Private Placement Memorandum
CONFIDENTIAL PRIVATE PLACEMENT MEMORANDUM
Offering of Class RRR Limited Partnership Interests in
FORTUNE PRE-IPO FUND, LP
A Delaware Limited Partnership
Fortune Partners Group LLC
Fortune Partners Group LLC
CONFIDENTIAL PRIVATE OFFERING MEMORANDUM
FORTUNE PRE-IPO FUND, LP
OFFERING OF CLASS RRR LIMITED PARTNERSHIP INTERESTS
This Confidential Private Offering Memorandum (“Memorandum”) relates to the offering by Fortune Pre-IPO Fund, LP, a Delaware limited partnership (the “Partnership”), of Class RRR limited partnership interests (the “Partnership Interests”) in the Partnership. The Partnership Interests are being offered to a limited number of individual or institutional investors that qualify as “accredited investors,” and “qualified clients” (as defined in the Partnership’s subscription application materials) within the meaning of Securities and Exchange Commission (“SEC”) Regulation D promulgated under the Securities Act of 1933, as amended (the “Securities Act”). The sole general partner of the Partnership is Fortune Partners Group LLC, a Florida limited liability company (the “General Partner”). Ross Menachem Kestin is the managing member of the General Partner.
Fortune Partners Group LLC, a Florida limited liability company (the “Investment Manager”, has been appointed by to serve as the investment adviser to the Partnership and, as such, has full discretionary authority and responsibility with respect to the investments and investment activities of the Partnership. Mr. Kestin serves as the managing member of the Investment Manager. See “The Partnership – General Partner” and “The Partnership – Investment
Manager.” As such, Mr. Kestin is the individual primarily responsible for directing the investment of the
The Partnership’s investment objective is to generate capital appreciation by targeting Pre-IPO investment opportunities with favorable risk-adjusted returns. The Investment Manager will seek to achieve the Partnership’s investment objective by primarily acquiring preferred and/or common stock (each a “Portfolio Investment”) of SpaceX. (the “Portfolio Company”). Portfolio Investments may be made by the Partnership directly in Portfolio Companies or indirectly by acquiring interests in special purpose vehicles that own preferred and/or common stock in Portfolio Companies (“Special Purpose Vehicles”). The Investment Manager will seek to invest the Partnership’s assets in Portfolio Investments that are backed by institutional investors, including, without limitation, venture capital and private equity firms that have provided capital for the Portfolio Company’s growth strategy. The Portfolio Investments may be sourced from various avenues, including, without limitation, former employees, current employees, founders, early venture capital firms, holders of interests in Special Purpose Vehicles and other stockholders of Portfolio Companies seeking liquidity and often willing to sell stock at a discount to previous valuations.
The Partnership will invest primarily in Portfolio Companies, which, in the Investment Manager’s view, are positioned for rapid growth and market leadership. In selecting Portfolio Investments, the Investment Manager will evaluate investment opportunities on a company-by- company basis. The Partnership intends that each Portfolio Investment will be a Designated Investment and will be held in a Side Pocket Account (as such terms are defined below) until such time as the Portfolio Company goes public or the position is otherwise liquidated. If there has been no Realization Event for a Designated Investment within three (3) years from the date the investment is made then the Limited Partners shall be provided the right to vote on the treatment of such Designated Investment.
The Investment Manager will seek to implement an investment process that evaluates opportunities consistently and allocates resources efficiently. This process involves idea generation, due diligence, risk mitigation and monitoring. The Partnership expects that many of the Portfolio Companies in which it will invest will eit-heiir-go public or be sold to strategic buyers.
Prospective limited partners, together with their financial and other advisors, should review carefully this entire Memorandum, especially the section entitled “Risk Factors,” and should discuss the Partnership and its contemplated activities with the General Partner prior to any decision to invest in the Partnership.
THIS MEMORANDUM HAS NOT BEEN FILED WITH OR REVIEWED BY THE SEC OR ANY STATE SECURITIES COMMISSION. NEITHER THE SEC NOR ANY STATE OR FEDERAL GOVERNMENTAL AGENCY HAS PASSED UPON THE ACCURACY OR ADEQUACY OF THIS MEMORANDUM OR ENDORSED THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
THE PARTNERSHIP INTERESTS OFFERED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT, NOR UNDER THE SECURITIES LAWS OF ANY STATE, AS THEY WILL BE OFFERED AND SOLD ONLY TO A LIMITED NUMBER OF INDIVIDUAL OR INSTITUTIONAL INVESTORS IN RELIANCE UPON THE EXEMPTION PROVIDED BY SEC RULE 506(b) OF REGULATION D ADOPTED UNDER THE SECURITIES ACT AND THE RELATED EXEMPTION FROM STATE SECURITIES LAWS REGISTRATION PROVIDED BY SECTION 18(B) OF THE SECURITIES ACT. AT SOME POINT IN THE FUTURE, THE GENERAL PARTNER, IN ITS SOLE DISCRETION, MAY DECIDE TO OFFER AND SELL THE PARTNERSHIP INTERESTS IN RELIANCE UPON AN EXEMPTION OTHER THAN THE ONE PROVIDED BY SEC RULE 506(b), INCLUDING, WITHOUT LIMITATION, THE EXEMPTION PROVIDED BY SEC RULE 506(c) OF REGULATION D ADOPTED UNDER THE SECURITIES ACT, IN WHICH CASE THE PARTNERSHIP MAY ENGAGE IN “GENERAL SOLICITATION AND ADVERTISING” IN CONNECTION WITH THE OFFER AND SALE OF THE PARTNERSHIP INTERESTS.
THE PARTNERSHIP IS EXEMPT FROM REGISTRATION AS AN INVESTMENT COMPANY UNDER THE INVESTMENT COMPANY ACT OF 1940, AS AMENDED. THEREFORE, INVESTORS IN THE PARTNERSHIP WILL NOT BE AFFORDED THE PROTECTIVE MEASURES AFFORDED BY SUCH ACT AND THE RULES PROMULGATED THEREUNDER.
THIS MEMORANDUM IS SUBMITTED TO A LIMITED NUMBER OF RECIPIENTS ON A CONFIDENTIAL BASIS SOLELY IN CONNECTION WITH THEIR CONSIDERATION OF AN INVESTMENT IN THE PARTNERSHIP INTERESTS. IT MAY NOT BE REPRODUCED IN WHOLE OR IN PART AND MAY NOT BE DELIVERED TO ANY PERSON WITHOUT THE PRIOR WRITTEN CONSENT OF THE GENERAL PARTNER. EACH PERSON ACCEPTING THIS MEMORANDUM THEREBY AGREES TO RETURN IT TO THE GENERAL PARTNER UPON REQUEST.
THIS MEMORANDUM DOES NOT CONSTITUTE AN OFFER OR SOLICITATION IN ANY STATE OR OTHER JURISDICTION IN WHICH AN OFFER OR SOLICITATION IS NOT AUTHORIZED.
THE PARTNERSHIP INTERESTS OFFERED HEREBY ARE ILLIQUID. NO PUBLIC MARKET FOR THE PARTNERSHIP INTERESTS EXISTS AND IN ALL PROBABILITY NONE WILL DEVELOP. THERE ARE SIGNIFICANT RESTRICTIONS ON THE TRANSFERABILITY OF THE PARTNERSHIP INTERESTS.
NO REPRESENTATIONS OR WARRANTIES OF ANY KIND ARE INTENDED OR SHOULD BE INFERRED WITH RESPECT TO THE ECONOMIC RETURN FROM OR THE TAX CONSEQUENCES OF, AN INVESTMENT IN THE PARTNERSHIP. NO ASSURANCE CAN BE GIVEN THAT EXISTING LAWS WILL NOT BE CHANGED OR INTERPRETED ADVERSELY. PROSPECTIVE INVESTORS ARE NOT TO CONSTRUE THIS MEMORANDUM AS LEGAL OR TAX ADVICE. EACH PROSPECTIVE INVESTOR SHOULD CONSULT HIS OWN COUNSEL AND ACCOUNTANT FOR ADVICE CONCERNING THE VARIOUS LEGAL, TAX AND ECONOMIC MATTERS CONCERNING HIS INVESTMENT.
NO OFFERING LITERATURE OR ADVERTISING IN ANY FORM MAY BE RELIED UPON IN THE OFFERING OF PARTNERSHIP INTERESTS EXCEPT FOR THIS MEMORANDUM AND EXHIBITS ATTACHED HERETO, UNLESS AND UNTIL THE GENERAL PARTNER, IN ITS SOLE DISCRETION, DECIDES TO OFFER AND SELL PARTNERSHIP INTERESTS IN RELIANCE UPON THE EXEMPTION PROVIDED BY SEC RULE 506(c) OF REGULATION D ADOPTED UNDER THE SECURITIES ACT, RATHER THAN IN RELIANCE UPON THE EXEMPTION PROVIDED BY SEC RULE 506(b). NO PERSONS OTHER
THAN THE GENERAL PARTNER, THE INVESTMENT MANAGER AND THEIR REPRESENTATIVES HAVE BEEN AUTHORIZED TO MAKE REPRESENTATIONS, OR GIVE ANY INFORMATION, WITH RESPECT TO THE PARTNERSHIP INTERESTS.
THIS MEMORANDUM MAY CONTAIN CERTAIN “FORWARD LOOKING INFORMATION” ABOUT THE PARTNERSHIP AND ITS INVESTMENT ACTIVITY IN RELIANCE UPON THE “SAFE HARBOR” PROVISIONS OF THE FEDERAL SECURITIES LAWS. THIS INFORMATION IS SUBJECT TO VARIOUS RISKS AND UNCERTAINTIES, INCLUDING, BUT NOT LIMITED TO, THOSE DESCRIBED UNDER “RISK FACTORS” HEREIN. ALL INVESTMENT PERFORMANCE IS INHERENTLY SUBJECT TO SIGNIFICANT UNCERTAINTIES AND CONTINGENCIES, MANY OF WHICH ARE BEYOND THE CONTROL OF THE INVESTMENT MANAGER AND THE GENERAL PARTNER. ANY SIGNIFICANT CHANGE THEREIN CAN MATERIALLY AFFECT FUTURE RESULTS. ACCORDINGLY, THERE CAN BE NO ASSURANCE THAT THE PARTNERSHIP’S INVESTMENT OBJECTIVE WILL BE ACHIEVED OR THAT THE PARTNERSHIP WILL NOT INCUR LOSSES.
NOTICE TO PROSPECTIVE PURCHASERS IN FLORIDA:
THE LIMITED PARTNERSHIP INTERESTS OFFERED HEREBY HAVE NOT BEEN REGISTERED UNDER THE FLORIDA SECURITIES ACT IN RELIANCE UPON AN EXEMPTION THEREFROM. ANY SALE MADE PURSUANT TO SUCH EXEMPTION IS VOIDABLE BY A FLORIDA PURCHASER WITHIN THREE (3) DAYS AFTER THE FIRST TENDER OF CONSIDERATION IS MADE BY SUCH PURCHASER TO THE ISSUER, AN AGENT OF THE ISSUER OR AN ESCROW AGENT, OR WITHIN THREE DAYS AFTER THE AVAILABILITY OF THAT PRIVILEGE IS COMMUNICATED TO THE PURCHASER, WHICHEVER OCCURS LATER.
A PROSPECTIVE INVESTOR SHOULD NOT SUBSCRIBE FOR PARTNERSHIP INTERESTS UNLESS SATISFIED THAT HE AND/OR HIS REPRESENTATIVE HAVE ASKED FOR AND RECEIVED ALL INFORMATION WHICH WOULD ENABLE BOTH TO EVALUATE THE MERITS AND RISK OF THE PROPOSED INVESTMENT. THE PARTNERSHIP WILL MAKE AVAILABLE TO EACH INVESTOR OR HIS AGENT, DURING THIS OFFERING AND PRIOR TO THE SALE OF ANY PARTNERSHIP INTERESTS, THE OPPORTUNITY TO ASK QUESTIONS OF AND RECEIVE ANSWERS FROM THE GENERAL PARTNER CONCERNING ANY ASPECT OF THE PARTNERSHIP AND ITS PROPOSED BUSINESS AND TO OBTAIN ANY ADDITIONAL INFORMATION, TO THE EXTENT THE PARTNERSHIP POSSESSES SUCH INFORMATION OR CAN ACQUIRE IT WITHOUT UNREASONABLE EFFORT OR EXPENSE.
Miami, Florida 33131
This summary of certain provisions of this Confidential Private Offering Memorandum (“Memorandum”) is intended only for quick reference, is neither complete nor exact and is qualified in its entirety by reference to the more detailed information appearing elsewhere in this Memorandum. Certain provisions of the Limited Partnership Agreement (the “Partnership Agreement”) of the Partnership (as defined below) and other documents referred to herein are summarized in this Memorandum, but it should not be assumed that the summaries are complete and such summaries are qualified in their entirety by the contents of the documents which they purport to summarize.
Investment Objective and
Fortune Pre-IPO Fund, LP, a Delaware limited partnership (the “Partnership”), formed pursuant to the Partnership Agreement substantially in the form of Exhibit A to this Memorandum.
The securities offered hereby are Class RRR limited partnership interests in the Partnership (the
“Partnership Interests”). There is no minimum
aggregate amount of Partnership Interests required to be sold in the offering.
The general partner of the Partnership is Fortune Partners Group LLC, a Florida limited liability company (the “General Partner”). The General Partner has full discretionary authority and responsibility to manage the operations, including, without limitation, the investment activities, of the Partnership. Ross Menachem Kestin serves as the managing member of the General Partner. See “The Partnership – General Partner; Investment Manager.”
Fortune Partners Group LLC, a Florida limited liability company (the “Investment Manager” has been appointed by the General Partner to serve as investment adviser to the Partnership, and, as such, has full discretionary authority and responsibility with respect to the investments and investment activities of the Partnership. Mr. Kestin serves as managing member of the Investment Manager. As such, Mr. Kestin is the individual primarily responsible for directing the investment of the Partnership’s assets. See “The Partnership — General Partner; Investment Manager.”
In addition to offering limited partner interests directly in the Partnership, the Partnership also acts as a “master” fund in a mini-master-feeder structure for Fortune Pre-IPO Offshore Fund Ltd. (the “Offshore Fund”) a BVI business company incorporated with limited liability under the BVI Business Companies Act 2004, which intends to invest all, or substantially all, of its assets in the Partnership. See “Risk Factors –Master-Feeder Structure.”
See “Investment Objective and Strategy”
An investment in the Partnership Interests offered hereby is subject to variousik-snr-1sciluding, without limitation, risks relating to the
operating history of the Partnership, securities and instruments to be invested in, the investment strategy, the use by the Partnership of certain investment techniques, certain conflicts of interest, and the illiquid nature of Partnership Interests. There is no assurance that the Partnership will achieve its investment objective or will not incur losses, or that it will be profitable. See “Risk Factors.”
Minimum Investment The minimum investment by a limited partner of the Partnership (each a “Limited Partner” and together with the General Partner, the “Partners”) is $250,000 for existing advisory clients of Fortune Partners Group LLC and $500,000 for non-clients, each of which may be waived by the General Partner in its discretion. See “Subscribing for Partnership Interests.”
Additional Contributions No Limited Partner will be obligated to contribute any capital to the Partnership in addition to the Limited Partner’s initial capital contribution. However, Limited Partners may make additional capital contributions to the Partnership, at the beginning of a month, or at other times with the consent of the General Partner, in minimum amounts of $100,000. The terms with respect to additional capital contributions, including appropriate dates and amounts, may be waived by the General Partner in its discretion. See “Subscribing for Partnership Interests.”
Partners After an initial four calendar month lock-up period each Limited
Partner may withdraw all or a portion of his capital account in the
Partnership as of the last business day of any calendar quarter (a “Withdrawal Date”) upon not less than 90 days’ prior written notice to the Partnership’s Administrator (as defined herein).
A partial withdrawal by a Limited Partner will only be permitted if (i) such withdrawal is for an amount not less than $100,000 and (ii) immediately after such withdrawal, the remaining balance of the Limited Partner’s capital account is at least equal to the lesser of the initial investment of the Limited Partner in the Partnership or
$500,000. The General Partner may require a Limited Partner to withdraw all or any part of his capital account from the Partnership at any time for any reason, including, without limitation, at any time after it receives notice of a Limited Partner’s desire to withdraw all or part of its capital account on a regular Withdrawal Date. Withdrawals may be suspended upon the occurrence of certain events including, without limitation, market stoppages, acts of war and other circumstances, as specified in the Partnership Agreement. See “The Partnership Agreement – Withdrawals by Partners.”
The General Partner may, in its discretion, permit withdrawals on a date other than a regular Withdrawal Date; however, in such event the Partnership reserves the right to charge a withdrawal fee in connection therewith.
Payment will be made to a Partner withdrawing 90% or less of the balance of his capital account within 30 days of the effective date of the withdrawal. Payment will be made to a Partner withdrawing more than 90% of the balance of his capital account in the following manner: (i) 90% of the amount of his capital account withdrawn, within 30 days of the effective date of the withdrawal; and (ii) the balance of the amount of his capital account withdrawn, within 30 days following delivery of the audited financial statements of the Partnership for the period inclusive of the Withdrawal Date. A Limited Partner shall not be entitled to interest on the amount of any retained withdrawal amount.
At the option of the General Partner, the amount of the withdrawal may be paid in whole in cash, or in whole in kind, or in part cash and part in kind. In kind payments may but need not be pro rata as to the assets of the Partnership. In connection with any withdrawal, the General Partner may deduct from the amount to be withdrawn any reserve or reserves which, in its discretion, is necessary to pay such withdrawing Limited Partner’s share of the liabilities of the Partnership and/or to pay the amount, if any, of the Management Fee (as defined herein) that the General Partner estimates will become due after such withdrawal with respect to such Limited Partner’s interest in any Side Pocket Account (as defined herein). Notwithstanding the foregoing, Limited Partners participating in a Side Pocket Account shall not be permitted to withdraw all or any portion thereof without the consent of the General Partner, which consent may be withheld by the General Partner in its discretion, for any reason whatsoever or for no reason.
