Manager in the amount of Nine Hundred and Ninety-seven Dollars ($997) for every Three Hundred Thousand Dollars ($300,000) principal Loan amount. Origination Fees shall be shared between the Manager and Fund as follows: Eighty Percent (80%) of Origination Fees will be payable to the Manager and Twenty Percent (20%) of the fees will be payable to the Company. The Manager reserves the right to modify the Origination Fee at any time for any reason (or no reason), without Members’ consent, based upon changes in prevailing market rates charged by the Company’s competitors.
(d) Purchase of Existing Loans. When the Company purchases an existing loan (or pool of loans) from a third party, the Manager or Affiliate will be paid a fee comparable to a loan Origination Fee.
(e) Loan Servicing Fee. At closing of the Loan the borrower will pay directly to the Manager as a closing cost: Two Hundred Dollars ($200) servicing set-up fee (one-time fee) and a non-refundable fee equal to Fifteen Dollars ($15) multiplied by the number of months of the term of the Loan. The Company will not receive any of the servicing fees paid by borrowers at closing. The Company will pay Manager the following loan servicing fee to service the loan during the life of the loan: (i) Twenty Dollars ($20), payable monthly, if the principal amount of the Loan is less than $500,000.00; or (ii) Thirty Dollars ($30), payable monthly, if the principal amount of the Loan is equal to or greater than $500,000.00. While the aggregate fee payable by the Company is listed above, this fee may vary from loan to loan. In addition, if the Manager decides to retain the services of a third-party loan servicing company, the loan servicing fee may vary from the one listed herein.
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(f) Loan Extension and Modification Fees. Extension Fees are collected from borrowers and payable to the Manager. Extension Fess are in the amount of Two Hundred and Fifty Dollars ($250) for a three-month extension of the Loan term; Five Hundred Dollars ($500) for a six-month extension of the Loan term; and One Thousand Dollars ($1,000) for One (1) year extension. Notwithstanding the foregoing, Extension Fees could be higher or lower depending on market rates and conditions.
(g) Loan Processing, Loan Documentation, and other Similar Fees. Loan processing fees, document preparation fees and other similar fees collected from the borrower shall be payable to the Manager at prevailing industry rates as part of the Manager’s Compensation.
(h) Default Fees. Default fees in the amount of Five Hundred Dollars ($500) paid by borrowers will be payable to the Manager in its capacity as Servicer.
(i) Late Fees and Late Charges. Late fees and late charges paid by borrowers will be shared between the Company and the Manager as follows: Fifty Percent (50%) of the late fees and charges will be payable to the Company and Fifty Percent (50%) of the late fees and charges will be payable to the Manager.
(j) Other Loan Fees. All fees paid by borrowers on account of the Loans will be payable to the Manager doing business as Lake City Servicing, including, but not limited to, all forbearance fees, collection fees, prepayment penalties, default interest, and all other similarly related fees incurred by borrowers (including, but not limited to, other fees authorized by loan documents for work performed regarding the subject Loan). In addition, beneficiary statements and pay-off demands (Fifty Dollars ($50) per request), overnight charges, non-sufficient funds (“NSF”) fees of One Hundred Dollars ($100), reconveyance fees of Thirty Five Dollars ($35), advancing fees, demand fees, and other similarly related fees incurred by borrowers will also be payable to the Manager under the fictious business name of Lake City Servicing.
(k) Rehabilitation Fees. In the event the Company acquires ownership of distressed real property, the Company may decide to rehabilitate the property to lease and/or sell. To rehabilitate the property, the Company will primarily retain the services of Arnold Professional Holdings, Inc., an Idaho corporation (“Arnold Professional Holdings”). Arnold Professional Holdings is an Affiliate of the Manager, and is licensed, bonded, and insured as a general contractor in Washington. Arnold Professional Holdings will provide general construction services to the Company, including repairing, renovation, or improvement of the property, and shall be entitled to a fee based on the prevailing industry rate, as agreed between the Manager and Arnold Professional Holdings. Notwithstanding the foregoing, the Company may, at its sole discretion, retain the services of a third-party general contractor, and such cost of rehabilitation will be an expense to the Company.
(l) Real Estate Commissions. The Manager or its Affiliates may earn real estate commissions (“Real Estate Commissions”) to list and sell real estate that the Company has acquired through foreclosure or otherwise. The Manager or its Affiliates, including The Lee Arnold Team, LLC, may generally earn up to Six percent (6%) of such a sale. In addition, the Manager may pay a referral fee ranging from Twenty Percent (20%) to Forty Percent (40%) of the Real Estate Commissions paid to the Manager to third party sales agents for properties located in states where the Manager does not presently operate in.
(m) Property Management Fee. The Manager may cause the Company to engage a third party to provide property management services with respect to properties acquired by the Company, or may elect to provide such services itself (or through an Affiliate of the Manager). In the event that the Manager (or an Affiliate thereof) provides any such property management services, the Company shall pay the Manager or its applicable Affiliate a market-rate property management fee.
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(n) Reimbursement of Expenses.
(i) Organization and Formation Expenses. The Manager has agreed to pay for all legal costs associated with the organization of the Offering. Notwithstanding the foregoing, the Company intends to reimburse the Manager for any non-legal organization and Offering costs and expenses incurred on behalf of the Company, which are approximately Ten Thousand Dollars ($10,000).
(ii) Operating Expenses. The Company shall pay its own general administrative and operating expenses, which may include, without limitation, legal expenses, accounting costs for the Company, and/or marketing expenses. It shall reimburse the Manager for any expenses incurred by the Manager that are properly considered ordinary and reasonable business expenses of the Company. This operating expense reimbursement fee will be calculated as of the first day of the month with regards to the aggregate capital in the Fund as of that day and paid out as of the first day of the following month.
(i) The Company will bear the cost of the annual tax preparation of the Company's tax returns, any state and federal income tax due, and any required independent audit reports required by agencies governing the business activities of the Company.
(j) The definition of Manager’s Fees includes all the fees described in “Compensation to Manager and Affiliates”.
(k) The Manager may, but has no obligation to, defer all or a portion of the Manager’s Fees. In such event, the Manager will be entitled to recover the deferred fees at a later time within the same calendar year only.
5.8Tenure.
(a) Term. The Manager will serve until the earlier of (1) the Manager’s resignation; (2) the Manager’s removal; (3) as to a Manager who is a natural person, the Manager’s death or adjudication of incompetency; and (4) as to a Manager that is an Entity, the Manager’s dissolution. In any such event, Members representing a Majority of the Membership Interest outstanding shall promptly elect a successor as Manager; provided, however if the then Manager desires to appoint an Affiliate as the new Manager, then such Affiliate may become the Manager without Member approval.
(b) Resignation. The Manager at any time may resign by written notice delivered to the Members at Thirty (30) days prior to the effective date of the resignation. Members may elect a replacement Manager with a Majority vote, provided, however if the then Manager desires to appoint an Affiliate as the new Manager, then such Affiliate may become the Manager without Member approval.
(c) Removal. The Members may remove the Manager if: (1) the Manager is convicted or found liable for an act of gross negligence or fraud which materially lowers the net asset value of the Company, and (2) the holders of at least a Majority of the outstanding Membership Interests vote in favor of such removal. A successor manager of the Company may only be elected by the Members, provided that if the then-current Manager appoints an Affiliate as the successor Manager then no vote or consent of the Members shall be required unless expressly mandated by applicable Idaho law.
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ARTICLE 6: RECORDS AND ACCOUNTING
6.1Maintenance of Records.
(a) Required Records. The Company will maintain, at its registered office in Idaho, such books, records and other materials as are reasonably necessary to document and account for its activities, including without limitation, those required to be maintained by the Act.
(b) Member Access. A Member and the Member's authorized representative will have reasonable access to, and may inspect and copy, all books, records and other materials pertaining to the Company or its activities so long as it does not violate another member’s right to privacy or confidentiality. The exercise of such rights will be at the requesting Member's expense.
(c) Confidentiality. No Member or Manager will disclose any information relating to the Company or its activities to any unauthorized person or use any such information for his or her or any other Person's personal gain.
6.2Financial Accounting.
(a) Accounting Method. The Company will account for its financial transactions using the accrual basis method of accounting. The Manager reserves the right to change such methods of accounting upon written notice to Members.
(b) Taxable Year. The Company's Taxable Year is the calendar year.
6.3Reports.
(a) Members. Annual reports concerning the Company’s business affairs, including the Company’s annual income tax return, will be provided to Members who request them in writing. Each Member will receive his, her, or its respective K-1 Form as required by applicable law. The Manager may, at its sole and absolute discretion, designate any Person to provide tax and accounting advice to the Company, at any time and for any reason.
(b) Periodic Reports. The Company will complete and file any periodic reports required by the Act or the law of any other jurisdiction in which the Company is qualified to do business.
6.4Tax Compliance.
(a) Withholding. If the Company is required by law or regulation to withhold and pay over to a governmental agency any part or all of a Distribution or allocation of Profit to a Member:
(1) the amount withheld will be considered a Distribution to the Member; and
(2) if the withholding requirement pertains to a Distribution in kind or an allocation of Profit, the Company will pay the amount required to be withheld to the governmental agency and promptly take such action as it considers necessary or appropriate to recover a like amount from the Member, including offset against any Distributions to which the Member would otherwise be entitled.
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(b) Tax Matters Partner. The Manager, or a Person designated by the Manager, shall act as the "Tax Matters Partner" pursuant to Section 6231(a)(7) of the Code. The Tax Matters Partner will inform the Members of all administrative and judicial proceedings pertaining to the determination of the Company's tax items and will provide the Members with copies of all notices received from the U.S. Internal Revenue Service regarding the commencement of a LLC-level audit or a proposed adjustment of any of the Company's tax items. The Tax Matters Partner may extend the statute of limitations for assessment of tax deficiencies against the Members attributable to any adjustment of any tax item. The Company will reimburse the Tax Matters Partner for reasonable expenses properly incurred while acting within the scope of the Tax Matters Partner's authority.
ARTICLE 7: DISSOLUTION
7.1Events of Dissolution. The Company will continue until (a) dissolved herein pursuant to Article 7 below, unless sooner dissolved or terminated under the Act or as described herein; (b) the sale or other disposition of all or substantially all the assets of the Company; (c) any event that makes the Company ineligible to conduct its activities as a limited liability company under the Act; or (d) otherwise by option of law.
7.2Effect of Dissolution.
(a) Appointment of Liquidator. Upon the Company's dissolution, the Manager (unless unwilling or unable to serve as such) shall serve as liquidator, and as such will wind up and liquidate the Company in an orderly, prudent and expeditious manner in accordance with the following provisions of this Article. While serving as liquidator, the Manager shall have the same authority, powers, duties and compensation as before dissolution, except that the liquidator shall not acquire any additional assets for the Company, and shall use its best efforts to liquidate the Company's existing assets as rapidly as is consistent with receiving the fair market value thereof. If the Manager is unwilling or unable to serve as liquidator, or has resigned or been removed, the Members shall elect another person, who may be a Member, to serve as liquidator.
(b) Distributions Upon Dissolution. The Company will not cease to exist immediately upon the occurrence of an event of dissolution, but will continue until its affairs have been wound up. Upon dissolution of the Company, the Manager will wind up the Company’s affairs by liquidating the Company's assets as promptly as is consistent with obtaining the fair market value thereof, either by sale to third parties or by collecting loan payments under the terms of the loan(s) until a suitable sale can be arranged. All funds received by the Company shall be applied to satisfy or provide for Company debts and liabilities and the balance, if any, shall be distributed to Members on a pro-rata basis.
(c) Time for Liquidation. The Company will not immediately cease to exist upon the occurrence of an event causing its dissolution, but will continue until its affairs have been wound up. It is acknowledged and agreed that the assets of the Company are illiquid, and will take time to sell. The liquidator shall liquidate the Company's assets as promptly as is consistent with obtaining the fair market value thereof, either by sale to third parties or by collecting loan payments under the terms of the loans. Due to high prevailing interest rates or other factors, the Company could suffer reduced earnings (or losses) if a substantial portion of its loan portfolio remains and must be liquidated quickly during the winding up period. Members who sell their Membership Interests prior to any such liquidation will not be exposed to this risk. Conversely, if prevailing interest rates have declined at a time when the loan portfolio must be liquidated, unanticipated profits could be realized by those Members who remained in the Company until its termination.
(d) Final Accounting. The liquidator will make proper accountings, (1) to the end of the month in which the event of dissolution occurred, and (2) to the date on which the Company is finally and completely liquidated.
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(e) Duties and Authority of Liquidator. The liquidator will make adequate provision for the discharge of all of the Company's debts, obligations and liabilities. The liquidator may sell, encumber or retain for distribution in kind any of the Company's assets. Any gain or loss recognized on the sale of assets will be allocated to the Members' Capital Accounts in accordance with the provisions of Article 4. With respect to any asset the liquidator determines to retain for distribution in kind, the liquidator will allocate to the Members' Capital Accounts the amount of gain or loss that would have been recognized had the asset been sold at its fair market value.
(f) Final Distribution. The liquidator will distribute any assets remaining after the discharge or accommodation of the Company's debts, obligations and liabilities to the Members in proportion to their Capital Accounts. The liquidator will distribute any assets distributable in kind to the Members in undivided interests as tenants in common. A Member whose Capital Account is negative will have no liability to the Company, the Company's creditors or any other Member with respect to the negative balance.
(g) Required Filings. The liquidator will file with the appropriate Secretary of State such statements, certificates and other instruments, and take such other actions, as are reasonably necessary or appropriate to effectuate and confirm the cessation of the Company's existence.
ARTICLE 8: GENERAL PROVISIONS
8.1Amendments. Except as otherwise provided herein, the Manager or the Majority of Members may propose, for consideration and action, an amendment to this Agreement, and a proposed amendment will become effective at such time as it is approved by the Members holding a Majority of the outstanding Membership Interests. Notwithstanding the foregoing, the Manager may amend this Agreement from time to time; provided, however, that any amendment that materially or adversely affects the rights of the Members to receive distributions, withdraw from the Company or their voting rights shall require the consent of the Manager and Majority of the Members.
(a) Amendments to be Adopted solely by the Manager. The Manager may, without the approval of any Member, amend any provisions of this Agreement, and execute, deliver, file and/or record all necessary documents that may be required in connection therewith (and any such amendment shall not be deemed to affect the Members disproportionally, materially or adversely affect the rights of the Members), as follows:
(i) a change in the name of the Company, the location of the principal place of business of the Company, the registered agent of the Company or the registered office of the Company;
(ii) the admission, substitution, withdrawal or removal of Members in accordance with this Agreement;
(iii) a change in the fiscal year or taxable year of the Company and any other changes that the Manager determines to be necessary or appropriate as a result of a change in the fiscal year or taxable year of the Company;
(iv) a change that, in the sole discretion of the Manager, it determines: (i) does not adversely affect the Members; (ii) to be necessary or appropriate to satisfy any requirements, conditions or guidelines contained in any opinion, directive, order, ruling or regulation of any federal or state agency or judicial authority or contained in any federal or state statute (including the Act), or (iii) is required to effect the intent expressed in any Offering document or the intent of the provisions of this Agreement or is otherwise contemplated by this Agreement; and
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(v) The Manager shall have the authority to execute and file any amendment to the Certificate required by the Act that it determines to be necessary or appropriate for the formation, continuation, qualification and operation of a limited liability company in the State of Idaho or any other state in which the Company may elect to do business or own property. The Company shall not be required, before or after filing, to deliver or mail a copy of the Certificate, any qualification document or any amendment thereto to any Member. If any such amendment results in inconsistencies between the Certificate and this Agreement, this Agreement will be considered to have been amended in the specifics necessary to eliminate fine inconsistencies.
8.2Power of Attorney. Each Member appoints the Manager, with full power of substitution, as the Member's attorney-in-fact, to act in the Member's name to execute and file (a) all certificates, applications, reports and other instruments necessary to qualify or maintain the Company as a limited liability company in the states and foreign countries where the Company conducts its activities, (b) all instruments that effect or confirm changes or modifications of the Company or its status, including, without limitation, amendments to the Certificate, and (c) all instruments of transfer necessary to effect the Company's dissolution and termination. The power of attorney granted by this Article is irrevocable, coupled with an interest and shall survive the death of the Member.
8.3 Arbitration. Either Member, Manager or the Company may, at its sole election, require that the sole and exclusive forum and remedy for resolution of a Claim be final and binding arbitration pursuant to this section (this “Arbitration Provision”). The arbitration shall be conducted in the State of Idaho in the Coeur d’Alene area. As used in this Arbitration Provision, “Claim” shall include any past, present, or future claim, dispute, or controversy involving Member (or persons claiming through or connected with Member), on the one hand, and the Company, on the other hand, relating to or arising out of this Agreement, and/or the activities or relationships that involve, lead to, or result from any of the foregoing, including (except to the extent provided otherwise in the last sentence of sub-section (iv) below) the validity or enforceability of this Arbitration Provision, any part thereof, or the entire Agreement. Claims are subject to arbitration regardless of whether they arise from contract; tort (intentional or otherwise); a constitution, statute, common law, or principles of equity; or otherwise. Claims include (without limitation) matters arising as initial claims, counter-claims, cross-claims, third-party claims, or otherwise. This Arbitration Provision applies to claims under the U.S. federal securities laws and to all claims that that are related to the Company, including with respect to this offering, our holdings, the common shares, our ongoing operations and the management of our investments, among other matters. The scope of this Arbitration Provision is to be given the broadest possible interpretation that is enforceable.
(i) The party initiating arbitration shall do so with the American Arbitration Association (the “AAA”) or JAMS. The arbitration shall be conducted according to, and the location of the arbitration shall be determined in accordance with, the rules and policies of the administrator selected, except to the extent the rules conflict with this Arbitration Provision or any countervailing law. In the case of a conflict between the rules and policies of the administrator and this Arbitration Provision, this Arbitration Provision shall control, subject to countervailing law, unless all parties to the arbitration consent to have the rules and policies of the administrator apply
(ii) If the Company elects arbitration, the Company shall pay all the administrator’s filing costs and administrative fees (other than hearing fees). If Member elects arbitration, filing costs and administrative fees (other than hearing fees) shall be paid in accordance with the rules of the administrator selected, or in accordance with countervailing law if contrary to the administrator’s rules. The Company shall pay the administrator’s hearing fees for one full day of arbitration hearings. Fees for hearings that exceed one day will be paid by the party requesting the hearing, unless the administrator’s rules or applicable law require otherwise, or Member requests that the Company pay them and the Company agree to do so. Each party shall bear the expense of its own attorney’s fees, except as otherwise provided by law. If a statute gives Member the right to recover any of these fees, these statutory rights shall apply in the arbitration notwithstanding anything to the contrary herein
(iii) Within 30 days of a final award by the arbitrator, a party may appeal the award for reconsideration by a three-arbitrator panel selected according to the rules of the arbitrator administrator. In the event of such an appeal, an opposing party may cross-appeal within 30 days after notice of the appeal. The panel will reconsider de novo all aspects of the initial award that are appealed. Costs and conduct of any appeal shall be governed by this Arbitration Provision and the administrator’s rules, in the same way as the initial arbitration proceeding. Any award by the individual arbitrator that is not subject to appeal, and any panel award on appeal, shall be final and binding, except for any appeal right under the Federal Arbitration Act (the “FAA”), and may be entered as a judgment in any court of competent jurisdiction.
(iv) The Company agrees not to invoke the Company’s right to arbitrate an individual Claim that a Member may bring in Small Claims Court or an equivalent court, if any, so long as the Claim is pending only in that court. EXCEPT AS EXPRESSLY PROVIDED IN THIS AGREEMENT, NO ARBITRATION SHALL PROCEED ON A CLASS, REPRESENTATIVE, OR COLLECTIVE BASIS (INCLUDING AS PRIVATE ATTORNEY GENERAL ON BEHALF OF OTHERS), EVEN IF THE CLAIM OR CLAIMS THAT ARE THE SUBJECT OF THE ARBITRATION HAD PREVIOUSLY BEEN ASSERTED (OR COULD HAVE BEEN ASSERTED) IN A COURT AS CLASS REPRESENTATIVE, OR COLLECTIVE ACTIONS IN A COURT.
8.4Notices. Notices contemplated by this Agreement may be sent by any commercially reasonable means, including hand delivery, first class mail, facsimile, e-mail or private courier. The notice must be prepaid and addressed as set forth in the Company's records. The notice will be effective on the date of receipt or, in the case of notice sent by first class mail, the Fifth (5th) day after mailing.
8.5Resolution of Inconsistencies. If there are inconsistencies between this Agreement and the Certificate, the Certificate will control. If there are inconsistencies between this Agreement and the Act, this Agreement will control, except to the extent the inconsistencies relate to provisions of the Act that the Members cannot alter by agreement. If there are inconsistencies between this Agreement and the Offering Circular, this Agreement will control. Without limiting the generality of the foregoing, unless the language or context clearly indicates a different intent, the provisions of this Agreement pertaining to the Company's governance and financial affairs and the rights of the Members upon Dissociation and dissolution will supersede the provisions of the Act relating to the same matters.
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8.6Provisions Applicable to Transferees. Each Member will execute and deliver any document or statement necessary to give effect to the terms of this Agreement or to comply with any law, rule or regulation governing the Company's formation and activities.
8.7Additional Instruments. Each Member will execute and deliver any document or statement necessary to give effect to the terms of this Agreement or to comply with any law, rule or regulation governing the Company's formation and activities.
8.8Computation of Time. In computing any period of time under this Agreement, the day of the act or event from which the specified period begins to run is not included. The last day of the period is included, unless it is a Saturday, Sunday or legal holiday, in which case the period will run until the end of the next day that is not a Saturday, Sunday or legal holiday. For purposes of this paragraph, a day shall be deemed to end at 5:00 p.m. in the time zone where the Company then maintains its principal place of business.
8.9Entire Agreement. This Agreement and the Certificate comprise the entire agreement among the parties with respect to the Company. This Agreement and the Certificate supersede any prior agreements or understandings with respect to the Company. No representation, statement or condition not contained in this Agreement or the Certificate has any force or effect.
8.10Waiver. No right or remedy under this Agreement may be waived, except by an instrument in writing signed by the party sought to be charged with the waiver.
8.11General Construction Principles. Words in any gender are deemed to include the other genders. The singular is deemed to include the plural and vice versa. The headings and underlined paragraph titles are for guidance only and have no significance in the interpretation of this Agreement.
8.12Binding Effect. Subject to the provisions of this Agreement relating to the transferability of Membership Interests and the rights of Transferees, this Agreement is binding on and will inure to the benefit of the Company, the Members and their respective distributees, successors and assigns.
8.13Governing Law. Idaho law governs the construction and application of the terms of this Agreement.
8.14Severability. If any provision of this Agreement shall be deemed invalid, unenforceable or illegal, then notwithstanding such invalidity, unenforceability or illegality, the remainder of this Agreement shall continue in full force and effect.
8.15Counterparts; Facsimile. This Agreement may be executed in counterparts, each of which will be considered an original as to the party signing it. Facsimile signatures shall have the same legal effect as original signatures.
[Signature Page to Operating Agreement Follows]
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[Signature Page to Operating Agreement]
CIRCLE OF WEALTH FUND III LLC, an Idaho Limited Liability Company
By:______________________________________
Lee Aaron Arnold, Chief Executive Officer and
President of Secured Investment Corp., a Wyoming
corporation, Manager
BY PURCHASING A MEMBERSHIP INTEREST IN THE COMPANY AND EXECUTING A SUBSCRIPTION AGREEMENT, EACH MEMBER AGREES TO THE TERMS AND PROVISIONS OF THIS OPERATING AGREEMENT, THE SUBSCRIPTION AGREEMENT AND THE OFFERING CIRCULAR.
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Exhibit B
CIRCLE OF WEALTH FUND III LLC
an Idaho limited liability company
SUBSCRIPTION AGREEMENT
THE MEMBERSHIP INTERESTS OF THE COMPANY SUBJECT TO THIS SUBSCRIPTION AGREEMENT ARE SECURITIES WHICH HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”). THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION (THE “SEC”) DOES NOT PASS UPON THE MERITS OF OR GIVE ITS APPROVAL TO ANY SECURITIES OFFERED OR THE TERMS OF THE OFFERING, NOR DOES IT PASS UPON THE ACCURACY OR COMPLETENESS OF ANY OFFERING CIRCULAR OR OTHER SELLING LITERATURE. THE SEC HAS NOT MADE AN INDEPENDENT DETERMINATION THAT THE SECURITIES ARE EXEMPT FROM REGISTRATION. THESE SECURITIES ARE OFFERED PURSUANT TO AN EXEMPTION FROM REGISTRATION WITH THE SEC. THE SEC HAS NOT MADE AN INDEPENDENT DETERMINATION THAT THIS INVESTMENT INVOLVES A DEGREE OF RISK THAT MAY NOT BE SUITABLE FOR ALL PERSONS. ONLY THOSE INVESTORS WHO CAN BEAR THE LOSS OF A SIGNIFICANT PORTION OF THEIR INVESTMENT SHOULD PARTICIPATE IN THE INVESTMENT.
1. SUBSCRIPTION.
AMOUNT OF INVESTMENT: $___________________________________________
NUMBER OF MEMBERSHIP INTERESTS PURCHASED: ___________________
*If no election is made, then the monthly income distribution will be automatically reinvested into the Company to purchase additional Membership Interests. Members may change their election at any time upon Thirty (30) days written notice to the Company. Upon receipt and after the Thirty (30) day notice has occurred, the Member’s election shall be changed and reflected on the following month in which the Member is entitled to receive a distribution.
