Each prospective investor should, after consultation with their advisors, carefully consider all of the risks of an investment in the Class A Units and not just the potential rewards. The following discussion highlights certain risk factors posed by an investment in the Class A Units. The following is not, and does not purport to be, a complete description of the risks associated with an investment in the Company. Rather, the following are only certain particular risks to which the Class A Units are subject that prospective investors should discuss in detail with their respective legal, tax and financial advisers. The risks disclosed in the Investment Materials must also be considered.
Risk of Sole Investment. The Company will restrict its investments to the Portfolio Company and, as a consequence, the aggregate return of the Company may be substantially adversely affected by the unfavorable performance of the Portfolio Company.
Concentration of Investment. The Portfolio Company’s businesses are concentrated, at least initially, in a single industry and, as a consequence, the aggregate return of the Company will be substantially adversely affected by the unfavorable performance of that industry sector.
Market Conditions. Current market conditions may adversely affect the Company in many ways, such as reducing the value or performance and liquidity of the Investment and reducing the ability of the Company to raise or deploy capital. A recession, a general market downturn, or a specific market dislocation, may result in lower investment returns for the Company.
Illiquid and Long-Term Investment. Although the Investment may occasionally generate some current income, the return of capital and the realization of gains, if any, from the Investment generally will occur only upon the partial or complete disposition of such Investment. It is not generally expected that the Investment will be sold for a number of years after being made. It is unlikely that there will be a public market for the securities held by the Company at the time of the Investment. The Company will generally not be able to sell the securities of the Portfolio Company publicly unless their sale is registered under applicable securities laws, or an exemption from such registration requirements is available, and unless permitted by the terms of the agreements to which the Company becomes a party upon making the Investment. In addition, in some cases the Company may be prohibited by third-party contracts or regulatory reasons from selling certain securities for a period of time.
Uncertainty of Financial Projections. Financial projections are inherently subject to uncertainty and factors beyond the control of the Manager. The inaccuracy of certain assumptions and general economic conditions, which are unpredictable, can have a materially adverse impact on the reliability of such projections. There can be no assurance that any projected results will be obtained, and actual results may vary significantly from such projections.
Limitations of Due Diligence. The Company has done and expects to do very limited due diligence with respect to the Investment. The Company’s due diligence may not reveal all of the liabilities associated with the Investment and may not reveal other weaknesses in the Portfolio Company’s business. There can be no assurance that the Manager’s due diligence processes will uncover all relevant facts that would be material to an investment decision. The Manager has not independently verified the contents of the Investment Materials and any inaccuracy in such Investment Materials could adversely impact the returns which the Manager expects the Company to achieve.
The Portfolio Company is not subject to public company reporting requirements including requirements regarding preparation of financial statements. The financial information appearing in the financial statements of the Portfolio Company may not reflect its financial position or results of operations in the way that they would be reflected if the financial statements had been prepared in accordance with U.S. GAAP or other generally accepted accounting standards and practices. As a result, the evaluation of the Investment and the ability to perform due diligence on and effective monitoring of the Investment may be impeded and the returns which the Manager expects the Company to achieve in respect of the Investment may not be realized. In the event of fraud by the Portfolio Company, the Company may suffer a partial or total loss of the amounts invested in the Portfolio Company.
Non-Controlling Investment. The Company is expected to hold a non-controlling interest in the Portfolio Company and therefore may have a limited ability to protect its position in the Portfolio Company.
No Track Record/History. The Company has been newly formed to make the Investment and has no separate assets or financial or operating history.
Dependence on Manager. The Members will not participate in the management of the Company or decisions with respect to the Investment, but, rather, will rely upon the Manager for such matters. The Manager, in turn, is managed by its board of managers, whose judgment and decisions in regard to the Investment will be essential to the success of the Investment. The Members do not vote for and cannot remove or replace the managers of the Manager and the Manager may only be removed or replaced with a vote of a majority of the members and in the event of a final, non-appealable court finding of fraudulent or grossly negligent misconduct.
Lack of Diversification. The Company has been established to make the Investment in the Portfolio Company. Accordingly, an investment in the Company will not be diversified in terms of industry, geography, capitalization or other factors commonly considered in assembling a diversified portfolio. The Company will be uniquely dependent on the performance of the Portfolio Company. Investors should consider an investment in the Company as only a small component within the context of a broader investment program. Any event or circumstance that adversely affects the results of operations and financial condition of the Portfolio Company will directly and adversely impact the Company and returns to its Members.
Potential Loss of Investment. You should not invest in the Company unless you can bear a loss of your entire investment in the Company. The Investment should be considered riskier than Investment in a larger and more diversified fund.
Illiquid Investment. Members should not rely upon the Company for liquidity or current income. There most likely will be little or no near-term cash flow available to Members. The Company and the Manager cannot control when the Portfolio Company realizes on its businesses and makes distributions to the Company.