The General Partner and its affiliates may withdraw any or all of the amounts in their capital accounts, without notice to or action by the Limited Partners and not subject to a withdrawal fee or other charge. See “The Partnership Agreement – Withdrawals by Partners.”
The General Partner, in its discretion, may waive, reduce or modify any terms related to withdrawals for a Limited Partner pursuant to a written agreement with the Limited Partner, or otherwise. See “The Partnership – Allocations of Profits and Losses; General Partner’s Incentive Allocation” and “The Partnership Agreement – Withdrawals by Partners.”
Qualification of Investors
Limited Partners must qualify as “accredited investors,” and “qualified clients” (as defined in the Partnership’s subscription application materials) within the meaning of SEC Regulation D promulgated under the U.S. Securities Act of 1933, as amended (the “Securities Act”). See “Subscribing for Partnership Interests.”
The General Partner is entitled to receive an incentive allocation (the “Incentive Allocation”) when there is a Realization Event with respect to any Designated Investment. The General Partner’s Incentive Allocation will be an amount equal to zero percent (0%)
of the net profits from each Realization Event, net of all expenses including the Investment Manager’s Management Fees.
In order to gain access to the most attractive pre-IPO shares the Partnership may co-invest with third party managers in SPV’s. As compensation for sourcing such Pre-IPO shares such third-party managers may receive a profit allocation at the SPV level not to exceed twenty five percent (25%) of the SPV’s profits.
The General Partner is also entitled to receive a ratable allocation of net realized profits or losses of the Partnership based upon its capital account balance, if any.
Under the Partnership Agreement, the General Partner in its discretion may waive or reduce the Incentive Allocation chargeable to any Limited Partner or reallocate any portion of its Incentive Allocation to any Limited Partner, without notice to or action by the Limited Partners; provided, however, that no such waiver or reduction may increase the amount thereof to be borne by any other Limited Partner.
See “The Partnership – Allocations of Profits and Losses; General Partner’s Incentive Allocation” and the Partnership Agreement, attached hereto as Exhibit A.
The Investment Manager is entitled to receive a management fee (the “Management Fee”) in consideration of the management and administrative services provided to the Partnership. The Management Fee shall equal a one-time fee of 2% of invested capital and is payable in advance at the time each investment is made.
The General Partner in its discretion may waive or reduce the Management Fee chargeable to any Limited Partner. See “The Partnership – Management Fee” and the Partnership Agreement, attached hereto as Exhibit A.
The Partnership shall bear all operating expenses and other costs of the Partnership including, but not limited to: (i) accounting, bookkeeping, tax and auditing fees and expenses (including the allocable share of the costs, fees and expenses relating to internal accounting and tax preparation functions); (ii) legal fees and expenses, including, but not limited to, fees and expenses incurred in connection with this Memorandum and the Partnership Agreement, any offering of Partnership Interests, Partnership contracts and investments; (iii) all fees and disbursements of the Partnership’s, the General Partner’s and the Investment Manager’s attorneys, consultants and other third parties performing work benefiting the Partnership or otherwise in connection with the Partnership’s investment activities (including, without limitation, the legal and other fees, costs and expenses of such parties in or related to any proxy contest or other shareholder initiative or proceeding and in any threatened or actual litigation or governmental investigation or proceeding, and the amount of any judgments or settlements paid in connection 4w- it-h such proxy contest,
shareholder initiative or litigation, or fines or penalties levied as a result of any such investigation or proceeding ); (iv) insurance and bonding costs; (v) all trading expenses and transaction costs, including, but not limited to, brokerage commissions and expenses relating to short sales, clearing and settlement charges, interest on loans and debit balances, margin interest, broker service fees and other clearing and custodial expenses; (vi) fees or assessments in connection with any regulatory registrations, qualifications and/or approvals of the Partnership, the General Partner or the Investment Manager, and related compliance fees and expenses, deemed appropriate by the General Partner; (vii) such research and portfolio management expenses as the General Partner or the Investment Manager deems appropriate, which may include, but are not limited to, expenses incurred in connection with due diligence investigations or research as to investments or potential investments, including travel, lodging and other expenses incurred in connection with visits to companies, meetings, research symposiums and communications with company management, security holders, analysts and other third parties, costs of research reports, data feeds and databases, news wires and quotation services, periodical subscription fees and costs of software (including risk control) utilized by the General Partner or the Investment Manager in connection with managing the Partnership’s portfolio; (viii) fees of the Partnership’s registered agent; (ix) fees of the Administrator; (x) the cost of preparation and distribution of reports and statements to Limited Partners; (xi) all filing and recording fees; (xii) all custodial fees, bank service fees, and fees or expenses associated with insuring the Partnership’s assets; (xiii) the Management Fee; (xiv) all applicable federal, state, local and foreign taxes payable by the Partnership; and (xv) any extraordinary expenses, such as indemnification and litigation expenses. See “The Partnership
– Operating Expenses.”
Notwithstanding the foregoing, any expense relating specifically to a Side Pocket Account shall be charged against the capital accounts of the Partners participating in such Side Pocket Account in proportion to their respective interests in such Side Pocket Account.
Certain of the Partnership’s, the General Partner’s and/or the Investment Manager’s expenses may be borne or reimbursed by broker-dealers executing transactions for the Partnership. See “Brokerage Arrangements; Custodian – Execution of Portfolio Transactions.”
Organizational Expenses Expenses incurred in the organization of the Partnership will be borne or reimbursed by the Partnership. For financial reporting purposes, organizational expenses will be amortized by the Partnership during its first 60 months of operations. Amortization of such expenses over a period that is up to 60 months is a divergence from U.S. generally accepted accounting principles, which may, in certain circumstances, result in a qualification of the Partnership’s annual audited financial statements. In such instances, the General Partner may make
modifications to its accounting practices in order to eliminate such qualifications.
Brokers; Brokerage BTG Pactual US Capital, LLC will be retained to serve as broker for the Partnership (the “Broker”) solely with respect to liquid assets. The General Partner may in its discretion terminate the Partnership’s relationship with the Broker and select a new Broker. In addition to the Broker, the General Partner may select other brokers to execute transactions for the Partnership on the basis of a variety of factors, including one or more of the following: the amount of commission, quality of execution, expertise in particular markets, reputation, experience, financial stability, quality of service, familiarity both with investment practices generally and the techniques employed by the Partnership, research and analytic services, and clearing and settlement capabilities. Brokerage may also be allocated on the basis of the broker’s agreement to pay certain expenses of the Partnership, the General Partner or its affiliates, subject to principles of best execution. See “Brokerage Arrangements; Custodian – Execution of Portfolio Transactions.”
Custodian The private shares of Portfolio Companies are not held at a custodian prior to an IPO. Such private shares are either held directly by the fund, through an SPV and/or other joint venture arrangement. However, the General Partner may select a clearing firm for, and custodian of, certain assets of the Partnership including securities for cash management purposes and to facilitate the liquidation or hedging of IPO shares after the IPO event. The Partnership will initially clear and settle the liquid portion of its portfolio’s securities transactions (representing non pre-IPO shares) through Pershing. The General Partner may change the Partnership’s custodian, or retain one or more additional custodians, in its discretion. See “Brokerage Arrangements; Custodian – Clearing and Settlement” and “Brokerage Arrangements; Custodian – Custody of Assets.”
Administrator The Partnership has entered into an administration agreement (“Administration Agreement”) with Opus Fund Services (the “Administrator“). The Partnership pays the Administrator a fee based on its standard schedule of fees charged by the Administrator for similar services as provided for in the Administration Agreement. See “Administrator.”
Side Pocket Accounts The Partnership Agreement provides that the Partnership will be authorized to maintain one or more separate memorandum accounts or special sub-accounts (each a “Side Pocket Account”) on its books for certain securities or other investments that, in the opinion of the Investment Manager, do not have a readily ascertainable market value or other illiquid investments which may be valued but are not freely transferable (such securities and other investments are referred to herein as, “Designated Investments”), which are designated by the Investment Manager to be held in a Side Pocket Account; provided, that Side Pocket Accounts may be utilized only for securities and other
investments whose market values become difficult to ascertain and/or become illiquid after the time of the initial investment therein by the Partnership. A Designated Investment may be held in a Side Pocket Account for any period of time, subject to the discretion of the Investment Manager. A Designated Investment shall be valued, for purposes of determining the Management Fees that are payable in respect of the Side Pocket Account related thereto at cost. The General Partner shall not receive any Incentive Allocation in respect of any Designated Investment held in a Side Pocket Account until either the General Partner determines that such Designated Investment is readily marketable and can be reliably valued and should, therefore, no longer be maintained in a Side Pocket Account or until there is a sale, distribution to Partners or other disposition of all or a portion of the investment in a Designated Investment (such sale, distribution or other disposition a “Realization Event”). Upon a determination by the General Partner that a Designated Investment should no longer be maintained in a Side Pocket Account, or upon any Realization Event with respect to the entire position, the Side Pocket Account shall be terminated, in which event the General Partner shall be entitled to receive an Incentive Allocation determined by reference to the fair value of such Designated Investment at the time of the determination that its value can be readily ascertained or is no longer illiquid, or the net proceeds realized in respect of the Designated Investment at the time of the Realization Event, as applicable.
Upon a Realization Event each Limited Partner with an Interest in such Side Pocket shall have the option to receive a cash distribution, an in-kind distribution or to re-invest its pro-rata share of the profits from such Designated Investment.
See “The Partnership – Allocation of Profits and Losses; General Partner’s Incentive Allocation” and “The Partnership Agreement – Side Pocket Accounts.”
Federal Tax Aspects of the
Partnership By reason of its organizational structure, the Partnership is expected to be treated as a partnership for federal income tax purposes. As an
entity treated as a partnership, the Partnership will not be subject to
U.S. federal income tax, but each Limited Partner will be required to report its distributive share (whether or not distributed) of the
Partnership’s income, gain, losses, deductions and credits. By reason
of the Partnership’s anticipated investment and trading practices, prospective investors in the Partnership should anticipate that a
substantial portion of the income of the Partnership may be treated as
ordinary income or short-term capital gains. Prospective investors should consult their own advisors regarding the tax implications of acquiring, owning or disposing of Partnership Interests under the laws of any jurisdiction to which they are subject. See “Certain Tax Considerations – Federal Income Taxes.”
Distribution Arrangements The Partnership may utilize third parties to assist in the solicitation of new investors in the Partnership. Unless a selling commission is expressly agreed to by an investor, any fees paid to such parties for such services will be borne by the General Partner or Investment Manager and will not reduce the investment of any Limited Partner. All subscribed funds will be invested in the Partnership.
Fiscal Year The Partnership’s fiscal year is the calendar year, subject to change in the discretion of the General Partner.
Auditors The General Partner has retained KPMG as the Partnership’s independent certified public accountants, which firm issues audit reports on the annual financial statements of the Partnership. Such firm also prepares certain federal income tax information for the Partners. The General Partner may change the auditing and accounting firms for the Partnership without the consent of the Limited Partners.
Partnership Reports Following the end of each fiscal year, the General Partner will deliver to each Limited Partner audited financial statements of the Partnership for such year, as well as a statement of such Limited Partner’s capital account and certain tax information for the preparation of such Limited Partner’s income tax returns. Each Limited Partner will also receive regular communications, at least quarterly, from the General Partner. See “The Partnership Agreement – Financial Records and Reports.”
The Investment Manager reserves the right to make interim reports available solely in electronic form on the web site of the Investment Manager or the Administrator.
Other Agreements The Partnership, the Investment Manager and/or the General Partner, without the approval of or notice to any Limited Partner, may enter into side letters or similar written agreements with an individual Limited Partner, including without limitation Mr. Kestin or any other principal, employee or affiliate of the General Partner, that have the effect of establishing rights under, or altering or supplementing the terms of, this Memorandum, the Partnership Agreement and the Subscription Agreement with respect to such Limited Partner. See “The Partnership Agreement – Management of Partnership.”
Additional Information Prospective Limited Partners are invited to meet with representatives of the General Partner and the Investment Manager for a further explanation of the terms and conditions of this offering of Partnership Interests and to obtain any additional information necessary to verify the information contained in this Memorandum, to the extent the General Partner or the Investment Manager possesses such information or can acquire it without unreasonable effort or expense. Requests for such information should be directed to: Francisco Baixauli at Fortune Partners Group LLC, 1001 Brickell Bay Drive, Suite 2402 Miami, Florida 33131, (305) 831-4999,
firstname.lastname@example.org, or to the Administrator
Opus Fund Services, 500 E Diehl Road, Suite 100, Naperville, Illinois,
60563, telephone no. (312) 753 7830, facsimile no. (312) 614-1705 or email@example.com.
INVESTMENT OBJECTIVE AND STRATEGY
Investment Strategy Overview
Today’s pace of innovation is breathtaking. The world is changing faster than ever before with disruption companies both creating and benefiting from massive growth. Many of the disruption companies are still private and quickly heading towards public offerings, leading to unprecedented value creation for shareholders. Unfortunately, these pre-IPO investments are often closed to new investors, out of reach due to extremely high minimums and offered only to a select class of investors.
The Partnership is determined to make these opportunities available to its Limited Partners, as the Fortune Pre-IPO Fund allows its investors to invest in a diversified portfolio of select pre-IPO companies. Leveraging key relationships, the fund purchases shares from company employees seeking liquidity. Acting as liquidity enablers often entails obtaining discounts to current market valuations, sometimes achieving discounts of as high as 20-30%. Investing alongside leading top venture capital firms, the fund intends to invest in at least five pre-selected leading disruptors by securing stakes in late-stage disrupter companies with proven business models and expected IPO dates within the next 1-2 years. Investing only in management approved share classes and transactions, the fund will attempt to negotiate discounts to most recent funding rounds with employees and off-market participants. Exiting stakes at post-IPO levels at the earliest available opportunity, the fund targets total returns upwards of 100% in each investment.
Investment Approach and Process
The initial target investments of the Fortune Pre-IPO Fund are some of the largest and most established companies in the rapidly expanding ride and hospitality sharing economies.
The fund aims to invest in SpaceX. Founded in 2002, SpaceX is disrupting the industry and revolutionizing access to space by materially bringing down launch payload costs. It furthermore aims to compete with the traditional aviation industry (by reducing travel time), disrupt terrestrial data communication incumbents (via its Starlink service), and provide for deep space exploration. Based on current and expected growth trajectories, SpaceX could reach $10 billion in annual revenues by 2025. The company is lead by Elon Musk, a CEO credited with the success of Tesla and Paypal, along with substantial returns for investors. Morgan Stanley’s recent discounted cash flow valuation suggests the company may be worth as much as $175 billion in its bull case. Starlink is a material part of the valuation analysis.
Target Company Valuations: Considering Growth & Liquidity Premiums
In order to consider IPO pricing implications for the target investments in the fund, we believe two variables are of paramount importance: underlying company growth rates and institutional liquidity premium considerations. Investors are willing and eager to pay for market-leading future growth and value liquidity and transparency above all when taking investment decisions. While all of the target companies present extremely compelling high growth propositions, we were interested in understanding their potential vlautions as listed companies, essentially assesing what their liquidity premiums would represent (to current private company valuations) once institutional and retail investors would be able to invest and trade in and out of the names as they do for any large-cap listed equities.
In order to do so, we compared the market valuations, revenue numbers and, most importantly, growth rates to a basket of high growth listed market companies; namely Amazon, Netflix, Twitter, Facebook and Dropbox. We then adjusted the sales multiples to reflect the difference in growth rates and arrived at longer term valuations for our private pre-IPO companies once they became publically traded, post IPOs.
In addition to its core investment strategy, the Partnership may employ other investment strategies deemed appropriate by the Investment Manager and may invest in and trade a variety of securities and instruments, including for hedging and other purposes. See “Investment Objective and Strategy.”
An investment in the Partnership involves significant risks. There is no assurance that the Partnership will achieve its investment objective or will not incur losses, or that it will be profitable. See “Risk Factors.”
Special Purpose Vehicles. The Partnership may invest in Portfolio Companies indirectly by acquiring interests in Special Purpose Vehicles. A Special Purpose Vehicle may hold minority or non- controlling interests in Portfolio Companies. Accordingly, the Special Purpose Vehicle may be unable to exercise control over their investments, and the shareholders with the controlling interests in such investments may be able to take actions, which adversely affect the value of the investment or the Partnership’s interest therein. Special Purpose Vehicles (alone, or together with other investors) may also be deemed to have a control position with respect to some Portfolio Companies in which it invests which could expose it to liabilities not normally associated with minority equity investments, such as additional risks of liability for environmental damage, product defects, failure to supervise management, violation of governmental regulations and other types of liability in which the limited liability generally characteristic of business operations may be ignored.
Special Purpose Vehicles; Compensation Arrangements. Special Purpose Vehicles may
be managed by Underlying Managers unrelated to and outside of the control of the Partnership. Finding, selecting and investing in Special Purpose Vehicles managed by Underlying Managers is a complex
process. In determining how to invest the Partnership’s capital in such Special Purpose Vehicles, the
Investment Manager will look for Underlying Managers whose investment strategies are expected to offer superior returns, considering both objective information relating to such Underlying Managers (such as
historical performance data) and subjective information. However, there can be no guarantee that the
Investment Manager’s assessment of any Underlying Manager will be accurate. In particular, there can be no assurance that past performance data or other objective or subjective information relating to an Underlying Manager will provide any indication as to how the Special Purpose Vehicle managed by such Underlying Managers will perform in the future. Even if the Investment Manager is able to accurately identify Underlying Managers whose underlying investments in Portfolio Companies are likely to produce attractive returns, there can be no assurance that the Partnership will be able to invest in such Special Purpose Vehicle.
Concentration. The Partnership’s investment portfolio may be expected at times to be significantly concentrated as to issuer, as well as industry and sector. In the view of the Investment Manager, such concentration offers a greater potential for capital appreciation as well as increased risk of loss. Such concentration may also be expected to increase the volatility of the Partnership’s investment portfolio.