Purchasers are required to electronically complete this Subscription Agreement for the desired investment amount. A Purchaser’s electronic signature, whether digital or encrypted, included in this Subscription Agreement is intended to authenticate this Subscription Agreement and to have the same force and effect as a manual signature. Electronic signature means any electronic symbol or process associated with a record and adopted by Purchaser with intent to sign such record.
Subject to the terms and conditions of the Agreement, the undersigned (“Purchaser”) hereby irrevocably subscribes for and agrees to purchase Membership Interests (“Membership Interests”) offered by CIRCLE OF WEALTH FUND III LLC, an Idaho limited liability company (the “Company”), in the amount indicated above, all in accordance with the terms and conditions of this Subscription Agreement, the Certificate of Formation (the “Certificate”), the Company’s Operating Agreement (“Operating Agreement”) and Offering Circular dated February 12, 2019, as amended (the “Offering Circular”).
(a) Purchaser acknowledges and agrees that this subscription cannot be withdrawn, terminated, or revoked. Purchaser agrees to become a Member and to be bound by all the terms and conditions of the Operating Agreement. This subscription shall be binding on the heirs, executors, administrators, successors and assigns of the Purchaser. This subscription is not transferable or assignable by the Purchaser, except as expressly provided in the terms and conditions of the actual Operating Agreement.
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(b) This subscription may be rejected as a whole or in part by the Company in its sole and absolute discretion. If this subscription is rejected, the Purchaser’s funds shall be returned to the extent of such rejection. This subscription shall be binding on the Company only upon its acceptance of the same.
(c) Neither the execution nor the acceptance of this Subscription Agreement constitutes the Purchaser as a Member, shareholder or secured creditor of the Company. This is an agreement only to purchase the Membership Interests in the amount set forth above; and the Purchaser will become a Member (and not a shareholder or secured creditor) only after the Purchaser’s funds are duly transferred to the account of the Company and the Membership Interests are issued thereupon to the Purchaser. Until such time, the Purchaser shall have only those rights as may be set forth in this Subscription Agreement.
(d) The offering of Membership Interests is described in the Offering Circular, that is available through the online website platform https://invest.securedinvestmentcorp.com (“Platform”), which is hosted by CrowdEngine Inc., and operated by the Company. Purchaser must read this Agreement, the Offering Circular, and Operating Agreement. By signing electronically below, Purchaser agrees to the following terms together with the Platform’s Terms and Conditions, Terms of Use, and consent to the Platform’s Privacy Policy, and agree to transact business with the Company and to receive communications relating to the Membership Interests electronically.
(e) Once Purchaser makes a funding commitment to purchase Membership Interests, it is irrevocable until the Membership Interests are issued, the purchase is rejected by the Company, or the Company otherwise determines not to proceed with the transaction.
(f) The Purchaser’s rights and responsibilities will be governed by the terms and conditions of this Subscription Agreement, the Offering Circular, the Certificate and Operating Agreement. If Purchaser is deemed an Accredited Investor, the Company will rely upon the information provided in this Subscription Agreement to confirm that the Purchaser is an “Accredited Investor” as defined in Regulation D promulgated under the Act. If Purchaser is a non-accredited investor, the Company will reply upon the information provided in this Subscription Agreement to confirm that the Purchaser is sophisticated and meets the non-accredited suitability standards further outlined below, that will allow the investor to purchase Membership Interests.
(g) Should the process from depositing an investor’s funds into the account of the Company and acceptance as a Member take longer than Fifteen (15) days, the Investor may request in writing to recover his, her or its investment funds. If, upon receipt of such request in writing, the Company has not yet accepted the Investor as a Member, then the Company may, in its sole and absolute discretion, return the Investor’s funds to the investor and revoke the Subscription Agreement within Ten (10) business days of receipt of such request from the Investor
2. REPRESENTATIONS AND WARRANTIES BY THE PURCHASER. The Purchaser represents, warrants, and agrees as follows:
(a) I have received and read the Offering Circular and its Exhibits, the Certificate and the terms and conditions of the Operating Agreement, and I am thoroughly familiar with the proposed business, operations, properties and financial condition of the Company. I have relied solely upon the Offering Circular and independent investigations made by me or my representative with respect to the investment in Membership Interests. No oral or written representations beyond the Offering Circular have been made or relied upon.
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(b) I have read and understand the Certificate and Operating Agreement and understand how the Company functions as a corporate entity. By purchasing the Membership Interests and executing this Subscription Agreement, I hereby agree to the terms and provisions of the Operating Agreement.
(c) I understand that the Company has limited financial and operating history. I have been furnished with such financial and other information concerning the Company, its management, and its business, as I consider necessary in connection with the investment in Membership Interests. I have been given the opportunity to discuss any questions and concerns with the Company.
(d) I am purchasing Membership Interests for my own account (or for a trust if I am a trustee), for investment purposes and not with a view or intention to resell or distribute the same. I have no present intention, agreement, or arrangement to divide my participation with others or to resell, assign, transfer, or otherwise dispose of all or part of the Membership Interests.
(e) I or my investment advisors have such knowledge and experience in financial and business matters that will enable me to utilize the information made available to evaluate the risks of the prospective investment and to make an informed investment decision. I have been advised to consult my own attorney concerning this investment and to consult with independent tax counsel regarding the tax considerations of participating in the Membership Interests and the Company.
(f) I have carefully reviewed and understand the risks of investing in the Membership Interests, including (without limitation) those set forth in the Offering Circular and the terms and conditions of the Operating Agreement. I have carefully evaluated my financial resources and investment position and acknowledge that I am able to bear the economic risks of this investment. I further acknowledge that my financial condition is such that I am not under any present necessity or constraint to dispose of the Membership Interests to satisfy any existent or contemplated debt or undertaking. I have adequate means of providing for my current needs and possible contingencies, have no need for liquidity in my investment, and can afford to lose some or all of my investment.
(g) I have been advised that the Membership Interests have not been registered under the Securities Act of 1933, as amended (the "Act"), or qualified under any State Securities Laws (the "Law"), on the ground, among others, that no distribution or public offering of the Membership Interests is to be effected and the Membership Interests will be issued by the Company in connection with a transaction that does not involve any public offering within the meaning of section 4(2) of the Act or of the Law, under the respective rules and regulations of the Securities and Exchange Commission.
(h) The information that the Purchaser has furnished herein, including (without limitation) the information furnished by Purchaser to the Company upon creating an account in the Platform regarding Purchaser’s qualification as an (i) an “accredited investor” as that term is defined in Rule 501 under Regulation D promulgated under the Act, and/or as (ii) a “Qualified Purchaser” defined Section 3 below, is correct and complete as of the date of this Agreement and will be correct and complete on the date, if any, that the Company accepts this subscription. Further, the Purchaser hereby agrees to immediately notify the Company of any change in any statement made herein prior to the Purchaser’s receipt of the Company’s acceptance of this Subscription, including, without limitation, Purchaser’s status as an “accredited investor” and/or Qualified Purchaser. The representations and warranties made by Purchaser may be fully relied upon by the Company and by any investigating party relying on them.
(i) The amount Membership Interests being purchased by the Purchaser does not exceed Ten Percent (10%) of the greater of Purchaser’s annual income or net worth (for natural persons), or Ten Percent (10%) of the greater of the Purchaser’s annual revenue or net assets at fiscal year-end (for entities).
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(j) The Purchaser, if an entity, is, and shall at all times while it holds Membership Interests remain, duly organized, validly existing and in good standing under the laws of the state or other jurisdiction of the United States of America of its incorporation or organization, having full power and authority to own its properties and to carry on its business as conducted. The Purchaser, if a natural person, is Eighteen (18) years of age or older, competent to enter into a contractual obligation, and a citizen or resident of the United States of America. The principal place of business or principal residence of the Purchaser is as shown on the signature page of this Agreement.
(k) The Purchaser has the requisite power and authority to deliver this Agreement, perform his, her or its obligations set forth herein, and consummate the transactions contemplated hereby. The Purchaser has duly executed and delivered this Agreement and has obtained the necessary authorization to execute and deliver this Agreement and to perform his, her or its obligations herein and to consummate the transactions contemplated hereby. This Agreement, assuming the due execution and delivery hereof by the Company, is a legal, valid and binding obligation of the Purchaser enforceable against the Purchaser in accordance with its terms.
(l) All information which I have furnished in this Subscription Agreement concerning myself, my financial position, and my knowledge of financial and business matters is correct, current, and complete.
3. INVESTOR SUITABILITY STANDARDS. The Company intends to sell the Membership Interests to qualified investors, including (i) “accredited investors” under Rule 501(a) of Regulation D (as explained below) and (ii) all other Investors so long as their investment in the Membership Interests does not represent more than Ten Percent (10%) of the greater of the Investor’s, alone or together with a spouse, annual income or net worth (for natural persons), or Ten Percent (10%) of the greater of annual revenue or net assets at fiscal year-end (for non-natural persons). The Membership Interests are offered hereby and sold to Investors that meet one of the categories (i.e., Accredited Investors and Investors whose investment in the Membership Interests does not represent more than Ten Percent (10%) of the applicable amount).
To qualify as an “Accredited Investor”, for purposes of satisfying one of the tests in the “qualified purchaser” definition, an Investor must meet ONE of the following conditions:
(a) Any bank as defined in section 3(a)(2) of the Act, or any savings and loan association or other institution as defined in section 3(a)(5)(A) of the Act whether acting in its individual or fiduciary capacity; any broker or dealer registered pursuant to section 15 of the Securities Exchange Act of 1934; any insurance company as defined in section 2(13) of the Act; any investment company registered under the Investment Company Act of 1940 or a business development company as defined in section 2(a)(48) of that Act; any Small Business Investment Company licensed by the U.S. Small Business Administration under section 301(c) or (d) of the Small Business Investment Act of 1958; any plan established and maintained by a state, its political subdivisions, or any agency or instrumentality of a state or its political subdivisions, for the benefit of its employees, if such plan has total assets in excess of $5,000,000.00; any employee benefit plan within the meaning of the Employee Retirement Income Security Act of 1974 if the investment decision is made by a plan fiduciary, as defined in section 3(21) of such Act, which is either a bank, savings and loan association, insurance company, or registered adviser, or if the employee benefit plan has total assets in excess of $5,000,000.00 or, if a self-directed plan, with investment decisions made solely by persons that are accredited investors;
(b) Any private business development company as defined in section 202(a)(22) of the Investment Advisers Act of 1940;
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(c) Any organization described in section 501(c)(3) of the Internal Revenue Code, limited liability company, Massachusetts or similar business trust, or partnership, not formed for the specific purpose of acquiring the securities offered, with total assets in excess of $5,000,000;
(d) Any director, executive officer, or general partner of the issuer of the securities being offered or sold, or any director, executive officer, or general partner of a general partner of that issuer;
(e) Any natural person whose individual net worth, or joint net worth with that person's spouse, at the time of his purchase exceeds $1,000,000.00 (excluding the person’s primary residence);
(f) Any natural person who had an individual income in excess of $200,000.00 in each of the two most recent years or joint income with that person's spouse in excess of $300,000.00 in each of those years and has a reasonable expectation of reaching the same income level in the current year;
(g) Any trust, with total assets in excess of $5,000,000.00, not formed for the specific purpose of acquiring the securities offered, whose purchase is directed by a sophisticated person as described in § 230.506(b)(2)(ii); or
(h) Any entity in which all of the equity owners are accredited investors.
For Purchasers who are not Accredited Investors, there are limitations on the aggregate purchase price of Membership Interests that may be paid by the Investor which is not more than Ten percent (10%) of the greater of such Purchaser’s:
(a) Annual income or net worth if a natural person (with annual income and net worth for such natural person purchaser determined as provided in Rule 501); or
(b) Revenue or net assets for such purchaser’s most recently completed fiscal year end if a non-natural person.
Annual income and net worth should be calculated as provided in the Accredited Investor definition under Rule 501 of Regulation D, as explained above. In particular, net worth in all cases should be calculated excluding the value of an Investor’s home, home furnishings and automobiles.
4. AGREEMENT TO REFRAIN FROM RESALE. The Purchaser agrees not to pledge, hypothecate, sell, transfer, assign or otherwise dispose of any Membership Interests, nor receive any consideration for Membership Interests from any person, unless
(a) A registration statement on a form appropriate for the purpose under the Act with respect to the Membership Interests proposed to be so disposed of shall be then effective and such disposition shall have been appropriately qualified in accordance with applicable securities laws; or
(b) All of the following shall have occurred: (i) the Manager has agreed to such transfer, and (ii) the Purchaser shall have furnished the Company with an opinion of the Purchaser's counsel in form and substance satisfactory to the Company to the effect that such disposition will not require registration of such Membership Interests under the Act or qualification of such Membership Interests under any other securities law.
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5. POWER OF ATTORNEY.
(a) The Purchaser irrevocably constitutes and appoints the Company with full power of substitution as his/her true and lawful attorney-in-fact and agent, to execute, acknowledge, verify, swear to, deliver, record, and file, in the Purchaser’s name or his/her assignee’s name, place, and stead, all instruments, documents, and certificates that may from time to time be required by the laws of the United States of America, the State of Idaho, and any other state in which the Company conducts or plans to conduct business, or any political subdivision or agency of the government, to effectuate, implement, and continue the valid existence of the Company, including, without limitation, the power of attorney and authority to execute, verify, swear to, acknowledge, deliver, record and file the following:
(i) the Membership Interests, the Operating Agreement, the Articles and all other instruments (including amendments thereto) that the Company deems appropriate to form, qualify or continue the Company as a limited liability company in the State of Idaho and all other jurisdictions in which the Company conducts or plans to conduct business;
(ii) all instruments that the Company deems appropriate to reflect any amendment to the Articles or Operating Agreement, or modification of the Company, made in accordance with the terms of the Articles or Operating Agreement;
(iii) a fictitious business name certificate and such other certificates and instruments as may be necessary under the fictitious or assumed name statute from time to time in effect in the State of Idaho and all other jurisdictions in which the Company conducts or plans to conduct business;
(iv) all instruments relating to the admission of any additional Members or other shareholders, owners or creditors, whether secured or unsecured; and
(v) all conveyances and other instruments that the Company deems appropriate to reflect the dissolution and termination of the Company pursuant to the terms of the Articles and the Operating Agreement.
(b) The power of attorney granted is a special power of attorney and shall be deemed to be coupled with an interest, shall be irrevocable, shall survive the death, dissolution, bankruptcy, or legal disability of the Purchaser, and shall extend to the Purchaser’s heirs, successors, and assigns. The Purchaser agrees to be bound by any representations made by the Company acting in good faith under such power of attorney, and each Member waives any and all defenses that may be available to contest, negate, or disaffirm any action of the Company taken in good faith under such power of attorney.
6. MISCELLANEOUS.
(a) CHOICE OF LAWS: This Subscription Agreement will be governed by and construed in accordance with the laws of the State of Idaho, without giving effect to its choice of laws rules.
(b) ENTIRE AGREEMENT: This Subscription Agreement constitutes the entire agreement between the parties and may be amended only by written agreement between all parties.
(c) ARBITRATION: Either party may, at its sole election, require that the sole and exclusive forum and remedy for resolution of a Claim be final and binding arbitration pursuant to this section (this “Arbitration Provision”). The arbitration shall be conducted in the State of Idaho in the Coeur d’Alene area. As used in this Arbitration Provision, “Claim” shall include any past, present, or future claim, dispute, or controversy involving Purchaser (or persons claiming through or connected with Purchaser), on the one hand, and the Company, on the other hand, relating to or arising out of this Agreement, and/or the activities or relationships that involve, lead to, or result from any of the foregoing, including (except to the extent provided otherwise in the last sentence of sub-section (iv) below) the validity or enforceability of this Arbitration Provision, any part thereof, or the entire Agreement. Claims are subject to arbitration regardless of whether they arise from contract; tort (intentional or otherwise); a constitution, statute, common law, or principles of equity; or otherwise. Claims include (without limitation) matters arising as initial claims, counter-claims, cross-claims, third-party claims, or otherwise. This Arbitration Provision applies to claims under the U.S. federal securities laws and to all claims that that are related to the Company, including with respect to this offering, our holdings, the common shares, our ongoing operations and the management of our investments, among other matters. The scope of this Arbitration Provision is to be given the broadest possible interpretation that is enforceable.
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(i) The party initiating arbitration shall do so with the American Arbitration Association (the “AAA”) or JAMS. The arbitration shall be conducted according to, and the location of the arbitration shall be determined in accordance with, the rules and policies of the administrator selected, except to the extent the rules conflict with this Arbitration Provision or any countervailing law. In the case of a conflict between the rules and policies of the administrator and this Arbitration Provision, this Arbitration Provision shall control, subject to countervailing law, unless all parties to the arbitration consent to have the rules and policies of the administrator apply
(ii) If the Company elects arbitration, the Company shall pay all the administrator’s filing costs and administrative fees (other than hearing fees). If Purchaser elects arbitration, filing costs and administrative fees (other than hearing fees) shall be paid in accordance with the rules of the administrator selected, or in accordance with countervailing law if contrary to the administrator’s rules. The Company shall pay the administrator’s hearing fees for one full day of arbitration hearings. Fees for hearings that exceed one day will be paid by the party requesting the hearing, unless the administrator’s rules or applicable law require otherwise, or Purchaser requests that the Company pay them and the Company agree to do so. Each party shall bear the expense of its own attorney’s fees, except as otherwise provided by law. If a statute gives Purchaser the right to recover any of these fees, these statutory rights shall apply in the arbitration notwithstanding anything to the contrary herein
(iii) Within 30 days of a final award by the arbitrator, a party may appeal the award for reconsideration by a three-arbitrator panel selected according to the rules of the arbitrator administrator. In the event of such an appeal, an opposing party may cross-appeal within 30 days after notice of the appeal. The panel will reconsider de novo all aspects of the initial award that are appealed. Costs and conduct of any appeal shall be governed by this Arbitration Provision and the administrator’s rules, in the same way as the initial arbitration proceeding. Any award by the individual arbitrator that is not subject to appeal, and any panel award on appeal, shall be final and binding, except for any appeal right under the Federal Arbitration Act (the “FAA”), and may be entered as a judgment in any court of competent jurisdiction.
(iv) The Company agrees not to invoke the Company’s right to arbitrate an individual Claim that you may bring in Small Claims Court or an equivalent court, if any, so long as the Claim is pending only in that court. EXCEPT AS EXPRESSLY PROVIDED IN THIS AGREEMENT, NO ARBITRATION SHALL PROCEED ON A CLASS, REPRESENTATIVE, OR COLLECTIVE BASIS (INCLUDING AS PRIVATE ATTORNEY GENERAL ON BEHALF OF OTHERS), EVEN IF THE CLAIM OR CLAIMS THAT ARE THE SUBJECT OF THE ARBITRATION HAD PREVIOUSLY BEEN ASSERTED (OR COULD HAVE BEEN ASSERTED) IN A COURT AS CLASS REPRESENTATIVE, OR COLLECTIVE ACTIONS IN A COURT.
(d) TERMINATION OF AGREEMENT: If this subscription is rejected by the Company, then this Subscription Agreement shall be null and void and of no further force and effect and no party shall have any rights against any other party hereunder and the Company shall promptly return the funds delivered with this Subscription Agreement.
(e) TAXES. The discussion of the federal income tax considerations arising from investment in the Company, as set forth in the Offering Circular, is general in nature and the federal income tax considerations to the Purchaser of investment in the Membership Interests will depend on individual circumstances. The Offering Circular does not discuss state income tax considerations, which may apply to all or substantially all Purchasers. There can be no assurance that the Internal Revenue Code or the Regulations under the Code will not be amended in a manner adverse to the interests of the Purchaser or the Company.
(f) DULY AUTHORIZED. If the Purchaser is a limited liability company, partnership, trust, or other entity, the individual(s) signing in its name is(are) duly authorized to execute and deliver this Subscription Agreement on behalf of such entity, and the purchase of the Membership Interests by such entity will not violate any law or agreement by which it is bound.
(g) LIMITED TRANSFERABILITY. The Purchaser understands that the Membership Interests will have limited transferability, accordingly, that Membership Interests must be held indefinitely unless they are subsequently registered under the Act and any other applicable securities law or exemptions from such registration is available. The Purchaser understands that the Company is under no obligation to register Membership Interests under the Act, to qualify Membership Interests under any federal or state securities law, or to comply with Regulation A or any other exemption under the Act or any other law.
(h) MEMBERSHIP INTERESTS CONTAIN RESTRICTIVE LEGEND. Any documents or certificates issued to evidence ownership of the Membership Interests will bear restrictive legends notifying prospective purchasers of the transfer restrictions set forth above, and the Company will not permit transfer of any Membership Interests on the books of the Company in violation of such restrictions.
(i) SUCCESSORS. The representations, warranties and agreements contained in this Subscription Agreement shall be binding on the Purchaser's successors, assigns, heirs and legal representatives and shall inure to the benefit of the respective successors and assigns of the Company and its directors and officers. If the Purchaser is more than one person, the obligations of all of them shall be joint and several, and the representations and warranties contained herein shall be deemed to be made by, and to be binding upon, each such person and his heirs, executors, administrators, successors, and assigns.
(j) ELECTRONIC SIGNATURE. This Subscription Agreement may be hereby executed and delivered in counterparts by electronic signature with the same effect as if the parties executing the counterparts had all executed one counterpart. Counterparts may be delivered via facsimile, electronic mail (including .pdf or any electronic signature complying with the U.S. federal ESIGN Act of 2000, e.g., clicking "I agree" or use of www.docusign.com) or other transmission method and any counterpart so delivered shall be deemed to have been duly and validly delivered and be valid and effective for all purposes. Each party consents and agrees that its electronic signature meets the requirements of an original signature as if actually signed by such party in writing. Further, each party agrees that no certification authority or other third-party verification is necessary to the enforceability of its signature. No party hereto may raise the use of an electronic signature as a defense to the enforcement of this Agreement or any amendment or other document executed in compliance with this Section.
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(k) CONSENT TO ELECTRONIC DELIVERY. Purchaser hereby agrees that the Company may deliver all notices, financial statements, valuations, reports, reviews, analyses or other materials, and any and all other documents, information and communications concerning the affairs of the Company and its investments, including, without limitation, information about the investment, required or permitted to be provided to Purchaser under the Notes or hereunder by means electronic mail or by posting on the Company’s Platform (or through Purchaser’s Platform account). Because the Company operates principally on the Internet, Purchaser will need to consent to transact business with the Company online and electronically. By entering into this Subscription Agreement, Purchaser consents to receive electronically all documents, communications, notices, Notes, contracts, and agreements arising from or relating in any way to Purchaser or the Company’s rights, obligations or services under this Agreement (each, a “Company Disclosure”). The decision to do business with the Company electronically is solely of the Purchaser.
(i) Scope of Consent. Purchaser hereby consents and agrees to receive Company Disclosures and transact business electronically, and Purchaser’s agreement to do so, applies to any transactions to which such Company Disclosures relate, including the Membership Interests issued to Purchaser.
(ii) Consenting to Do Business Electronically. Before deciding to do business electronically with the Company, Purchaser should consider whether Purchaser has the following required hardware and software capabilities: (i) access to the Internet; an email account and related software capable of receiving email through the Internet; (ii) a web browser that supports secure sessions; and (iii) hardware capable of running all necessary software.
(iii) Updates Affecting Delivery of Company Disclosures. Purchaser agrees to keep the Company informed of any change in Purchaser’s email or home mailing address so that Purchaser can continue to receive all Company Disclosures in a timely manner. If Purchaser’s registered e-mail address, registered residence address or telephone number changes, Purchaser must promptly notify the Company of the change by updating Purchaser’s account information on the Company’s Platform. Purchaser hereby agrees and acknowledges that, as of the date hereof, Purchaser is able to access, receive and retain all Company Disclosures electronically sent via email or posted on the Platform.
(l) INDEMNIFICATION. The Purchaser shall indemnify and defend the Company and its directors and officers from and against any and all liability, damage, cost, or expense (including attorneys’ fees) arising out of or in connection with:
(i) Any inaccuracy in, or breach of, any of the Purchaser’s declarations, representations, warranties or covenants set forth in this document or any other document or writing delivered to the Company;
(ii) Any disposition by the Purchaser of any Membership Interests in violation of this Agreement, the Certificate or Operating Agreement, or any applicable law; or
(iii) Any action, suit, proceeding or arbitration, whether threatened, pending or actual, alleging any of the foregoing.
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7. FURTHER REPRESENTATIONS. Purchaser (whether an individual or entity) understands that the Company will be relying on the accuracy and completeness of the statements and responses contained in this Subscription Agreement. Purchaser represents and warrants to the Company as follows:
(a) My statements and responses contained in this Subscription Agreement are complete and correct and may be relied on by the Company for the purpose of complying with all applicable security laws and to determine whether I am a suitable investor.
(b) I will notify the Company immediately of any material change in any statement or response made in this Subscription Agreement before acceptance by the Company of this subscription.
(c) I have sufficient knowledge and experience in financial and business matters to evaluate the merits and risks of the prospective investment, or I have consulted with Investment Advisors and other professional advisors who have sufficient knowledge and experience in financial and business matters to evaluate the merits and risks of prospective investment.
(d) I am able to bear the economic risk of an investment in the Membership Interests for an indefinite period of time and understand that an investment in the Membership Interests is illiquid and may result in a complete loss of such investment.
(e) Purchaser understands and agrees that the Company is relying upon the truthfulness of the certification being made by Purchaser as to Purchaser’s status as an Accredited Investor (as applicable) for the reason checked in Section 9 above or Section 9 above. Purchaser further understands and agrees that the Company may request to be shown, in confidence, documentation reasonably satisfactory to the Company supporting the certification by the Purchaser as to the Purchaser’s status as an Accredited Investor. The Company reserves the right to refuse to accept any subscription as to which the Company is not satisfied (in its sole and absolute discretion) that the Purchaser is an Accredited Investor.