Long-Term Investment. The Investment requires a long-term commitment. A Member must be prepared to bear the risks of owning Units for an extended and indeterminate period of time. The Manager (not the Members) will determine when and how to liquidate the Investment, which is subject to various restrictions and no market.
No Market for Class A Units; Restrictions on Transferability; No Withdrawal Rights. The Class A Units have not been registered under the Securities Act or the securities laws of any state or other jurisdiction and cannot be resold unless they are subsequently registered under the Securities Act and other applicable securities laws or an exemption from registration is available. It is unlikely that registration of the Class A Units* under the Securities Act or other securities laws will ever be affected. There is no public market for the Class A Units, and none is expected to develop. A Member will also generally not be permitted to assign its Class A Units without the prior consent of the Manager, which, except in the case of certain estate planning type transfers described in the LLC Agreement, may be withheld in its sole discretion. Members may not, except in extraordinary circumstances, withdraw from the Company. Consequently, Members may not be able to liquidate their interests prior to the termination of the Company and must be prepared to bear the risks of owning Class A Units for an extended period of time.
Dilution. The Company may be subject to capital calls or may participate in future rounds of financing of the Portfolio Company to the extent the Portfolio Company permits. In such event, the Company may issue additional Class A Units or create and issue additional classes of Units in the Company or in additional separate entities. To the extent the Company elects to take on additional capital by selling additional Units or otherwise, the Manager may in its sole discretion offer such Units or opportunities to one or more Members. In the event a particular Member does not participate pro rata in such additional raise, such Member’s relative percentage interest in the Company will be diluted.
Indemnification. The Company is required under the LLC Agreement to indemnify the Manager and its members, managers, officers, employees and agents for costs, expenses and losses suffered in furtherance of the Company’s business, except in certain limited circumstances. The assets of the Company will be available to satisfy these indemnification obligations, and Members may be required to return distributions to satisfy such obligations. Such obligations will survive the dissolution of the Company.
Taxable Income and Gain in the Absence of Corresponding Cash Distributions. A Member’s tax liability related to its investment in the Company could exceed the amount of cash distributed to the Member in a particular year. There can be no assurance that the Company will have sufficient cash flow to permit it to make annual distributions in the amount necessary to pay all tax liabilities resulting from Member’s ownership of Units.
Audit Risk. The Company may take positions with respect to certain tax issues that depend on legal and other interpretive conclusions. Should any such positions be successfully challenged by the Internal Revenue Service (the “IRS”), a Member may incur additional tax liabilities, interest and penalties as a result. Audits will be conducted, and any resulting adjustments will be made at the partnership level, which may be at the Company level or may be at the Portfolio Company level. The Company does not control the audits or tax elections of the Portfolio Companies. In the case of an adjustment paid by or allocated to the Company, the Company will seek appropriately to allocate economic burdens of any non-de minimis adjustment among the Members to the extent possible. However, as a result of the IRS’ adjusting tax items at the partnership level, a Member may bear a greater economic burden than if adjustments were made at the Member level.
Repayment of Cash Distributions. Under the Delaware Limited Liability Company Act, a member who receives a distribution from a limited liability company at a time when, after giving effect to the distribution, the liabilities of such limited liability company exceed the fair value of the assets of such limited liability company, and who knows of this situation at the time of such distribution, is liable to such limited liability company for a period of three years thereafter for the amount of such distribution. For purposes of this calculation, liabilities for which the recourse of creditors is limited to specified property of such limited liability company are not included and an asset subject to liabilities for which the recourse of creditors is limited to such asset are only included to the extent the fair market value of such asset exceeds such asset’s associated liabilities. The Company is a Delaware limited liability company and, therefore, the Members will be subject to these provisions with respect to distributions from the Company.
Amendments to the LLC Agreement. The LLC Agreement may generally be amended by the Manager to add additional classes of Units, among other things. Such amendments do not require the consent of the Members. Only in very limited circumstances will any amendments require the consent of a majority in interest of the Members. There is no requirement that the Company offer preemptive rights to the Members to participate in future investments in the Portfolio Company. In the event an amendment does require consent of a majority in interest of the Members, it is possible that an amendment could be made, including, with certain exceptions, an amendment impacting economic interests, over the objection of one or more dissenting, minority Members. There is no assurance that any particular minority Member’s interests will be completely aligned with the interests of the majority in interest of the Members in regard to the subject of any particular amendment to the LLC Agreement.