Holding Periods. In view of the Partnership’s investment strategy, the typical holding periods for the Partnership’s positions may vary substantially, with anticipated holding periods for core positions ranging from several months to possibly as long as two years or more. In instances where investment criteria are not being met, positions (including core positions) may be liquidated earlier than originally anticipated. The Partnership’s portfolio turnover will reflect the foregoing.
Initial Public Offerings. The Partnership’s portfolio is intended to include stocks purchased in initial public offerings (“IPOs”), in situations when such companies satisfy the Investment Manager’s investment methodology. Equity securities issued in an IPO (so-called “new issues”) are subject to certain investment restrictions imposed by the Financial Industry Regulatory Authority (“FINRA”). Limited Partners which are “restricted persons,” within the meaning of FINRA Rule 5130, will be limited to an aggregate 10% participation in profits and losses resulting from the Partnership’s investment in any new issues. In addition, under the “spinning prohibition” set forth in FINRA Rule 5131, the Partnership will be restricted from purchasing new issues from a FINRA member broker-dealer if the aggregate beneficial interests in the Partnership of Covered Persons (as defined herein) related to a particular Covered Company (as defined herein) exceed 25%, unless the Partnership restricts the portion of its profits or losses from new issues that are allocated to the Covered Persons related to such Covered Company to no more than 25%. See “The Partnership Agreement – New Issues.”
Cash Positions. As a defensive strategy, or pending the identification of companies meeting the Investment Manager’s methodology, the Partnership may hold or invest in cash, U.S. government securities, commercial obligations, bankers’ acceptances, certificates of deposit, money- market instruments and other cash equivalents. Such holdings may be significant at certain times. Accordingly, the Partnership may not be fully invested at all times.
Other Investments. The Investment Manager will be authorized to invest in all types of investments in furtherance of the Partnership’s investment strategy, including, but not limited to, those described above. Accordingly, such possible investments to be utilized by the Partnership will not necessarily be limited to those described herein.
Certain Investment Techniques
Short Selling. Short selling may be employed where the Investment Manager believes the security sold short is likely to decline in price, and may also be employed in hedging situations, where the position is intended to wholly or partially offset another position in a related security. Selling securities short involves selling securities that the Partnership does not own. In order to make delivery to its purchaser, the Partnership must borrow securities from a third-party lender. The Partnership subsequently returns the borrowed securities to the lender by delivering to the lender securities purchased in the open market. The Partnership must generally pledge cash with the lender equal to the sales proceeds of the borrowed securities as well as any additional cash or securities required as collateral under applicable margin regulations. In addition to lending the securities, the lender generally pays the Partnership a fee (or rebate of interest) for the use of the Partnership’s cash. The Partnership will generally realize a profit (or a loss) as a result of a short sale if the price of the security decreases (or increases) between the date of the short sale and the date on which the Partnership covers its short position, i.e., purchases the security to replace the borrowed security, at a cost less than (or greater than) its cost of establishing and maintaining its short position.
Hedging. Where the Investment Manager believes that it is both prudent and cost-effective to do so, the Investment Manager may seek to hedge certain market and macroeconomic risks on a portfolio- wide basis and/or risks related to certain individual positions. However, it may be expected that some or all market and other risks will be unhedged.
Leverage. The Investment Manager may, though its not expected to, utilize leverage on a moderate in connection with the Partnership’s investment activities. Leverage involves the use of borrowed funds, primarily margin borrowings, to increase the amount of invested capital in the Partnership’s long or short positions. Leverage may also be employed “synthetically,” through derivative instruments such as (without limitation) options, swaps and forwards. There is no fixed limitation on the Partnership’s use or
extent of leverage, other than applicable regulatory requirements. The use of leverage can increase both the proportionate amount of potential gain, as well as of potential loss, relative to the Partnership’s equity capital. If, however, the value of the position declines (or, in the case of a margined short position, the securities sold short increase in value), the securities (or cash) serving as collateral for such margin position may be liquidated, resulting in a loss proportionately greater than would be the case absent such use of leverage. Leverage may also be utilized by the Partnership for liquidity purposes in connection with Limited Partner withdrawals.
Options. The Partnership may engage in various types of options transactions, including hedging positions in options on securities, commodities, indices and other investments, including buying and selling both put and call options. Hedging activity is designed to reduce the risks relating to market fluctuations in the price of a security held long by the Partnership, as well as risks attendant to short selling, and may offset other transactions in the underlying stock or other securities held by the Partnership involved in the transaction. Long positions maintained by the Partnership may be hedged through the purchase of put options on the securities purchased. Short positions maintained by the Partnership may be hedged through the purchase of call options on the securities sold short. In certain situations, the Partnership may purchase call options as an alternative (in whole or in part) to establishing a long position, and may purchase put options as an alternative (in whole or in part) to establishing a short position.
The Investment Manager may utilize options on specific securities, as well as combinations of options, such as straddles or spreads, and market index or “market basket” options or other instruments, to increase or adjust investment exposure or in order to seek to limit certain risks. Accordingly, the Partnership may have positions in a variety of options or similar instruments.
Swaps and Other Derivatives. The Investment Manager may utilize various types of swaps and other derivatives, in furtherance of the Partnership’s investment objective. These instruments may be employed in order to increase return (so-called “synthetic” leverage), as a partial or complete hedge against other Partnership positions or against certain market or interest rate risks or as part of other trading strategies. Such instruments will generally be established through a negotiated contract entered into by the Partnership with a financial counterparty. In connection therewith, the Partnership will generally be required to deliver eligible collateral to the counterparty, typically consisting of cash, securities or other instruments held in the Partnership’s portfolio. In the event of a default by the Partnership or other prescribed events, the counterparty may use, assign and/or liquidate the collateral and/or require the Partnership to provide additional collateral. Such instruments are generally illiquid with no trading market.
Other Investment Techniques. The Investment Manager will be authorized to engage in a broad variety of investment techniques, in furtherance of the Partnership’s investment strategy including, but not limited to, those described above. Accordingly, such possible investment techniques to be utilized by the Partnership will not necessarily be limited to those described herein.
The Partnership’s investment strategy inherently involves certain significant risks. See “Risk Factors” below. Moreover, there can be no assurance that the above practices will necessarily be applied in all cases, or if applied, will successfully limit risk to acceptable levels.
The Partnership may periodically maintain all or a portion of its assets in cash or cash equivalents, and may not be fully invested at all times. See “Investment Objective and Strategy – Investments.”
All securities investments risk the loss of capital. No guarantee or representation is made that the investment objective of the Partnership will be achieved. An investment in the Partnership is speculative, and involves certain considerations and risk factors that prospective purchasers of Partnership Interests should carefully consider before investing. Limited Partners must be able to bear the risk of loss of their entire investment. Moreover, Limited Partners will have no control over how the Investment Manager will invest the Partnership’s assets.
Risks Relating to the Partnership Generally
No Operating History. The Partnership has a brief operating history upon which potential investors may evaluate the Partnership’s future performance. As a newly formed enterprise, the Partnership is subject to the typical risks attendant to any newly formed business with no operating history.
Dependence Upon the Principal of the Investment Manager/General Partner. The success of the Partnership critically depends upon the skills and efforts of Mr. Kestin as the managing member of the Investment Manager and the General Partner. In the event that Mr. Kestin ceases to be responsible for the Partnership’s investments for any reason, and although other investment personnel may be available to continue operations, the operations of the Partnership could be adversely affected. Mr. Kestin may have significant business responsibilities in addition to those of the Partnership including, without limitation, the management of other investment vehicles and accounts. See “Risk Factors – Conflicts of Interest” below.
Market Volatility and Economic Instability. The securities markets have in recent years been characterized by high degrees of volatility and unpredictability. In addition, the U.S. and other national economies have recently undergone significant disruptions, and future economic conditions are uncertain. Both market and economic conditions and events may be expected to have an impact (potentially adverse) on the profitability of the Partnership.
Substantial Withdrawals. Substantial withdrawals by Limited Partners within a short period of time could require the Investment Manager to arrange for the Partnership’s positions to be liquidated more rapidly than would otherwise be desirable, which could (i) adversely affect the value of the remaining Partnership Interests, (ii) cause the Partnership to utilize leverage in order to satisfy withdrawal requests, which would likely cause the remaining Limited Partners to bear the costs of such leverage, or (iii) result in the General Partner choosing to terminate the Partnership. Under the Partnership Agreement, the General Partner has the right to suspend withdrawals, or to delay any withdrawal payment if it determines that the liquidation of investments necessary to fund such withdrawal would be detrimental to the remaining Partners. In addition, regardless of the period of time in which withdrawals occur, the resulting reduction in the Partnership assets could make it more difficult to generate positive returns or recoup losses due to a reduced equity base.
Institutional Risk. The institutions, including brokerage firms, banks, and custodians with which the Partnership does business, or to which securities have been entrusted for custodial and prime brokerage purposes, may encounter financial difficulties that impair the operational capabilities or the capital position of the Partnership (including, but not limited to, impairment resulting out of the loss of, or delay in the recovery of, the portfolio securities or other assets of the Partnership). Brokers may trade with an exchange as a principal on behalf of the Partnership in a “debtor-creditor” relationship, unlike other clearing broker relationships where the broker is merely a facilitator of the transaction. Such brokers could, therefore, have title to all of the assets of the Partnership (for example, the transactions which the broker has entered into on behalf of the Partnership as principal as well as the margin payments which the Partnership provides). In the event of such a broker’s insolvency, the transactions which the broker has
entered into as principal could default and the Partnership’s assets could become part of the insolvent broker’s assets, to the detriment of the Partnership. Because securities owned directly by the Partnership will generally not be held in the Partnership’s name and may not be held on a fiduciary basis or segregated from other assets of the prime broker or other broker dealers, a failure of a prime broker or another broker- dealer may put such securities at risk and is likely to have a greater adverse impact on the Partnership than if such securities were registered in the Partnership’s name. In this regard, assets may be held in “street name” such that a default by the broker may cause the Partnership’s rights to be limited to that of an unsecured creditor.
Alternative Investing Generally. The Partnership is designed for investors seeking potential long-term growth from alternative investments, who do not require regular current income and who can accept a high degree of risk in their investments. In view of, among other things, the Partnership’s ability to invest in a wide range of securities and instruments and to use a broad variety of investment techniques, the Partnership may be deemed speculative in nature and is not intended to be a comprehensive investment program. The Partnership is intended for investment solely by sophisticated investors who are accustomed to and fully understand the risks of such investments.
No assurance can be given that the Partnership will achieve its investment objective or that the Partnership’s investment strategy will be successful.
Risks Relating to Investment Strategy and Techniques
General Investment Risk. The Partnership’s investments will consist of securities identified by the Investment Manager’s methodology. Since such strategy involves identifying securities which are generally undervalued (or, in the case of short positions, overvalued) by the marketplace, success of such strategy necessarily depends upon the market eventually recognizing such value in the price of the security, which may not necessarily occur. The Partnership’s portfolio positions may undergo significant short term declines and experience considerable price volatility. Since the General Partner’s methodology does not require any minimum market capitalization, the Partnership may take positions in smaller capitalization companies or other issuers which may involve an increased level of general investment risk. Equity positions may include speculative securities. Accordingly, investors in the Partnership must be prepared to assume the risks inherent in such speculative investments. An investment in the Partnership should not be regarded as a complete investment program and should be considered solely by investors prepared to experience possible short term volatility and fluctuations in value in the interest of seeking superior long-term capital appreciation.
Equity Risks. The Partnership may invest in equity and equity derivative securities, including exchange traded funds and index based products. The value of these securities generally will vary with the performance of the issuer and movements in the equity markets. As a result, the Partnership may suffer losses if it invests in equity securities of issuers whose performance diverges from the Investment Manager’s expectations or if equity markets generally move in a single direction and the Partnership has not hedged against such a general move. To the extent the Partnership invests in equity derivatives and private placements activities, the Partnership will be exposed to risks that issuers will not fulfill their contractual obligations to the Partnership, such as delivering marketable common stocks upon conversions of convertible securities and registering restricted securities for public resale.
Concentration of Investments. The Partnership’s investment portfolio may, at times, be confined to the securities of relatively few issuers. Any concentration necessarily increases the degree of Partnership exposure to a variety of issuer-related, industry or market risks. By concentrating investments in a small number of large security positions relative to Partnership capital, a loss in any such position could materially reduce the Partnership’s performance asset base, to the extent not offset by other gains.
Short Selling. Short selling may be utilized both in situations where the Investment Manager believes the securities in question are overvalued, and therefore likely to experience significant price declines over time, or as a hedge or offset to related long positions. Short selling inherently involves certain additional risks. Selling securities short creates the risk of losing an amount greater than the initial investment in a relatively short period of time and the theoretically unlimited risk of an increase in the market price of the securities sold short. There is also the risk that the securities borrowed by the Partnership in connection with a short sale would need to be returned to the securities lender on short notice. If the request for return of securities occurs at a time when other short sellers of the security are receiving similar requests, a “short squeeze” can occur, and the Partnership might be compelled, at the most disadvantageous time, to replace borrowed securities previously sold short with purchases on the open market, possibly at prices significantly in excess of the proceeds received earlier. In addition, short selling can involve significant borrowing and other costs which can reduce the profit or create losses in particular positions.
There are other inherent difficulties and challenges in short selling. The general negative misperceptions about short-sellers may limit the Investment Manager’s access to management of various issuers and impede its research efforts. Management and other stakeholders of issuers may take legal action against short-sellers to prevent or discourage the legal short sales of the issuer’s securities to avoid depressing the value of its securities. The Investment Manager and the Partnership could be subject to such private legal actions. The cost of, and management time committed to, defending any such action(s) could be substantial.
Price Volatility. Stocks are inherently volatile. Such volatility may result in the value of the Partnership’s assets fluctuating from time-to-time more greatly than that of other investment vehicles which may be more diversified. There can be no assurance that the Investment Manager’s investment strategy, including its hedging techniques, or other investment strategies or techniques, will be effective in protecting the Partnership from such price volatility.
Investments With Limited or No Liquidity. The Partnership may take significant positions in particular securities which are relatively large as compared to their trading volume or overall market capitalization. Such positions may at times prove more difficult to sell in a timely or efficient manner and could thus impair to some extent the Partnership’s ability to fully realize portfolio gains or limit losses. The Investment Manager does not intend to generally limit investments to issues of any particular minimum capitalization and may, in fact, focus upon smaller capitalization stocks when such securities appear to afford greater appreciation potential. Such stocks often have less liquidity than large capitalization issues.
Options. The Partnership may utilize options in furtherance of its investment strategy primarily for hedging certain risks. Options positions may include long positions, where the Partnership is the holder of put or call options, as well as short positions, where the Partnership is the seller (writer) of an option. Although option techniques can increase investment return, they can also involve a relatively higher level of risk. The writing (selling) of uncovered options involves a theoretically unlimited risk of a price increase or decline, as the case may be, in the underlying security. The expiration of unexercised long option positions effectively results in loss of the entire cost or premium paid for the option. Option premium costs, as well as the cost of covering options written by the Partnership, can reduce or eliminate position profits or create losses as well. The Partnership’s ability to close out its position as a purchaser of an exchange-listed option is dependent upon the existence of a liquid secondary market on option exchanges. On occasion the Partnership may also utilize options, particularly in foreign markets, which may have limited liquidity.
The seller (“writer”) of a call option which is covered assumes the risk of a decline in the market price of the underlying security or other instrument below the purchase price of the underlying instrument, less the amount of premium received by the seller, and forgoes the opportunity for gain on the
underlying instrument above the exercise price of the option. The buyer of a call option assumes the risk of losing its entire investment (the premium paid) in the call option. If the buyer of a call option sells short the underlying security or other instrument, a loss on the call option itself may be offset, in whole or in part, by any gain on the short sale of the underlying position.
The seller (“writer”) of a put option which is covered assumes the risk of an increase in the market price of the underlying security or other instrument above the sales price (in establishing the short position) of the underlying instrument, plus the premium received by the seller, and forgoes the opportunity for gain on the underlying instrument below the exercise price of the option. The buyer of a put option assumes the risk of losing its entire investment (the premium paid) in the put option. If the buyer of a put option holds a long position in the underlying security or other instrument, a loss on the put option itself may be offset, in whole or in part, by any gain on the underlying position.
Leverage; Interest Rates; Margin. As discussed above, the Investment Manager may, but does not expect to, utilize leverage, on behalf of the Partnership, on a moderate basis, as the Investment Manager considers appropriate, primarily for investment purposes to increase investment positions or to make additional investments. Leverage may be employed by means of conventional margin arrangements, or through options, swaps, forwards and other derivative instruments (i.e., so called “synthetic” leverage).
While leverage (including the use of derivatives) presents opportunities for increasing the Partnership’s total return, it has the effect of potentially increasing losses as well. Accordingly, any event that adversely affects the value of an investment, either directly or indirectly, could be magnified to the extent that leverage is employed. The effect of the use of leverage by the Partnership in a market that moves adversely to the investments of the entity employing the leverage, could result in a loss to the Partnership that would be greater than if leverage were not employed by the Partnership. In addition, to the extent that the Partnership borrows funds, the interest cost at which the Partnership can borrow will affect the operating results of the Partnership.
The use of short-term margin borrowings by the Partnership may result in certain additional risks to the Partnership. For example, should the securities that are pledged to brokers to secure the Partnership’s margin accounts decline in value, or should brokers from which the Partnership has borrowed increase their maintenance margin requirements (i.e., reduce the percentage of a position that can be financed), then the Partnership could be subject to a “margin call,” pursuant to which the Partnership must either deposit additional funds with the broker or suffer mandatory liquidation of the pledged securities to compensate for the decline in value. The broker will typically have the right to liquidate the Partnership’s portfolio in certain circumstances. In the event of a precipitous drop in the value of the assets of the Partnership, the Partnership might not be able to liquidate assets quickly enough to pay off the margin debt and might suffer mandatory liquidation of positions in a declining market at relatively low prices. Similar risks may arise in connection with longer-term borrowings and certain derivative transactions. See “Derivatives” below.