(f) Purchaser understands and agrees that the Company is relying upon the truthfulness of the certification being made by Purchaser as to Purchaser’s suitability as a non-accredited investor (as applicable) for the reason checked in Section 3 above or Section 9 above. Purchaser further understands and agrees that the Company may request to be shown, in confidence, documentation (including but not limited to income tax returns, bank statements, W-2 forms, etc.) reasonably satisfactory to the Company supporting the certification by the Purchaser as to the Purchaser’s financial condition and capability to meet the non-accredited investor suitability standards provided to Purchaser. The Company reserves the right to refuse to accept any subscription as to which the Company is not satisfied (in its sole and absolute discretion) that the Purchaser is an Accredited Investor.
(g) Purchaser agrees and understands that in making this investment, Purchaser: (a) must have sufficient knowledge and experience in such financial and business matters to be capable of evaluating the merits and risks of a purchase of the Membership Interests; or (b) must retain the services of an “Investment Advisor” (who may be an attorney, accountant, or other financial adviser unaffiliated with, and who is not compensated by, the Company or any affiliate or selling agent of the Company, directly or indirectly) for the purpose of aiding in the evaluation of this particular transaction.
[Signature Page to Subscription Agreement follows]
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[Signature Page to Subscription Agreement]
FOR GOOD AND VALID CONSIDERATION, the receipt and sufficiency of which are hereby acknowledged, the Purchaser, intending to be legally bound, has executed this Subscription Agreement on ___________________________ ______, _________.
BY PURCHASING MEMBERSHIP INTERESTS AND EXECUTING THIS SUBSCRIPTION AGREEMENT, EACH PURCHASER HEREBY AGREES, UPON ACCEPTANCE BY THE COMPANY, TO BE LEGALLY BOUND BY THE TERMS OF THE OPERATING AGREEMENT.
___________________________________________________________________________________
Name of Entity (if applicable)(printed or typed)
_______________________________________ _______________________________________
Purchaser Signature Co-Purchaser Signature
_______________________________________ _______________________________________
Name and title (if applicable) of person signing Name and title (if applicable) of person signing
_______________________________________ _______________________________________
Purchaser E-mail Address Co-Purchaser E-mail Address
_______________________________________ _______________________________________
Purchaser Address Co- Purchaser Address
_______________________________________ _______________________________________
Purchaser Telephone Co-Purchaser Telephone
ACCEPTANCE: (NOT VALID UNTIL ACCEPTED BY COMPANY)
ACCEPTANCE
The Company has accepted this Subscription Agreement as of this ___day of ________________, 20___, by the signature of a duly authorized representative.
CIRCLE OF WEALTH FUND III LLC
an Idaho limited liability company
By: _______________________________________________
Name: Lee Aaron Arnold
Title: President and Chief Executive Officer of Secured
Investment Corp., Manager of the Company
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Exhibit C
INDEX TO FINANCIAL STATEMENTS
TABLE OF CONTENTS
Page No.
Independent Auditor’s Report | 2 |
Balance Sheet | 3 |
Statement of Income and Changes in Member’s Equity | 4 |
Statement of Cash Flows | 5 |
Notes to Financial Statements | 6-13 |
1 |
INDEPENDENT AUDITOR'S REPORT
To the Member of
Circle of Wealth Fund III LLC
Coeur D'Alene, Idaho
We have audited the accompanying financial statements of Circle of Wealth Fund III LLC (an Idaho limited liability company), which comprise the balance sheet as of December 31, 2018, and the related statements of operations and changes in member's equity, and cash flows for the period from December 3, 2018 (inception) through December 31, 2018, and the related notes to the financial statements.
Management's Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
Auditor's Responsibility
Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Circle of Wealth Fund III LLC as of December 31, 2018, and the results of its operations and its cash flows for the period from December 3, 2018 (inception) through December 31, 2018, in accordance with accounting principles generally accepted in the United States of America.
ArmaninoLLP
San Ramon, California
February 4, 2019
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Circle of Wealth Fund III LLC
Balance Sheet
December 31, 2018
_________________________
ASSETS | ||||
Cash and cash equivalents | $ | 25,000 | ||
Prepaid expenses | 3,000 | |||
Total assets | $ | 28,000 | ||
LIABILITIES AND MEMBER'S EQUITY | ||||
Liabilities | ||||
Accounts payable | $ | 3,000 | ||
Total liabilities | 3,000 | |||
Member's equity | 25,000 | |||
Total liabilities and member's equity | $ | 28,000 |
The accompanying notes are an integral part of these financial statements.
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Circle of Wealth Fund III LLC
Statement of Income and Changes in Member's Equity
For the Period from December 3, 2018 (Inception) through December 31, 2018
_________________________
Revenues | $ | — | ||
Total revenues | — | |||
Operating expenses | — | |||
Total operating expenses | — | |||
Net income | — | |||
Member's equity, beginning of period | — | |||
Member's contributions | 25,000 | |||
Member's equity, end of period | $ | 25,000 |
The accompanying notes are an integral part of these financial statements.
4 |
Circle of Wealth Fund III LLC
Statement of Cash Flows
For the Period from December 3, 2018 (Inception) through December 31, 2018
_________________________
Cash flows from operating activities | ||||
Net income | $ | — | ||
Adjustment to reconcile net income to | ||||
net cash provided by operating activities | ||||
Prepaid expenses | (3,000 | ) | ||
Accounts payable | 3,000 | |||
Net cash provided by operating activities | — | |||
Cash flows from financing activities | ||||
Member's contributions | 25,000 | |||
Net cash provided by financing activities | 25,000 | |||
Net increase in cash | 25,000 | |||
Cash and cash equivalents at beginning of period | — | |||
Cash and cash equivalents at end of period | $ | 25,000 |
The accompanying notes are an integral part of these financial statements.
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Circle of Wealth Fund III LLC
Notes to Financial Statements
December 31, 2018
1. | NATURE OF OPERATIONS |
Circle of Wealth Fund III, LLC (the "Fund") is an Idaho limited liability company that was organized to make, fund, originate, refinance, purchase, sell and/or otherwise acquire loans secured by first or junior position deeds of trust or mortgages on non-owner occupied residential and commercial properties located throughout the United States; and acquire, develop, rehabilitate, and/or hold and/or sell non-owner occupied real estate located throughout the United States. The Fund is managed by Secured Investment Corp., a Wyoming corporation (the "Manager"). The Fund receives certain operating and administrative services from the Manager, some of which are not reimbursed to the Manager. The Fund's financial position and results of operations would likely be different absent this relationship with the Manager.
The Fund was organized to continue indefinitely unless dissolved and terminated pursuant to the provisions of the Fund's operating agreement.
As of December 31, 2018, the Fund has not commenced planned principal operations nor generated revenue. The Fund's activities since inception have consisted of formation activities and preparations for raising capital. Once the Fund commences planned principal operations, it will incur significant additional expenses. The Fund is dependent upon additional capital resources for the commencement of its planned principal operations and is subject to significant risks and uncertainties; including failing to secure funding to operationalize the Fund's planned operations or failing to profitably operate the business.
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Cash and cash equivalents |
The Fund considers all highly liquid financial instruments with maturities of three months or less at the time of purchase to be cash equivalents. Cash on deposit occasionally exceeds federally insured limits. The Fund believes that it mitigates this risk by maintaining deposits with major financial institutions.
Risks and uncertainties
The Fund has no operating history and has not generated revenue from operations. The Fund's business and operations are sensitive to general business and economic conditions in the U.S. along with local, state, and federal governmental policy decisions. A host of factors beyond the Fund's control could cause fluctuations in these conditions, including but not limited to: its ability to raise sufficient funds from investors to fund loans and acquire real estate as well as potential changes to Regulation A. Adverse developments in these general business and economic conditions could have a material adverse effect on the Fund's financial conditions and the results of operations.
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Circle of Wealth Fund III LLC
Notes to Financial Statements
December 31, 2018
Management estimates and related risks
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions about the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities, at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Such estimates will relate principally to the determination of the allowance for loan losses, interest-only strip receivables on loans sold and fair value of real estate held and serving as collateral for Fund loans. Although these estimates will reflect management's best estimate, it is at least reasonably possible that a material change to these estimates could occur in the near term.
The fair value of real estate, in general, is impacted by current real estate and financial market conditions. Should these markets experience any significant declines, the resulting collateral values of the Fund's loans, if any, will likely be negatively impacted. The impact to such values could be significant and as a result, the Fund's actual loan losses could differ significantly from management's current estimates.
Mortgage loans receivable
Mortgage loans, the majority of which the Fund intends to make available for sale to prospective investors, will generally be stated at the lower of cost or fair value. Subordinate mortgage loans will represent the Fund's retained portion of any mortgage loans sold to third-party buyers after having been originated by the Fund. The subordinate mortgage loans, which the Fund has the intent and ability to hold for the foreseeable future or to maturity, will generally be stated at their outstanding principal balance with interest thereon being accrued as earned. Mortgage loans receivable are expected to make up the only class of financing receivables within the Fund's lending portfolio. As a result, further segmentation of the loan portfolio will not be considered necessary.
If the probable ultimate recovery of the carrying amount of a loan, with due consideration for the fair value of collateral, is less than amounts due according to the contractual terms of the loan agreement and the shortfall in the amounts due are not insignificant, the carrying amount of the investment shall be reduced to the present value of estimated future cash flows discounted at the loan's effective interest rate. If a loan is collateral dependent, it is valued at the estimated fair value of the related collateral.
Interest is accrued daily on the principal of the loans. If events and or changes in circumstances cause management to have serious doubts about the further collectability of the contractual payments, a loan may be categorized as impaired and interest is no longer accrued. Any subsequent payments on impaired loans are applied to reduce the outstanding loan balances including accrued interest and advances.
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Circle of Wealth Fund III LLC
Notes to Financial Statements
December 31, 2018
Allowance for loan losses
Loans and the related accrued interest are analyzed on a periodic basis for recoverability. Delinquencies are identified and followed as part of the loan system. A provision is made for losses on loans to adjust the allowance for loan losses to an amount considered by management to be adequate, with due consideration to collateral value, to provide for unrecoverable loans and receivables, including impaired loans, accrued interest and advances on loans. As a collateral-based lender, the Fund does not consider credit risks which may be inherent in a further segmented loan portfolio as a basis for determining the adequacy of its allowance for loan losses but rather focuses solely on the underlying collateral value of the loans in its portfolio to do so. As a result, the Fund does not consider further segmentation of its loan portfolio and related disclosures necessary. The Fund writes off uncollectible loans and related receivables directly to the allowance for loan losses once it is determined that the full amount is not collectible.
Interest-only strip receivables
Interest-only strip receivables represent the present value of residual cash flows the Fund expects to receive on mortgage loans receivable sold to third-party investors after having been originated by the Fund. The value of these receivables is determined by estimating the future cash flows using assumptions of key factors, such as prepayment and default rates and discount rates appropriate for the type of asset and risk. The value of interest-only strip receivables could be affected by external factors, such as changes in the behavior patterns of customers and changes in the strength of the economy; therefore, actual performance could differ from these assumptions. The Fund evaluates the performance of the receivables relative to these assumptions on a regular basis. The Manager negotiates the participation interest to be earned by the Fund for loans sold on a case-by-case basis.
Real estate owned
Real estate purchased is recorded at cost. Costs of real estate improvements are capitalized, whereas costs relating to holding real estate are expensed. The portion of interest costs relating to development of real estate is capitalized.
Impairment losses of real estate held and held for sale are measured as the amount by which the carrying amount of a property exceeds its fair value less estimated costs to sell. Impairment losses of real estate held for use are determined by comparing the expected future undiscounted cash flows of the property, including any costs that must be incurred to achieve those cash flows, to the carrying amount of the property. If those cash flows are less than the carrying amount of the property, impairment is measured as the amount by which the carrying amount of the asset exceeds its fair value. Valuations are periodically performed by management, and any subsequent write downs are recorded as a charge to operations.
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Circle of Wealth Fund III LLC
Notes to Financial Statements
December 31, 2018
Fair value measurements
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Fund determines the fair values of its assets and liabilities based on a fair value hierarchy that includes three levels of inputs that may be used to measure fair value (Level 1, Level 2 and Level 3).
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Fund has the ability to access at the measurement date. An active market is a market in which transactions occur with sufficient frequency and volume to provide pricing information on an ongoing basis. Level 2 inputs are inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability. Unobservable inputs reflect the Fund's own assumptions about the assumptions market participants would use in pricing the asset or liability (including assumptions about risk). Unobservable inputs are developed based on the best information available in the circumstances and may include the Fund's own data.
The Fund does not record loans at fair value on a recurring basis but uses fair value measurements of collateral security in the determination of its allowance for loan losses. The fair value for impaired secured loans is determined using the sale comparison, income and other commonly used valuation approaches.
The following methods and assumptions were used to estimate the fair value of financial instruments:
· | Secured loans (Level 2 or Level 3). For loans in which a specific allowance is established based on the fair value of the collateral, the Fund records the loan as nonrecurring Level 2 if the fair value of the collateral is based on an observable market price or a current appraised value. If an appraised value is not available or the fair value of the collateral is considered impaired below the appraised value and there is no observable market price, the Fund records the loan as nonrecurring Level 3. |
· | Interest-only strip receivables (Level 3). For interest-only strip receivables, the Fund estimates the fair value using internal valuation models. The fair value of these receivables is determined by estimating the future cash flows using assumptions of key factors, such as prepayment and default rates and discount rates appropriate for the type of asset and risk. |
Deferred loan origination fees
Loan origination fees represent amounts charged by the Fund to the borrowers for such things as points, loan processing fees, underwriting fees and other similar charges. As the majority of the Fund's loans are expected to be held for sale, the Fund defers recognition of the fees until the loan is sold.
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Circle of Wealth Fund III LLC
Notes to Financial Statements
December 31, 2018
Subscription liabilities and subscription funds in transit
The Fund accepts subscription agreements and funds from prospective investors who wish to become members of the Fund. If the subscription funds are needed in the normal course of the Fund's operations on any day other than the first day of the month, the subscription funds will be borrowed at an annual rate of 6% for the odd days within the month the borrowing took place.
Income taxes
The Fund is a limited liability company for federal and state income tax purposes. Under the laws pertaining to income taxation of limited liability companies, no federal income tax is paid by the Fund as an entity. Each individual member reports on their federal and state income tax returns their distributive share of Fund income, gains, losses, deductions and credits, whether or not any actual distribution is made to such member during a taxable year.
The Fund has evaluated its current tax positions and has concluded that as of December 31, 2018, the Fund does not have any significant uncertain tax positions for which a reserve would be necessary.
Subsequent events
The Fund has evaluated subsequent events through February 4, 2019, the date the financial statements were available to be issued. No subsequent events have occurred that would have a material impact on the presentation of the Fund's financial statements.
3. | FUND PROVISIONS |
The Fund is an Idaho limited liability company. The rights, duties and powers of the members of the Fund are governed by the operating agreement and the Idaho Limited Liability Company Act. The following description of the Fund's operating agreement provides only general information. Members should refer to the Fund's operating agreement and offering circular for a more complete description of the provisions. The Manager is in complete control of the Fund business, subject to the voting rights of the members on specified matters. The Manager acting alone has the power and authority to act for and bind the Fund.
Members representing a majority of the outstanding Fund membership interests may approve or disapprove any of the following matters: (i) the Fund's merger with or conversion into another entity; (ii) causing the Fund to incur debt which would exceed the amount provided for in the offering circular; (iii) a transaction, not expressly permitted by the operating agreement or offering circular, involving a conflict of interest between the Manager and the Fund; (iv) remove the Manager if: (1) the Manager is convicted or found liable for an act of gross negligence or fraud which materially lowers the net asset value of the Fund, and (2) the holders of at least a majority of the outstanding membership interests vote in favor of such removal; (v) election of a successor manager; (vi) amendments to the operating agreement.
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Circle of Wealth Fund III LLC
Notes to Financial Statements
December 31, 2018
3. | FUND PROVISIONS (continued) Profits and losses |
Profits and losses accrued during any accounting period shall be allocated among the members in accordance with their respective membership interests maintained throughout that accounting period.
Fund expenses
The Fund shall bear all costs and expenses associated with the operation of the Fund, including, but not limited to, the annual tax preparation of the Fund's tax returns, any state and federal income tax due, legal fees, accounting fees, filing fees, and any required independent audit reports required by agencies governing the business activities of the Fund, foreclosure costs and expenses associated with the foreclosing on assets, costs associated with force placed insurance, and costs and expenses associated with the disposition of assets. For the period ended December 31, 2018, the Manager elected to absorb all operating and administrative expenses of the Fund.
Distributions
Members will be eligible for monthly distributions of the Fund's net profits. The Fund will make all distributions to the members in proportion to the membership interest they held during the period for which the distribution is declared until each member has received six percent (6%) cumulative annual preferred return. If returns are higher than 6% cumulative annual preferred return, the remaining funds will be distributed 50% to the members in proportion to the membership interest and 50% to the Manager as a performance fee. In the event that the Fund is unable to pay to the members the full preferred return in any accounting period, the shortfall shall neither cumulate nor compound into the following accounting period, and the Fund shall not be required to pay the shortfall in any succeeding accounting period.
Liquidity, capital withdrawals and early withdrawals
There is no public market for interests of the Fund and none is expected to develop in the foreseeable future. There are substantial restrictions on transferability of membership interests. Any transferee must be a person that would have been qualified to purchase a member unit in the offering and a transferee may not become a substituted member without the consent of the Manager.
A member may withdraw as a member of the Fund and may receive a return of capital if approved by the Manager, and provided that the following conditions have been met: (i) the member has been a member of the Fund for a period of at least twelve (12) months; and (ii) the member provides the Manager with a written request for return of capital at least 90 days prior to such withdrawal. If a withdrawal is approved by the Manager, the member may only withdraw up to 25% of the total withdrawal amount each following calendar quarter until the full amount is withdrawn. The Fund will use its best efforts to honor requests for a return of capital subject to, among other things, the Fund's then cash flow, the amount of Fund reserves and the Fund's then-current financial condition.
11 |
Circle of Wealth Fund III LLC
Notes to Financial Statements
December 31, 2018
4. | RELATED PARTY TRANSACTIONS Loan servicing fees |
Fund loans are serviced by a third-party servicer and a related party servicer selected by the Manager. The loan servicing companies will receive compensation from the Fund for performing these loan servicing activities. The loan servicing companies may also be entitled to retain up to 50% of any late fees and all fees for payoff demand statements and related documents and return check charges.
Loan origination fees
At the closing of a loan, a borrower will pay origination points. The origination points shall be disbursed at the closing of a loan in the following manner: 80% to the Manager or an affiliated company and 20% to the Fund.
Asset management fees
The Manager earns asset management fees of 1.75% per annum based on the Fund's net assets under management, calculated and payable monthly. The asset management fee will typically be paid on the last day of each calendar month with respect to the net assets under management as of last day of such month.
Performance fees
As described in Note 3, after payment to members of a priority return, the Manager is eligible to receive performance fees.
Operating expenses
The Manager shall be entitled to reimbursement by the Fund for all reasonable and customary expenses incurred in the formation of the Fund and in the ongoing management of the Fund.
Loan fees
The operating agreement provides for other loan fees, such as loan processing and documentation fees, to be charged by the Manager. These fees are paid directly by the borrowers and are not expenses of the Fund.
12 |
Circle of Wealth Fund III LLC
Notes to Financial Statements
December 31, 2018
4. | RELATED PARTY TRANSACTIONS (continued) Rehabilitation services |
In the event that the Fund acquires ownership of distressed real property, whether through foreclosure or otherwise, the Fund may decide to rehabilitate the property to lease or sell. To rehabilitate the property, the Fund will primarily retain the services of Arnold Professional Holdings, Inc. ("APH"), an Idaho corporation, owned by the Chief Executive Officer ("CEO") of the Manager. APH is a licensed, bonded and insured general contractor in the state of Washington. APH will receive compensation for its services equal to a fee based on the prevailing industry rate, as agreed between the Manager and APH.
Real estate commissions
The Manager or its affiliates may earn real estate commissions to list and sell real estate that the Company has acquired through foreclosure or otherwise. The Manager or its affiliates may generally earn up to six percent (6%) for such a sale. In addition, the Manager may pay a referral fee ranging from twenty percent (20%) to forty percent (40%) of the real estate commissions paid to the Manager to third party sales agents for properties where the Manager does not presently operate in.
Property management fee
In the event that the Fund acquires any real property, the Manager may cause the Fund to engage a third party to provide property management services with respect to such real property, or may elect to provide property management services itself. In the event that the Manager or its affiliates provides any such property management services, the Fund will pay the Manager or its affiliate a market rate property management fee.
Member contributions
The Manager made member's equity contributions totaling $25,000 for the period ended December 31, 2018.
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Exhibit D
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the use in the Offering Circular constituting a part of this Offering Statement on Form 1-A, as it may be amended, of our Independent Auditor's Report dated February 4, 2019 relating to the balance sheet of Circle of Wealth Fund III LLC as of December 31, 2018, and the related statements of operations and changes in member's equity, and cash flows for the period then ended and the related notes to the financial statements.
Armanino LLP |
San Ramon, California |
May 31, 2019 |
Exhibit E
Tel: (949) 379-2600 Fax: (949) 379-2610
|
90 Discovery Irvine, California 92618 www.geracilawfirm.com |
Anthony F. Geraci* Christina L. Geraci Paul Sievers Gregory M. Lee Sabine Wromar Amy E. Martinez Dennis R. Baranowski Nema Daghbandan Jaspreet Kaur Melissa Martorella Melissa L. Lucar Kevin S. Kim Jenny Park Alexa Stephenson Bryan P. Redington * Admitted in Arizona &New Jersey |
February 12, 2019
Circle of Wealth Fund III LLC 701 E. Front Avenue Floor 2 Coeur d’Alene, ID 83814
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Re: | Opinion of Counsel Securities Qualified Under Offering Statement on Form 1-A | ||
Ladies and Gentlemen:
We have acted as special counsel to Circle of Wealth Fund III LLC, an Idaho limited liability company (the “Company”) in connection with its preparation and filing with the Securities and Exchange Commission of an Offering Statement via Form 1-A (as mended or supplemented, the “Offering Statement”) pursuant to Regulation A under the Securities Act of 1933, as amended (the “Securities Act”), relating to the filing of the Offering Statement and the offering by the Company of up to $50,000,000 of the Company’s membership interests (“Membership Interests”).
In rendering the opinion set forth below, we have reviewed such documents and made such examination of law as we have deemed appropriate to give the opinions set forth below. We have relied, without independent verification, on certificates of public officials and, as to matters of fact material to the opinions set forth below, on certificates of officers of the Company. As to certain matters of fact, both expressed and implied, we have relied upon representations, statements or certificates of officers of the Company.
Based on the foregoing, and subject to the stated assumptions, we are of the opinion that, when issued in accordance with the terms of the Offering Circular, the Membership Interests will be validly issued and fully paid, and holders of the Membership Interests will have no obligation to make payments or contributions to the Company or its creditors solely by reason of their ownership of the Membership Interests.
Our opinion set forth herein is limited to the limited liability company law of the State of Idaho and to the extent that judicial and regulatory orders or decrees or consents, approvals, licenses, authorizations, validations, filings, recordings or registrations for governmental authorities are relevant, to those required under such law. We express no opinion and make no representation with respect to any other laws or the law of any other jurisdiction.
We hereby consent to the filing of this opinion as an exhibit to the Offering Statement and Form 1-A and to any references to this firm in any prospectus contained therein. In giving this consent, we do not admit that we are experts within the meaning of Section 11 of the Securities Act or within the category of persons whose consent is required by Section 7 of the Securities Act.
Our opinion is expressly limited to the matters set forth above and we render no opinion, whether by implication or otherwise, as to any other matters relating to the Company or any other document or agreement involved with the issuance of the Membership Interests. We assume no obligation to advise you of facts, circumstances, events or developments which may hereafter be brought to our attention and which may alter, affect, or modify the opinions expressed herein.
Please feel free to contact me if you have any questions at the above contact information.
Very truly yours,
GERACI LAW FIRM
/s/ Geraci Law Firm
Geraci Law Firm |
Exhibit F
NON-OWNER OCCUPIED RESIDENTIAL LOAN UNDERWRITING GUIDELINES
Effective: December 1, 2012
Modified: December 20, 2018
CIRCLE OF WEALTH FUND II LLC
THESE NON-OWNER-OCCUPIED RESIDENTIAL LOAN UNDERWRITING GUIDELINES ARE CONFIDENTIAL AND PROPRIETARY. THEY ARE INTENDED FOR INTERNAL USE ONLY. DELIVERY OF THESE GUIDELINES TO ANYONE (INDIVIDUAL OR ENTITY) NOT EMPLOYED BY OR UNDER A CONFIDENTIALITY AGREEMENT WITH COGO CAPITAL IS STRICTLY PROHIBITED AND IS GROUNDS FOR IMMEDIATE TERMINATION.