Elimination of Fiduciary Duties, Exculpation and Indemnification. The LLC Agreement, to the maximum extent permitted by Delaware law, eliminates fiduciary duties on the part of the Manager that would otherwise have applied. The Manager and its manager will not be liable to the Members or the Company for any loss or damage incurred by reason of any act or omission undertaken by management on behalf of the Company if such act or omission was undertaken without violating the covenant of good faith and fair dealing. Further, the Company will indemnify members of management for any loss or damage incurred by reason of any act or omission undertaken on behalf of the Company was taken without violating the covenant of good faith and fair dealing. As such, the Members will have a more limited right of action against the members of management than they would have in the absence of such exculpatory and indemnification provisions.
Need for Additional Financing. The Portfolio Company will almost certainly need additional capital through equity or debt financings or other sources, such as strategic collaborations, which it may not be able to obtain on acceptable terms or at all. If the Portfolio Company raises additional capital through equity offerings, the ownership interest of the Company may be diluted, and the terms of any new equity securities may have a preference over the Company’s holdings. If the Portfolio Company raises additional capital through debt financing, it may be subject to covenants limiting or restricting its ability to take specific actions, such as incurring additional debt or making capital expenditures on specified financial ratios, any of which could restrict its ability to operate as a business and adversely affect its business.
Investors should review and carefully consider the Investment Materials. The Manager has not independently verified the information disclosed in the Investment Materials and is not responsible for the contents of the Investment Materials. There is no assurance that the Portfolio Company will achieve its objectives.
Development Stage Company. The Company is an investment company looking at investment opportunities in acquisition of established and profitable small & mid-sized businesses across the USA. This company is developing intellectual property in revolutionizing the investment industry. There remain significant risks that may or may not be now known in order to develop the product(s) of the Company and bring them to market in a profitable manner. Management has minimal experience in either advancing a business through the startup development stage or developing a profitable business in this industry. There are many risk factors, therefore, that could negatively affect the investment, including these and the following risk factors and risk factors not now known.
No Public or Other Market for Units Interests. There is no public or other market for the Units interests, and there can be no assurance that such market will develop after an investment in the Company. The Company has arbitrarily determined the purchase price for Units interest; and it has no direct relationship to earnings, book value, fair market value, assets or other objective standards of worth.
Preemptive Rights. No Member, except for this Subscriber, of the Company shall have a preemptive right because of his ownership interest to have first offered to Subscriber any part of the presently authorized Units of the Company. Thus, any and all Units of the Company presently authorized, and not already issued, may at any time be issued, optioned, and contracted for sale, or sold and disposed of by the members of the Company to such persons, and upon such terms and conditions as the members see proper and advisable, but the Subscriber shall have first offered such Units or any part thereof to existing members.
Competition. The business to be carried on by the Company is highly competitive and the Company will be competing with numerous other established businesses. The success of the Company is dependent upon its ability to successfully compete with such other business; and there are no assurances that it will do so, in which case the Units purchased by the subscriber may become worthless or substantially reduce in value. The risk is particularly in connection with the other companies offering artificial intelligence technology solutions and business opportunities related to the chatbot and technology industries.
Compensation of Management. The directors, offices and other employees of the Company, some of whom will be Members, will receive fees, commissions, compensation and salary for services rendered to the Company, which fees, commissions, compensation and salary may not necessarily be dependent upon the success of the Company’s business.
Crucial Business Relationships in Process of Development. The Company is in process of negotiation of business relationships that are crucial to the strategy disclosed herein and therefore its success. This includes negotiating development, agreements. There is no assurance that these transactions will be completed or if completed with terms that support the projections included herein.
Intellectual Property Development. The initial services being developed are intellectual property of SMB VIG LLC (Management Company). The financial investment intellectual property has been developed, but as with all intellectual property must be continually undated. If unforeseen challenges in any of these areas arise this could not only increase time to market but significantly increase development cost and negatively affect investment. If any competitors or companies take any legal action unfounded or founded this could negatively affect investment.
Sales and Marketing. If the services are not well received by the general public, if advertising isn’t as effective as projected, if the product receives poor reviews by industry experts, if competitive services arise, if the per Units cost is too high for the general public, or if the economic conditions change, these all could negatively affect sales and the investment.
SMB VIG is a platform built by and for value investors with a shared mission: to identify, evaluate, and invest in overlooked, high-potential small and medium-sized businesses (SMBs) across Main Street America
This website is intended for accredited investors only.
All content on www.smbvig.com is proprietary information of SMB Value Investing Group (“SMB VIG”) and is for informational purposes only.
SMB VIG is not a registered investment adviser, broker-dealer, law firm, or tax advisor. Nothing here constitutes financial, legal, or tax advice, or an offer or solicitation of securities. Private securities are speculative and illiquid investments that carry substantial risk, including the potential loss of all invested capital. Investors should undertake independent due diligence and consult with qualified financial, legal, and tax advisors before making any commitment. SMB VIG LLC is not affiliated with, endorsed by, or associated with any of the companies mentioned on this site. All trademarks are the property of their respective owners.