Derivatives. The derivatives markets are frequently characterized by limited liquidity, which can make it difficult as well as costly to close out open positions in order to either realize gains or to limit losses. Additionally, many derivatives are valued on the basis of dealers’ pricing of these instruments. However, the price at which dealers value a particular derivative and the price which the same dealers would actually be willing to pay for such derivative should the Partnership be required to sell such position, may be materially different. Such differences may have a materially adverse effect on the Partnership if it is required to sell derivative instruments in order to raise funds for margin purposes or to pay withdrawals.
The pricing relationships between derivatives and the underlying instruments on which they are based may not conform to anticipated or historical patterns, resulting in unanticipated losses.
The stability and liquidity of forwards, swaps, repurchase agreements, and other over-the- counter derivative transactions depend in large part on the creditworthiness of the parties to the transaction. If there is a default by the counterparty to a transaction, the Partnership may have contractual remedies pursuant to the agreements related to the transaction; however, exercising such contractual rights may involve delays or costs, or may not be successful, which could adversely affect the Partnership. It is possible that in the event of a counterparty credit default, the Partnership may not be able to recover all or a portion of its investment in such derivative instrument and may be exposed to additional liability (i.e., the obligations associated with what has become an unhedged position).
Foreign Investments. A portion of the Partnership’s assets may consist of foreign investments, which may include foreign or domestic equity securities denominated in foreign currencies and/or traded outside of the United States. Such investments require consideration of certain risks typically not associated with investing in U.S. securities or property. Such risks include, among other things, trade balances and imbalances and related economic policies, unfavorable currency exchange rate fluctuations, imposition of exchange control regulation by the United States or foreign governments, United States and foreign withholding taxes, limitations on the removal of funds or other assets, policies of governments with respect to possible nationalization of their industries, political difficulties, including expropriation of assets, confiscatory taxation and economic or political instability in foreign nations.
There may be less publicly available information about certain foreign companies than would be the case for comparable companies in the United States and certain foreign companies may not be subject to accounting, auditing and financial reporting standards and requirements comparable to or as uniform as those of United States companies. Securities markets outside the United States, while growing in volume, have for the most part substantially less volume than U.S. markets, and many securities traded on these foreign markets are less liquid and their prices more volatile than securities of comparable U.S. companies. In addition, settlement of trades in some non-U.S. markets is slower, less systematic and more subject to failure than in U.S. markets. There also may be less extensive regulation of the securities markets in countries other than the United States.
Transaction Execution and Costs; Brokerage Allocation. Although the Investment Manager will seek to utilize brokerage firms which will afford superior execution capability to the Partnership, there is no assurance that all of the Partnership’s transactions will be executed with optimal quality. In addition to seeking broker-dealers with superior execution capability, the Investment Manager may allocate transactions to brokers which agree to pay all or a part of certain research-related expenses of the Partnership, the Investment Manager and/or its affiliates, or so-called “soft dollar” arrangements. Although the Investment Manager will, in general, seek such arrangements only where it believes the same will be consistent with principles of best execution, such soft dollar arrangements may result in increased commission costs or other inefficiencies in execution. There can be no assurance that the Investment Manager will be successful in seeking to reduce the expenses of the Partnership through satisfactory soft dollar arrangements or that such arrangements will not result in increased transaction costs or otherwise impact the Partnership.
Limitations on Shorting and Hedging Strategies. The Investment Manager may employ certain hedging techniques. Hedging against a decline in the value of a portfolio position does not eliminate fluctuations in the values of portfolio positions, or prevent losses if the values of such positions decline, but establishes other positions designed to gain from those same developments, thus moderating the decline in the overall portfolio value. Such hedge transactions, however, also limit the opportunity for gain if the value of the portfolio position should increase. In addition, the degree of correlation between price movements of the instruments used in a hedging strategy and price movements in the portfolio position being hedged may vary. Insufficient correlation between hedged and hedging positions may not only result
in failing to protect the Partnership against the risks sought to be hedged but may actually increase the magnitude of overall loss in the event of losses in the hedging positions.
For a variety of reasons, the Investment Manager may not seek or be able to establish a sufficiently accurate correlation between such hedging instruments and the portfolio holdings being hedged. Moreover, the Investment Manager may not necessarily endeavor to hedge the Partnership portfolio whatsoever. In the event hedging is utilized, it will be employed, in general, solely as a technique to limit certain market risks. As a general matter, the Partnership’s portfolio will still be exposed to basic issuer risk and other risks attendant to its investment strategy and to particular positions, which risks will not be generally hedged.
Overall Investment Risk. All securities investments risk the loss of capital. The nature of the securities to be purchased and traded by the Partnership and the investment techniques and strategies to be employed by the Investment Manager may increase this risk. Many unforeseeable events, including, but not limited to, actions by various government agencies and domestic and international economic and political developments, may cause sharp market fluctuations which could adversely affect the Partnership.
There can be no assurance that the investments or investment techniques employed by the Partnership will achieve the Partnership’s investment objective or that the Partnership will ever be profitable. There can be no assurance that the Partnership will not incur losses.
Conflicts of Interest
There are a number of actual or potential conflicts of interest between and among the General Partner, the Investment Manager, the Partnership and Mr. Kestin. Among those that should be considered by each prospective Limited Partner are the following:
Other Investment Vehicles or Clients. The Investment Manager, the General Partner and their affiliates, including Mr. Kestin, may participate in or sponsor other investment vehicles, and possibly have additional advisory accounts or clients, in the future. Such investment vehicles and accounts may employ investment strategies similar to, or different from, that of the Partnership. The Investment Manager, the General Partner and their affiliates, including Mr. Kestin, may also determine to engage in other businesses. The existence of such present and future multiple investment vehicles, accounts and/or clients, or other businesses, necessarily creates certain conflicts of interest.
The existence of multiple investment vehicles, accounts and/or clients may also create conflicts as to time and resource commitments on the part of the General Partner’s and the Investment Manager’s personnel (including Mr. Kestin). While Mr. Kestin will devote such time to the business of the Partnership as he deems necessary, he may have other ongoing investment and business responsibilities which could have the effect of reducing the time he devotes to the investment activities of the Partnership.
Allocation Issues. It is possible that other investment vehicles, accounts and/or clients managed by the Investment Manager or its affiliates may invest in the same securities as the Partnership. The Investment Manager intends to allocate investment opportunities among the Partnership and such other investment vehicles, accounts and clients by applying such considerations as it deems appropriate, including relative size of such investment vehicles, accounts and clients, amount of available capital, size of existing positions in the same or similar securities, impact of leverage, investment objective and strategy considerations, including, without limitation, concentration parameters and tax considerations and other factors. As a result of such considerations, allocations among the Partnership and other such investment vehicles, accounts and clients will not necessarily be pro rata. The Partnership will not be entitled to investment priority and may not necessarily participate in every investment opportunity. In cases where a limited amount of a security or other instrument is available for purchase, the allocation of such security,
as between the Partnership and any such other investment vehicles, accounts and clients, may necessarily reduce the amount thereof available for purchase by the Partnership.
Although the Partnership and other investment vehicles, accounts and/or clients managed by the Investment Manager and its affiliates may generally invest in the same securities, the net performance of the Partnership may vary materially from other such vehicles as a result of the allocation policies described above, as well as differing expenses, tax considerations, the impact of leverage and other factors.
Balancing Transactions. Other investment vehicles, accounts and/or clients of the Investment Manager that employ similar or substantially similar investment strategies to those of the Partnership may invest and trade on a pari passu basis; however, certain differences in the specific investment strategies employed (including, applicable investment parameters, eligibility criteria with respect to various clients or investors, applicable expenses, available capital, the relative use of leverage and other factors) (collectively, “Client Differences”) may result in non-pari passu treatment of specific clients with respect to some or all of their investment and trading activities.
The Investment Manager may, from time to time in its discretion, be expected to adjust (or “rebalance”) the portfolio holdings of one or more of its clients so as to eliminate or minimize variations among the portfolio holdings of such clients that employ the same or similar investment strategies or otherwise to maintain, in the view of the Investment Manager, a desirable portfolio composition for each of such clients, subject to the applicable Client Differences. With respect to any rebalancing transactions, different broker-dealers will generally be used to effect buy orders, on one hand, and sell orders, on the other hand, in the same security. Rebalancing transactions will be effected at the next publicly quoted price on the trading day on which securities are rebalanced among clients. Rebalancing transactions may, or may not, be subject to commissions.
Time Commitments. Mr. Kestin intends to devote a portion of his time and efforts to the management of the Partnership and, possibly, other accounts with comparable strategies, as he deems necessary. However, additional clients or other business responsibilities may have the effect of reducing the time he devotes to the investment activities of the Partnership. The Investment Manager and/or the General Partner may retain additional personnel as Mr. Kestin deems necessary.
Valuation Risk. The Net Asset Value of the Partnership will be calculated by the Administrator based on prices obtained from the Investment Manager and/or independent third-party sources including exchanges. The fair market value of those assets of the Partnership, if any, for which third-party prices are not available, or with respect to which the Investment Manager believes third-party pricing does not accurately reflect fair value, will be valued based on other sources deemed reliable by the Investment Manager, and may be based on internal valuation analysis, such as a discounted cash-flow valuation. In order to value the assets and liabilities of the Partnership, the Investment Manager or its designee may rely on information provided by employees of the Investment Manager or its affiliates or outside parties, and such persons may provide inaccurate, incomplete, outdated or otherwise unreliable information. In the case of employees of the Investment Manager who receive compensation based on the performance of certain investments, such employees may be motivated to provide incorrect valuation information in order to receive increased compensation. The Investment Manager may be unable to detect every error contained in the valuation information. To the extent the information received by the Partnership is inaccurate or unreliable, the valuation of the Partnership’s assets and liabilities may be inaccurate.
The General Partner and the Investment Manager will not be liable to the Partnership if a price reasonably believed by it/them to be an accurate valuation of a particular asset of the Partnership is found to be misvalued and/or mispriced.
Conflicts Regarding Advisory Compensation. The Incentive Allocation to which the General Partner is entitled will be determined, based upon the increase, if any, in the aggregate Net Asset Value from a Realization Event. See “The Partnership – Allocation of Profits and Losses; General Partner’s Incentive Allocation.” In general, the fact that a portion of the advisory compensation is based on capital appreciation of the Partnership Interests may create an incentive for the Investment Manager, to make investments that are more speculative than would be the case in the absence of performance-based advisory compensation. The General Partner has the right to agree to reductions in the Incentive Allocation and/or Management Fee chargeable to particular Limited Partners, for such consideration it deems appropriate, without notice or offering any similar opportunity to other Limited Partners. See “– Possible Agreements with Certain Limited Partners” and “The Partnership Agreement – Management of Partnership.”
Possible Conflicts Regarding Brokerage Allocations. The Investment Manager may allocate brokerage on the basis of a broker’s agreement to pay all or part of certain research-related expenses of the Partnership, the Investment Manager and/or their affiliates, provided such expenses qualify for a “safe harbor” provision under Section 28(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Accordingly, to the extent such allocations result in the payment by such brokers of expenses that would otherwise be borne by the General Partner, the Investment Manager or their affiliates, they will realize an economic benefit from such allocations and may be deemed to have a financial conflict of interest with the Partnership. The Investment Manager will not endeavor to allocate, as between the Partnership and other managed investment vehicles or accounts, particular items of expenses paid relative to the vehicle or account generating the particular commission revenues utilized for payment of such expenses, except in limited circumstances when deemed appropriate. Accordingly, brokerage allocations from the Partnership may also have the effect of indirectly benefiting other vehicles and accounts managed by the Investment Manager or its affiliates. See “Brokerage Arrangements; Custodian – Execution of Portfolio Transactions.”
Possible Agreements with Certain Limited Partners. The Partnership and the General Partner may from time to time enter into agreements with one or more Limited Partners whereby in consideration for agreeing to invest certain amounts in the Partnership or other consideration deemed material by the General Partner, such Limited Partners may be granted favorable rights not afforded to other Limited Partners or investors, generally. Such rights may include one or more of the following: special rights to make future investments in the Partnership and/or other investment vehicles or managed accounts managed by the General Partner and its affiliates; special redemption rights relating to frequency, notice and/or other terms; rights to receive reports from the Partnership on a more frequent basis or that include information not provided to other Limited Partners (including, without limitation, more detailed information regarding investment transactions and positions); rights to receive reduced rates of the Incentive Allocation and/or Management Fee; rights to receive a share of the Incentive Allocation, Management Fee or other amounts earned by the General Partner or its affiliates; and such other rights as may be negotiated between the Partnership and such Limited Partners. The Partnership, the General Partner and/or the Investment Manager may enter into such agreements without the consent of or notice to the other Limited Partners.
In addition, the General Partner may issue additional classes of Partnership Interests with offering terms that differ from the Partnership Interests offered pursuant to this Memorandum (including, with respect to participation in certain investments of the Partnership, withdrawal rights and compensation payable to the General Partner and the Investment Manager) without the consent of, or notice to, the existing Limited Partners of the Partnership.
It is possible that, under certain circumstances, one or more of the favorable rights granted to the Limited Partners may have a material adverse effect on Limited Partners not receiving those benefits.
In addition, the General Partner and/or the Investment Manager may from time to time enter into similar agreements with one or more managed account investors. It should be noted that managed account investors will typically be provided with additional transparency with respect to the investment positions of the managed accounts and may be provided with real-time, direct access to the managed accounts portfolio positions, on a negotiated, case-by-case basis.
Information Provided by the General Partner. Factual information contained in this Memorandum, including without limitation, the investment strategy and policies, biographical and certain other information, has been furnished largely by the General Partner and its affiliates and in general has not been independently confirmed or verified. Therefore, Limited Partners should seek to confirm such information, acquire additional information or conduct further investigation as they deem appropriate in connection with a decision to invest in the Partnership.
No Separate Counsel
Logan Law Office, P.A. acts as counsel to the General Partner, the Investment Manager and the Partnership. The Partnership does not have U.S. counsel separate and independent from U.S. counsel to the General Partner and the Investment Manager. Harney Westwood & Riegels acts as legal counsel to the Offshore Fund as to matters of British Virgin Islands law. Logan Law Office, P.A. and Harney Westwood & Riegels do not represent investors in the Partnership and the Offshore Fund, and no independent counsel has been retained to represent investors in the Partnership or the Offshore Fund. Logan Law Office, P.A. and Harney Westwood & Riegels is not responsible for: (i) any acts or omissions of the General Partner, the Investment Manager or the Partnership (including the monitoring of the General Partner’s, the Investment Manager’s and/or the Partnership’s compliance with any guidelines, policies, restrictions or applicable law, or the selection, suitability or advisability of their investments and investment activities) or any administrator, accountant, custodian, prime broker or other service provider to the General Partner, the Investment Manager and/or the Partnership; (ii) supervising the activities the General Partner, the Investment Manager and/or the Partnership; or (iii) any loss or claim arising from the failure of the General Partner, the Investment Manager and/or the Partnership to seek competent legal or tax advice.
Limited Liquidity of Partnership Interests
Partnership Interests in the Partnership are significantly less liquid than many other securities investments, as there will not be an active secondary trading market for the Partnership Interests. In addition, a Limited Partner’s right to withdraw his Partnership Interests is subject to significant limitation. The General Partner has the right to agree to differing withdrawal terms with respect to particular Limited Partners, for such consideration as they may deem appropriate, without notice or offering any similar terms to other Limited Partners. The Partnership has the right to suspend or limit withdrawals under certain conditions. See “The Partnership Agreement – Withdrawals by Partners.”
Although withdrawal payments will generally be made in cash, the General Partner will have the right to determine that a withdrawal payment be made in the form of securities held by the Partnership or in a combination of cash and securities. See “The Partnership Agreement – Withdrawals by Partners.”
In addition, the Partnership Interests are being offered without registration under the Securities Act, in reliance upon an exemption contained in Section 4(a)(2) of the Securities Act and SEC Regulation D promulgated thereunder. Certain restrictions on transferability preclude disposition and transfer of Partnership Interests other than pursuant to an effective registration statement or in accordance with an exemption from registration contained in the Securities Act. In addition, the consent of the General Partner must be obtained before the transfer of any Partnership Interest. In light of the restrictions imposed
on the transfer of Partnership Interests, and in light of the limitations imposed on a Limited Partner’s ability to redeem his Partnership Interests, including the General Partner’s right to suspend or defer any redemption under certain circumstances, an investment in the Partnership should be viewed as illiquid. See “The Partnership Agreement – Withdrawals by Partners” and “Restrictions on Transfer.”
The Investment Manager may designate certain investments as “Designated Investments” as discussed herein. Limited Partners are not permitted to withdraw Partnership Interests held in Designated Investments and will only receive the proceeds from the related Designated Investments after they have been realized or deemed realized by the Partnership. See “— Designated Investments below.”
The General Partner, in its sole discretion, may waive, reduce or modify any terms related to withdrawals for a Limited Partner pursuant to a written agreement with the Limited Partner, or otherwise. See “The Partnership Agreement – Withdrawals by Partners.”
The Partnership will be authorized to maintain one or more separate memorandum accounts or special sub-accounts (each a “Side Pocket Account”) on its books for certain privately placed unregistered securities or other investments that, in the opinion of the Investment Manager, do not have a readily ascertainable market value or other illiquid investments which may be valued but are not freely transferable (such privately placed and illiquid securities and other investments are referred to herein as, “Designated Investments”), which are designated by the Investment Manager to be held in a Side Pocket Account; provided, that Side Pocket Accounts may be utilized only for securities and other investments whose market values become difficult to ascertain and/or become illiquid after the time of the initial investment therein by the Partnership. A Designated Investment may be held in a Side Pocket Account for any period of time, subject to the discretion of the Investment Manager. The Partnership may not be able to readily dispose of Designated Investments and, in some cases, may be contractually prohibited from disposing of such investments for a specified period of time.