1 |
Table of Contents
Table of Contents | 2 |
Article I. Introduction. | 5 |
Article II. Loan Application Process | 2 |
Article III. Loan Programs | 2 |
Section 3.01 Loan Type | 6 |
(a) Security | 6 |
(b) Applicant | 6 |
(c) Loan Purpose | 6 |
(d) Interest Rates and Fees | 6 |
(e) Loan Fees | 6 |
(f) Loan Terms | 6 |
(g) Interest only | 6 |
(h) Lending Area | 6 |
(i) Typical Loan to Value | 6 |
(j) Minimum Loan Amount | 7 |
Section 3.02 Applicant’s Loan Package | 7 |
(a) Purchase Transaction | 7 |
(b) Refinance Transaction | 7 |
(c) Additional Documents – Loan Processing | 8 |
Article IV. Underwriting the Applicant | 8 |
Section 4.01 Applicant Eligibility | 8 |
Section 4.02 Formation and Governing Documents | 9 |
(a) Corporation | 9 |
(b) Limited Liability Company | 9 |
(c) IRA | 10 |
(d) Trust | 10 |
(e) Non-Profit | 10 |
Section 4.03 Financial Condition | 11 |
(a) Credit Report | 11 |
(b) Bank Statements | 11 |
(c) Tax Returns | 11 |
(d) Liquid Reserves | 12 |
Section 4.04 Capital and Reserve Requirements | 12 |
Section 4.05 Payment Guaranty | 13 |
Section 4.06 Source of Funds | 13 |
Section 4.07 Borrower Resume | 13 |
Section 4.08 Foreclosures and Bankruptcies | 13 |
Section 4.09 Repeat Borrower Policy/Repeat Broker Policy | 14 |
Section 4.10 Maximum Open Loans Policy | 14 |
Article V. Underwriting the Property | 14 |
Section 5.01 Non-Owner Occupied | 14 |
Section 5.02 LTV | 15 |
Section 5.03 Property(ies) Valuation | 15 |
Section 5.04 Leases & Rent Roll | 16 |
Section 5.05 Rehab | 17 |
Section 5.06 Contractor Bids | 18 |
Section 5.07 Title Report | 18 |
Section 5.08 | 18 |
Section 5.09 | 18 |
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Section 5.10 Private Road Access | 18 |
Section 5.11 Condominiums | 19 |
Section 5.12 Manufactured Housing | 19 |
Section 5.13 Uninhabitable Properties (Fire, Flood, Condemned, Etc.) | 19 |
Section 5.14 Property Located within HOA | 19 |
Section 5.15 Leasehold Interest | 19 |
Section 5.16 Seasoning of Property | 20 |
(a) Refinance | 20 |
(b) Purchase | 20 |
(c) Gift; Quit Claim | 20 |
Section 5.17 Cross-Collateralized Loans | 20 |
Article VI. Individual Applicants; Community Property States; and Homestead Laws | 20 |
Article VII. Second Mortgage; Additional Mortgages | 21 |
Article VIII. Cash Out Policy | 21 |
Section 8.01 Rehabbing Funds | 21 |
Section 8.02 Non-Rehab Full Cash Out | 21 |
Article IX. Loan Committee | 22 |
Section 9.01 Purpose of Loan Committee | 22 |
Section 9.02 Loan Committee Meetings | 22 |
Article X. Loan Approval; Document Preparation; Loan Documents | 23 |
Article XI. Loan Closing; Disbursement of Funds | 23 |
Exhibits | |
Exhibit A – Loan Fee Chart | |
Exhibit B – Specials | |
Exhibit C – Pricing Matrix | |
Exhibit D – Judicial/Non-Judicial Map |
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DISCLAIMER
This manual (“Manual”) sets out the underwriting policies, procedures, and guidelines for use by Circle of Wealth Fund III LLC (the “Company”). The Manual reflects current practices and requirements and may be amended periodically. All materials contained herein are the property of the Company. No part of this Manual may be photocopied, duplicated, or reproduced for any purpose without express, written consent of the Company.
For further information on the underwriting policies, procedures, and guidelines of the Company as contained in this Manual, please contact the Company at:
Circle of Wealth Fund III LLC
701 E Front St.
Coeur d’Alene, ID 83814
Phone: (800) 971-5988
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Article I. Introduction.
The Company funds a wide variety of loan products, while many of the products are not of a conventional nature, the loans must be sound and prudent based on the different characteristics and risks associated with each loan scenario. This Manual reflects the Company’s non-owner occupied residential property lending program, which is designed to provide real estate loans to investors on non-owner occupied one to four-unit residential properties. The investment loans are intended to be a first-mortgage-lien-specialty-lending asset. If loan applications submitted for purchase or re-finance meet the Company’s eligibility standards (“Guidelines”) and are deemed prudent as described in this Manual, the loan will be funded. The loan parameters and the adherence of the loan to the Guidelines determine a loan's eligibility for funding by the Company.
Generally, the Guidelines should be met for all loans submitted to the Company for funding. All loans will be fully reviewed for viability, eligibility, and collateral. Loans that do not meet all of the applicable Guidelines are not necessarily excluded from approval. The Company may review exceptions to the Guidelines on a case-by-case basis, provided that compensating factors exist and good business sense prevails. The Guidelines may be amended or supplemented by the Company from time to time by issuance of revised pages, or any other written statements. Any amendments or revisions will become effective on the date stated in the written statement or the date set forth on the amended Manual.
Article II. Loan Application Process.
Applications are accepted on a continuous basis and may be submitted via e-mail to a loan officer. An applicant (as used herein the term applicant will be referring to the individual or business entity that is seeking to become the borrower) must submit a completed loan application and provide the required documents necessary to determine eligibility. A loan officer will conduct an initial evaluation of the loan package and applicant against these Guidelines, and ensure that the loan package and application are not subject to any disqualifying factors. Once the loan officer has conducted an initial evaluation, the loan officer will deliver the initial package to the loan processing department. The loan processing department will obtain any follow-up documentation from the applicant, and supplement the loan package with additional information as discussed within this Manual. At such time, as the loan processing department is in possession of a complete loan file, the entire loan package will be submitted to the underwriting department for review. The underwriting team will review the loan application package and may request additional information prior to the denial or approval of the loan, and may attach certain conditions to the loan file. Any loan outside of these Guidelines shall be submitted to the Company’s Loan Committee for final denial or approval. Once a loan is approved or denied by the Company’s underwriting department or Loan Committee, the loan officer will notify the applicant of the decision.
Article III. Loan Programs.
The following represents a brief description of the Company’s non-owner occupied residential loan programs.
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Section 3.01 Loan Type. The Company arranges only business and commercial purpose loans. The Company shall not arrange any consumer loans or transactions (i.e. personal, family or household loans). All properties must be non-owner occupied at the time of funding and for the duration of the loan.
(a) | Security. All loans must be secured by first liens on the subject property. These may be called First Trust Deeds, First Deeds of Trust, or First Mortgages, depending on state regulations and customs. No junior lien positions may be accepted. Further, any encumbrances evidencing an obligation with priority ahead of Company must be eliminated prior to funding so that Company’s security is in first position. |
(b) | Applicant. The applicant must be a properly formed, validly existing U.S. entity. Loans are not permitted to individuals or foreign entities. |
(c) | Loan Purpose. The loan purpose must be for business and/or commercial purposes and not for personal, family or household use. |
(d) | Interest Rates and Fees. The Company’s interest rates to applicants typically do not exceed 15% per annum, and loan origination points typically do not exceed 5% of the loan amount. Exact rates and fees for a specific transaction are determined following the Company’s risk assessment of the transaction. All loan fees must be paid at closing by the applicant. Some rates are capped by state law. The loan officer shall consult Company’s most recent state-by-state maximum interest and fee chart to confirm that the rates and fees do not exceed the state caps. See Exhibit C for Pricing. |
(e) | Loan Fees. The applicant must pay an application fee at the time of submitting a loan. The application fee is $197 for the first guarantor and $97 for each additional guarantor. The applicant must also pay a processing/broker fee equal to a minimum amount of $997 per $300,000 of the loan amount per transaction, which must be paid at the time of closing. See Exhibit A for a chart detailing the loan fee examples. |
(f) | Loan Terms. Typical loan terms range from six (6) months to 36 months. |
(g) | Interest only. Loans provided by the Company are typically interest-only loans with the full principal due at maturity. Some longer-term loans may have an amortization schedule established by the Underwriter. |
(h) | Lending Area. The specific states in which this loan program is available are the following states: AL, AK, AR, AZ, CA, CO, CT, DE, DC, FL, GA, HI, ID, IL, IN, IA, KS, KY, LA, ME, MD, MA, MI, MS, MO, MT, ND, NH, NJ, NM, NY, NC, OH, OK, PA, SC, TN, TX, UT, VA, WA, WV, WI, and WY. Loans are available in California through Cogo Capital Orange County, Inc. – California BRE License #: 01928542; NMLS #: 1051036. Loans are available in Arizona through Cogo Capital – Arizona Mortgage Broker License # 0950084. |
(i) | Typical Loan to Value. Typical loan to value ranges from 50% to 70% with caps of 80% to 100% loan to cost. |
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(j) | Minimum Loan Amount. Minimum loan amount is $30,000. |
Section 3.02 Applicant’s Loan Package. The
following represents the typical loan package requirements for the Company’s above-described loan program.
(a) | Purchase Transaction. If the applicant submitted an application to obtain a loan for a purchase transaction, the applicant must be able to provide the following documentation or information to the Company. The Company’s underwriting department will not begin underwriting the loan file until the Company is in possession of all necessary information. |
(i) | Fully completed and executed loan application; |
(ii) | Background Check (provided by an approved vendor); |
(iii) | Tri-Merge Credit Report (provided by an approved vendor); |
(iv) | Collateral Property DNA Report (if applicable); |
(v) | Valid photo ID of borrowing entity’s authorized signatory and any guarantor; |
(vi) | Signed Social Security Card and/or ITIN; |
(vii) | Fully completed and executed Purchase and Sale Agreement; |
(viii) | Executed real estate schedule sold and owned for borrower and guarantor; |
(ix) | Applicant’s bank statements; |
(x) | Previous Year Tax Returns or SSA-1099; |
(xi) | Evidence for source of down payment, if applicable; |
(xii) | Terms of seller carry-back financing, if applicable; |
(xiii) | Recorded entity formation documents; |
(xiv) | Governing documents of applicant entity; |
(xv) | Federal Tax Identification Number and state identifying number; |
(xvi) | Appraisal; |
(xvii) | Insurance binder; |
(xviii) | Flood Insurance binder (if located in flood zone); |
(xix) | Flood Certificate; |
(xx) | Preliminary title report; |
(xxi) | Closing protection letter from vendor on company’s approved list; |
(xxii) | Statement of Work, if applicable; |
(xxiii) | Contractor bids, license, and insurance, if applicable; |
(xxiv) | Draw schedule (if applicable); |
(xxv) | Fully executed Zero Tolerance Fraud Policy form; |
(b) | Refinance Transaction. If the applicant submitted an application to obtain a loan for a refinance transaction, the applicant must be able to provide the following documentation or information to the Company. The Company’s underwriting department will not begin underwriting the loan file until the Company is in possession of all necessary information. |
(i) | Fully completed and executed loan application; |
(ii) | Background Check (provided by an approved vendor); |
(iii) | Tri-Merge Credit Report (provided by an approved vendor); |
(iv) | Collateral Property DNA Report (if applicable); |
(v) | Valid photo ID of borrowing entity’s authorized signatory and any guarantor; |
(vi) | Signed Social Security Card and/or ITIN; |
(vii) | Executed lease agreement(s) (if applicable); |
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(viii) | Executed rent roll certificate (if applicable); |
(ix) | Executed real estate schedule sold and owned for borrower and guarantor; |
(x) | Applicant’s bank statements; |
(xi) | Settlement statement/HUD from acquisition; |
(xii) | Previous Year Tax Returns or SSA-1099; |
(xiii) | Recorded entity formation documents; |
(xiv) | Governing documents of applicant entity; |
(xv) | Federal Tax Identification Number and state identifying number; |
(xvi) | Appraisal; |
(xvii) | Insurance binder; |
(xviii) | Flood Insurance binder (if located in flood zone); |
(xix) | Flood Certificate; |
(xx) | Preliminary title report; |
(xxi) | Closing protection letter from vendor on company’s approved list; |
(xxii) | Statement of Work, if applicable; |
(xxiii) | Contractor bids, license, and insurance, if applicable; |
(xxiv) | Draw schedule (if applicable); |
(xxv) | Fully executed Zero Tolerance Fraud Policy form; |
(xxvi) | Formal Pay Off Valid through anticipated date of closing. |
(c) | Additional Documents – Loan Processing. The following represents additional loan package documents that should be obtained by the Company’s loan processing department prior to submitting the full loan package to the Company’s underwriting department. The Company’s underwriting department will not begin underwriting the loan file until the Company’s processing department has obtained the following information (which is in addition to the information provided to the Company by the applicant). |
(i) | Secretary of State’s website print out or Certificate of Good Standing for applicant that is an entity; |
(ii) | Agent First Report; |
(iii) | USPS report; |
(iv) | UCC filing searches, if applicable. |
If a loan processor submits a loan file to the underwriting team that is not inclusive of information identified above, the underwriting team shall return the loan file to the loan processor until the loan package is complete.
Article IV. Underwriting the Applicant.
Section 4.01 Applicant Eligibility. Applicant must be a properly formed, validly existing U.S. entity formed in any
one of the 50 states or the District of Columbia. The Company may make an exception for certain individuals when extraordinary
circumstances dictate an exception should be made. Exceptions to the applicant being an entity must be approved by either the Company’s
legal counsel or the Loan Committee.
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Section 4.02 Formation and Governing Documents. The Applicant must produce the following documents regarding the entity:
(a) | Corporation. |
(i) | Articles of Incorporation and Certificate of Existence/Good Standing. |
§ | Recorded Articles of Incorporation are always required. |
§ | Certificate of Good Standing (or equivalent) are required if available in the jurisdiction of corporate formation. |
(ii) | Bylaws. |
§ | Bylaws governing the day to day activities of an entity that is a corporation. Bylaws also outline who has the authority to execute documents on behalf of and bind the corporation. |
· | A corporation is owned by shareholders |
· | Shareholders elect a board of directors |
· | The board of directors appoint the company’s officers |
· | The signatory authority of the company’s officers should be set forth in the bylaws |
§ | If borrowing entity does not have bylaws, an acceptable alternative is a corporate consent form executed by all shareholders designating an authorized signatory for purposes of the loan documents. |
§ | If a corporation is owned by a single shareholder who also serves as the sole board member and sole officer of the corporation, the corporation may not have bylaws. In this instance, the Company will accept an affidavit signed at closing by the sole shareholder representing that he/she is the sole shareholder, sole director, sole officer and sole signatory authority. |
§ | Bylaws or other satisfactory legal document must state percentage ownership of all shareholders totaling 100%. |
(iii) | Non-Signing Owner Consent. |
§ | Shareholders who have an ownership interest of less than 30% of the corporation and will not sign as a guarantor must provide a signed Consent Form in the form approved by Company. |
(iv) | EIN Number. |
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§ | Applicant must provide the Federal Tax Identification Number (EIN) for the entity. The Company requires the electronic or hard copy of form delivered from the IRS to verify the entity’s EIN. |
(b) | Limited Liability Company. |
(i) | Certificate of Formation / Articles of Formation/Articles of Organization and Certificate of Existence/Good Standing. |
Recorded Certificate of Formation or Articles of Formation or Articles of Organization (differs by state) is required. |
§ | Certificate of Good Standing (or equivalent) are required if available in the jurisdiction of corporate formation. |
(ii) | Operating Agreement. |
§ | The operating agreement governs the day to day activities of a limited liability company. The operating agreement also outlines who has the authority to execute documents on behalf of and bind the entity |
· | LLC’s typically are owned by members and managed by a manager. The members may or may not be the manager. |
· | If the LLC is managed by a manager, typically, the members will not have the right to execute documents and bind the entity. |
· | If the LLC is member-managed, then a specific percentage majority of the members will be required to execute documents and bind the entity. The operating agreement should set forth the degree or percentage of majority approval that is required. |
§ | If borrowing entity does not have operating agreement, an acceptable alternative is a consent form executed by all known members designating an authorized signatory for purposes of the loan documents. |
§ | If the LLC is owned by a single member, the entity may not have an operating agreement. In this instance, the Company will accept an affidavit signed at closing by the sole member representing that he/she is the sole member and the only person who has authority to execute on behalf of the entity. |
§ | Operating Agreement or other satisfactory legal document must state percentage ownership of all members totaling 100%. |
(iii) | Non-Signing Owner Consent. |
§ | Members who have an ownership interest of less than 30% of the LLC and will not sign as a guarantor must provide a signed Consent Form in the form approved by Company. |
(iv) | EIN Number. |
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§ | Applicant must provide the Federal Tax Identification Number (EIN) for the entity. The Company requires the electronic or hard copy of form delivered from the IRS to verify the entity’s EIN. |
(c) IRA
(i) | Real Estate Investment Authorization |
(ii) | Action of Members designating authorized signer for above. |
(iii) | At the discretion of the Company, IRA’s may have additional requirements. |
(d) Trust
(i) A Recorded Trust Registration Document is required.
(ii) Non-Recorded, Non-Registered, and Non-Testamentary documents will not be accepted.
(iii) At the Company’s discretion, additional trust documents may be required.
(e) Non-Profit
(i) Recorded Organizational documents
(ii) Letter documenting IRS 501(c)3 tax exemption status.
(iii) Bylaws or other applicable governing documents.
(iv) At the Company’s discretion, additional documents may be required.
(v) | Applicant must provide the Federal Tax Identification Number (EIN) for the entity. The Company requires the electronic or hard copy of form delivered from the IRS to verify the entity’s EIN. |
(vi) | Company will only accept bank statements from the non-profit entity and will not accept personal bank statements. |
Section 4.03 Financial Condition.
(a) | Credit Report and Disqualifying Factors. Credit Reports are required of each applicant. The company does not currently have a minimum required credit score but the credit score is a factor when pricing the loan. Refer to Exhibit C for pricing details. Credit Reports pulled by the Company are valid for 90 days. If the report is pulled by the company and the loan is in process or if another loan is started and closed within the 90-day period, only one report is needed. However, if the 90-day period expires prior to the closing date of any loan the Company, in its sole discretion, may require an additional credit report to be pulled and supplied to Underwriting for final approval. A 3rd party credit report will not be permitted to fulfill the credit report requirement. |
If the applicant is an entity, the Company shall require a credit report on each owner (member if an LLC or shareholder if a corporation) who owns an interest exceeding 30% of the applicant entity and/or any guarantor of the loan. The company will average all mid-scores to calculate the credit score used in reference to pricing the loan.
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The Company will decline a loan if the credit report contains any of the following:
(i) Bankruptcy or foreclosure within the previous 12 months
(ii) Active federal or state tax lien(s) without a Federal or state approved payment plan and 6 months payment history
(iii) Active child support lien(s) in default or subject to an enforcement action
(b) | Bank Statements. The applicant is required to supply the Company with the 2 most recent bank statements. In lieu of the 2 most recent bank statements, the applicant may provide a pdf of 60 days’ of the applicant’s bank account activity, which can be obtained online for certain banks, as long as the pdf details a running balance of the account. If the Company is unclear who the account owner is, the applicant may be asked to provide proof of ownership. |
It is acceptable for a majority owner (30% + ownership interest) of the applicant entity to submit his/her/its bank statements to satisfy the above described requirement. This may also be required of all guarantors.
The Company uses the bank statements to evaluate the applicant’s financial conditions to determine whether the applicant has sufficient capital to satisfy the capital and reserve requirements discussed below. At the company’s discretion additional financial documents may be required.
(c) | Tax Returns – Prior year tax returns are required on all loans. Form 1040 will be required from each guarantor. If the entity is a multiple member partnership or a corporation that has been in existence > 1 year, then the 1065, 1120, and/or K-1may also be required. |
The purpose of the tax returns is to help support the reasonableness of the applicant’s income as well as the measurement of the borrower’s financial responsibility.
AGI will not be used in determining the reasonability of the income.
If the prior year tax return is unavailable due to the application date being before file date of April 15 (individual) or March 15 (corporation/partnership) the 2-year prior will be accepted.
If the prior year tax return is unavailable due to an extension, the applicant will be required to submit a copy of the approved extension as well as the prior 1-year’s returns.
(d) Liquid Reserves – Liquid reserves must be proven with the two (2) most recent account statements and can be comprised of the following Asset Types.
Asset or Account Type | Weight |
1. Checking/Savings/Money Market Accounts | 100% |
2. Publicly traded stocks, bonds, and mutual funds | 50% |
3. Annuities | 50% |
4. Individual Retirement Accounts (IRAs), SEP or Keogh | 50%, 100% if over age 60 |
5. 401(k) plans (net of any money borrowings against the plan) | 50% |
6. Trust Assets (must document right to access) | 50% |
7. Business funds (must have 100% ownership of entity or written notarized permission) | 100% |
8. Funds received from cash out loan | 50% |
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9. Non-vested or restricted stock | 0% |
10. Foreign currency | 75% |
11. Proven credit lines (for rehab reserve only) | 50% |
Section 4.04 Capital and Reserve Requirements. The Company requires the applicant demonstrate that he/she/it has sufficient capital to cover the following applicable costs and expenses:
· | Down Payment (for a purchase transaction); |
· | 10% of Construction / rehab costs AND 10% of Construction / rehab costs for any other open Rehab/Construction loan balances (if the property will be rehabbed); |
· | Closing costs that exceed the loan amount (for all transactions); |
· | Reserve requirement |
o | 3 months’ worth of interest only payment reserve (for all open loans with the Company); and |
o 3 months’ worth of payment reserve for any second or third mortgage on the property, if applicable (for all open loans with the Company). Collectively, this reserve requirement shall be referred to herein as the “Reserve Requirement.”
The Company may allow the above requirements to be satisfied by either the applicant’s primary principal (30% + ownership interest), any individual guarantor, or a combination of assets of all guarantors in lieu of the applicant satisfying the above requirements.
To establish whether the applicant has sufficient cash to meet the Reserve Requirement, the applicant shall submit the most recent 2 months bank statements. The Company will subtract the cash to close and any other loan costs from the ending balance on the most recent statement and then average the remaining balance with the ending balance from the previous month statement, and that average should be sufficient to cover the Reserve Requirement. If the monthly average is insufficient to satisfy the reserve requirement, the LTV will not exceed 50%.
If the applicant is requesting a loan for a refinance transaction and the subject property is cash flowing as a result of being rented out, the Company shall only require that the applicant demonstrate sufficient cash flow for the property of 2-months Reserve Requirement as opposed to a 3-month Reserve Requirement. The purpose of this is for the Company to be able to verify the rental cash flow from the bank statements. If the cash flow is not verifiable by the 2 months of bank statements this exception is not met.
Section 4.05 Payment Guaranty. The Company shall require all owners (members if an LLC or shareholders if a corporation) who own an interest exceeding 30% of the applicant entity to execute a personal payment guaranty for repayment of the loan. Notwithstanding anything contained herein to the contrary, in the event that the applicant is a self-directed IRA or an entity that is owned by a self-directed IRA, and the owner of the self-directed IRA is prohibited under IRS rules from executing a personal guaranty, the applicant will need to find a 3rd party to guaranty the loan or the Company shall cap the loan to value at 50%.
Section 4.06 Source of Funds. If the applicant is using the applicant’s funds to (i) pay for closing
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costs; (ii) establish reserves; (iii) pay the down payment; or (iv) pay for the property rehab. The Company shall require the applicant to provide bank statements to demonstrate sufficient funds to cover items (i), (ii), (iii), and (iv).
If the applicant is using funds not sourced to an applicant’s bank account to (i) pay for closing costs;
(ii) establish reserves; (iii) pay the down payment; or (iv) pay for the property rehab, the Company shall require that the party providing the funds necessary to pay any of the above expenses has sufficient capital necessary to pay those expenses. The Company shall require that the party providing the funds provide proof of sufficient capital by way of: (i) banks statements demonstrating the funds are set aside in a verifiable bank account; (ii) a verifiable receipt from an escrow company into which the funds have been deposited for purposes of holding the funds until the closing of the loan transaction; or (iii) any other verifiable means that demonstrates to the satisfaction of the Company’s underwriting department that the party paying any of the above expenses has sufficient capital to pay those expenses.
Section 4.07 Borrower Resume. The applicant shall submit an executed schedule of real estate owned detailing information about properties the applicant owns. If the applicant is an entity, the schedule of real estate will detail all properties that each principal owner (any person owning more than 30% of the applicant) owns and all properties that the entity owns. This schedule of real estate shall be on a form provided by the Company or a form that is acceptable to the Company.
In addition to the applicant’s current real estate holdings, the applicant must submit a schedule of real estate sold detailing past real estate investment properties that have been sold. In order to qualify for the increased LTV as outlined in the table contained in Section 5.05, the applicant must show executed purchase and sale HUDs to demonstrate the income earned on each sold transaction.
Section 4.08 Foreclosures and Bankruptcies. When the applicant submits a credit report for the applicant or any guarantor or the Company pulls a credit report for the applicant or any guarantor, and the credit report shows the applicant or any guarantor has had or is currently involved in any foreclosure action or bankruptcy proceeding, the applicant and/or guarantor shall be required to submit a letter of explanation for each instance of a foreclosure or bankruptcy on the applicant and/or guarantor’s credit report. Credit reports are used primarily for loan pricing rather than loan approval however the company may decline a loan based on the credit report if it contains foreclosure or bankruptcy within the last 12 months, or if it shows an active tax lien without a Federal or state approved payment plan and 6 months payment history, or active child support lien in default or subject to an enforcement action. The company will not originate a loan if any guarantor or borrowing entity has an active, not-discharged, bankruptcy proceeding.
Section 4.09 Repeat Borrower Policy/Repeat Broker Policy. The Company encourages repeat borrowers; however, if an applicant is a current borrower with one or more outstanding loans, and that applicant has failed to make a loan payment on or before the expiration of the applicable grace period provided for in the promissory note (the typical grace period is 5 days after the first day of each month) on any loan, the applicant will be precluded from obtaining an additional loan through the Company until such time as the loan or loans in which payments have not been made on or before the expiration of the applicable grace period are brought current.
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The Company may make an exception for an applicant who, within the last six (6) months, has made one or more loan payments on one or more loans between the 6th day of the month and the 30th/31st day of the month only with a majority consent of the Company’s lender committee and only after the applicant has submitted a letter of explanation regarding the time of the payments. If the Company makes an exception under this paragraph, the Company shall require that, prior to the funding of any new loan, the applicant pay any and all late fees and penalties which are then due and payable under any promissory note obtained through the Company.