A Designated Investment shall be valued, for purposes of determining the Management Fees that are payable in respect of the Side Pocket Account related thereto at cost A withdrawing Limited Partner with a Partnership Interest in a Designated Investment will not receive any amount in respect of such Partnership Interest until the related Designated Investment is realized or deemed realized. See “The Partnership Agreement – Withdrawals by Partners,” “The Partnership Agreement – Side Pocket Accounts” and “The Partnership Agreement – Valuation of Assets.”
The Partnership is not expected to make annual distributions to its Partners. The Partnership, as an entity, assuming that it is treated as a partnership for federal income tax purposes, will not be subject to any federal income tax and each Limited Partner, in computing his own federal income tax liability for a taxable year, will be required to take into account his allocable share of all items of Partnership income, gain, loss, deduction or credit for the Partnership taxable year ending within or with such taxable year of the Limited Partner, regardless of whether such Limited Partner has received any distributions from the Partnership. Thus, a Limited Partner’s income tax liability in any particular year is likely to exceed the amount of distributions, if any, received by him.
The Partnership may utilize the services of one or more consulting firms to provide research, investment data and portfolio management services to the Partnership. Consultants will work
with, and assist, the Investment Manager and the General Partner in connection with their management responsibilities. Fees and expenses of such consultants will be borne by the Partnership.
Lack of Participation by Limited Partners
Limited Partners have no right to participate in management decisions of the Partnership and their right to vote in a variety of matters, including amendments to the Partnership Agreement, is restricted. See “The Partnership Agreement – Management of Partnership.”
The summary of certain of the material tax principles applicable to an investment in the Partnership that is set forth in this Memorandum, see “Certain Tax Considerations,” is considered to be a correct interpretation of existing laws and regulations in force as of the date of this Memorandum; however, no assurance can be given that courts or fiscal authorities responsible for the administration of such laws will agree with such interpretations or that changes in such laws and regulations will not occur. Any such changes may or may not be retroactive with respect to transactions consummated prior to the date such changes are announced. This summary is not intended as a substitute for careful tax planning, and prospective investors in the Partnership are urged to contact their own tax advisors with respect to the tax consequences to them of an investment in the Partnership.
Bad Actor Events
Recent changes to Rule 506 of Regulation D promulgated under the Securities Act prohibit an issuer from claiming an exemption from registration of its securities under such rule if the issuer, any of its predecessors, any affiliated issuer, any director, executive officer, other officer participating in the offering of the interests, general partner or managing member of the issuer, any beneficial owner of 20% or more of the voting power of the issuer’s outstanding voting equity securities, any promoter connected with the issuer in any capacity as of the date hereof, any investment manager of the issuer, any person that has been or will be paid (directly or indirectly) remuneration for solicitation of purchasers in connection with such sale of the issuer’s interests, any general partner or managing member of any such investment manager or solicitor, or any director, executive officer or other officer participating in the offering of any such investment manager or solicitor or general partner or managing member of such investment manager or solicitor has been subject to certain “Bad Actor” events described in Rule 506(d)(1) of Regulation D subsequent to September 23, 2013, subject to certain limited exceptions. The Partnership is required to exercise reasonable care in conducting an inquiry to determine whether any such persons have been subject to such “Bad Actor” events and is required to disclose any “Bad Actor” events that occurred prior to September 23, 2013 to investors in the Partnership. While the Partnership believes that it has exercised reasonable care in conducting an inquiry into “Bad Actor” events by the foregoing persons and is not aware of any required disclosures, it is possible that (a) additional “Bad Actor” events may exist of which the Partnership is not aware and (b) the SEC, a court or other finder of fact may determine that the steps that the Partnership has taken to conduct its inquiry were inadequate and did not constitute reasonable care. If such a finding were made, the Partnership may lose its ability rely upon Rule 506 of Regulation D promulgated under the Securities Act for the placement of the Interests and, depending on the circumstances, may be required to register any offering of the Partnership’s Interests with the SEC and under applicable state securities laws or to conduct a rescission offer with respect to the securities sold in any such offering.
“Master-Feeder” Investment Structure
The General Partner has formed Fortune Pre-IPO Offshore Fund, LTD an offshore feeder fund to the Partnership (the “Offshore Fund”). The Offshore Fund is managed by the General Partner.
The shares of the Offshore Fund are offered primarily to non-U.S. investors and certain qualified U.S. tax- exempt entities. It is intended that the Offshore Fund will invest all, or substantially all, of its assets in the Partnership. The Partnership may elect to use one of a number of alternative master-feeder investment structures which may vary in one or more respects from the structure described in the previous paragraph. The management and affairs of the Offshore Fund would be governed by its board of directors, whose membership may vary from the management of the General Partner.
Limited Regulatory Protection
The Partnership is not registered under the Investment Company Act of 1940, as amended (the “Investment Company Act”), and the offering and sale of the Partnership Interests is not registered under the Securities Act or any similar state law, in reliance upon various exemptions. The Investment Manager is registered as an investment adviser with the SEC. The SEC has not passed on the merits or risks of this offering or the accuracy or completeness of this Memorandum. See “The Partnership – The General Partner; Investment Advisor”.
Although the Partnership may be subject to the securities laws of certain jurisdictions in which Partnership Interests may be offered for sale, there can be no assurance that the Partnership will be subject to significant regulation under the securities laws of any particular jurisdiction. In general, there may be other aspects of current or future regulation of investment partnerships, investment advisers and their affiliates or associated persons which could have an impact upon the Partnership’s investment activities or operations.
Each of the General Partner and the Investment Manager is exempt from registration as a commodity pool operator with the Commodity Futures Trading Commission (the “CFTC”) pursuant to the exemption under CFTC Rule 4.13(a)(3) for commodity pools that are offered and sold without marketing to the public in the United States and pursuant to an exemption from registration under the Securities Act, and that meet certain tests with respect to their commodity interest positions. Therefore, unlike a registered commodity pool operator, neither the General Partner nor the Investment Manager is required to deliver a disclosure document and a certified annual report to participants in the pool.
Liability of Limited Partners
A Limited Partner’s liability to the Partnership will be limited to the amount the Limited Partner has contributed to the capital of the Partnership and any profits thereon. In the event of a withdrawal when the Partnership’s remaining assets are insufficient to pay its debts, however, if provided under applicable law a withdrawing Limited Partner may have liability to certain creditors of the Partnership, but only to the extent of the funds withdrawn. Once a Partnership Interest has been paid for in full, the holder of that Partnership Interest will have no further obligation to make additional capital contributions to the Partnership.
Reserve for Contingent Liabilities
Under certain circumstances, the General Partner may find it necessary upon withdrawal by a Limited Partner to set up a reserve for contingent liabilities and withhold a certain portion of such Limited Partner’s capital account. This could happen, for example (but without limitation), if the Partnership were involved in litigation or subject to an audit by the Internal Revenue Service.
Exculpation of the General Partner and the Investment Manager
The General Partner and the Investment Manager, as fiduciaries, have a responsibility to the Limited Partners to exercise good faith and fairness in all dealings affecting the Partnership. However,
pursuant to the Partnership Agreement, the Partnership has agreed to indemnify and exculpate the General Partner, the Investment Manager and their respective affiliates, members, shareholders, directors, officers, managers, employees and agents (including, without limitation, Mr. Kestin) from any liability for losses, damages or expenses resulting from their respective status as General Partner or Investment Manager, or their acts or omissions, the Partnership’s business, or their management of the Partnership’s affairs, unless gross negligence or willful misconduct on the part of the General Partner, the Investment Manager or such other parties is involved. In addition, the General Partner and the Investment Manager are organized as a limited liability companies. Members of a limited liability company do not generally have individual liability for its debts and obligations, except as otherwise provided by law. Due to the limited liability company structure of the General Partner and the Investment Manager, Mr. Kestin also has limited individual liability in connection with the services performed in his capacity as managing member of the General Partner and the Investment Manager to the extent provided by applicable law. In the opinion of the SEC, indemnification for liabilities arising under the securities laws is against public policy and is therefore unenforceable. Certain state securities commissions may also limit or prohibit indemnification for securities laws liabilities.
THE PARTNERSHIP General Partner; Investment Manager
The General Partner is Fortune Partners Group LLC, a Florida limited liability company. The General Partner has full discretionary authority and responsibility for the management and control of the Partnership.
The Investment Manager is Fortune Partners Group LLC, a Florida limited liability company. Fortune Partners Group LLC is registered as an investment adviser with the SEC. The Investment Manager has been appointed by the General Partner to serve as investment adviser to the Partnership and has full discretionary authority and responsibility over the investments of the Partnership. Mr. Kestin is the managing member of both the General Partner and the Investment Manager.
The following is a summary of the business and educational backgrounds of Mr. Kestin:
Ross Menachem Kestin, founded the General Partner and the Investment Manager in 2015 and will serve as the Portfolio Manager of the Partnership. Mr. Kestin has held the positions of Chief Executive Officer and Chief Investment Officer of Fortune Partners Group LLC since the firm’s business inception. He focuses on managing and advising the investment portfolios of offshore funds and high net worth individuals and entities. He is also the sole owner of Fortune Partners Group. From 2007 to 2015, Mr. Kestin served as the Chief Executive Officer of Fortune Financial Strategies S.A., a multi-family office and investment advisor based in Geneva, Switzerland, growing the firm’s assets under management to over
$1 billion. Mr. Kestin was a co-founder of Fortune Financial Strategies S.A.
Prior to this, Mr. Kestin served as the Associate Director of HSBC Private Bank (Suisse) SA, in Geneva, Switzerland, where he oversaw investment advisory and analysis responsibilities for high net worth investors from Brazil, Latin America and around the world. Mr. Kestin earned his Bachelor of Arts from Brandeis University in Waltham, Massachusetts, and his Masters of Business Administration from Bar- Ilan University in Ramat Gan, Israel in 2003. Prior to this, Mr. Kestin worked at SAIS Swiss Alternative Investment Strategies Group AG, in Zug, Switzerland, Tamir Fishman Asset Management in Tel Aviv, Israel, and Bank Leumi (USA) in New York, USA. Mr. Kestin currently resides in Miami, USA, together with his wife and three children.
Mr. Kestin may be assisted on certain investment-related and other matters relating to the Partnership by future personnel of the General Partner and the Investment Manager. The Investment Manager may utilize independent research consultants who have specialized expertise and familiarity with the industries and securities invested in by the Partnership. In addition, the General Partner, the Investment Manager and/or the Partnership may hire various independent contractors to provide various types of operational assistance.
See “Summary – Management Fee.”
Allocation of Profits and Losses; General Partner’s Incentive Allocation
The following is a condensed summary of the methods that are used in allocating the Partnership’s Net Profits and Net Losses. The Partnership Agreement, attached hereto as Exhibit A, contains a more detailed discussion relating to the establishment of fiscal periods and the procedures that are used in valuing the Partnership’s assets and in calculating and allocating Net Profits and Net Losses between fiscal periods and among the Partners, as well as the definition of certain capitalized terms used in this discussion.
The General Partner is entitled to receive the Incentive Allocation from each Limited Partner’s capital account or share of Side Pocket Account for each Realization Event. The General Partner’s Incentive Allocation will be an amount equal to zero percent (0%) of the net profits of such Realization Event. In order to gain access to the most attractive pre-IPO shares the Partnership may co-invest with third party managers in SPV’s. As compensation for sourcing such Pre-IPO shares such third-party managers may receive a profit allocation at the SPV level not to exceed twenty five percent (25%) of the SPV’s profits.
For purposes of the Incentive Allocation calculation only, the calculated amounts of “Net Profits” and “Net Losses,” as they relate to an allocation to a Limited Partner with respect to a Realization Event, will be reduced (in the case of Net Profits) or increased (in the case of Net Losses) by the Management Fees charged to the Limited Partner with respect to such calendar year.
Under the Partnership Agreement the General Partner in its discretion may waive or reduce the Incentive Allocation chargeable to any Limited Partner or re-allocate any portion of its Incentive Allocation to any Limited Partner, without notice to or action by the Limited Partners; provided, however, that no such waiver or reduction may increase the amount thereof to be borne by any other Limited Partner. Under such provisions, the General Partner intends to so waive the Incentive Allocation with respect to any Limited Partner affiliated with the General Partner or the Investment Manager.
See “Summary – Operating Expenses.”
See “Summary – Organizational Expenses.”
See “Summary – Distribution Arrangements.”
See “Summary – Auditors.”
THE PARTNERSHIP AGREEMENT
The rights and obligations of the Partners are governed by the Partnership Agreement, the form of which is included as Exhibit A to this Memorandum. Each prospective Limited Partner should review the entire Partnership Agreement carefully before subscribing. The statements herein concerning the Partnership Agreement are merely a brief summary of certain provisions thereof, do not purport to be complete and are qualified in their entirety by reference to the Partnership Agreement itself. In the event there are inconsistencies between this Memorandum and the Partnership Agreement, the Partnership Agreement will control.
The Partnership commenced investment activities on August 1, 2018, and will continue indefinitely, unless terminated pursuant to the terms of the Partnership Agreement.
Management of Partnership
The General Partner will have full discretionary authority and responsibility to manage the operations (including, without limitation, the investment activities) of the Partnership. The Investment Manager, has been appointed by the General Partner to serve as the investment adviser to the Partnership, and, as such, will have full discretionary authority and responsibility with respect to the investments and the investment activities of the Partnership. Limited Partners will not participate in the management or control of the Partnership’s business or operations. The General Partner, the Investment Manager and their personnel may engage in other business ventures, including those which may be competitive with the operations and business of the Partnership and shall only be required to devote such time to the business of the Partnership as is deemed necessary in their sole discretion.
The General Partner may at any time determine to liquidate and dissolve the Partnership without any action by the Limited Partners. In addition, the General Partner may at any time, with the written consent of Limited Partners holding not less than fifty-one percent (51%) in amount of the capital accounts of the Limited Partners, withdraw from the Partnership and appoint a successor General Partner. Upon the adjudication of bankruptcy or insolvency of the General Partner, the Limited Partners may, upon the written consent of Limited Partners holding not less than fifty-one percent (51%) in amount of the capital accounts of the Limited Partners, continue the Partnership and appoint a successor General Partner or Partner. In the absence of such written consent, the Partnership will be dissolved. The General Partner will be deemed to have withdrawn as a general partner of the Partnership upon its bankruptcy, insolvency, liquidation or dissolution.
Liability of Limited Partners
Once a capital contribution has been paid for in full, the holder of that Partnership Interest will have no further obligation to make additional capital contributions. A Limited Partner’s liability to the
Partnership will be limited to the amount he has contributed to the capital of the Partnership and any profits thereon. To the extent required by law, a Limited Partner may be obligated to return all or part of a withdrawal or other distribution from the Partnership if received at a time when the Partnership had insufficient assets to discharge Partnership liabilities.
Valuation of Assets
The Administrator will calculate the Net Asset Value of the Partnership in U.S. dollars as of the last business day of each calendar month and as of any other valuation date determined by the General Partner. In the event any valuation date is a day on which stock exchanges and financial institutions in the United States are closed, the Administrator will calculate the Net Asset Value of the Partnership as of the close of the business day preceding such valuation date.
“Net Asset Value” of the Partnership means the total value of the Partnership’s assets, reduced by the amount of its liabilities (whether accrued or contingent) determined as of the valuation date, with such adjustments as are described below. In determining the value of instruments held by the Partnership, such value will generally be determined by the General Partner in accordance with the Partnership’s governing documents, as described below:
In determining net assets, the value of the Partnership’s assets and liabilities are to be determined as follows:
(a) Listed, National Market System, OTC Securities. Freely marketable securities that are listed or admitted to trading on any U.S. or foreign stock exchange or national market system or comparable foreign market system, or reported upon by a primary U.S. or foreign quotation system reporting “closing price” and/ or “last sale” information, will be valued as follows: (A) at the closing price of the Investment on the applicable composite exchange reporting system, national market system or other quotation system, as the case may be, at the close of business of the regular trading session on the valuation date; or if closing price information is not available with respect to such date; then (B) at the last reported sale price of the security on the applicable composite exchange reporting system, national market system or other quotation system, as the case may be, at the close of business of the regular trading session on the valuation date; or in case there shall have been no sale of such security on such date; then (C) at the representative “bid” price for such security on such composite reporting system, national market system or other system, as the case may be, at the close of business of the regular trading session on the valuation date; or if no such “bid” price is reported on such date; then (D) at such price as the General Partner deems to be fair market value.
(b) Marketable Securities Not Subject to “Closing Price” or “Last Sale” Information. Freely marketable securities traded over the counter or in another market but not listed or admitted to trading on any U.S. or foreign stock exchange or national market system, or subject to any other U.S. or foreign quotation system reporting “closing price” or “last sale” information, will be valued as follows: (A) at the representative “bid” price at the close of the regular trading session on the valuation date, as reported in the primary U.S. or foreign quotation system (or, if not so reported, then as reported by a recognized quotation service); or, if not so reported then (B) at the average representative “bid” prices of one or more primary market-makers or dealers in such securities on the valuation date; or (C) if there are no primary market- makers or dealers in such securities on the valuation date, then at such price as the General Partner deems to be fair market value.
(c) Securities With a Limited Market. Securities without an active trading market, as hereinafter defined, will be assigned fair value by the General Partner based upon: (i) recent sale price(s); (ii) opinions of brokers who trade actively in the securities; (iii) comparison with market values for similar
companies; (iv) the investment risk and/or potential; (v) marketability (if any); and/or (vi) such other factors as the General Partner, in its sole discretion, deems appropriate. An “active trading market” will be deemed to be one in which quotations are available and published on a reasonably consistent basis via an international news wire service to include, but not be limited to, Reuters, Bloomberg, Knight Ridder or Dow Jones.
(d) Short Positions. Securities held short by the Partnership will be valued as respectively provided in paragraph (a), (b) or (c) above, as applicable, except that the “asked” price will be substituted for the “bid” price when applicable. The value of securities held short by the Partnership will be treated as a liability of the Partnership and, together with the amount of any margin or other loans on account thereof, will be subtracted from the Partnership’s assets in determining net assets.
(e) Options. Options for the purchase or sale of securities listed on an exchange will in any event be valued at the representative “bid” price at the close of business on the date of determination and other options will be valued at their fair value, as determined by the General Partner. Premiums from the sale of options written by the Partnership will be included in the assets of the Partnership and the market value of such options will be included as a liability of the Partnership.
(f) Dividends. Dividends declared but not yet received, and rights in respect of securities which are quoted ex-dividend or ex-rights, will be included at the fair value thereof, less any applicable taxes thereon, as determined by the General Partner which may, but need not, be the fair market value so determined on the day the particular securities are first quoted ex-dividend or ex-rights.
(g) Cash Items. Short term money market instruments and bank deposits will be valued at cost (together with accrued and unpaid interest) or market, depending on the type of investment, as the General Partner deems appropriate.
(h) Other Assets. The value of any other Partnership assets (or the value of the assets mentioned in paragraphs (a) through (g) above in situations not covered thereby, or in the event of any other happening determined by the General Partner in its discretion to make another method of valuation advisable) will be their fair value determined in such manner as may be selected from time to time by the General Partner in its discretion.
(i) Liabilities Generally. All liabilities of the Partnership, including appropriate accruals for the Management Fee and other expenses, accruals for interest due and any reserve or reserves deemed appropriate by the General Partner, for any contingent liabilities, will be treated as liabilities of the Partnership and subtracted from total assets to determine net assets.
(j) Designated Investments. Designated Investments and other investments for which no such market prices are available will be generally carried on the books of the Partnership at fair value (which may be cost) as reasonably determined by the General Partner. If, in the opinion of the General Partner, a Designated Investment (or a portion thereof) can be fairly valued, then the Designated Investment may be deemed to have been liquidated or realized at such value. Profits and losses realized by the Partnership from the realization (including the deemed realization) of Designated Investments will be attributable solely to the Partnership Interests representing the particular Designated Investment in the year the realization or deemed realization occurs. Any Partnership expense that relates specifically to a particular Designated Investment will be charged solely to the Partnership Interests attributable to that particular Designated Investment. The determination as to whether an expense relates specifically to a particular Designated Investment will be made by the General Partner in its sole discretion.
All matters concerning the valuation of securities and other assets, the determinations of assets and liabilities, the allocation of net capital appreciation and net capital depreciation among the Partners, the allocation of related Partnership tax items among the Partners and all accounting procedures not specifically and expressly provided for by the terms of the Partnership Agreement, will be determined by the General Partner (or, in the discretion of the General Partner, the Administrator), whose determination, so long as made in good faith, will be final and conclusive as to all of the Partners. The Administrator will be entitled to rely upon the advice of the General Partner and/or other third parties and pricing sources, all to the extent the Administrator in its discretion deems appropriate. To the extent applicable to any of the foregoing, the General Partner will follow GAAP, except when it in its discretion deems the same to be inequitable or inappropriate.
Withdrawals by Partners
See “Summary – Withdrawals by Partners”
Suspension of Withdrawals
The Partnership may suspend withdrawals, or suspend or postpone the payment of any withdrawal proceeds from capital accounts, during one or more of the following circumstances: (i) one or more U.S. or foreign stock exchanges or other markets on which a significant amount of the Partnership’s investments are listed or quoted and which constitute the primary markets for such investments, are closed for any reason other than that of an ordinary holiday, or transactions at these exchanges are restricted or suspended; (ii) the existence of a war, natural catastrophe or any like state of affairs which constitutes an emergency as a result of which disposal of securities by the Partnership is not possible in an orderly manner; (iii) any means of communications or calculation necessary to determine the price or value of any of the Partnership’s investments do not function; (iv) the transfer of funds involved in the realization or acquisition of any investments is, in the judgment of the General Partner, not possible at normal rates of exchange; (v) in the event of a passing of a resolution to wind up the Partnership or of the filing of a petition to wind up the Partnership; (vi) the redemption or withdrawal of funds from the Partnership is materially restricted, impaired or delayed, including, without limitation, by reason of any of the foregoing or the applicable requirements of any regulatory authority; (vii) the requested withdrawal would result in a violation of any provision of law; or (viii) the funding of the withdrawal would have a detrimental impact on the remaining Partners. All Limited Partners will be notified of any such suspension, and the termination of any such suspension, by means of a written notice.
Side Pocket Accounts
See “Summary – Side Pocket Accounts”
The General Partner may require a Limited Partner to withdraw all or any part of his capital account from the Partnership at any time for any reason, including, without limitation, at any time after it receives notice of a Limited Partner’s desire to withdraw all or part of its capital account on a regular withdrawal date. All such required withdrawals are in the discretion of the General Partner and may be required of any one or more Limited Partners at any time.
The General Partner is not required under the Partnership Agreement to make any distributions of Net Profits. Any distribution of Net Profits is in the discretion of the General Partner and is made ratably to all Partners in accordance with their relative capital accounts at the time of such
distribution. Distributions may be in cash or in selected portfolio securities or other assets of the
Partnership, or any combination thereof, in the discretion of the General Partner.
The Partnership may acquire securities which are “new issues,” within the meaning of Financial Industry Regulatory Authority (“FINRA”) Rule 5130, as amended from time to time (the “New Issue Rule”). The Partnership Agreement provides that if both: (i) the Partnership (whether directly or indirectly) purchases securities that meet the definition of a “new issue” (“New Issue Securities”) set forth in the New Issue Rule; and (ii) the allocation of any item of cost, expense, profit, gain, income or loss with respect to such New Issue Securities (a “New Issue Item”), would result in an aggregate allocation thereof to Partners (including the General Partner) who are “restricted persons” within the meaning of the New Issue Rule (“Restricted Partners”) in excess of 10% (or such other maximum percentage then permitted by the New Issue Rule or any successor FINRA rule) of the amount of such New Issue Item allocated to all Partners; then the amount of such excess allocation shall be immediately re-allocated solely to those Partners who are not Restricted Partners in accordance with the general profit and loss allocation provisions under the Partnership Agreement.
In addition, FINRA Rule 5131 prohibits FINRA members from allocating New Issue Securities to any account in which an executive officer, a director or a person materially supported by such an executive officer or director (each, a “Covered Person”) of a public company or a non-public company meeting certain criteria (each, a “Covered Company”) has a beneficial interest, if the FINRA member has or expects to have an investment banking relationship with the Covered Company (the “Spinning Prohibition”). However, the Spinning Prohibition does not apply to certain exempted entities which include, among others, any account in which the beneficial interests of Covered Persons in respect of any particular Covered Company in the aggregate do not exceed 25% of such account. Beneficial ownership of Covered Persons associated with different Covered Companies are not aggregated for purposes of determining the 25% threshold.
In practical application, the Spinning Prohibition requires that the Partnership, if it wishes to be able to participate in New Issue Securities offerings, determine which of its Limited Partners are Covered Persons of Covered Companies and whether the Partnership is exempt from the Spinning Prohibition. Based upon such determination, the Partnership will be able to advise FINRA members to what extent it is eligible to participate in New Issue Securities. The Partnership Agreement provides that if both: (i) the Partnership purchases New Issue Securities; and (ii) the allocation of any New Issue Item would result in an aggregate allocation thereof to Partners (including the General Partner) who are (directly or indirectly) Covered Persons of a particular Covered Company in excess of 25% (or such other maximum percentage then permitted by the Spinning Prohibition or any successor FINRA rule) of the amount of such New Issue Item allocated to all Partners; then the amount of such excess allocation shall be immediately re-allocated solely to those Partners who are not (directly or indirectly) Covered Persons of the particular Covered Company (subject to the New Issue Rule restrictions described above) in accordance with the general profit and loss allocation provisions under the Partnership Agreement. The General Partner may, in its discretion and without the consent or approval of any Limited Partner, determine to modify such policy in the future to prohibit Covered Persons of Covered Companies (or Partners who are beneficially owned by Covered Persons of Covered Companies) from any such participation or to change the manner in which New Issue Securities are allocated to Covered Persons of Covered Companies (and/or Partners who are beneficially owned by Covered Persons of Covered Companies).
The Partnership Agreement may be amended at any time upon the written consent of the
General Partner and Limited Partners holding a majority in amount of the capital accounts of the Limited
Partners. In addition, the General Partner has the right, without consent or prior notice to the Limited Partners, to make certain technical amendments to the Partnership Agreement or amendments which do not adversely affect any existing Limited Partner (including without limitation amendments raising or otherwise modifying the Management Fee or Incentive Allocation rates with respect to future Limited Partners); provided, however, that without the specific consent of each Partner adversely affected thereby, no amendment may: (i) reduce the capital account of any Partner or impair his rights of withdrawal with respect thereto; (ii) change the respective liabilities of the General Partner and the Limited Partners; (iii) have the effect of allocating net profits and net losses generally other than in proportion to the respective capital account balances of the Partners, subject to the General Partner’s Incentive Allocation; or (iv) change the provisions of the Partnership Agreement regarding amendments. Prospective Limited Partners should be aware, accordingly, that other than the specific amendments enumerated above, amendments to the Partnership Agreement affecting their interests may be made without necessarily obtaining their consent.
Financial Records and Reports
The General Partner, at the Partnership’s expense, has engaged an independent certified public accounting firm to audit the annual financial statements of the Partnership. The General Partner will provide income tax information to each Limited Partner to enable it to file its federal, state and local income tax returns. Each Limited Partner will be sent the annual audited financial statements of the Partnership and annual tax information as soon as practicable after the end of each fiscal year. The General Partner will also send reports to each Limited Partner, at least quarterly, as to the Partnership’s performance.
The Partnership reserves the right to make interim reports available solely in electronic form on the web site of the Partnership, the General Partner, the Investment Manager or the Administrator.
The Partnership Agreement designates the General Partner as the “partnership representative” of the Partnership. As such, the General Partner will receive the IRS’s initial notice with respect to any Partnership administrative adjustment initiated by the IRS. Although each Limited Partner is entitled to participate in the administrative proceedings at the Partnership level, the General Partner will determine whether the Partnership, as such, will challenge any adjustment proposed by the IRS.
BROKERAGE ARRANGEMENTS; CUSTODIAN Execution of Portfolio Transactions
For the avoidance of doubt pre-IPO private shares of Portfolio Companies are generally not transacted through a broker nor held at a custodian. The pre-IPO deals are sourced through a variety of methods directly and indirectly with counterparties. A broker may be engaged in the General Partner’s discretion to trade in certain asset classes including securities for cash management purposes and to facilitate the liquidation or hedging of IPO shares after an IPO event.
The General Partner will have full investment discretion with respect to the initiation of portfolio securities transactions for the Partnership as well as full authority to select broker-dealers to execute such transactions. The Broker will have certain administrative responsibilities, including the issuance of account statements and information with respect to securities transactions effected through other broker-dealers. The Broker will be allocated a portion of the Partnership’s securities transactions, subject to principles of best execution. The Partnership is not committed to continue any brokerage relationship for any minimum period, and the General Partner, in its sole discretion, may select other or additional brokers to act as broker(s) of the Partnership at any time without notice to the Limited Partners.
The General Partner may allocate a portion of the Partnership’s brokerage business to additional brokers, other than the Broker, on the basis of certain considerations, which may include the amount of commission, quality of execution, the reputation, experience and financial stability of the broker- dealer involved and the quality of service, familiarity with the securities markets and investment techniques employed by the Partnership, research and analytic services, clearing and settlement capabilities, the availability of margin or other leverage, block positioning or other special execution capabilities or other services provided to the Partnership. In allocating brokerage to the Broker or such other broker-dealers, the commissions the Partnership will pay to such broker-dealers will not necessarily represent the lowest commission rates available, but will reflect the General Partner’s evaluation of the research and other brokerage-related services supplied by such broker-dealers and which benefit the Partnership, either alone or together with the other clients of the General Partner or its affiliates. In each case, the General Partner will make a determination that the amount of any increased commission costs on account of such research or other services is reasonable relative to the value of services so provided.
Subject to the considerations described above, the selection of a broker (including a prime broker) to execute transactions, provide financing and securities on loan, hold cash and short balances and provide other services may be influenced by, among other things, the provision by the broker-dealer of the following: capital introduction services, marketing assistance, consulting services with respect to technology, operational assistance, equipment and office space, commitment of capital, access to company management and access to deal flow. The General Partner may place transactions with a broker-dealer that (i) provides the General Partner (or an affiliate) with the opportunity to participate in capital introduction events sponsored by the broker-dealer or (ii) refers investors to the Partnership or other products advised by the General Partner (or an affiliate), if otherwise consistent with seeking best execution; provided, however, that the General Partner is not selecting the broker-dealer in recognition of the opportunity to participate in such capital introduction events or the referral of investors.
Because securities of the Partnership will generally not be held in the Partnership’s name and may not be held on a fiduciary basis or segregated from other assets of the relevant broker-dealer, a failure of the broker-dealer may put such securities at risk and is likely to have a greater adverse impact on the Partnership than if such securities were registered in the Partnership’s name.
Investors in the Partnership may include funds of funds and/or clients of investment advisers and consultants, in each case that are affiliated with broker-dealers or, possibly, brokerage firms themselves; and, such funds of funds, investment advisers and consultants may recommend to the General Partner that it direct Partnership investment transactions to such broker-dealers from time to time. The General Partner will be subject to a conflict of interest in determining whether to select such brokers-dealers to execute transactions on behalf of the Partnership.
Section 28(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), provides a “safe harbor” to investment managers who use commission dollars of their advisory accounts (so-called “soft-dollars”) to obtain investment research and brokerage services that provide lawful and appropriate assistance to the managers in performing investment decision making responsibilities, provided that the amount of any increased commission costs on account of such research or other services is reasonable relative to the value of the services so provided. Any such arrangement will be confined to products or services that qualify as “research and brokerage services” within the meaning of Section 28(e) and that meet the other requirements of that Section. The Limited Partnership Agreement contains provisions expressly authorizing the use of brokerage allocations and commissions for the purposes described above.
In general, any and all brokerage allocations are subject to principles of best execution and the other allocation policies described above, as well as any restrictions imposed by applicable law.
The research obtained through the Partnership’s brokerage allocations, whether or not directly useful to it, may be useful to the General Partner, the Investment Manager or any of their affiliates, and/or in connection with services rendered to the Partnership or to other investment vehicles or accounts managed by the General Partner, the Investment Manager or any of their affiliates. Similarly, research obtained by the General Partner, the Investment Manager or any of their affiliates for commissions paid to brokers in the course of managing other investment vehicles or accounts may be useful to the Partnership. Since any particular research obtained by the General Partner, the Investment Manager or any of their affiliates may be useful to the Partnership and such other investment vehicles or accounts, neither the General Partner nor the Investment Manager will, in considering the reasonableness of brokerage commissions paid by the Partnership, attempt to allocate the relative costs or benefits of research as among the Partnership and such other investment vehicles or accounts except in limited circumstances where appropriate.
When the Investment Manager deems the purchase and sale of securities to be in the best interest of the Partnership and any other managed investment vehicles or accounts, it may aggregate the securities to be purchased or sold in order to obtain superior execution and/or lower brokerage expenses. In particular, execution prices for identical securities purchased or sold on behalf of multiple investment vehicles or accounts in any one business day may be averaged. In such event, the General Partner and/or the Investment Manager will allocate the securities purchased or sold, as well as expenses incurred in the transaction, among the Partnership and any other participating investment vehicles or accounts by applying such considerations as they deem appropriate, including relative account size of such investment vehicles and accounts, amount of available capital, size of existing positions in the same or similar securities, impact of leverage, tax considerations and other factors. As a result of such considerations, allocations among the Partnership and such other entities and accounts will not necessarily be pro rata. The Partnership will not be entitled to investment priority over other managed investment vehicles or accounts and may not necessarily participate in every investment opportunity. The General Partner and/or the Investment Manager will endeavor to make all investment allocations in a manner that it considers to be the most equitable to all managed entities and accounts.
The Partnership’s securities transactions can be expected to generate a substantial amount of brokerage commissions and other compensation, all of which the Partnership, not the General Partner or the Investment Manager, will be obligated to pay. The General Partner and the Investment Manager will have complete discretion in deciding what brokers and dealers the Partnership will use and in negotiating the rates of compensation the Partnership will pay.
Clearing and Settlement
Clearing and settling functions normally include, among other matters, arranging for: (i) the receipt and delivery of public securities purchased, sold, borrowed and loaned; (ii) the making and receiving of payments therefore; (iii) custody of securities fully paid for or not fully paid for and, therefore compliance with margin and maintenance requirements; (iv) custody of all cash, dividends and exchanges, distributions and rights accruing to the Partnership’s account; and (v) tendering securities in connection with cash tender offers, exchange offers, mergers or other corporate reorganizations. The Partnership will initially clear and settle the liquid portion of its portfolio’s securities transactions (representing non pre- IPO shares) through Pershing. The General Partner may change its selection of a custodian at any time, in its discretion.
Custody of Assets
The General Partner will initially engage Pershing as the custodian for certain assets as described above. The General Partner may change custodians, and/or retain one or more additional custodians, in its discretion.
The Partnership expects to enter into an Administration Agreement (the “Agreement”) with Opus Fund Services (Bermuda) Ltd. (the “Administrator”). The fee payable to the Administrator will be based on its standard schedule of fees charged by the Administrator for similar services. Pursuant to the Agreement, the Administrator is responsible, subject to the overall supervision of the General Partner, for the day-to-day administration of the Partnership, including:
(i) calculating the net asset value of each such Partnership in accordance with that
Partnership’s valuation policies and procedures;
(ii) providing registrar and transfer agency services in connection with the issuance and transfer of Interests;
(iii) performing the required acts relating to the redemption and/or subscription for the
(iv) processing capital calls and distributions;
(v) furnishing periodic investor statements to the investors;
(vi) performing due diligence on prospective investors as required and ensuring
compliance with applicable anti-money laundering laws; and
(vii) performing certain other administrative and clerical services in connection with the administration of each Partnership as agreed among those funds and the Administrator.