The Company will not make exceptions for an applicant who, within the last six (6) months, has made any payment to the Company more than 30 days late.
Section 4.10 Maximum Open Loans Policy. The Company allows borrowers to have a maximum of 4 open loans at one time and of those 4 open loans only 1 may be a Rehab/Construction Loan. Upon the payoff of a loan the borrower is able to obtain a new loan, but only in accordance with the applicable maximum open loans limitations described in this Section.
From time to time, the Company offers certain Maximum Open Loans “specials” to some of its clients. The current Maximum Open Loans “specials” are set forth on the attached Exhibit B. Subject to validly existing legal obligations, the Company may discontinue or make changes to Maximum Open Loans “specials” in its sole discretion and without notice. Please see explanations in Exhibit B to determine if the applicant is currently able to obtain “special” offers
Article V. Underwriting the Property.
Section 5.01 Non-Owner Occupied. The Company does not broker or fund loans on 1-4 unit residential property that is (or is to be) owner occupied. The Company considers the property to be “owner-occupied” if the applicant or any owner of the borrowing entity or any guarantor resides (or intends to reside) at the property, or if any person who is a close family member of an individual applicant or an owner of the borrowing entity or a guarantor resides (or intends to reside) at the property. A “close family member” shall refer to mother, father, sibling, grandmother, grandfather, son, daughter, grandson, and granddaughter.
Section 5.02 LTV for As-Is Non Rehab Loans. (This section is specific to As-Is, Non-Rehab Loans. For LTV requirements regarding Rehab/Construction Loans refer to section 5.05)
For as-is purchases, the following LTV guidelines apply:
Purchase Price | 90% |
Purchase Closing Costs | 0% |
Not to Exceed LTV | 65% |
*The LTV table above does not apply to Cook County, Illinois; Cuyahoga County, Ohio; Baltimore County, Maryland; or Wayne County, Michigan. In these counties, the maximum LTV is 50%.
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For loans in the amount of $40,000 or less, the maximum loan to value shall be 50% of the “as is” value as determined by Section 5.03.
In the event of a Cash-Out transaction refer to Article VIII.
In the event of Rehab/Construction Loan refer to Section 5.05
From time to time, the Company offers certain LTV “specials” to some of its clients. The current LTV “specials” are set forth on the attached Exhibit B. Subject to validly existing legal obligations, the Company may discontinue or make changes to LTV “specials” in its sole discretion and without notice. Please see explanations in Exhibit B to determine if the applicant is currently able to obtain “special” offers.
Section 5.03 Property(ies) Valuation
Appraisal - The Company requires that all applicants obtain an appraisal from a 3rd party appraiser from the approved vendor list. The Company may accept a different 3rd party appraisal of the subject property; provided, however, such appraisal must be dated within 90 days of the applicant’s loan application, and; provided, further, the Company may require a re-certification from the 3rd party appraisal company, which cost shall be paid by the applicant. The Company, in its sole and absolute discretion, may decide not to accept an appraisal that is provided by the applicant or a broker associated with the applicant. If the Company chooses to accept an appraisal that is not in the name of the Company, as part of its acceptance of that appraisal, the Company shall require that the appraisal be assigned to the Company and the appraiser execute a consent form allowing the Company to share the appraisal with potential funders.
(a) | As-Is, Non-Rehab Loan - Appraisals are ordered as an “As Is” Value appraisal. The company requires a minimum of 3 As Is comparables, of like kind and similar construction, sold within the last 6 months. |
(b) | Rehab/Construction loans are ordered as an “ARV” appraisal. The ARV appraisal will include an “As Is” value to be contained in the appraiser’s notes. The ARV appraisal will also include the description of the work that must be completed to achieve the After Repaired Valuation (ARV). The company requires a minimum of 3 As-Is and 3 ARV comparables, of like kind and similar construction, sold within the last 6 months. |
If an appraisal is over 90 days old (from appraisal date to Closing Date), the Company may require the applicant obtain a new appraisal, recertification, or desk review.
Other Valuation Tools – At the Company’s discretion the Company may require additional valuations to be accessed to test the reasonability of the Appraisal. If there is a question as to the reasonability of the Appraisal, a desk top review appraisal may be ordered at the expense of Company and such costs shall not be charged to the applicant. In such an instance, the value of the property for purposes of determining LTV shall be the mean average of: (i) the original Appraisal value; and, (ii) the desk top review appraisal value.
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Section 5.04 Leases & Rent Roll. If the subject property is currently being rented out at the time of the applicant’s loan application, the applicant shall produce all current leases for all tenants occupying the subject property by filling out and executing a rent roll indicating the name of the tenant(s) and the amount of monthly rent paid by each tenant.
The information set forth on the rent roll should match the corresponding information set forth within each lease. The rent roll must be signed by the applicant and shall either be on the Company’s form or a rent roll form that is acceptable to the Company.
If the Company is unable to match up bank statement deposit records with the lease amounts set forth on the rent roll (and/or the copies of leases provided by the applicants), the Company’s underwriting team may ask for additional information, including additional bank statements, to verify the flow of monthly rental payments.
To verify the accuracy of any rent roll, the Company may request a copy of any portion of the applicant or the principal owner’s tax return which indicates the real estate owned by the applicant or the principal owner.
Section 5.05 LTV for Rehab/Construction Loans. The Company may allow the applicant to access repair or collateral improvement funds as part of the loan; provided, that the total amount of all funds deployed does not exceed the maximum LTV and LTC guidelines shown in the table below. Applicants can qualify for increased LTV and LTC based on either a credit report pulled by the Company or experience documented by purchase and sale HUDs demonstrating profit earned on each sold transaction. The borrower may be approved for a higher LTV based on education level through related company, Lee Arnold System of Real Estate lending. These exceptions are listed in Exhibit B.
Purchase Price | 90% |
Rehab | 100% |
Purchase Closing Costs | 0% |
Not to Exceed LTV | 65% |
*The LTV table above does not apply to Cook County, Illinois; Cuyahoga County, Ohio; Baltimore County, Maryland; or Wayne County, Michigan. In these counties, the maximum LTV is 50%.
Contractor Bid - The Company requires all Rehab loans to include a Contractor Bid from a licensed and insured Contractor based state or local licensing requirements. Refer to Section 5.06 for details.
The company requires the applicant to escrow funds used for rehab purchases per the specific details in Section 5.06. Prior to the Company providing escrow disbursement authorization, the Company shall be provided certain documentation and information regarding the rehab or renovation work. These requirements shall be detailed in the escrow agreement which will be executed at closing and may include, but not be limited to, receipts, contractor/subcontractor bids, lien waivers, before and after pictures of work performed or to be performed, certificates of completion, and city or private inspector reports, if applicable.
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Prior to the Company providing fund disbursement for permittable work, (such as plumbing, electrical, and HVAC), the borrower must supply permits, lien waivers (if applicable) and proof of completion of the work done by a licensed and insured contractor. The disbursements for the rehab work will be approved upon the submission of these documents amongst the other previously mentioned documentation.
Section 5.06 Contractor Bids. With every loan transaction in which a portion of the loan proceeds will be used to make improvements to the property, the Company requires the applicant submit contractor bids for the improvements to be made. The contractor bids must be from a licensed, insured contractor, which may include the applicant or any of the applicant’s principals. The Company shall require the establishment of an escrow account with 110% of the rehab funds based upon the contractor bid. The draws will be released on a reimbursement basis according to a written draw schedule agreed to and signed at closing. The final 10% of the 110% escrowed rehab funds shall not be released under any circumstance until the final completion of all improvements to the property as detailed on the written draw schedule. Because the rehab loan will be based on reimbursement, the borrower must show reserves of 10% of the rehab budget.
The contractor’s bid will be evaluated by the use of multiple inspection reports. The Company may use discretion within the multiple reports to adjust the rehab funds lent on the project based on these multiple reports.
Section 5.07 Title Report. For all transactions, applicant shall be required to deliver to the Company a preliminary title report for the subject property(ies) from a Company-approved vendor list.
If the applicant is pledging additional collateral as part the loan application, applicant shall deliver to the Company a preliminary title report for all properties.
Section 5.08 Private Water Supply – Well. For any property that will be used as security for a potential transaction, if the property obtains its water supply from any source other than a municipal water utility, the applicant shall demonstrate that the property securing the loan has permanent access and rights to culinary water meeting all state, local, and federal regulatory requirements. This will require, at a minimum, that the applicant provide a certification from the local health district, other applicable local governmental agency, or licensed inspector verifying that the water source utilized for the residence meets applicable requirements. Where water is obtained from any source located off of the property, the applicant shall demonstrate that its access and ability to access and utilize the water is permanent in nature. This may include a well sharing agreement, an easement (including access for repairs and replacements of necessary infrastructure). If the Company cannot verify that the subject property has permanent legal access to a culinary water source, no loan shall be made.
Section 5.09 Private Sewage – Septic System. For any property that will be used as security for a potential transaction, if the property is served by a septic system, the applicant shall be required to
submit a septic tank and system verification from a licensed installation contractor, or from the applicable local governmental agency regulating septic and sewer systems.
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Section 5.10 Private Road Access. For any property that is accessed by a private road, the Company requires that a private road access/maintenance agreement be recorded on title. The private road access/maintenance agreement must ensure continued access to the property or verification that the road cannot be closed or shut off for access to the property.
Section 5.11 Condominiums. If the subject property is a condominium, notwithstanding any other requirement contained in this Manual, the following shall apply:
· | The applicant must supply the Company with a copy of COA/HOA governing documents, including bylaws, CC&R’s, and any other document which governs the COA/HOA; |
· | Governing documents must allow for non-owner-occupied units, units to be purchased and owned by entities, and a waiver of first right of refusal on the sale of a unit; |
· | The COA/HOA must have and maintain general liability insurance for the entire condo project; |
· | The COA/HOA master fidelity policy (if applicable); and |
· | Hazard insurance on the subject unit is required. |
Section 5.12 Manufactured Housing. If the subject property is a manufactured home, notwithstanding any other requirement contained in this Manual, the following shall apply:
· | The manufactured home must be at least a doublewide, no single wide will be allowed; |
· | Must be a HUD Certified Home; |
· | The manufactured home must only have been moved ONE TIME, from the factory to its original foundation; and |
· | MFH Appraisal Report required which demonstrates to the satisfaction of the Company that: |
o | The home has a remaining life span of a minimum of 15 years; |
o | HUD data plate and labels are present on the home; |
o Vehicle-based title has been eliminated or will be eliminated through the loan closing (if the title will be eliminated at the loan closing, the Company shall require an engineering certification of the foundation system, and confirm that there are no noted liens on the vehicle title or UCC filings indicating a security interest has attached to the title);
o | HUD certified tie downs are present or there exists an engineered certification; |
o | Axles, tires, and hitches have been removed; |
o All alterations or add-ons need Labor and Industry, local building code jurisdiction or engineering certification; and
o There are no existing building code violations.
Section 5.13 Uninhabitable Properties (Fire, Flood, Condemned, Etc.). If the subject property is currently uninhabitable for any reason, notwithstanding any other requirement contained in this Manual, the following shall apply:
· | The applicant must supply the company with contractor bids from licensed and insured contractors for completion of entire property rehab in order to make the property habitable; |
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· | The applicant must supply the Company a copy of municipality approval of rehab plans; |
· | 110% of contractor bid will be held in escrow and drawn down per applicable draw schedule (applicant responsible for all escrow costs, and before and after pictures prior to next release); |
· | The applicant must provide the Company with an anticipated draw schedule to be reviewed and approved during the underwriting process. The final 10% of the 110% escrowed rehab funds shall not be released under any circumstance until the final completion of all improvements to the property as detailed on the written draw schedule. This schedule will be agreed to and signed at closing. (The company will require a draw schedule on all ARV loans, whether habitable or not.) |
Section 5.14 Property Located within HOA. If the subject property is a residence located with an HOA, notwithstanding any other requirement contained in this Manual, the following shall apply:
· | The applicant must deliver to the Company a copy of all HOA governing documents, including bylaws, CC&R’s, and any other document which govern the HOA; |
· | Copy of most recent HOA dues/fees; and |
· | Governing documents must allow for non-owner-occupied units and units to be purchased and owned by entities. |
Section 5.16 Seasoning of Property.
Refinance. At present the Company does not require the applicant to hold the property for a time period prior to obtaining a refinancing loan from the Company, but reserves the right to amend as needed.
Purchase. At present the Company does not have a seasoning requirement for a purchase transaction, but reserves the right to amend as needed.
Gift; Quit Claim. At present the Company does not have a seasoning requirement for a gift or quit claim transaction, but will reduce LTV to 50% for the first 24 months of ownership.
Section 5.17 Cross-Collateralized Loans. Standard guidelines apply when all properties used as security for a loan transaction are of the same loan type (e.g. all purchases or refinances). Only one (1) rehab property can be included in the cross-collateralization. The rehab property may be secured by free and clear property(ies). When a single loan transaction consists of multiple property types (e.g. some properties are purchases and some properties are refinances), the following applies:
Whether or not the borrower will be receiving cash out at the loan transaction closing (see Article IX), each property will be analyzed individually; according to the LTV guidelines of each property and transaction type, but may be funded together as one loan.
If on a particular loan transaction, the borrower needs funds for rehab (see Section 5.06) and those rehab funds will be escrowed by the Company, the Company requires that all escrowed funds for rehab only be used for rehab work on collateralized properties.
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Article VI. Individual Applicants; Community Property States; and Homestead Laws.
In the event the Company allows an individual applicant (in lieu of an entity) to be the named applicant, in community property states, as well as in some states with homestead laws, and if the applicant is married, the applicant and the applicant’s spouse must both execute the loan documents, even if not on title, to perfect the lien on the property. Currently, the following are community property states: Alaska; Arizona; California; Idaho; Louisiana; Nevada; New Mexico; Texas; Washington; and Wisconsin.
Article VII. Second Mortgage; Additional Mortgages.
In the event of a purchase transaction where the property seller is financing a portion of the purchase price with a seller carry back second mortgage and a promissory note, the Company requires that the applicant deliver a copy of the second mortgage and the promissory note during the application process. Furthermore, the Company requires that the second mortgage and the note be executed at the same closing as the first mortgage and promissory note. The Company also requires an inter-creditor form to be signed. The title commitment applicable to the loan must reflect the second or junior lien position.
In the event of a second mortgage on the subject property, the Company’s maximum LTV is either:
(a) If an As-Is, Non-Rehab Loan: the lesser of (i) 65% of purchase price or (ii) 65% of the “as is” value as determined by Section 5.03; or,
(b) If a Rehab/Construction Loan: 65% of the “ARV” value as determined by Section 5.03
The Company shall apply the above requirements to any junior security interest that is or will be recorded against the subject property at the time of the Company’s loan transaction closing.
Article VIII. Cash Out Policy. The Company’s cash out policy applies any time an applicant receives greater than 10% of the loan amount in cash at the closing of the loan transaction. The Company considers the applicant to have received cash out if at the loan closing, loan proceeds were used for the payment of liens, judgments, tax bills, water bills, and all other liens (excluding mortgages) appearing on a title report. Cash out on an Rehab/Construction loan, may not exceed $2000.
Section 8.01 Rehabbing of Property. All rehab funds will be deposited into an escrow account and will be accessed upon a predetermined draw schedule executed at closing. All funds will be available on a reimbursement basis. With this all applicants applying for a rehab loan must show proof of 10% reserve of rehabbed funds.
Section 8.02 Non-Rehab/Rental of Property – (Full Cash Out Transaction). When the applicant entity submits a loan application for a transaction where there is no rehab work to be done to the property and the applicant entity will receive a majority of the loan amount in cash at the closing table, the maximum loan amount shall be capped at a loan to value of 50% or $75,000, whichever is less.
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Article IX. Loan Committee. The Company’s loan committee shall be comprised of a minimum of five people, and include one member of the Company’s underwriting department, one member of the Company’s sales team, one member of the Company’s funding team, and two executive members. The Company’s loan committee may also include an additional member of the Company’s executive management team or the Servicing Manager.
Section9.01 Purpose of the Loan Committee. Any loan that falls outside of these Guidelines as described in this Manual, but, for one reason or another, may make good business sense to fund, must be approved by a majority (greater than 50%) of the Company’s loan committee; provided, however, such percentage shall be subject to the rules described below regarding the number of loan committee members present at a loan meeting. If less than a majority of the Company’s loan committee approves to move forward with a loan package, the loan package shall proceed no further. If there are less than 3 members of the loan committee present at a meeting whether in person, via phone or some other electronic means, the loan committee meeting shall be rescheduled.
If there are only 3 members of the loan committee present at a meeting whether in person, via phone or some other electronic means the vote required to approve a loan submitted to loan committee shall be 100%. If there are only 4 members of the loan committee present at a meeting whether in person, via phone or some other electronic means the vote required to approve a loan submitted to loan committee shall be 75%. An affirmative vote of the loan committee approving a loan to be moved to the funding department, must be approved by a minimum of one executive team representative, otherwise the file will be denied.
The Company’s loan committee may approve the loan application subject to certain conditions which must be satisfied prior to the loan file being submitted to the Company’s funding department.
Section 9.02 Loan Committee Meetings. The Company shall establish a regularly scheduled weekly time for a loan committee meeting and may call additional meetings if the Company’s underwriting department deems additional meetings necessary. If the Company’s underwriting department determines that the weekly meeting is unnecessary, the Company’s underwriting department may cancel the regularly scheduled loan committee meeting.
Article X. Loan Approval; Document Preparation; Loan Documents. Once a loan transaction has been approved the Company’s underwriting team, no changes to the loan amount or loan terms is permitted without the loan package being resubmitted to the Company’s underwriting team for approval of the loan package with the new terms. Once (i) a loan application has received approval from either the underwriting team or the loan committee, and (ii) the underwriting/closing team is in possession of an executed lender agreement, the underwriting/closing team shall commence drawing up the loan documents. The Company’s loan documents currently consist of the following:
1. | Promissory Note; |
2. | Mortgage Assignment of Rents, Security Agreement and Fixture Financing Statement or Deed of Trust, Assignment of Rents, Security Agreement and Fixture Financing Statement; |
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3. | Borrower Agreement; |
4. | Loan Purpose and Property Use Affidavit, |
5. | Guaranty; |
6. | Compliance Agreement; |
7. | Escrow Instructions; |
8. | Insurance Declaration Page; |
9. | Underwriting and/or Funding Approved HUD; |
10. | Community Property Affidavit (if applicable); |
11. | Statement of Work (if applicable); |
12. | Company Approved Draw Schedule (if applicable); |
13. | Single Owner Affidavit (if applicable); |
14. | Subordination Agreement (if renters occupy property); |
15. | Escrow Holdback Agreement (if applicable); and |
16. | UCC Financing Statement (if applicable). |
Article XI. Loan Closing; Disbursement of Funds. The management of all loan closing and disbursements of funds will be done by the Company’s closing department and in such a manner as is consistent with the closing department’s processes and procedures. The disbursement will be approved upon approval of the Final HUD by the Underwriting and/or the Funding Department.
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EXHIBIT A
Loan Fee Chart Example
Loan Amount | Loan Fee | ||
Up to $300,000 | $997 | ||
$300,001 – $600,000 | $1994 | ||
$600,001 - $900,000 | $2,991 | ||
$900,001 - $1,200,000 | $3,988 | ||
$1,200.001 - $1,500,000 | $4,985 | ||
$1,500,001 - $1,800,000 | $5,982 | ||
$1,800,001 - $2,100,000 | $6,979 | ||
So on and so forth |
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EXHIBIT B
LTV “Specials”
As of October 24, 2018
Purchasers of Master Rehabber Certification Program, Master Lien Abatement Certification Program, Regional Real Estate Clinic, One-on-One Real Estate Mentorship, or Lee’s Inner Circle:
Subject to all of the other requirements contained in this Manual, as applicable, the contents of this Manual are modified as needed for the individuals (and entities in which the enrollee owns a majority interest in) who have become certified by the Lee Arnold System of Real Estate Investing as a Master Rehabber, Master Lien Abatement Specialist, Regional Real Estate Clinic, or is a member of Lee’s Inner Circle, as follows:
We will provide 100% financing of –
· | Property purchase price; |
· | Closing costs; and |
· | Rehab costs |
Up to 70% of the ARV of the property. The terms in Article VIII governing cash outs remain fully applicable.
*LTV pricing specials are subject to change
Purchasers of Master Rehabber Certification Program:
Subject to all of the other requirements contained in this Manual, as applicable, the contents of this Manual are modified as needed for the individuals (and entities in which the enrollee owns a majority interest in) who have become certified by the Lee Arnold System of Real Estate Investing as a Master Rehabber as follows:
The Company allows borrowers who have completed Master Rehabber, One-on-One Real Estate Mentorship, or are members of Lee’s Inner Circle to have a maximum of 4 open Rehab/Construction Loans at one time.
The Company allows borrowers who have completed Master Lien Abatement to have a maximum of 3 open Rehab/Construction Loans at one time.
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Exhibit C
Company Pricing/Underwriting
Application Fee - $197 for the first guarantor and $97 for each additional guarantor
Appraisal Fee - Amount is determined by and paid directly from borrower to 3rd party appraisal company.
Consulting Fees - $997 per $300,000 loaned (charged on the HUD at the time of closing)
Rehab Inspection Fees
ü | $200 per draw |
ü | $175 per draw inspection |
Loan Pricing
Company may determine final loan pricing in its sole discretion based on any reasonable factors, however, the general framework for Loan Pricing is as follows:
Credit Score or Experience* | Points | Interest |
720+ or 5+ flips | 2% | 12% |
680-719 or 3-4 flips | 3% | 13% |
620-679 or 1-2 flips | 4% | 14% |
619 or 0 flips | 5% | 15% |
* In order to qualify, the transactions must have been completed within the last 24 months and applicant must provide Company with purchase and sale HUDs to demonstrate the income earned for each completed transaction.
Applicants may also have the opportunity to buy down their Points and Interest as follows:
Additional Cash to Close (% of Loan Amount) | Points | Interest |
5% | -1% | -1% |
10% | -2% | -2% |
15% | -3% | -3% |
Florida and Tennessee are exceptions – loans in these states are capped at 18% annual combined interest rate.
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Exhibit D
Judicial vs Non-Judicial Map
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Exhibit G
Master Service Agreement
Customer Full Legal Name: Secured Investment Corp
Customer Address: 701 E Front Ave, Fl 2, Coeur d'Alene, ID 83814
This Master Subscription Services Agreement is between Crowd Engine, Inc., a Delaware corporation with its principal place of business at 4770 South 900 East, Suite 200, Salt Lake City, UT 84117 (“CrowdEngine"), and the Customer named above (“Customer"). This Agreement is effective as of the last date beneath the parties' signatures below (the “Effective Date").
CrowdEngine provides crowdfunding solutions through which CrowdEngine's customers can operate an equity, donation, or rewards based crowdfunding website.
Customer desires to access and use CrowdEngine's solutions to operate a crowdfunding website.
Therefore, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, and intending to be legally bound, CrowdEngine and Customer agree as follows:
1. | DEFINITIONS |
1.1 “Administrative Account" means security access codes, passwords and user IDs for Customer's authorized internal personnel to access the CrowdEngine Technology and Subscription Services for the purpose of configuring and administering the Customer Portal.
1.2 “Affiliate" means any entity which directly or indirectly controls, is controlled by, or is under common control with the subject entity. “Control," for purposes of this definition, means direct or indirect ownership or control of more than 50% of the voting interests of the subject entity.
1.3 “Agreement" means collectively this Master Subscription Services Agreement and any exhibits, schedules and addenda hereto and any Service Order entered into between Customer and CrowdEngine.
1.4 “Applicable Laws" means any country, federal, state, provincial, commonwealth, cantonal or local government laws, statutes, rules, regulations, or ordinances or similar government requirement applicable to a party, including without limitation all applicable securities, data protection, privacy and electronic communications laws and regulations, whether in existence as of the date of this Agreement or thereafter enacted, promulgated or amended.
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1.5 “Authorized User" means any individual or entity which is required to log in to the Customer Portal in order to use one or more of its features or functionalities. Authorized Users may include, without limitation, individuals or entities that use the Customer Portal to run a crowdfunding project and to provide rewards or to issue equity in connection with such project, to make pledges to or investments in a crowdfunding project or investment offering, and/or to provide comments or questions with respect to a crowdfunding project.
1.6 | “Authorized User Agreement" has the meaning given to such term in Section 4. |
1.7 "CrowdEngine Technology" means the computer hardware, software, source code, proprietary methods and systems, and other tangible equipment and intangible computer code necessary to deploy and serve the Subscription Services via the Customer Portal, as available on the Effective Date of this Agreement and subject to modification from time to time.
1.8 “Customer Content" means all information, content and materials provided by Customer and/or its End Users which are displayed and/or published on the Customer Portal, including without limitation text, artwork, information relating to projects, products, services, designs, and prototypes of Customer and/or its End Users, and all Proprietary Rights related thereto.
1.9 “Customer Data" means business and financial data and information of Customer, submitted by or for Customer to the Subscription Services, or collected and processed by or for Customer using the Subscription Services relating to Customer's crowdfunding activities on the Customer Portal, and all End User Information.
1.10 “Customer Domain" means the public domain name owned by Customer (for example, Customername.com) which Customer will point and configure to the Customer Portal URL for End Users to access the Customer Portal.
1.11 "Customer Portal" means the CrowdEngine URL created for Customer, hosted by CrowdEngine (for example, Customer.crowdengine.com) (the “Customer Portal URL"), to which Customer drives End Users via its Customer Domain and the site at which CrowdEngine will provide the Subscription Services, including the CrowdEngine Technology, to Customer pursuant to this Agreement.