The Administrator has delegated certain duties under the Agreement to its affiliate, Opus Fund Services (USA) LLC (the “Sub-Administrator”). Unless otherwise indicated, references in this Private Placement Memorandum to the Administrator shall include the Sub-Administrator.
Under the Agreement, the Partnership will indemnify and hold harmless the Administrator and each of its affiliates, directors, officers, employees, permitted delegates and sub-delegates, agents or shareholders or any of them (together “Indemnified Parties”) against any liabilities, obligations, losses, damages, penalties, actions, judgments, claims, demands, suits, costs, expenses or disbursements of any kind which may be imposed on, incurred by or asserted against any Indemnified Parties in connection with their services to that fund, except that no Indemnified Party will be indemnified against any liability to which it would be subject by reason of its gross negligence, willful misconduct or fraud. In addition, in the absence of gross negligence, willful misconduct or fraud by any of the Indemnified Parties, no such party will be liable for any loss or damage that a Partnership may suffer on account of anything done, omitted or suffered by that party in good faith in providing services to that Partnership.
THE ADMINISTRATOR IN NO WAY ACTS AS GUARANTOR OR OFFEROR OF THE INTERESTS OR ANY UNDERLYING INVESTMENT, NOR IS IT RESPONSIBLE FOR THE ACTIONS OF THE PARTNERSHIP’S CUSTODIANS OR BROKERS. THE ADMINISTRATOR IS NOT RESPONSIBLE FOR ANY INVESTMENT DECISIONS OF THE PARTNERSHIP (ALL OF WHICH WILL BE MADE BY THE INVESTMENT ADVISER). THE ADMINISTRATOR WILL NOT PROVIDE ANY INVESTMENT ADVISORY OR MANAGEMENT SERVICE TO THE PARTNERSHIP AND THEREFORE WILL NOT BE IN ANY WAY RESPONSIBLE FOR THE PARTNERSHIP’S PERFORMANCE. THE ADMINISTRATOR WILL NOT BE RESPONSIBLE FOR MONITORING ANY INVESTMENT RESTRICTIONS OR COMPLIANCE WITH THE INVESTMENT RESTRICTIONS AND THEREFORE WILL NOT BE LIABLE FOR ANY BREACH THEREOF.
CERTAIN TAX CONSIDERATIONS
Federal Income Taxes
The Partnership’s Status. For federal income tax purposes, the Partnership will be classified as a disregarded entity if it has only one member and as a partnership if it has at least two members. If and when the Partnership is classified as a partnership, the Partnership, does not intend it will be a “publicly traded partnership” that is treated as a corporation for federal income tax purposes.
Section 7704 of the Code provides that a “publicly traded partnership” shall be treated as a corporation for federal income tax purposes, subject to certain exceptions, and defines a “publicly traded partnership” as any partnership whose partnership interests therein are “traded on an established securities market” or are “readily tradable on a secondary market (or the substantial equivalent thereof).” A publicly traded partnership will not be treated as a corporation if 90% or more of its gross income for a taxable year consists of “qualifying income,” which generally includes dividends, interest and gain from the disposition of a capital asset (such as stock). The Partnership expects that most of its gross income will constitute “qualifying income.” Moreover, the Partnership may, if necessary to ensure that the Partnership will not be treated as publicly traded partnerships, (a) limit its investments to investment vehicles that it believes are reasonably certain to generate gross income that will satisfy the qualifying income safe harbor (as it shall then exist) and/or (b) take such steps as may be reasonably necessary or appropriate to ensure that the Partnership Interests will not be deemed to be “traded on an established securities market” or “readily tradable on a secondary market (or the substantial equivalent thereof),” which steps may include limiting the number of investors in the Partnership to 100 (determined as provided in Regulations that have been promulgated by the Treasury Department under Section 7704 of the Code), limiting the right of investors to withdraw their Partnership Interests or requiring the withdrawal of Partnership Interests by investors. If the Partnership were treated as an association taxable as a corporation for any taxable year, the after-tax returns from an investment in the Partnership could be materially reduced.
Except as otherwise specifically provided herein, the following discussion assumes that the Partnership has at least two members and that the Partnership is treated as a partnership for U.S. federal income tax purposes.
Taxation of Operations. As an entity treated as a partnership, the Partnership will not pay U.S. federal income taxes. Each Limited Partner’s distributive share of the income of the Partnership will pass through the Partnership to each Limited Partner, and each Limited Partner will be required to report its distributive share (whether or not distributed) of the Partnership’s income, gain, losses, deductions and credits. Thus, a Limited Partner’s tax liability may exceed the cash distributed to him in a particular year unless the Limited Partner requests a partial withdrawal of his Partnership Interest in order to obtain cash to pay taxes attributable to such Partnership Interest.
The Partnership may invest its assets in a variety of investments, including debt and equity securities of non-U.S. corporations, and may utilize a variety of investment techniques, including short sales, straddles, wash sales and currency trading. As a consequence, investors in the Partnership should anticipate that the Partnership may be deemed to have realized taxable income without any receipt of cash, that a substantial portion of the income of the Partnership may consist of interest, dividends (only a portion of which may be qualified dividend income (see below)) and other ordinary income, and that a substantial portion of any capital gains or losses that might be realized by the Partnership may be treated as short-term capital gains or losses.
Tax Allocations of Profits or Losses. Under the Partnership Agreement, if a Limited
Partner withdraws all or a portion of its Partnership Interest during or as of the end of a Fiscal Year (and
such withdrawal is paid to the Partner in cash), the General Partner in its discretion may make a special allocation to such Limited Partner of the Partnership’s ordinary income and/or capital gain and deductions, ordinary loss and/or capital loss in such a manner as will reduce the amount, if any, by which the amount withdrawn by such Limited Partner exceeds, or is less than, as the case may be, such Limited Partner’s federal income tax basis in its interest in the Partnership before such allocation. Any ordinary income, capital gain, deductions, ordinary loss and/or capital loss not so allocated will be allocated, to the extent practicable, to all Limited Partners in the same manner as the correlative amounts had been allocated for book purposes in the current or prior fiscal years. No assurance can be given that the Internal Revenue Service (the “Service”) will not challenge such allocations. If the allocations provided by the Partnership Agreement were not respected for federal income tax purposes, the amount of taxable income or loss allocated to a Partner under the Partnership Agreement might be increased or decreased.
Tax Rates. Short-term capital gains, dividend income (other than qualified dividend income) and taxable interest income are currently taxed at a maximum marginal rate of 37.0%. Long-term capital gains, and qualified dividend income received by taxpayers other than corporations, are generally taxed at lower rates, as described below. For a taxpayer other than a corporation, a net capital loss also may be used to offset ordinary income up to $3,000 per year, and the unused portion of such loss may be carried forward indefinitely, but, subject to certain exceptions, generally may not be carried back. A net capital loss allocated to a Limited Partner may be used to offset other capital gains.
The maximum tax rate on net capital gains (i.e., the excess of net long-term capital gain for most capital assets held over one year over net short-term capital loss) and qualified dividend income is generally 20% for taxpayers other than corporations. Qualified dividend income generally includes dividend income from corporations organized in the United States and from non-U.S. corporations that are either organized within a United States possession or organized in nations that have a comprehensive tax treaty with the United States. In addition, dividends paid by a non-U.S. corporation in respect of stock that is traded on an established U.S. securities market are eligible for the 20% rate. There are a number of exceptions and qualifications to the general rules regarding eligibility for the 20% rate on qualified dividend income. For example, in order to qualify for the reduced rate of 20%, the recipient of dividends must have held the security on which the dividends are paid for at least sixty-one days during the 121-day period beginning sixty days prior to the ex-dividend date.
In addition, the Healthcare and Education Reconciliation Act (the “Reconciliation Act”), which modifies the Patient Protection and Affordable Care Act (PL 111-148). The Reconciliation Act imposes a 3.8% tax on certain net investment income of individuals. The 3.8% tax is in addition to any other applicable taxes. The Reconciliation Act defines net investment income to include gross income from interest, dividends, annuities, royalties and rents (other than such income derived from an active trade or business), gross income from a trade or business that is not considered to be active (e.g., the trade or business is a passive activity within the meaning of Code Section 469 or is trading in financial instruments or commodities), and net gain attributable to the disposition of property other than property held in an active trade or business, in each case less any deductions properly allocable to such gross income or net gain.
Limitation on Allowable Losses and Deductions. The Partnership will be required to make a determination each year as to whether, and to what extent it should take the position that it is, for federal income tax purposes, (a) a trader in securities or, alternatively, (b) an investor in securities.
If the Partnership is properly characterized as a trader, the expenses of the Partnership (other than investment interest expense) will be deducted by the Partnership as business expenses under Section 162 of the Code and thus taken into account in the determination of the net income or loss allocated to the Limited Partners.
If, however, the Partnership is characterized as an investor, expenses associated with the Partnership’s investment activity (other than investment interest expense) should be separately stated by the Partnership, and each Limited Partner who is an individual should be entitled to deduct his share of such expenses under Section 212 of the Code. Deductions under Section 212 of the Code constitute “miscellaneous itemized deductions” under Section 67 of the Code and would only be deductible to the extent that the taxpayer’s allocable share of such expenses, together with the taxpayer’s other miscellaneous itemized deductions, exceeded, in the aggregate, 2% of the taxpayer’s adjusted gross income. Such deductions would also not be given effect in calculating a Limited Partner’s alternative minimum tax liability. In addition, Section 68 of the Code reduces the amount of itemized deductions otherwise allowable to non-corporate taxpayers; the amount disallowed varies based on the taxpayer’s adjusted gross income.
Under Section 163(d) of the Code, a non-corporate taxpayer’s deduction for investment interest (including his allocable share of a partnership’s investment interest) is limited to the amount of his net investment income (including his allocable share of a partnership’s net investment income). Investment interest deductions that are disallowed by reason of such limitation may be carried forward to subsequent years, subject to the same limitation. Investment interest includes deductible interest and short sale expenses on indebtedness that is properly allocable to property held for investment. Net investment income is generally defined as the ordinary income and net gain from property held for investment less deductible investment expenses (other than interest or short sale expenses) directly connected with producing such income or gain. However, “net investment income” does not include long term capital gains or qualified dividend income unless the taxpayer elects to pay tax on such amounts at ordinary income rates. A limited partner’s distributive share of partnership interest expense allocable to an active trade or business of securities trading is subject to the limitations of Code Section 163(d), notwithstanding the general deductibility of trade or business expenses under Code Section 162.1 It is expected that some or all of the interest paid by a non-corporate taxpayer on indebtedness incurred to purchase Partnership Interests will be considered “investment interest.” However, the rules for determining the extent to which such interest will be considered “investment interest” are quite complicated, and non-corporate investors should consult their tax advisors with respect to the effect of the investment interest limitation as applied to their particular situations.
The Partnership expects that any losses attributable to the Partnership will not constitute “passive” losses for purposes of the “passive loss” rules of Section 469 of the Code, and that, therefore, the deduction of such losses by a Limited Partner will not be restricted under Section 469. A Limited Partner’s ability to use its losses will be further limited by rules limiting deductions to amounts “at-risk” in an investment and by rules limiting deductions to the amount of the Limited Partner’s basis in his Partnership Interest. If a Limited Partner is limited in his use of his deductions by either the “at-risk” or basis limitation rules, the Limited Partner will be entitled to utilize the deductions in succeeding years to the extent that there is an increase in the Limited Partner’s basis in his Partnership Interest or, as applicable, in the amount such Limited Partner has “at-risk” in the Partnership.
Basis in Partnership Interest. A Limited Partner’s basis for his Partnership Interest in the Partnership is relevant for determining, among other things, the deductibility of the Limited Partner’s share of losses and for computing gain or loss, if any, which the Limited Partner will recognize upon a taxable transfer of his Partnership Interest and upon receipt of certain distributions. Generally, the tax basis of a Limited Partner’s Partnership Interest is equal to the amount of money plus the tax basis of other property contributed to the Partnership by the Limited Partner to purchase the Partnership Interest (a) increased by (i) any additional capital contributions made by the Limited Partner to the Partnership, (ii) the Limited Partner’s allocable share of the income of the Partnership and (iii) the Limited Partner’s share of liabilities (if any) to which the Partnership’ assets are subject, and (b) reduced (but not below zero) by (i) distributions
1 See Rev. Rul. 2008-12, 2008-10 I.R.B. amplified by Rev. Rul. 2008-38, 2008-51 I.R.B.
made by the Partnership to the Limited Partner and (ii) the Limited Partner’s share of deductions and losses of the Partnership.
Distributions and Withdrawals. A Limited Partner will recognize gain upon the receipt of cash distributions from the Partnership (including distributions made in connection with a whole or partial redemption of a Limited Partner’s Partnership Interest), if, and to the extent that, the amount of cash received by the Limited Partner exceeds the Limited Partner’s adjusted tax basis in his Partnership Interest. By contrast, a Limited Partner generally will not recognize gain or loss on the distribution by the Partnership of property other than cash. However, under certain circumstances the distribution of marketable securities can be treated as a distribution of cash in an amount up to the fair market value of such securities for purposes of determining whether a Limited Partner recognizes gain on such distributions. Marketable securities distributed by an “investment partnership” to an “eligible partner” are not treated as cash. The Partnership expects that it will be treated as an “investment partnership” and that the Limited Partners will be treated as “eligible partners.” However, there is relatively little guidance as to the meaning of such terms. Accordingly, if, contrary to current expectations, the Partnership is not treated as an “investment partnership” or a Limited Partner is not treated as an “eligible partner,” an in-kind distribution of marketable securities to a Limited Partner could result in the recognition of gain by such Limited Partner. It is not anticipated that the Partnership will make in-kind distributions except in unusual circumstances.
Notwithstanding the foregoing, a Limited Partner will recognize ordinary income if and to the extent that a distribution of cash or other property results in a reduction of the Limited Partner’s share of the unrealized appreciation of “inventory items which have appreciated substantially in value” and/or of the unrealized income attributable to “unrealized receivables,” each as defined in Section 751 of the Code, that are held directly or indirectly by the Partnership. For these purposes, certain securities held by the Partnership may be treated as “unrealized receivables”, with respect to which a withdrawing Limited Partner may recognize ordinary income.
Long-term and Short-term Capital Gains and Losses; Division of Holding Period. Gain or loss recognized in connection with a distribution made upon the withdrawal of a Partnership Interest by a Limited Partner who is not a “dealer” in securities and who has held such Partnership Interest for more than 12 months generally will be long-term capital gain or loss. However, to the extent that income is disproportionately allocated to a withdrawing Limited Partner (see “Tax Allocations of Profits or Losses”), gain will not be recognized in connection with the distribution. In addition, if a Limited Partner acquired its Partnership Interest over a period of time, or if a Limited Partner acquired its Partnership Interest in exchange for properties as to which the Limited Partner had different holding periods, then the holding period for the Limited Partner’s Partnership Interest generally will be divided on the basis of the value of the portions thereof that were acquired at different times or were acquired in exchange for properties with different holding periods, and the gain or loss recognized, if any, will be divided as between long-term and short-term in a like manner.
Alternative Minimum Tax. Depending on a Limited Partner’s own tax situation, an investment in the Partnership could create or increase such investor’s liability under the alternative minimum tax provisions applicable to corporations or individuals, as the case may be. Prospective investors are urged to consult their tax advisors in this regard.
Section 1256 Contracts. The Partnership may invest in certain options contracts described in Section 1256 of the Code (“Section 1256 Contracts”), which must be marked-to-market on an annual basis. Such mark-to-market gain or loss will be 60% long-term and 40% short term capital gain or loss, provided however, that the Partnership may be required to defer the recognition of losses on such Section
1256 Contracts to the extent of any unrecognized gains on offsetting positions in non-Section 1256
Contracts held by the Partnership.
Investments in Non-U.S. Corporations. Pursuant to various “anti-deferral” and “anti- conversion” provisions of the Code (the “Subpart F” and “passive foreign investment company” provisions), investments (if any) by the Partnership in certain foreign corporations may cause a Limited Partner to (i) recognize taxable income prior to the Partnership’s receipt of distributable proceeds, (ii) pay an interest charge on receipts that are deemed as having been deferred or (iii) recognize ordinary income that, but for the “anti-deferral” provisions, would have been treated as long-term or short-term capital gain.
Other Possible Tax Consequences to Investors. Prospective investors should also be aware that the Service may challenge the Partnership’s entity classification, its treatment of items of income, gain, loss, deduction and credit (including, without limitation, various fees and expenses payable directly or indirectly by the Partnership), or its characterization of the Partnership’s transactions, and that any such challenge, if successful, could result in the imposition of additional taxes, penalties and interest charges.
Possible Legislative or Other Actions Affecting Tax Aspects. Prospective investors should recognize that the present U.S. federal income tax treatment of an investment in the Partnership may be modified by legislative, judicial or administrative action at any time and that any such action may affect investments and commitments previously made. The rules dealing with U.S. federal income taxation are constantly under review by persons involved in the legislative process and by the Service and the Treasury Department, resulting in revisions of regulations and revised interpretations of established concepts as well as statutory changes. Also, many provisions of current law will expire by their terms in later years. Revisions in U.S. federal income tax laws and interpretations thereof, and the scheduled expiration of certain provisions of current law, could adversely affect the tax aspects of an investment in the Partnership.
Tax Returns, Tax Information and Penalties. U.S. federal income tax returns will be filed on an accrual basis for the Partnership. The Partnership will endeavor to provide to the Limited Partners U.S. tax information by April 15 of each year but cannot guarantee that it will be able to do so by that date. Preliminary tax estimates, based upon the available information, will be provided on a timely basis, however, in order to facilitate the making of appropriate estimated tax payments by Limited Partners.
The Code imposes certain penalties on partnerships and partners in the event of failure to make various filings in a timely manner and in the event of various understatements of income tax. The General Partner intends to cause the Partnership to fully comply with all of its applicable filing and reporting requirements.