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1.12 “Documentation" means documentation related to Customer's access of the CrowdEngine Technology to access and use the Subscription Services delivered by CrowdEngine to Customer, as updated by CrowdEngine from time to time.
1.13 “End Users" means collectively Authorized Users and Visitors.
1.14 “End User Information" means the names, phone numbers, email addresses, physical addresses, contact information, credit card information and any other personal or business information of End Users.
1.15 “Malicious Code" means code, files, scripts, agents or programs intended to do harm, including, for example, viruses, worms, time bombs and Trojan horses.
1.16 "Proprietary Rights" means any and all rights, whether registered or unregistered, in and with respect to patents, copyrights, Confidential Information, know-how, trade secrets, moral rights, contract or licensing rights, confidential and proprietary information protected under contract or otherwise protected under law, trade names, domain names, trade dress, logos, animated characters, trademarks, service marks, and other similar rights or interests in intellectual property.
1.17 “Service Order" means an ordering document specifying the Subscription Services to be provided hereunder that is entered into between Customer and CrowdEngine, including any addenda and supplements thereto.
1.18 "Subscription Services" means the web services described and specified on the applicable Service Order and any updates or upgrades to such services which may be generally released by CrowdEngine to its Customers and End Users from time to time during the term of this Agreement. The Subscription Services include the CrowdEngine Technology.
1.19 “Visitor" means an individual who is permitted to use certain features or functionalities of the Customer Portal without being required by Customer to log in. Visitors may include, without limitation, those individuals who browse the Customer Portal and those who are allowed by Customer to provide comments or questions regarding a crowdfunding project without logging in.
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2. SERVICES
2.1 Interface Customization. Unless otherwise agreed to in the applicable Service Order, CrowdEngine will provide a standard design template that can be customized or replaced by Customer.
2.2 Launch Support. If so specified in the applicable Service Order, CrowdEngine will also provide launch support services to Customer to expedite Customer's set-up and use of the Subscription Services.
2.3 Provision of Subscription Services. CrowdEngine will (a) use commercially reasonable efforts to make the Subscription Services available to Customer pursuant to this Agreement and the applicable Service Order,
(b) provide CrowdEngine standard support for the Subscription Services to Customer at no additional charge, and/or upgraded support, if purchased, and (c) use commercially reasonable efforts to make the online Subscription Services available 24 hours a day, 7 days a week, except for: (i) planned downtime (of which CrowdEngine will give at least 24 hours electronic notice and which CrowdEngine will schedule to the extent practicable during the weekend hours between 6:00 p.m. Friday and 3:00 a.m. Monday Mountain time), and (ii) any unavailability caused by circumstances beyond CrowdEngine's reasonable control, including, for example, an act of God, act of government, flood, fire, earthquake, civil unrest, act of terror, strike or other labor problem (other than one involving CrowdEngine employees), Internet service provider failure or delay, or denial of service attack. Customer acknowledges that End Users will access the Customer Portal via their own Internet access (i.e., CrowdEngine is not supplying internet access or support to End Users).
3. USE OF SERVICES
3.1 Permitted Use. Customer may only access and use the Subscription Services for the purpose of offering the Customer Portal to Customer's End Users.
3.2 Non-transferability. The rights granted in this Agreement are granted only to the named Customer, and not to any other entity, including without limitation Customer's Affiliates. Customer may not transfer or sublicense its rights under this Agreement or sell or redistribute the Customer Portal to any other party.
3.3 Administrative Accounts for Subscription Services. CrowdEngine will permit access to the Subscription Services by Customer only over the Internet using Administrative Accounts assigned by CrowdEngine to authorized Customer employees. Administrative Accounts will be deemed the Confidential Information of CrowdEngine. Accordingly, no Administrative Account may be shared by Customer or Customer employees with any other individual not assigned such an Administrative Account by CrowdEngine, except that an
Administrative Account may be reassigned to a new individual replacing one who no longer requires ongoing use for Customer's permitted use of the Subscription Services. Customer will be responsible for all activities conducted using the Administrative Accounts.
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3.4 Administration. Customer will be responsible for the administration of the Customer Portal via the assigned Administrative Accounts and for all Customer Content that appears therein, including, without limitation the design, configuration, and custom functionality of the Customer Portal that is permitted by the Subscription Services.
3.5 Technical Contacts. Customer will designate a primary technical contact for communicating with CrowdEngine regarding technical issues hereunder. Customer may change its primary technical contact from time to time by providing written notice to CrowdEngine.
3.6 Fulfillment. Customer will be solely responsible for fulfilling all orders and/or investments placed by End Users via the Customer Portal and for providing customer service to End Users.
3.7 Other Customer Responsibilities. In addition to all other obligations and requirements of Customer set forth in this Agreement, Customer will (a) be responsible for its employees' compliance with this Agreement,
(b) be responsible for the accuracy, quality and legality of Customer Data and the means by which Customer acquires Customer Data, (c) use commercially reasonable efforts to safeguard and protect the Administrative Accounts and prevent unauthorized access to or use of the Subscription Services, and notify CrowdEngine promptly of any such known or suspected unauthorized access or use, (d) use Subscription Services only in accordance with this Agreement, the Documentation and Applicable Laws, and (e) notwithstanding anything to the contrary in this Agreement, not refer to CrowdEngine or include any information about CrowdEngine in any written private placement memorandum or other written offering material or communications used by Customer in connection with an offering of securities without CrowdEngine's prior written consent in each instance.
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3.8 Use Restrictions. Except as allowed herein, Customer represents, covenants and warrants that Customer will not, nor will it permit or assist others to, do or attempt to do any of the following: (a) make the Subscription Service or CrowdEngine Technology available to, or use the Subscription Service CrowdEngine Technology for the benefit of, anyone other than Customer or Authorized Users in accordance with the terms and conditions of this Agreement, (b) sell, resell, license, sublicense, distribute, rent, lease or time-share the Subscription Service, CrowdEngine Technology or Administrative Accounts, or, except as expressly permitted in Section 3.1, include the Subscription Service or CrowdEngine Technology in a service bureau or outsourcing offering, (c) use the Subscription Service or CrowdEngine Technology to store or transmit infringing, libelous, defamatory, fraudulent, or otherwise unlawful or tortious material, or any discriminatory, obscene, harmful, pornographic, vulgar, harassing, hateful, abusive or racially, ethnically, religiously, sexually or otherwise offensive material, or any material in violation of third-party privacy rights, (d) process or permit to be processed the data of any third-party that is not expressly authorized herein to access and use the Subscription Service or CrowdEngine Technology, (e) use the Subscription Service or CrowdEngine Technology to store, transmit or propagate any Malicious Code or any other programming routine intended to damage the Subscription Services or CrowdEngine Technology, (f) interfere with or disrupt the integrity or performance of the Subscription Service or CrowdEngine Technology or the third-party data contained therein, (g) attempt to gain unauthorized access to the Subscription Service or CrowdEngine Technology or its related systems or networks or the third party data contained therein, (h) abuse or fraudulently use the Subscription Service or CrowdEngine Technology, or access, alter, or destroy any information of any Customer of CrowdEngine by any fraudulent means or device, (i) permit direct or indirect access to or use of the Subscription Service, CrowdEngine Technology or Administrative Accounts in a way that circumvents a contractual usage limit, (j) knowingly permit access to the Customer Portal by a direct competitor of CrowdEngine, (k) copy the Subscription Service or CrowdEngine Technology or any part, feature, function or user interface thereof, (l) access the Subscription Services or CrowdEngine Technology for the purpose of building a product or service that is competitive with, or copies the features or user interface of, the Subscription Services or CrowdEngine Technology, (m) use or permit to be used the Subscription Services or CrowdEngine Technology for purposes of evaluating, benchmarking or doing any other comparative analysis of the services or products offered through the Subscription Services or CrowdEngine Technology, for the purposes of publication without CrowdEngine's prior written consent, which CrowdEngine will be free to withhold for any or no reason, (n) access, modify,
copy, cache, store or create derivative works based on the Subscription Service or CrowdEngine Technology, (o) attempt to reproduce or duplicate, or succeed in reproducing or duplicating, the Subscription Services, (p) reverse-engineer, decompile, disassemble, create a derivative work from, or otherwise attempt to derive the source code of, any part of the CrowdEngine Technology (to the extent such restriction is permitted by Applicable Laws), (q) utilize the Customer Portal or Subscription Services as a factor in establishing an individual's eligibility for credit, insurance or employment, or in connection with a determination of an individual's eligibility for a license or other benefit granted by a governmental authority, or in connection with underwriting individual insurance, or in any way that would cause the Subscription Services to constitute a “consumer report" under the Fair Credit Reporting Act or similar statute or by any authority having jurisdiction over the parties, (r) use spam or unsolicited email to promote the Subscription Service or CrowdEngine Technology, or (s) use the Subscription Service, CrowdEngine Technology, or Customer Portal in a manner that violates any Applicable Law. Customer agrees to abide by our upstream providers Acceptable Use Policy,available here https://aws.amazon.com/aup/ and here https://www.heroku.com/policy/aup.
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3.9 Communication Services. The Subscription Services may contain e-mail services, bulletin board services, news groups, forums, communities, personal web pages, calendars, photo albums, file cabinets or other message or communication facilities designed to enable Customer or End Users to communicate with others
(the "Communication Services"). Customer agrees to use the Communication Services only to post, send and receive messages and materials that are proper and, when applicable, related to the particular Communication Services, in accordance with Applicable Law. CrowdEngine has no obligation to monitor the Communication Services. CrowdEngine reserves the right, but is not obligated, to review materials posted to the
Communication Services and to edit, remove or refuse to post any materials which are in violation of the representations set forth in this Agreement with or without notice to Customer, or to remove any materials at any time, without notice to Customer, for any reason and in CrowdEngine's sole discretion. CrowdEngine reserves the right to terminate or suspend access to any or all of the Communication Services at any time, without notice, for any reason whatsoever. Customer acknowledges that emails, chats, postings, conferences and other communications by End Users are not controlled or endorsed by CrowdEngine, and such communications will not be considered reviewed, screened or approved by CrowdEngine. Statements made in forums, bulletin boards, chats and other Communication Services reflect only the views of their authors.
CrowdEngine specifically disclaims any liability with regard to the Communication Services and any actions resulting from Customer or End User participation in any Communication Services. CrowdEngine reserves the right at all times to disclose any Customer Content found on the Communications Services as CrowdEngine deems necessary to satisfy any Applicable Law, regulation, legal process or governmental request in CrowdEngine's reasonable business judgment, provided that CrowdEngine gives Customer prior notice of its intent to disclose such Customer Content found on the Communications Services.
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3.10 Third Party Services. Certain links provided by CrowdEngine lead to third party websites. These third party websites are not under the control of CrowdEngine and may collect data or solicit personal information from Customer or the End Users. CrowdEngine is not responsible for their content, business practices or privacy policies, or for the collection, use or disclosure of any information those third party websites may collect.
CrowdEngine is providing these links to Customer and End Users only as a convenience, and the inclusion of any link does not imply endorsement by CrowdEngine of the linked third party websites. Some of these third party websites may charge separate fees, which are not included in any subscription or other fees that Customer may pay to CrowdEngine. Any separate charges or obligations Customer incurs in Customer's dealings with these third parties are Customer's responsibility. CrowdEngine makes no representation or warranty with regard to third-party websites, including, without limitation, any products, services, software or content provided by any third party even if linked from the Customer Portal or via the Subscription Services. CrowdEngine may in its sole discretion replace or discontinue access to any third party websites at any time.
3.11 Suspension of Service. Notwithstanding anything to the contrary in this Agreement, in the event of any breach by Customer of any of Customer's representations, warranties, covenants, or obligations under this Agreement, other than for non-payment as provided in Section 6.4, in addition to any other remedies available at law or in equity, CrowdEngine will have the right to suspend any Subscription Services if deemed reasonably necessary by CrowdEngine in its reasonable business judgment to prevent any harm to CrowdEngine and its business. CrowdEngine will provide notice to Customer and an opportunity to cure, if practicable, depending on the nature of the breach. Once cured, CrowdEngine will promptly restore the Subscription Services.
4. AUTHORIZED USER AGREEMENTS.
4.1 Authorized User Agreement. Customer will ensure that each Authorized User, as a pre-condition to being authorized by Customer to use the Customer Portal, enters into a binding agreement with Customer (which
may be an electronic agreement which the Authorized User accepts by “clicking through" an acceptance gateway) (each, an “Authorized User Agreement") which, among other things, (a) limits the Authorized User's use of the Customer Portal solely to conducting the Authorized User's own crowdfunding project or to pledging to or investing in, or providing comments or questions with respect to another Authorized User's crowdfunding project, (b) contains obligations and restrictions affording protection to the CrowdEngine Technology, the Subscription Services, and CrowdEngine's Confidential Information consistent in all material respects with, and at least as protective as, the terms and conditions applicable thereto as provided in this Agreement, (c) expressly disclaims and excludes all warranties purported to be made on or behalf of, and all liability of, Customer's suppliers and service providers, (d) requires the Authorized User to observe and comply with all Applicable Laws and to not engage in unfair or deceptive trade practices or fraudulent activity, (e) obtains from the Authorized User all rights and licenses necessary for CrowdEngine's receipt, storage, processing, use, modification, and disclosure of the Authorized User's End User Information and other Customer Content supplied by the Authorized User to the fullest extent necessary or useful for CrowdEngine's provision of the Subscription Services and performance of its other obligations hereunder, (f) links to and incorporates the Customer's privacy policy, and (g) requires the Authorized User to acknowledge and agree that Customer's suppliers and service providers are intended third party beneficiaries of such agreement and are entitled to rely upon and enforce all provisions of such agreement to the same extent as if CrowdEngine was a party thereto. Promptly upon becoming aware of any breach by an Authorized User of an Authorized User Agreement, Customer will take all steps reasonably necessary to mitigate the damages, liability and other adverse effects arising therefrom, and to prevent further harm, including without limitation by disabling such Authorized User's access to the Customer Portal, if warranted.
4.2 Customer Privacy Policy. Customer will display on the Customer Portal and incorporate into each Authorized User Agreement a privacy policy which complies with all Applicable Laws, including without limitation those pertaining to privacy, user data, personal data, and data security, and will require each End User to agree and consent to the privacy policy. Customer will not obtain, collect or use any End User Information, or possess any data that is not publicly available, in violation or breach of such privacy policy, or otherwise engage in any practice inconsistent with such privacy policy or any other terms of the Agreement.
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4.3 Visitor Website Terms of Use. Customer will display on the Customer Portal a website terms of use which, among other things, expressly disclaims and excludes all warranties purported to be made on or behalf of, and all liability of Customer's suppliers and service providers, obtains from the Authorized User all rights and licenses necessary for CrowdEngine's receipt, storage, processing, use, modification, and disclosure of the Authorized User's End User Information and other Customer Content supplied by the Authorized User to the fullest extent necessary or useful for CrowdEngine's provision of the Subscription Services and performance of its other obligations hereunder, links to and incorporates the Customer's privacy policy and includes procedures for notification of and removal of infringing content consistent with procedures described in the Digital Millennium Copyright Act, and will require each End User to agree and consent to such terms of use. Customer will promptly respond to all notices of removal of infringing content in accordance with the applicable procedures set forth in the Digital Millennium Copyright Act.
5. | CUSTOMER CONTENT |
5.1 Customer Representations Regarding Customer Content. Customer may upload or otherwise transmit on or through the Customer Portal only Customer Content that is not subject to any third-party Proprietary Rights, or Customer Content in which any holder of Proprietary Rights has given express authorization for distribution on the Customer Portal or Subscription Services. Customer represents and warrant that to the best of its knowledge: (a) the Customer Content and all elements thereto are wholly owned original works of authorship created and/or developed by or for Customer, are in the public domain, or are properly authorized by the holder of the Proprietary Rights relating to such Customer Content; (b) Customer did not copy any content incorporated or used in the Customer Content or any element thereto from any copyrighted or other proprietary source owned by any other person or entity without such owner's express authorization; (c) the Customer Content does not infringe upon any statutory or common law copyright, any trade dress, trademark, or service mark, or any patent; (d) the Customer Content does not violate the right of privacy or publicity of any person, and do not contain any matter libelous or otherwise in contravention of the rights of any third party; (e) the Customer Content contains no matter that violates any federal, state, or local common law, statute, or regulation, nor is it in any manner unlawful; (f) no third party has made any claims of infringement of their Proprietary Rights by the Customer Content. Customer acknowledges and agrees that Customer is solely responsible for all of the Customer Content that is uploaded or otherwise transmitted on or through the Subscription Services. CrowdEngine will have the right, but not the obligation, in its sole discretion to monitor Customer Content on the Customer Portal. CrowdEngine cannot monitor or prescreen all of the Customer Content on the Customer Portal, and CrowdEngine will not be responsible for and will not consistently attempt to do so. Customer acknowledges and agrees that (a) CrowdEngine does not monitor the Customer Content passing through the Subscription Services and Customer Portal for purposes of verifying accuracy or legal compliance, and (b) Customer will ensure that the Customer Content transmitted via the Customer Portal complies with all Applicable Laws and regulations, whether now in existence or hereafter enacted and in force. CrowdEngine will make good faith efforts to investigate allegations that the Customer Content violates this Agreement, but CrowdEngine (a) makes no warranty to Customer that CrowdEngine will edit, remove, or continue to permit the display of any specific Customer Content which violates the representations set herein, whether or not subject to such allegations, and (b) will have no liability whatsoever for editing, removing, or continuing to permit the display of any Customer Content which violates this Agreement. CrowdEngine does not endorse, approve, or prescreen any Customer Content that Customer communicates on the Customer Portal or Subscription Services. CrowdEngine does not assume any responsibility or liability for Customer Content that is generated by Customer using the Customer Portal or Subscription Services. Customer bears the entire risk of the completeness, accuracy or usefulness of Customer Content found on the Customer Portal. CrowdEngine does not control the quality, accuracy or content of any versions of the Customer Portal or Subscription Services translated into a different language by Customer or any third party. Vulgar language, crude or explicit sexual references, discussions of illegal drugs, and hate speech are always inappropriate Customer Content. IF, IN CROWDENGINE'S REASONABLE BUSINESS JUDGMENT, ANY CONTENT IS FOUND TO BE IN VIOLATION OF ANY REPRESENTATION OR WARRANTY SET FORTH IN THIS AGREEMENT OR ANY STATE OR FEDERAL LAW OR ANY APPLICABLE FOREIGN LAWS, RULES AND REGULATIONS, CUSTOMER HEREBY CONSENTS THAT CROWDENGINE MAY EDIT, DELETE, REFUSE TO POST, AND/OR REMOVE SUCH CONTENT AND/OR SUSPEND ANY OR ALL OF THE SERVICES TO PREVENT ANY HARM TO CROWDENGINE AND ITS BUSINESS. CROWDENGINE WILL PROVIDE CUSTOMER AN OPPORTUNITY TO CURE, IF PRACTICABLE, DEPENDING ON THE NATURE OF THE BREACH. ONCE CURED, CROWDENGINE WILL PROMPTLY RESTORE THE SERVICES.
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5.2 Customer Content License. Customer grants CrowdEngine an irrevocable, non-exclusive, worldwide, royalty-free, sublicensable, transferable right and license to use, host, store, cache, reproduce, publish, display (publicly or otherwise), perform (publicly or otherwise), distribute, rent, lease, transmit, modify, adapt (including, without limitation, in order to conform it to the requirements of any networks, devices, services, or media through which the Subscription Services makes the Customer Content available), and create derivative works of, the Customer Content. The rights Customer grants in this license are for the sole purpose of allowing CrowdEngine to provide the Subscription Services pursuant to this Agreement. The reference in this license to "create(ing) derivative works" is not intended to give CrowdEngine a right to make substantive editorial changes or derivations of the Customer Content, but does, for example, enable reblogging or reposting of the Customer Content, which allows End Users to redistribute Customer Content from the Customer Portal to another site in a manner that allows them to add their own text or other content before or after Customer Content.
6. | FEES AND PAYMENT |
6.1 Fees. Customer will pay all Fees (including without limitation set-up fees, launch support fees, custom development fees, and subscription fees) as set forth in any applicable Service Order(s). Except as otherwise specified herein or in a Service Order, (a) fees are based on Subscription Services purchased and not actual usage, and (b) payment obligations are non-cancelable and fees paid are non-refundable. All Fees are due and payable within ten days of the date of the invoice.
6.2 Invoicing and Payment. Fees will be invoiced and due in accordance with with the payment terms set forth on any relevant Service Order according to CrowdEngine policies which are available online
at http://crowdengine.com/billing-policies. Customer is responsible for providing complete and accurate billing and contact information to CrowdEngine and notifying CrowdEngine of any changes to such information. You must report any overcharges or billing disputes within 30 days of the time you become aware, or should have become aware, of the existence of the overcharge or dispute.
6.3 Overdue Charges. If any invoiced amount is not received by CrowdEngine by the due date, then without limiting CrowdEngine's rights or remedies, those charges may accrue late interest at the rate of 1.5% of the outstanding balance per month, or the maximum rate permitted by law, whichever is lower.
6.4 Suspension of Subscription Service. If any charge owing by Customer is 30 days or more overdue, CrowdEngine may, without limiting its other rights and remedies, suspend Subscription Services until such amounts are paid in full, provided CrowdEngine has given Customer at least 10 days' prior notice that its account is overdue in accordance with the “Notices" section below.
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6.5 Taxes. CrowdEngine's fees do not include any taxes, levies, duties or similar governmental assessments of any nature, including, for example, value-added, sales, use or withholding taxes, assessable by any jurisdiction whatsoever (collectively, “Taxes"). Customer is responsible for paying all Taxes associated with its purchases hereunder. If CrowdEngine has the legal obligation to pay or collect Taxes for which Customer is responsible under this section, CrowdEngine will invoice Customer and Customer will pay that amount unless Customer provides CrowdEngine with a valid tax exemption certificate authorized by the appropriate taxing authority. For clarity, CrowdEngine is solely responsible for taxes assessable against it based on its income, property and employees.
6.6 Future Functionality. Customer agrees that unless otherwise expressly stated on a Service Order executed by CrowdEngine, Customer's purchases are not contingent on the delivery of any future functionality or features, or dependent on any oral or written public comments made by CrowdEngine regarding future functionality or features.
7. | CROWDENGINE'S PROPRIETARY RIGHTS |
7.1 Reservation of Rights. CrowdEngine reserves all of its right, title and interest, including without limitation all Proprietary Rights, in and to the CrowdEngine Technology, the Subscription Services, and the Customer Portal (excluding the Customer Data and Customer Content), including without limitation, web pages, databases, source code, tools, URL addresses registered by CrowdEngine, custom functionality, CrowdEngine domains, URLs, product names, trademarks, and logos associated with the Subscription Services and underlying source code. All rights not expressly granted to Customer herein with respect to the Subscription Services and CrowdEngine Technology are expressly reserved by CrowdEngine in perpetuity.
7.2 License by Customer to Use Feedback. Customer hereby unconditionally and irrevocably transfers and assigns to CrowdEngine any rights Customer may have to any suggestions, ideas, enhancement requests, feedback, recommendations or other information that Customer sends to CrowdEngine relating to Customer's suggestions regarding improving, modifying or changing the Subscription Services (“Feedback"). All Feedback will be deemed unconditionally and irrevocably assigned by Customer to CrowdEngine from the moment of submission and/or delivery to CrowdEngine. Accordingly, CrowdEngine will be irrevocably entitled to use, reproduce, modify, adapt, publish, broadcast, license, perform, post, sell, translate, create derivative works from and distribute any Feedback for any purpose whatsoever, commercial or otherwise, in any medium now known or hereafter devised, without compensation or credit to the provider of the Feedback. Customer also gives up any claim that any use by CrowdEngine or its licensees or licensors of any Feedback violates any of Customer rights, including but not limited to moral rights, privacy rights, rights to publicity, proprietary or other rights, or rights to credit for the material or ideas set forth therein.
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8. | CONFIDENTIALITY |
8.1 Definition of Confidential Information. “Confidential Information" means all information disclosed by a party (“Disclosing Party") to the other party (“Receiving Party"), whether orally or in writing, that is designated as confidential or that reasonably should be understood to be confidential given the nature of the information and the circumstances of disclosure. Confidential Information of Customer includes without limitation Customer Data; Confidential Information of CrowdEngine includes without limitation the Subscription Services; and Confidential Information of each party includes the terms and conditions of this Agreement and all Service Order (including without limitation pricing), as well as business and marketing plans, technology and technical information, product plans and designs, and business processes disclosed by such party. However, Confidential Information does not include any information that (i) is or becomes generally known to the public without breach of any obligation owed to the Disclosing Party, (ii) was known to the Receiving Party prior to its disclosure by the Disclosing Party without breach of any obligation owed to the Disclosing Party, (iii) is received from a third party without breach of any obligation owed to the Disclosing Party, or (iv) was independently developed by the Receiving Party.
8.2 Protection of Confidential Information. The Receiving Party will use the same degree of care that it uses to protect the confidentiality of its own confidential information of like kind (but not less than reasonable care) (i) not to use any Confidential Information of the Disclosing Party for any purpose outside the scope of this Agreement, and (ii) except as otherwise authorized by the Disclosing Party in writing, to limit access to and disclosure of Confidential Information of the Disclosing Party to those of its and its Affiliates' employees and contractors who need that access for purposes consistent with this Agreement and who have signed confidentiality agreements with the Receiving Party containing protections no less stringent than those herein. Neither party will disclose the terms of this Agreement or any Service Order to any third party other than its Affiliates, legal counsel and accountants without the other party's prior written consent, provided that a party that makes any such disclosure to its Affiliate, legal counsel or accountants will remain responsible for such Affiliate's, legal counsel's or accountant's compliance with this “Confidentiality" section.
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8.3 Compelled Disclosure. The Receiving Party may disclose Confidential Information of the Disclosing Party to the extent compelled by law to do so, provided the Receiving Party gives the Disclosing Party prior notice of the compelled disclosure (to the extent legally permitted) and reasonable assistance, at the Disclosing Party's cost, if the Disclosing Party wishes to contest the disclosure. If the Receiving Party is compelled by law to disclose the Disclosing Party's Confidential Information as part of a civil proceeding to which the Disclosing
Party is a party, and the Disclosing Party is not contesting the disclosure, the Disclosing Party will reimburse the Receiving Party for its reasonable cost of compiling and providing secure access to that Confidential Information.
8.4 General Skills and Knowledge. Notwithstanding anything to the contrary in this Agreement, Customer agrees that CrowdEngine is not prohibited from utilizing any skills or knowledge of a general nature acquired during the course of providing the Subscription Services, including without limitation information publicly known or available or that could reasonably be acquired in similar work performed for another Customer of CrowdEngine.
9. | REPRESENTATIONS, WARRANTIES, EXCLUSIVE REMEDIES AND DISCLAIMERS |
9.1 Customer Representations, Covenants and Warranties.
(a)Customer represents and warrants that it has obtained all material licenses, authorizations, approvals, consents or permits required by Applicable Laws to conduct its business and to perform its obligations under this Agreement.(b)Customer represents, covenants and warrants that the performance of its obligations and use of the Subscription Services and Customer Portal by Customer and End Users will comply with, and will not violate, any Applicable Laws, or regulations, including without limitation any and all laws and regulations of the country in which Customer chooses to provide the Customer Portal/Subscription Services, including without limitation any privacy and data security laws and regulations and the CAN-SPAM Act of 2003 and including without limitation by causing a breach of any agreements with any third parties or unreasonably interfering
with the use by other CrowdEngine Customers of CrowdEngine services.(c)Customer represents, covenants and warrants that: (i) Customer has all rights and interests to operate, license, maintain, modify, and otherwise conduct business with CrowdEngine and End Users through the Customer Portal; (ii) Customer will ensure that all transmissions of Customer Content to CrowdEngine are authorized; (iii) Customer will use the Subscription Services, and will use commercially reasonable efforts to ensure End Users use the Customer Portal, solely for legal purposes.(d)Without limitation to any other provision of this Agreement and notwithstanding any other obligations Customer may have pursuant to Applicable Laws, Customer will, consistent with industry standards and best practices, implement and maintain appropriate administrative, technical and physical safeguards to protect the confidentiality of Customer Data, including without limitation End User Information.(e)Without limitation to any other provision of this Agreement and notwithstanding any other obligations Customer may have pursuant to Applicable Laws, Customer represents, covenants and warrants that Customer will limit access to Customer Data, including without limitation End User Information, to those individuals who have a “need to know" in connection with Customer's business and will obligate those individuals to acknowledge consumers' rights to privacy and adhere to fair information practices. Customer acknowledges that its right to use and disclose information concerning consumer information is subject to the federal Gramm-Leach-Bliley Act (the “ Gramm Act") and its implementing regulations and other country, federal and state laws and regulations regarding privacy and the confidentiality of Customer or consumer records. Customer agrees to comply with the applicable requirements under the Gramm Act (15 U.S.C. section 6801 et seq.) and the Privacy Safeguards Rule promulgated by the Federal Trade Commission thereunder (16 C.F.R. Section 314 (together, the “GLB Act") with respect to “nonpublic personal information" (as defined under the GLB Act) it receives on individuals, including, without limitation, to use that information solely for the purposes of carrying out this Agreement, and implementing procedures required under the GLB Act to safeguard such information.
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9.2 Disclaimers. EXCEPT AS EXPRESSLY PROVIDED HEREIN, NEITHER PARTY MAKES ANY WARRANTY OF ANY KIND, WHETHER EXPRESS, IMPLIED, STATUTORY OR OTHERWISE, AND EACH PARTY SPECIFICALLY DISCLAIMS ALL IMPLIED WARRANTIES, INCLUDING ANY IMPLIED WARRANTY OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE OR NON-INFRINGEMENT, TO THE MAXIMUM EXTENT PERMITTED BY APPLICABLE LAW. EXCEPT AS EXPRESSLY PROVIDED IN THIS AGREEMENT AND TO THE FULLEST EXTENT PERMISSIBLE BY LAW, WITHOUT LIMITING THE FOREGOING, CROWDENGINE SPECIFICALLY DISCLAIMS ANY REPRESENTATION OR WARRANTY REGARDING (a) ITS NETWORK, INCLUDING WITHOUT LIMITATION ANY LIABILITY OR INDEMNIFICATION OBLIGATIONS FOR ANY HARM OR DAMAGES CAUSED BY ANY THIRD-PARTY HOSTING PROVIDERS; (b) THE AMOUNT OF REVENUE THAT MAY BE GENERATED; AND (c) ANY ECONOMIC OR OTHER BENEFIT THAT CUSTOMER MIGHT OBTAIN THROUGH ITS PARTICIPATION IN THIS AGREEMENT. SPECIFICALLY, CROWDENGINE DISCLAIMS ANY REPRESENTATION OR WARRANTY THAT ANY SERVICES WILL MEET ANY REQUIREMENTS OF CUSTOMER OR END USERS UNDER FEDERAL, STATE OR LOCAL LAWS. CROWDENGINE EXPRESSLY DISCLAIMS ANY LIABILITY TO ANY PERSON FOR LOSS OR DAMAGE CAUSED BY ERRORS OR OMISSIONS IN THE CROWDENGINE TECHNOLOGY OR SERVICES, UNLESS SUCH ERRORS OR OMISSIONS RESULT FROM CROWDENGINE'S GROSS NEGLIGENCE, BUT NOT FOR ANY OTHER CAUSE.
9.3 Acknowledgment. CUSTOMER AGREES AND ACKNOWLEDGES THAT CROWDENGINE IS NOT, IN ANY MANNER, PROVIDING LEGAL SERVICES OR LEGAL ADVICE TO CUSTOMER. FURTHERMORE, CUSTOMER AGREES AND ACKNOWLEDGES THAT CROWDENGINE IS NOT AN ADVISOR AS TO TAX, FINANCIAL, BUSINESS, ACCOUNTING OR REGULATORY MATTERS IN ANY JURISDICTION. NONE OF THE ADVICE, GUIDANCE OR ANY SERVICES PROVIDED BY CROWDENGINE WILL BE DEEMED LEGAL, TAX, FINANCIAL OR BUSINESS ADVICE. CUSTOMER IS SOLELY RESPONSIBLE FOR CONSULTING WITH ITS LEGAL COUNSEL TO ENSURE THAT THE CUSTOMER PORTAL COMPLIES WITH ALL APPLICABLE LAWS. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, CROWDENGINE WILL PROVIDE A COMPLIANT REG A+ SOLUTION OUT OF THE BOX BUT MAKES NO REPRESENTATION OR WARRANTIES REGARDING THE CUSTOMER PORTAL'S COMPLIANCE WITH THE SECURITIES ACT, THE EXCHANGE ACT OR ANY OTHER APPLICABLE SECURITIES OR BLUE SKY LAWS ANY FOR PRIVATE PLACEMENT OR SIMILAR SECURITIES OFFERINGS AS IT RELATES TO ANY CUSTOMIZATION, CHANGES, MODIFICATIONS, OR ALTERATIONS MADE TO THE PORTAL BY CUSTOMER.
10. | MUTUAL INDEMNIFICATION |
10.1 Indemnification by Customer.
(a)To the fullest extent permissible by law, Customer will defend, indemnify and hold harmless CrowdEngine and its Affiliates, and their respective employees, officers, directors, attorneys, agents, independent contractors, assigns and representatives, (collectively, “ CrowdEngine Indemnitees"), including without limitation each individual, corporation, partnership, trust, limited liability company, association or other entity (each, a “Person"), if any, who controls such CrowdEngine Indemnitee within the meaning of the Securities Act of 1933, as amended (the “Securities Act", or the Securities Exchange Act of 1934, as amended (the “Exchange Act"), against any and all liabilities, claims, losses, reasonable costs and expenses, including reasonable attorneys' fees together, “Damages"), which CrowdEngine Indemnitees have incurred or may incur as a result of any claim or action brought or that may be brought by a third party, to the extent relating to, in connection with, or arising out of (a) any violation of any Applicable Law by Customer; (b) the End User Information or Customer Content contained on the Customer Portal or the administration of any portion of the Customer Portal by Customer via the Administrative Accounts; (c) any breach by Customer of any representation, warranty, obligation or any other breach of this Agreement; (d) any violation of third party Proprietary Rights by any Customer Content provided by Customer or End Users hereunder; (e) any negligent, reckless or intentional acts or omissions by Customer or any of Customer's employees, agents or representatives; or (f) anything published on the Customer Portal. Customer will have the right to select and control legal counsel for the defense of any such claim or action and for any negotiations relating to any such claim or action as it applies to or against Customer. CrowdEngine will reasonably cooperate in the investigation, defense and settlement of any claim or action and will provide prompt notice of any such claim or action or reasonably expected claim or action to Customer. CrowdEngine will have the right, but not the obligation, to retain its own separate legal counsel at its own expense to defend any such claim or action. If Customer fails or refuses to defend or settle any claims or actions, then CrowdEngine will, upon written notice to the Customer, have the right to defend or settle (and control the defense of) such claims or actions.(b)To provide for just and equitable contribution to joint liability under the Securities Act in any case in which either: (i) any CrowdEngine Indemnitee otherwise entitled to indemnification under Section 10.1(a) makes a claim for indemnification pursuant to Section 10.1(a) but it is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case, notwithstanding the fact that Section 10.1(a) provides for indemnification in such case, or (ii) contribution under the Securities Act may be required on the part of any party hereto for which indemnification is provided under Section 10.1(a), then, and in each such case, such parties will contribute to the aggregate losses, claims, damages, liabilities, or expenses to which they may be subject (after contribution from others) in such proportion as is appropriate to reflect the relative fault of each of Customer and the CrowdEngine Indemnitee in connection with the statements, omissions, or other actions that resulted in such loss, claim, damage, liability, or expense, as well as to reflect any other relevant equitable considerations. The relative fault of Customer and of the CrowdEngine Indemnitee will be determined by reference to, among other things, whether the untrue or allegedly untrue statement of a material fact, or the omission or alleged omission of a material fact, relates to information supplied by Customer or by the CrowdEngine Indemnitee and the parties' relative intent, knowledge, access to information, and opportunity to correct or prevent such statement or omission; provided, however, that, in any such case no Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) will be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation; provided, further, however, in no event will the aggregate liability for all CrowdEngine Indemnitees for contribution under this Section 10.1(b) exceed the limitation of liability amount set forth in Section 11, except in the case of willful misconduct or fraud by a CrowdEngine Indemnitee.
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10.2 Indemnification by CrowdEngine. CrowdEngine will defend Customer against any claim, demand, suit or proceeding made or brought against Customer by a third party alleging that the use of the Subscription Service in accordance with this Agreement infringes or misappropriates such third party's intellectual property rights (a “Claim Against Customer"), and will indemnify Customer from any damages, attorneys' fees and costs finally awarded against Customer as a result of, or for amounts paid by Customer under a court-approved settlement of, a Claim Against Customer, provided Customer (a) promptly gives CrowdEngine written notice of the Claim Against Customer, (b) gives CrowdEngine sole control of the defense and settlement of the Claim Against Customer (except that CrowdEngine may not settle any Claim Against Customer unless it unconditionally releases Customer of all liability), and (c) gives CrowdEngine all reasonable assistance, at CrowdEngine's expense. If CrowdEngine receives information about an infringement or misappropriation claim related to a Subscription Service, CrowdEngine may in its discretion and at no cost to Customer (i) modify the Subscription Services so that they no longer infringe or misappropriate, (ii) obtain a license for Customer's continued use of that Subscription Service in accordance with this Agreement, or (iii) terminate Customer's subscriptions for that Subscription Service upon 30 days' written notice and refund Customer any prepaid fees covering the remainder of the term of the terminated subscriptions. The above defense and indemnification obligations do not apply to the extent a Claim Against Customer arises from Customer's breach of this Agreement or from any Customer Content or Customer Data. This paragraph states CrowdEngine's sole liability to Customer, and Customer's exclusive remedy against CrowdEngine, for any type of claim described in this paragraph.
11. | LIMITATION OF LIABILITY |
11.1 Limitation of Liability. EXCEPT WITH RESPECT TO EACH PARTY'S INDEMNIFICATION OBLIGATIONS UNDER THIS AGREEMENT AND EITHER PARTY'S BREACH OF ITS OBLIGATIONS PURSUANT TO SECTION 8 (CONFIDENTIALITY), NEITHER PARTY'S LIABILITY WITH RESPECT TO ANY SINGLE INCIDENT ARISING OUT OF OR RELATED TO THIS AGREEMENT WILL EXCEED THE AMOUNT PAID BY CUSTOMER HEREUNDER IN THE SIX
(6) MONTH PERIOD PRECEDING THE INCIDENT, PROVIDED THAT IN NO EVENT WILL EITHER PARTY'S AGGREGATE LIABILITY ARISING OUT OF OR RELATED TO THIS AGREEMENT EXCEED THE TOTAL AMOUNT PAID BY CUSTOMER HEREUNDER. THIS LIMIT IS CUMULATIVE AND ALL PAYMENTS UNDER THIS AGREEMENT FOR THE SIX (6) MONTH PERIOD PRECEDING THE INCIDENT WILL BE AGGREGATED TO CALCULATE SATISFACTION OF THE LIMIT. THE EXISTENCE OF MULTIPLE CLAIMS WILL NOT ENLARGE THIS LIMIT. THE ABOVE LIMITATIONS WILL APPLY WHETHER AN ACTION IS IN CONTRACT OR TORT AND REGARDLESS OF THE THEORY OF LIABILITY. HOWEVER, THE ABOVE LIMITATIONS WILL NOT LIMIT CUSTOMER'S PAYMENT OBLIGATIONS UNDER THE “FEES AND PAYMENT" SECTION ABOVE.
11.2 Exclusion of Consequential and Related Damages. EXCEPT WITH RESPECT TO EACH PARTY'S INDEMNIFICATION OBLIGATIONS UNDER THIS AGREEMENT AND EITHER PARTY'S BREACH OF ITS OBLIGATIONS PURSUANT TO SECTION 8 (CONFIDENTIALITY), IN NO EVENT WILL EITHER PARTY HAVE ANY LIABILITY TO THE OTHER PARTY FOR ANY LOST PROFITS, REVENUES OR INDIRECT, SPECIAL, INCIDENTAL, CONSEQUENTIAL, COVER OR PUNITIVE DAMAGES, WHETHER AN ACTION IS IN CONTRACT OR TORT AND REGARDLESS OF THE THEORY OF LIABILITY, EVEN IF A PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. THE FOREGOING DISCLAIMER WILL NOT APPLY TO THE EXTENT PROHIBITED BY LAW.
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12. | TERM AND TERMINATION |
12.1 Term of Agreement. This Agreement shall commence on the Effective Date and continue until all Service Orders hereunder have expired or have been terminated, or until this Agreement is terminated in accordance with its terms.
12.2 Term of Service Order. Any Service Order created under this Agreement will commence immediately upon execution by both parties, and will continue thereafter as provided in the Service Order; provided, however, that notwithstanding anything to the contrary herein or in any Service Order, all existing Service Orders will also terminate upon the termination of this Agreement.
12.3 Termination for Cause. If either party fails to comply with any of the material terms and conditions of this Agreement or Service Order, including without limitation the payment of any Subscription Fee or reimbursement due and payable to CrowdEngine under this Agreement, the other party may terminate this Agreement and/or any or all Service Orders and any and all license rights upon fifteen (15) days' written notice to the defaulting party specifying any such breach, unless within the period of such notice, all breaches specified therein will have been remedied.
12.4 Termination by CrowdEngine for End of Life. CrowdEngine intends to continue to provide and support the Subscription Services for so long as Customer renews in accordance with the applicable Service Order; provided, however, if, CrowdEngine determines in its sole discretion that it is no longer feasible to support the Subscription Services, CrowdEngine may terminate this Agreement for end of life at any time by providing one hundred eighty (180) days' written notice to Customer.
12.5 Refund or Payment upon Termination. If this Agreement is terminated by Customer in accordance with the “Termination for Cause" section above or if this Agreement is terminated by CrowdEngine in accordance with the “Termination by CrowdEngine for End of Life" section above, CrowdEngine will refund Customer after the effective date of termination any prepaid fees covering the remainder of the term of all Service Orders in effect on the date of termination. If this Agreement is terminated by CrowdEngine in accordance with the “Termination for Cause" section above, Customer will pay CrowdEngine any unpaid fees covering the remainder of the term of all Service Orders. In no event will termination relieve Customer of its obligation to pay any fees payable to CrowdEngine for the period prior to the effective date of termination.
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12.6 Effect of Termination. Upon the termination or expiration of this Agreement, the Customer Portal URL will be de-activated and will no longer be used by either party. Upon the expiration or termination of this Agreement for any reason: (a) Customer will cease use of, and return to CrowdEngine, any materials provided by CrowdEngine; (b) CrowdEngine will return to Customer all End User Information, Customer Content, Customer Confidential Information and any other Customer materials then in the possession of CrowdEngine; and (c) CrowdEngine will make Customer Content inaccessible and cease use of the Customer Content, provided that Customer acknowledges and agrees that: (i) removed Customer Content may persist in caches or backups for a reasonable period of time, and (ii) CrowdEngine will not have control over any Customer Content that has been copied from the Customer Portal by End Users and reposted or redistributed to a third party site (Facebook, Twitter, personal blog, etc.), and CrowdEngine will not be responsible for the removal of such reposted and/or redistributed Customer Content on third party sites.
12.7 Transition Services. If Customer is current in all payments due to CrowdEngine at the time of expiration or termination this Agreement, CrowdEngine will provide to Customer its End User Information, Customer Content and any other Customer materials in the possession of CrowdEngine in a standard database document format readily available to CrowdEngine at no additional charge. If Customer requests the End User Information and Customer Content in a non-standard format, Customer will pay to CrowdEngine a reasonable fee for technical services as determined by CrowdEngine.
12.8 Surviving Provisions. Any provision of the Agreement that by its express terms or nature contemplates performance or observance subsequent to termination or expiration of the Agreement will survive termination or expiration of the Agreement and continue in full force and effect.
13.GENERAL | PROVISIONS |
13.1 Export Compliance. The Subscription Services, other CrowdEngine technology, and derivatives thereof may be subject to export laws and regulations of the United States and other jurisdictions. CrowdEngine and Customer each represents that it is not named on any U.S. government denied-party list. Customer will not knowingly permit any User to access or use any Subscription Service in a U.S.-embargoed country (currently Cuba, Iran, North Korea, Sudan or Syria) or in violation of any U.S. export law or regulation.
13.2 Entire Agreement and Order of Precedence. This Agreement is the entire agreement between CrowdEngine and Customer concerning its subject matter and supersedes all prior and contemporaneous agreements, proposals or representations, written or oral, concerning its subject matter. No modification, amendment, or waiver of any provision of this Agreement will be effective unless in writing and signed by the party against whom the modification, amendment or waiver is to be asserted. The parties agree that any term or condition stated in a Customer quote, bid, purchase order or in any other Customer order documentation (excluding Service Order) is void. In the event of any conflict or inconsistency among the following documents, the order of precedence will be: (1) the applicable Service Order, (2) any exhibit, schedule or addendum to this Agreement, and (3) the body of this Agreement.
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13.3 Interpretation. The parties hereto agree that this Agreement has been negotiated jointly and constitutes an arms-length negotiation. The parties agree that this Agreement will be interpreted as if drafted jointly by the parties and that no adverse inference will arise against a party nor will any provision hereof be interpreted against a party by virtue of that party's authorship of any provision of this Agreement.
13.4 Relationship of the Parties. The parties are independent contractors. This Agreement does not create a partnership, franchise, joint venture, agency, fiduciary or employment relationship between the parties.
13.5 | Third-Party Beneficiaries. There are no third-party beneficiaries under this Agreement. |
13.6 Notices. Any notice or communication required or permitted to be given hereunder may be delivered by hand, deposit with an overnight courier, sent by email or facsimile (provided delivery is confirmed), or U.S. Mail (registered or certified only), return receipt requested, in each case to the address set forth on the initial page hereof or at such other addresses as will be designated in writing by either party to the other in accordance with this Section. Such notice will be deemed to be given when received.
13.7 Waiver. No failure or delay by either party in exercising any right under this Agreement will constitute a waiver of that right.
13.8 Severability. If any provision of this Agreement is declared invalid or unenforceable, such provision will be deemed modified to the extent necessary and possible to render it valid and enforceable. In any event, the unenforceability or invalidity of any provision will not affect any other provision of this Agreement, and this Agreement will continue in full force and effect, and be construed and enforced, as if such provision had not been included, or had been modified as above provided, as the case may be.
13.9 Assignment. Neither party may assign any of its rights or obligations hereunder, whether by operation of law or otherwise, without the other party's prior written consent (not to be unreasonably withheld); provided, however, either party may assign this Agreement in its entirety (including without limitation all Service Orders), without the other party's consent to its Affiliates or in connection with a merger, acquisition, corporate reorganization, or sale of all or substantially all of its assets. Notwithstanding the foregoing, if Customer is acquired by, sells substantially all of its assets to, or undergoes a change of control in favor of, a direct competitor of CrowdEngine, then CrowdEngine may terminate this Agreement upon written notice. In the event of such a termination, CrowdEngine will refund Customer any prepaid fees covering the remainder of the term of all subscriptions. Subject to the foregoing, this Agreement will bind and inure to the benefit of the parties, their respective successors and permitted assigns.
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13.10 Governing Law. This Agreement, and any disputes arising out of or related hereto, will be governed exclusively by the internal laws of the State of Utah, without regard to its conflicts of laws provisions or the United Nations Convention on the International Sale of Goods.
13.11 Venue. The state and federal courts located in Salt Lake City, Utah, will have exclusive jurisdiction over any dispute relating to this Agreement, and each party consents to the exclusive jurisdiction of those courts. EACH PARTY HEREBY WAIVES ITS RIGHT TO A TRIAL BY JURY WITH RESPECT TO ANY CLAIM, ACTION OR PROCEEDING, DIRECTLY OR INDIRECTLY, ARISING OUT OF, OR RELATING TO, THIS AGREEMENT TO THE FULLEST EXTENT PERMITTED BY LAW.
13.12 Counterparts. This Agreement may be signed in multiple counterparts, which, taken together, will be considered one original. Facsimile signatures, signatures on an electronic image (such as .PDF or .JPG format), and electronic signatures will be deemed to be original signatures.
Signed by each party's authorized representative:
Service Order
This Service Order (“Service Order"), dated as of 12/12/2018 , is entered into and made between Crowd Engine, Inc. (“CrowdEngine") and Secured Investment Corp (“Customer").
Both parties acknowledge that upon execution of this Service Order by both parties this Service Order will to be a valid attachment to and incorpoated in the CrowdEngine Master Services Agreement by and between
CrowdEngine and Customer dated 12.12.2018 , (the “ Service Agreement"). All other terms of the Service Agreement will remain in full force and effect. Capitalized terms used in this Service Order and not otherwise defined will have the same meaning as set forth in the body of the Service Agreement.
This Service Order (?Service Order"), dated as of 12/12/2018 , is entered into and made between Crowd Engine, Inc. (?CrowdEngine") and Secured Investment Corp (?Customer"). Both parties acknowledge that upon execution of this Service Order by both parties this Service Order will to be a valid attachment to and incorpoated in the CrowdEngine Master Services Agreement by and betweenCrowdEngine and Customer dated, (the ? Service Agreement"). All other terms of the Service Agreement will remain in full force and effect. Capitalized terms used in this Service Order and not otherwise defined will have the same meaning as set forth in the body of the Service Agreement.
1. Services.
1.1 Services Description. The services provided will be as described on www.crowdengine.com, and similar to the services provided at equitydemo.new.crowdengine.com, which may be modified from time to time, including without limitation to include software enhancements, security updates, and maintenance. Customer agrees to have the tagline “Powered by CrowdEngine" in a font and size agreed to by the parties at the bottom of the Customer Portal.
2. | Subscription Fees |
2.1 Setup Fee. The initial setup fee for provisioning of the CrowdEngine Technology and Subscription Services for establishing the Customer Portal will be a non-refundable fee of $3,000.00, due upon the execution of this Service Order.
2.2 Subscription Fee. The periodic Subscription Fee for this Service Order shall be $1,500.00 per month, plus any selected options. Other than the initial payment, Subscription Fees shall be automatically paid by credit card or ACH debit and due on the 1st day of each calendar month. Any partial periods shall be pro- rated. Test The Waters Special Pricing (Reg A+ only). After your first full month payment of $1,500, pay only $500 per month until FINRA approves your Reg A+ offering while collecting investor data. First Full month payment will be due January 1, 2019. No monthly fee will be due for December.
3. Term. The initial term (“Initial Term") of this Service Order will commence as of the date first written above and continue for 6 months. After the Initial Term this Service Order will continue on a month-to-month basis unless either party notifies the other in writing not less than thirty (30) days prior to its intention not to renew. Any discounted months shall not count towards the Initial Term commitment.
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3.1 Early Termination. If Customer terminates the Service Agreement or this Service Order or ceases to continue making Subscription Fee payments prior to the expiration of the initial term for any reason other than
for material breach by CrowdEngine, then subscription fees for the remainder of the term will accelerate and become due and payable in a lump sum immediately upon termination.
Signed by each party's authorized representative:
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Payment Authorization
Sign and complete this form to authorize Crowd Engine Inc, to make a charge to your ACH account listed above. By signing this form you give Crowd Engine
Inc permission to debit your account for the amounts due under the Master Service Agreement and associated Service Orders.
I authorize Crowd Engine Inc. to charge the bank account via ACH in this authorization form according to the terms outlined in the executed MSA. I certify that I am an authorized user of this bank account, and that I will not dispute the payment with my bank; so long as the transaction is consistent with the terms the Crowd Engine Master Service Agreement.
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Exhibit H
LENDER WELCOME LETTER
DATE
END LENDER NAME
END LENDER ADDRESS
Lender Account No.:
Borrower Account No.: | Loan Closing Date: | |||
Borrower Name: | Loan Funding: | $0.00 | ||
Property Address: | Your Funding %: | 0.000% |
Dear LENDER NAME,
Thank you for allowing Lake City Servicing to be your loan collection agent. The “Borrower Account” number, or loan number, assigned to this loan is referenced above. Also, note your “Lender Account” number above. When making inquiries please have these numbers available.
Our policy is to process each payment and deposit it into our loan servicing trust account on the same day it is received. When the Borrower’s check clears, funds are disbursed to the lenders either by ACH electronic deposit or by a Lake City Servicing trust check. ACH electronic deposits & Checks are issued every Monday, Wednesday & Friday per week. If for any reason your Borrower’s check is returned unpaid, we must place a “Stop Payment” on our trust check issued to you, or reverse your ACH electronic deposit. If our trust check has already been paid to your account, we will request that you immediately reimburse us the full amount of our trust check.
With the exception of loans set up as Adjustable Rate Loans, it is the responsibility of the Lender to notify Lake City Servicing in writing or by email of any changes to the loan or loan terms in a timely manner.
On or around the 5th of each month, you will receive a “Lender Statement” listing all previous monthly payments received, current principal balances, and next payment due dates on each of your accounts.
Please return the enclosed “Loan Servicing Agreement” as soon as possible. It is required by the regulators before Lake City Servicing can process payments and disburse your money.
If you have any questions, please feel free to call 1-800-630-9252, 8:00 a.m. to 5:00 p.m. Monday thru Friday Pacific Standard Time and ask for the Loan Servicing department.
Sincerely,
Lake City Servicing
701 E. Front Ave, Ste. 201 • Coeur d’Alene, ID 83814
Phone: 800-630-9252 Fax: 800-380-6492
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STANDARD LOAN SERVICING AGREEMENT
Borrower: | |
Lender: | |
Property Address: | |
Loan Amount: | $0.00 |
THIS STANDARD LOAN SERVICING AGREEMENT (“Agreement”) is made
and entered into this ___ day of _________________, 20___, by and between Lake City Servicing (“Servicer”) and
the Lender or Lenders whose signatures appear below and in counterparts to this Agreement (collectively, the “Lender”),
the Lender being the lender, funder, owner or owner of an interest therein, holder or transferee of that certain promissory note
(“Note”) secured by that certain Deed of Trust or Mortgage, whichever is applicable (“Security Instrument”)
and further evidenced by certain other loan documents (collectively, the Note, Security Instrument and all other loan documents
will be referred to herein as the “Loan Documents”).
1. Scope. Lender retains Servicer as Lender’s agent to employ commercially reasonable and prudent practices to collect all scheduled payments on the loan identified above (“Loan”) subject to the terms and conditions of this Agreement. Lender shall supply to Servicer all available relevant documents of the Loan file including, but not limited to Notes, Deed/Mortgages, Modification Agreements, Forbearance Agreements, Assignments or any other document effecting condition of title or payment distribution and showing the correct beneficiary, needed by Servicer to complete its tasks, including but not limited to, file setup, servicing functions, and to satisfy regulatory requirements, before servicing functions will be performed, continued, or funds distributed. Upon any occurrence that could impact servicing functions, including but not limited to, Assignment of Beneficial Interest, modification of Loan terms, Lender must notify Servicer immediately of such occurrence and provide copies of relevant documents before servicing functions will be performed, continued, or funds distributed.
To the extent such instructions do not violate any applicable federal, state or locate law or regulations and unless as otherwise provided herein, Servicer shall follow instructions from Lender; provided, however, if the Loan is owned by multiple Lenders (a “Multi-Lender Loan”), Servicer shall consult with all Lenders but shall only follow instructions from the Majority; provided, however, in the event of instructions from the Lender or a Majority, the Loan Documents shall govern and Servicer shall follow the Loan Documents. A “Majority” is determined by 50.1% or more ownership of the Note. Servicer shall not follow instructions from a Lender or the Majority if such instructions would require Servicer to violate any federal, state or local law or regulations. A default upon any interest in the Note shall constitute a default upon all interests. The Majority may determine and direct the actions to be taken on behalf of all Lenders in the event of default or with respect to other matters requiring the direction or approval of all Lenders, including but not limited to, designation of brokers, servicing agents or others acting on their behalf and the sale, encumbrance or lease of any real or personal properties which may be owned by Lenders as the result of foreclosure or receipt of a deed in lieu of foreclosure, or modification or forbearance of the Loan. Servicer shall consult with Lender or Majority on non-routine collection matters. Servicer shall not, however, enter into any modification or forbearance of the Loan with any borrower without the express written permission of the Lender (or a Majority of Lenders in a Multi-Lender Loan).
1. Term and Termination. This Agreement shall commence on the date set forth above. This Agreement shall terminate as to the Loan when any of these events occur: (a) payment in full of the Loan and reconveyance of the related Security Instrument; (b) thirty (30) days’ written notice by Servicer to Lender; (c) thirty (30) days’ written notice by Lender to Servicer (unless a shorter period of time is permitted under certain circumstances as provided in this Agreement or applicable law), or (d) if Lender has checked the box in Section 5, after the property has been sold following foreclosure. If the Lender elects to terminate this Agreement in order to transfer servicing to another party, Lender shall pay Servicer a $75 transfer fee.
Prior to the effectiveness of any termination of this Agreement in its entirety or as to the Loan, Servicer shall deliver to Lender all of Lender’s funds, an appropriate accounting and all necessary documentation. At termination of the Loan, Lender shall immediately reimburse Servicer for any outstanding advances made pursuant to Section 7 below. Servicer shall be entitled to withhold funds due Lender if Lender owed Servicer funds under Section 7.
2. Standard Loan Servicing Functions. Servicer shall in accordance with industry standards and applicable laws, rules, and regulations: (a) issue monthly statements to each Borrower for the Loan, including a maturity letter informing Borrower the Loan is going to mature; (b) issue late notices to Borrowers as applicable calculating in any late fees due; (c) issue final notices to each Borrower as applicable warning of the possibility of foreclosure if payment is not received; (d) answer Borrower inquiries, demands, and requests, and act as intermediary between Borrower and Lender; (e) issue payoff demands and beneficiary statements, (f) demand, receive, and collect all Loan payments, deposit them by the next business day into Servicer’s trust account and transfer by bank wire (ACH) or check Lender’s and/or Lender’s share of such funds (net proceeds) in accordance with instructions provided to Servicer, normally within fifteen (15) days of receipt or upon sufficient time to clear funds (but not more than twenty-five (25) business days from the time funds have been cleared); (g) issue annual income tax statements (1098 and 1099-INT) to the Borrower and Lender; (h) execute and deliver on Lender’s behalf and in Lender’s name any documents necessary or convenient for the exercise of any rights or duties which Lender may have as servicing agent under the Security Instruments; and (i) convey payoff demands within two (2) business days of receipt to Lender for written or email approval, and if Lender’s written or email approval is not received by Servicer within the following two (2) business days, Servicer shall assume the payoff demand to be correct and accept it.
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3. Standard Loan Servicing Compensation. As consideration, each of the above named Lenders shall pay to Servicer a servicing fee equal to:
a. | Twenty dollars ($20.00) per month on Loans with a principal balance of less than Four Hundred Ninety-Nine Thousand Nine Hundred Ninety-Nine and 99/100 Dollars ($499,999.99); |
b. | Forty dollars ($40.00) per month on Loans with a principal loan balance greater than Four Hundred Ninety-Nine Thousand Nine Hundred Ninety-Nine and 99/100 Dollars ($499,999.99); or |
c. | forty percent (40%) of .075% of the principal loan balance on Loans with a principal balance of loans greater than One Million and No/100 Dollars ($100,000,000) payable monthly until the Loan has been paid off. For example, on a Loan with a principal balance of One Million and No/100 Dollars ($100,000,000), the total annual servicing fee payable to the Servicer is Seven Hundred Fifty and No/100 Dollars ($750) or Sixty Two and 50/100 Dollars ($62.50) per month. Forty percent of Sixty Two and 50/100 Dollars ($62.50) is Twenty-Five and No/100 Dollars ($25) per month as the monthly servicing fee Lender shall be responsible for in the above scenario. |
Servicer shall deduct the above referenced monthly service fee from that portion of borrower’s payment that is due each Lender. As additional consideration, the Servicer shall be entitled to one hundred percent (100%) of fees related to beneficiary statements and payoff demands, overnight charges NSF fees, reconveyance fees, advancing fees, demand fees, and other fees earned by Servicer and all bankruptcy and administration fees, and fifty percent (50%) of all late charges, fees, and penalties (but 0% of default interest) as described in the Note.
4. | Loan Servicing Functions After Default (including bankruptcy & foreclosure management and monitoring). If the Borrower defaults, the Lender may, but has not obligation, to elect to appoint Servicer as Lender’s agent to conduct the following activities: (i) all activities set forth under Section 3 above; (ii) process and manage foreclosure of the Loan, including authorization to act on behalf of the Lender to execute all foreclosure documents including, but not limited to, Substitution of Trustee. Servicer may produce a copy of this Agreement as evidence of its authority. In accordance with various State and/or Federal Laws and Servicer’s interpretation of proper procedures and risk, Servicer reserves the right to determine how advances and/or late charges are assessed and to adjust all unpaid late charges or assessments of late charges accordingly; (iii) coordinate bankruptcy relief and legal issue resolution; (iv) address known city or municipal notices and issues. If the Lender elects to appoint Servicer to provide the loan servicing functions as set forth in this Section 5, the Advance by Lender or Servicer are subject to the terms of Section 7. Certain foreclosure and bankruptcy fees and expenses are set forth on the attached Exhibit A, which is hereby incorporated into this Agreement by this reference. The fees and expenses set forth on Exhibit A are fees and expenses billed directly to the Lender by a third party national foreclosure management company. Because the fees and expenses set forth on Exhibit A are those of a third party they are subject to change at any time. The Servicer or an affiliate may provide REO services to the Lender; however, such services shall be subject to a separate fee schedule which may be obtained from the Servicer upon request. |
a. | Limited Power of Attorney. If Lender has elected to appoint Servicer as Lender’s agent to conduct the activities described in Section 5 above, Lender hereby does make, constitute, and appoint Servicer as Lender’s true and lawful attorney-in-fact for the following specific and limited purposes only: |
to do all things necessary or pertinent and to execute any and all documents on behalf of Lender in order for Servicer to carry out and fulfill all of the duties and responsibilities as described above in Section 5 in a timely manner; provided, however, Servicer shall have received email confirmation from Lender consenting to the Servicer’s actions prior to exercising Servicer’s rights under this limited power of attorney.
This limited power of attorney is effective with respect to each Loan and continues until the earlier of (i) the Loan being paid in full and the Security Instrument is released and the property has been reconveyed; (ii) this Agreement has been terminated; or (iii) the property, after being foreclosed upon by the Lender, has been sold, transferred or otherwise assigned by the Lender to a new owner.
5. | Delinquent Loan Servicing Compensation. If the Lender elects to appoint the Servicer to perform the services described above in Section 5 a fee in the amount of $500.00, Prior to Servicer performing any services described in Section 5, Servicer shall send to Lender an invoice detailing Lender’s payment options for those services. The payment options are the following: (i) a one-time flat fee in any amount equal to Five Hundred and No/100 Dollar ($500) or (ii) a monthly fee equal to One Hundred Twenty-Five and No/100 dollars ($125.00). |
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6. Protective Advances. Lender may make such advances as approved by the Majority or, if Lender is the only owner of the Loan, such advances that are necessary and prudent to protect and to collect Lender’s interest in the Loan. If the Loan is a Multi-Lender Loan, and Lender fails to make advances approved by the Majority, other owners of the Loan are authorized to advance the amount Lender failed to advance and to receive payment in full before any further payments to the Lender who failed to advance payment. Servicer, in its absolute discretion, may advance its own funds to protect the security of Loan, including advances to cure liens, property insurance, foreclosure expenses, repair, advertising, litigation expenses and similar items, but not Loan payments. Servicer shall be reimbursed such advances from the next Loan payment, or within ten (10) days after a written request to Lender. To secure Servicer’s advances, Lender hereby irrevocably assigns to Servicer, to the extent of advances owed to Servicer, the Loan payments or portion of the Loan payoff received after an advance is made, to reimburse Servicer for any advance made on behalf of Lender. Lender will be liable to the remaining investors for all damages incurred as result of the Lender’s failure to act or failure to advance funds. Lender will be liable for actual attorneys’ fees incurred as a result of said failure to act or failure to advance funds. Should Lender not reimburse Servicer for any fees or advances due (including those fees under Sections 4 and 6 above), Servicer has the right to deduct said amount from any funds due Lender (including funds from other loans serviced by Servicer) until such time as Servicer has been reimbursed in full for fees and advances due Servicer from Lender.
7. No Additional Obligations of Servicer. Lender acknowledges that Servicer has no obligation, other than described elsewhere in this Agreement, to make any payment (other than the forwarding of a Borrower’s payment) to or on behalf of Lender, to liens or to otherwise protect or enforce the Lender’s security or rights hereunder. In the event any payment collected for the benefit of Lender is returned NSF or uncollectible in Servicer’s Trust Account, Lender will immediately upon notification from Servicer, return Servicer’s uncashed Trust Check, or immediately reimburse Servicer’s Trust Account the full amount received from Servicer’s Trust Check. In no event is Servicer obligated to cover or make good Borrower’s shortages in Servicer’s Trust Account. Servicer is hereby authorized to place a “Stop Payment” on Lender’s Trust Check from Servicer, or reverse any ACH (Electronic Funds Transfer) whenever the representing funds are returned NSF or uncollectible in Servicer’s Trust Account. Servicer may deduct such amounts from any proceeds due Lender.
8. Insurance and Taxes. Since the Borrower’s monthly payment does not include amounts for the payment of insurance and/or property taxes, it is the responsibility of the Lender to: (a) verify insurance coverage annually and send copies of insurance coverage to the Servicer, however Servicer is not responsible for the consequences of any non-payment of insurance, and (b) check for payment of taxes annually or use a tax service; Servicer may receive notices of property tax delinquencies and notify Lender of any known non-payment of taxes if Servicer has signed up for a tax service and listed Lender and Servicer for notices of non-payment of taxes, however Servicer is not responsible for the consequences of any non-payment of taxes. Servicer accepts no responsibility for the consequences of incorrect information supplied by Lender.
9. Loan Documents. Lender shall retain custody of the original Loan Documents, unless otherwise specified in writing by the Lender. In the event Lender elects to have Servicer involved in the foreclosure process set forth above in Section 5, Lender agrees to deliver the original Loan Documents to Servicer upon request.
10. Warranties. Lender further understands and agrees that the security for any Note and Security Instrument is directly related to the equity in the security real estate and THAT NO WARRANTIES ARE IMPLIED OR EXPRESSED. Lender understands that the value or sale ability of real estate can change at any time and therefore, that equity in the security real estate can increase or decrease. Lender hereby releases Servicer from any liability whatsoever in connection with the determination of the value of the security real estate.
11. Indemnification. Servicer shall indemnify, defend and hold Lender and its officers, employees, representatives, members, directors, parent companies, affiliates, subsidiaries, successors and assigns harmless from any and all claims, demands, causes of action, losses, damage, fines, penalties, liabilities, costs and expenses, including reasonable attorney’s fees and court costs, sustained or incurred by Lender by reason of or arising directly from third party claims that were caused by or resulted from (i) any actions or omissions by Servicer, Servicer’s contractors, or agents, that are outside the scope of its authority hereunder except to the extent Lender has approved of the action that was outside the scope of its authority and/or (ii) taking any action, or refraining from taking any action, with respect to any Loan or property, by Servicer, Servicer's, contractors, or agents, that result from the malfeasance, willful misconduct, gross negligence or a failure by Servicer to act in compliance with the terms of this Agreement. The foregoing indemnification shall survive the termination of this Agreement.
Lender shall indemnify, defend and hold Servicer and its officers, employees, representatives, members, directors, parent companies, affiliates, subsidiaries, successors and assigns harmless from any and all claims, demands, causes of action, losses, damage, fines, penalties, liabilities, costs and expenses, including reasonable attorney’s fees and court costs, sustained or incurred by Servicer by reason of or arising directly from third party claims or actions that were caused by or resulted from (i) any actions or omissions in respect of any Loan or property of any prior servicer, owner or originator of a Loan or property, (ii) any acts or omissions taken under the limited power of attorney; provided, Servicer is acting on the upon the direction and email authorization of the Lender, and/or (iii) taking any action, or refraining from taking any action, with respect to any Loan or property, that result from the malfeasance, willful misconduct or gross negligence of Lender, Lender's contractors, or agents, or from the failure of the Lender to provide Servicer the necessary Loan documents in order to allow Servicer sufficient time to timely process satisfactions, payoffs and releases. The foregoing indemnification shall survive the termination of this Agreement.
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12. Independent Contractor. At all times during the term of this Agreement, Servicer shall be an independent contractor and not an employee of Lender. Lender shall have the right to control Servicer only pursuant to this Agreement. Lender shall not have the right to control the means by which Servicer accomplishes its services and duties pursuant to this Agreement. Servicer shall, at its sole cost and expense, furnish all facilities, materials, and equipment that may be required for furnishing services pursuant to this Agreement.
13. Servicer Not Agent. Except as otherwise provided herein or as Lender may specify in writing, Servicer shall have no authority, express or implied, to act on behalf of Lender in any capacity whatsoever as an agent. Except as otherwise provided herein or as Lender may specify in writing, Servicer shall have no authority, express or implied, to bind Lender to any obligation whatsoever.
14. Assignment or Subcontracting. No assignment or subcontracting by Servicer of any of its obligations under this Agreement or of funds to be received under this Agreement shall be of any force or effect unless the assignment has had the prior written approval of Lender. Lender may terminate this Agreement rather than accept any proposed assignment or subcontracting and Lender shall not be liable for any transfer fee. In the event Lender sells, transfers or otherwise assigns the Loan Documents, the new holder/owner of the Loan Documents may be required to execute a servicing agreement with Servicer at the request of Servicer.
15. Litigation Response Costs. If Servicer is served with a Summons and Complaint which requires Servicer to appear in person and/or give testimony on behalf of Lender for any legal action against Lender, Servicer is to be reimbursed for any litigation response costs, fees and expenses, including, but not limited to, hotel, airline, meals and car rental. Servicer is to be paid $125 per normal business hour from the Servicer’s main office per employee needed. Lender shall not be responsible for any such costs and fees if the appearance is a result or related to Servicer’s act or activity that were not a direct result of Lender’s instructions or not within the scope of the Servicer’s services contemplated under this Agreement.
16. Limitation of Liability of Servicer. Except to the extent the validity of the Loan is adversely affected or caused by Servicer or its representatives, Servicer is not responsible to Lender, its successors, assigns, Lender, or any other third party for the validity of the Loan submitted by Lender, including without limitation, (i) the Loan documents, including notes, deeds/mortgages, or assignments, (ii) whether the Loan is a valid, enforceable or existing lien on the property, (iii) the enforceability of the Loan against the Borrower of the Loan, (iv) or any regulatory compliance or violation of any other state or federal laws.
17. Notice. Except as otherwise provided herein, all notices required under this Agreement shall be in writing and delivered by one of the following means (i) personally; (ii) facsimile; or (iv) by overnight delivery service or by first class mail, postage prepaid, to each party at the address listed below. Either party may change the notice address (including email address) by notifying the other party in writing. Notices shall be deemed received upon receipt, electronic confirmation of delivery as to facsimile notices, or three (3) days after deposit in the U. S. Mail, whichever is applicable.
18. Governing Law. Each Party specifically acknowledges and agrees that this Agreement and its interpretation and enforcement are governed by the laws of the state of Idaho. Furthermore, each Party irrevocably (i) submits to the jurisdiction of any court of the State of Idaho located in Kootenai County for the purpose of any suit, action or other proceeding arising out of this Agreement or any of the agreements or transactions contemplated hereby (each, a “Proceeding”), (ii) agrees that all claims in respect of any Proceeding may be heard and determined in any such court, (iii) waives, to the fullest extent permitted by law, any immunity from jurisdiction of any such court or from any legal process therein, (iv) agrees not to commence any Proceeding other than in such courts and (v) waives, to the fullest extent permitted by law, any claim that such Proceeding is brought in an inconvenient forum.
19. Miscellaneous. The substantially prevailing party will be entitled to recover its attorneys’ fees from the substantially non-prevailing parties incurred in connection with the prevailing party’s efforts to enforce this Agreement, regardless of whether any action or proceeding is commenced. Each exhibit referenced in this Agreement is incorporated into this Agreement. This Agreement constitutes the entire agreement among the parties and supersedes any prior understandings or agreements, written or oral, that relate to the subject hereof. This Agreement may not be amended except by a writing signed by each party. If for any reason any provision of this Agreement is determined by a tribunal of competent jurisdiction to be legally invalid or unenforceable, the validity of the remainder of the Agreement will not be affected and such provision will be deemed modified to the minimum extent necessary to make such provision consistent with applicable law and, in its modified form, such provision will then be enforceable and enforced. This Agreement is binding upon the parties and will bind their executors, personal representatives, legatees, heirs, successors and assigns. No waiver by any party of any right or default under this Agreement will be effective unless in writing and signed by the waiving party. No such waiver will be deemed to extend to any prior or subsequent right or default or affect in any way any rights arising by virtue of any prior or subsequent such occurrence. This Agreement may be executed in counterparts and via facsimile or PDF electronic transmission, and each such counterpart will be deemed to be an original instrument. All such counterparts together will constitute one and the same Agreement.
20. WAIVER OF JURY TRIAL. SERVICER AND LENDER SHALL AND HEREBY DO WAIVE TRIAL BY JURY TO THE EXTENT PERMITTED BY LAW, IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM BROUGHT BY EITHER OF THE SAID PARTIES TO THIS AGREEMENT AGAINST THE OTHER ON ANY MATTERS WHATSOEVER ARISING OUT OF OR IN ANY WAY CONNECTED WITH THIS AGREEMENT OR ANY CLAIM OF DAMAGE RESULTING FROM ANY ACT OR OMISSION OF THE PARTIES IN ANY WAY CONNECTED WITH THIS AGREEMENT.
(Signature page follows)
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SIGNATURE PAGE
STANDARD LOAN SERVICING AGREEMENT
IN WITNESS WHEREOF, the parties have executed this Agreement, effective as of the date and year first written above.
SERVICER: Lake City Servicing By:
LCS Customer Service
Servicer’s Address & Contact Information: 701 E. Front Ave. 2nd
Floor
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LENDER(S): ________________________________________ ________________________________________
(Entity Name & State of Incorporation, if applicable) ________________________________________ (Print Name) ________________________________________
(Signature) ________________________________________
(Print Title, if applicable) ________________________________________
(Print Name) ________________________________________
(Signature) ________________________________________
(Print Title, if applicable) ________________________________________
Lender’s Address & Contact Information: ________________________________________ ________________________________________ ________________________________________ Phone: _________________________________ Fax: ____________________________________ Email: __________________________________
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Dear LENDER,
As a valued client of Lake City Servicing, we are always looking for ways to improve our service to you. We noticed that you had not signed up for our direct deposit service, and we would like to let you know the benefits this service offers you.
Our direct deposit service automatically deposits your interest payments into the checking or savings account that you specify every Monday, Wednesday & Friday. There’s no more waiting for the mail to get your check! If you’re not home, out on a business trip, or enjoying a vacation you can still collect your interest payments with no worries.
When we direct deposit your interest checks, we will send you an email notification that a payment has been direct deposited to your account. This email includes an attachment that specifies which loan your deposit was for.
We also already send you monthly statements on the first business day of each month. These statements show each deposit that was made for the month prior, as well as showing the status of your portfolio of loans with Lake City Servicing.
We look forward to helping you get the most out of your investment. For your convenience, we have included a direct deposit form with this letter. If you have any questions, please don’t hesitate to contact one of our friendly customer service representatives at (800) 630-9252.
Yours in success,
The Lake City Servicing Team
Send in your ACH Direct Deposit form and get your money faster! Sign up today!!
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DIRECT DEPOSIT FORM
Loan payments due to investor/lenders are directly deposited into any personally identifiable bank account (general investment company accounts are not eligible). You will receive an email notification as well as your bank itemization of the deposit.
Customer Information:
Lake City Servicing Account No.: SIHYF2
Name:_____________________________________________________________________________
Address:___________________________________________________________________________
City: State: Zip Code________________________________________________________________
Telephone #:_______________________________________________________________________
E-Mail (for notification of deposit):____________________________________________________
Banking Information:
Name of Primary Bank:______________________________________________________________
Type of Account: ○ Checking ○ Savings
Routing Number: ________________________Account Number:__________________________
I/we authorize Lake City Servicing to initiate ACH transactions to my/our account indicated above:
___________________________ ________________________________ _______________________________
Signature Date Signature
___________________________ ________________________________ _______________________________
Signature Date Signature
PLEASE ATTACH A VOIDED CHECK (OR COPY) TO THIS FORM
Please mail to: Lake City Servicing, 701 E. Front Ave. 2nd Floor Coeur d’ Alene ID 83814
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