The foregoing discussion is only a brief summary of certain information reporting requirements. Substantial penalties may apply if the required reports are not made on time. Prospective investors and Limited Partners are strongly urged to consult their own tax advisors concerning these reporting requirements as they relate to their investment in the Partnership.
Partnership Representative. In the event that the Service initiates an audit or other proceeding with regard to the Partnership, the Code provides, in general, that the tax treatment of items of partnership income, gain, loss, deduction and credit will be determined at the partnership level in a single partnership proceeding as to which the “partnership representative” (the “Partnership Representative”) will have substantial administrative responsibilities and authority. The General Partner has been designated as the Partnership Representative for the Partnership. The Partnership Representative (or certain other partners) may generally seek judicial review of a partnership adjustment, but there will be only one action for judicial review by which each partner will be bound. Any costs incurred by the Partnership in connection with an audit or any related judicial or administrative proceeding could reduce any anticipated yield on an investment in the Partnership. In addition, the Code provides, in general, that: (a) a partner must report a partnership item consistent with its treatment on the partnership return, unless the partner files a statement which identifies the inconsistency, and (b) the statute of limitations for adjustment of tax with respect to partnership items under the partnership level proceedings will generally be three years from the
date of filing (or, if later, the last date for filing) the partnership return. The period of limitations may be extended by the Partnership Representative or another person authorized by the Partnership.
Election to Adjust Basis of Partnership Assets. Under the Partnership Agreement and Section 754 of the Code, the General Partner has the authority to elect to adjust the basis of the Partnership’s assets in connection with certain distributions to investors or certain transfers of Partnership Interests. In certain circumstances, such basis adjustments are required by the Code. Any such basis adjustment could affect the amount of a Limited Partner’s distributive share of gain or loss recognized by the Partnership on a disposition of its assets. The General Partner has no present intention of making such an election; however, the General Partner reserves the right to make this election in its discretion.
Mark-to-Market Election. If properly characterized as a trader in securities and/or commodities, the Partnership may elect to report its income from sales of securities and commodities on a “mark-to-market” basis for U.S. federal income tax purposes. Under this accounting method, (a) gains or losses recognized by the Partnership upon an actual disposition of securities and commodities are treated as ordinary income or loss, and (b) any securities and commodities held by the Partnership on the last day of its taxable year are treated as if they had been sold by the Partnership on such date at their fair market value, and gains or losses realized upon such deemed sales will be treated as ordinary income or loss. For purposes of measuring gain or loss with respect to any such security or commodity in a subsequent year, the amount of any gain or loss previously recognized under mark-to-market accounting is taken into account in determining the Partnership’s tax basis for the security or commodity. Each Limited Partner’s proportionate share of such actual or deemed gains or losses will flow through to the Limited Partner.
Tax-Exempt Investors. Generally, qualifying tax-exempt organizations, including pension and profit-sharing plans, are exempt from U.S. federal income taxation. This general exemption from tax does not apply to the “unrelated business taxable income” (“UBTI”) of a tax-exempt organization. UBTI includes “unrelated debt-financed income,” which, for any taxable year, generally consists of (i) income derived by a tax-exempt organization (directly or through a partnership) from income-producing property with respect to which there is “acquisition indebtedness” at any time during the taxable year and (ii) gains derived by a tax-exempt organization (directly or through a partnership) from the disposition of property with respect to which there is “acquisition indebtedness” at any time during the twelve-month period ending with the date of such disposition. Because the Partnership will engage in leveraged trading, a tax-exempt investor that is a Limited Partner may be required to report a substantial portion of any income or gain from such trading as UBTI.
It is possible that the Service could assert that the amount of “unrelated debt-financed income” allocable to a tax-exempt investor that is a Limited Partner exceeds the amount of net income allocable to such investor if a substantial portion of the trading activities of the Partnership were be debt-financed, and losses on other trading might not be allowed to offset gains on debt-financed trading.
Any tax-exempt investor that is a charitable remainder unitrust or a charitable remainder annuity trust should also be aware that any portion of its income that is determined to be UBTI will be subject to an excise tax in an amount equal to the entire amount of such UBTI.
TAX–EXEMPT INVESTORS THAT ARE LIMITED PARTNERS ARE URGED TO CONSULT THEIR ADVISORS WITH RESPECT TO THE CONSEQUENCES OF AN INVESTMENT IN THE PARTNERSHIP.
Non-U.S. Investors. A non-U.S. person considering acquiring an Interest in the Partnership should consult his or its own tax advisers as to the federal, state and local tax consequences of an investment in the Partnership, as well as with respect to the treatment of income or gain received from the Partnership under the laws of his or its country of citizenship, residence or incorporation. The federal income tax
treatment of a foreign investor in the Partnership will depend on whether that investor is found, for federal income tax purposes, to be engaged in a trade or business in the United States as a result of its investment in the Partnership. Generally, an investor would be deemed to be engaged in a trade or business in the United States, and would be required to file a U.S. tax return (and possibly one or more state or local returns) if the Partnership were so engaged.
The Partnership believes that it will not be deemed to be engaged in a trade or business by reason of its investment activities. However, because the resolution of this issue will depend on the specific activities of the Partnership, there can be no assurance in this regard. If the Partnership were deemed to be engaged in a trade or business, each non-U.S. investor’s allocable share of the income of the Partnership that is treated as effectively connected with such trade or business (“ECI”) would be subject to net basis U.S. federal income tax, and in the case of a non-U.S. investor that is a corporation, a “branch profits” tax at a rate of 30% (or, possibly, a reduced rate under an applicable U.S. income tax treaty). The Partnership would be required to withhold U.S. income tax on each non-U.S. investors’ allocable share of such effectively connected income at the maximum marginal rate applicable to individuals or corporations, as appropriate. If the amount of such withholding tax exceeded such non-U.S. investor’s total U.S. federal income tax liability, such non-U.S. investor would be entitled to claim a refund of such excess upon filing a timely U.S. federal income tax return.
In order to avoid earning ECI, the Partnership may take advantage of a safe harbor provided by Section 864(b)(2) of the Code (the “Safe Harbor”). Under the Safe Harbor, a taxpayer (other than a dealer in securities) will not be deemed to be engaged in a U.S. trade or business solely because it trades in stock or securities (including contracts or options to buy or sell securities) for its own account. In addition, under the Safe Harbor, a taxpayer (other than a dealer in commodities) will not be deemed to be engaged in a U.S. trade or business solely because it trades in commodities for its own account provided that “the commodities are of a kind customarily dealt in on an organized commodity exchange and . . . the transactions are of a kind customarily consummated at such place.”
When a non-U.S. person receives income from a U.S. source that is not connected with the conduct of a trade or business in the United States, certain categories of such income (the broadest and most important of which is “fixed or determinable annual or periodical gains, profits, and income” from a U.S. source (“FDAP Income”)) are subject to a withholding tax at a flat rate of 30% (or lower tax treaty rate) imposed on a gross basis. FDAP Income is generally defined as income of a fixed or determinable annual or periodical nature, such as dividends and certain interest income. It is not possible to predict whether, or to what extent, if any, a tax treaty might eliminate or reduce this withholding tax with respect to any particular investor.
Certain types of income are specifically exempted from the 30% tax and thus withholding is not required on payments of such income to a non-U.S. company. The 30% tax is not imposed on U.S. source capital gains (whether long- or short-term), on interest paid to a non-U.S. corporation on its deposits with U.S. banks or on interest which qualifies as portfolio interest. The term “portfolio interest” generally includes interest on an obligation in registered form which has been issued after July 18, 1984 and with respect to which the person who would otherwise be required to deduct and withhold the 30% tax receives the required statement that the beneficial owner of the obligation is not a U.S. person within the meaning of the Code.
Interest received by a person who is or is deemed to be a 10% owner of the issuer of the obligation is not considered portfolio interest.
The Partnership will be required to withhold on the amount of gain realized, directly or indirectly, on the disposition of a “U.S. real property interest” (which includes stock of certain corporations)
included in the distributive share of a non-U.S. investor, generally at the maximum marginal rate applicable to individuals or corporations, as appropriate, and such investor will be required to file a U.S. federal income tax return reporting such gain and paying any remaining tax due.
The Foreign Account Tax Compliance Act (“FATCA”) provisions of the Hiring Incentives to Restore Employment Act (PL 111-147), (the “HIRE Act”), impose information reporting obligations on certain non-U.S. entities which are “foreign financial institutions” or “non-financial foreign entities” as such terms are defined by FATCA. These additional obligations do not apply to non-U.S. individuals. Failure of a “foreign financial institution” or “non-financial foreign entity” to comply with the new information reporting obligations could result in the imposition of a 30% withholding tax on such foreign investor’s distributive share of certain U.S. source income of the Partnership (including FDAP Income, portfolio interest and, the gross proceeds of dispositions of certain capital assets).
The identity of a foreign investor may be disclosed on the Partnership’s U.S. tax return. In addition, foreign investors may have to supply certain beneficial ownership certificates to the Partnership (which would be available to the Service) in order to obtain reductions in U.S. withholding tax, to the extent applicable.
Non-U.S. investors are strongly urged to consult their own tax advisors concerning the U.S. federal income tax consequences of making an investment in the Partnership in light of their own particular circumstances.
U.S. State and Local Taxes
In addition to the U.S. federal income tax aspects described above, prospective purchasers of Partnership Interests should consider, and consult their own tax advisors concerning, the effects of state and local taxation on an investment in the Partnership. In this connection, it should be noted that a Limited Partner’s distributive share of the taxable income or loss of the Partnership may be taxable by the state or locality in which such Limited Partner is a resident.
Federal Estate and Gift Taxation
Although the foregoing material is intended to summarize only certain significant U.S. federal income tax consequences of an investment in the Partnership, each prospective investor should be aware that U.S. federal and state estate and gift tax law may apply as well. Since the tax consequences of any gift or transfer may depend upon the particular circumstances and upon the individuals or organization involved in the transaction, a prospective investor should consult with tax counsel as to the consequences of a gift or the investor’s death while owning an Partnership Interest.
Taxation of the Partnership by Other Jurisdictions
Interest, dividend and other income realized by the Partnership from non-U.S. sources, and capital gains realized on the sale of securities of non-U.S. issuers, may be subject to withholding and other taxes levied by the jurisdiction in which the income is sourced. It is impossible to predict the rate of foreign tax the Partnership will pay since the amount of the assets to be invested in various countries and the ability of the Partnership to reduce such taxes, are not known.
Limited Partners will be informed by the Partnership as to their proportionate share of the foreign taxes paid by the Partnership. Limited Partners may be entitled to claim either a credit (subject to various limitations and restrictions) or, if they itemize their deductions, a deduction (subject to the
limitations generally applicable to deductions) for their share of such foreign taxes in computing their federal income taxes. Since the availability of a credit or deduction depends on the particular circumstances of each investor, prospective investors are advised to consult their own tax advisers regarding the availability of credits or deductions.
CERTAIN ERISA CONSIDERATIONS
Fiduciaries of benefit plan investors, as defined in Section 3(42) of ERISA (“Benefit Plan Investors”)2, including U.S. pension plans and individual retirement accounts, in consultation with their advisors, should carefully consider the impact of ERISA, the Code and the regulations, rules, procedures and judicial decisions thereunder on an investment in the Partnership. Among other matters, a fiduciary of a Benefit Plan Investor should consider (a) whether the investment is prudent and in accordance with the documents and instruments governing such Benefit Plan Investor; (b) the composition of the Benefit Plan Investor’s portfolio with respect to diversification; (c) the cash flow needs of the Benefit Plan Investor and the effect thereon of the illiquidity of the investment; (d) the Benefit Plan Investor’s funding objectives; (e) the tax effects of the investment described in this Memorandum under “Certain Tax Considerations”; (f) the fact that the investors may consist of a diverse group of investors and that the Partnership will not take the particular objectives of any investor or class of investors into account; (g) the risks of an investment in the Partnership discussed in this Memorandum under “Risk Factors”; and (h) the fact that, as discussed below, it is expected that the investment by Benefit Plan Investors will not be sufficient to cause the Partnership to be deemed to be holding plan assets and, therefore, that none of the Partnership, the Investment Manager, the General Partner or any of their respective principals, employees, affiliates, agents or consultants will be acting as a fiduciary under ERISA or the Code with respect to the Benefit Plan Investor, either with respect to the Benefit Plan Investor’s purchase or retention of its investment or with respect to the management of the business and investments of the Partnership. None of the Partnership, the Investment Manager, the General Partner or any of their respective principals, employees, affiliates, agents or consultants makes any representation with respect to whether an investment in Partnership Interests would be a suitable investment for any Benefit Plan Investor.
As discussed below, it is expected that the Partnership will not be deemed to hold plan assets under its current structure. If, however, the Partnership were deemed to hold plan assets, ERISA’s prudence and other fiduciary standards (and/or comparable provisions of the Code) would apply to, and might materially affect, the operations of the Partnership. Furthermore, any transaction involving the Partnership would be deemed to be a transaction with each Benefit Plan Investor that was an investor in the Partnership, and the General Partner and the Investment Manager would be fiduciaries of each such Benefit Plan Investor under ERISA and/or the Code. Such treatment would subject the actions of the Partnership to the conflict of interest and other restrictions applicable to fiduciaries under ERISA and/or the Code. In addition, unless an administrative exemption were available, such treatment would generally prohibit the Partnership from entering into transactions with parties in interest to any of the Benefit Plan Investors.
2 For purposes of Section 3(42), the term “benefit plan investor” means “an employee benefit plan subject to part 4 [of Title I of ERISA], any plan to which section 4975 of the [Code] applies, and any entity whose underlying assets include plan assets by reason of a plan’s investment in such entity.” The term “benefit plan investor” includes, therefore, but is not limited to, employee pension benefit plans and employee welfare plans maintained by U.S. domestic companies, 401(k) plans, individual retirement accounts, medical benefit plans and education savings accounts. The term does not include (a) a governmental plan (as defined in Section 3(32) of ERISA), (b) a foreign employee benefit plan, but only if such plan is maintained outside of the United States primarily for the benefit of persons substantially all of whom are neither citizens of nor residents in the United States, and (c) a church plan (as defined in Section 3(33) of ERISA), but only if no election has been made under Code Section 410(d).
If the Partnership were deemed to hold plan assets and any actions of the Partnership were deemed to constitute a breach of fiduciary duty, then other fiduciaries, including fiduciaries of the Benefit Plan Investors which purchase Partnership Interests, could be held liable, either directly or as co-fiduciaries of the Partnership, if, for example, such fiduciaries had knowledge of the breach or failed to act in accordance with the standards of care applicable to fiduciaries under ERISA and/or the Code in causing the Benefit Plan Investor to invest in the Partnership. In addition, if the Partnership were deemed to hold plan assets, individual retirement account investors could lose their tax-exempt status under Section 408(e)(2) of the Code if the Partnership engaged in certain transactions with the individual retirement account beneficiaries.
Pursuant to Section 3(42) of ERISA and U.S. Department of Labor Regulations Section
2510.3-101, the assets of an entity, such as the Partnership, will not be treated as plan assets for purposes of ERISA and/or the Code if less than 25% of the total value of each class of equity interest in such entity
is held by Benefit Plan Investors (excluding, for purposes of calculating such 25% threshold, the value of any equity interest held by a person (other than such a Benefit Plan Investor) who has discretionary authority
or control with respect to the assets of the entity or any person who provides investment advice for a fee
(direct or indirect) with respect to such assets, or any affiliate of such a person).
No Benefit Plan Investor may acquire, without the consent of the General Partner, Partnership Interests if after giving effect thereto the assets of the Partnership would be plan assets for the purposes of ERISA. In addition, if the Partnership concludes that it is probable that the continuation of any Benefit Plan Investor as an investor in the Partnership would result in all or any portion of the assets of the Partnership being deemed to constitute plan assets of such investors for the purposes of ERISA and/or the Code, the Partnership may take such actions as it deems necessary or appropriate to mitigate, prevent or cure such adverse consequences, taking into account the interests of all investors and of the Partnership as a whole. Such actions may include, in the Partnership’s discretion, causing an immediate withdrawal of some or all of any Benefit Plan Investor’s Partnership Interests.
RESTRICTIONS ON TRANSFER
A Limited Partner may not transfer or assign his Partnership Interest without the prior written consent of the General Partner, which consent is in the General Partner’s discretion. A transferee of all or any part of a Limited Partner’s Interest will become a substitute Limited Partner only with the consent of the General Partner and only upon compliance with all applicable provisions of law.
The death, incompetence or dissolution of a Limited Partner will not terminate the Partnership, but such Limited Partner’s share of Partnership profits and losses and his obligations under the Partnership Agreement will devolve on such Limited Partner’s representatives. Such representatives or their assignee may become a Limited Partner only with the written consent of the General Partner.
The Partnership Interests have not been registered under the Securities Act. The Partnership Interests are being offered and will be sold in the absence of such registration by reason of an exemption under Section 4(a)(2) of the Securities Act and Regulation D promulgated thereunder. The Limited Partners have not been, and will not be, granted the right to require the registration of the Partnership Interests, and, the Partnership has no intention to so register the Partnership Interests.
The availability of the foregoing exemption from registration under the Securities Act is dependent, in part, upon the financial status of each Limited Partner and the suitability of such an investment for him/her. Accordingly, each subscriber of Partnership Interests is required to make certain representations and warranties to the General Partner and the Partnership and to agree to indemnify, hold harmless and pay all judgments and claims against the General Partner or any of its affiliates for any liability
incurred as a result of any misrepresentation or any warranty not performed by the subscriber. Each subscriber’s attention is directed to the Subscription Agreement, a copy of which is attached as Exhibit B to this Memorandum, for a complete description of these warranties and representations.
ANTI-MONEY LAUNDERING LAWS AND PROGRAMS
In the event that the General Partner/Administrator determines, in its discretion, that verification of identity of an existing or prospective Limited Partner or the identification of the source of the Limited Partner’s funds is required by applicable anti-money laundering laws, anti-terrorist financing laws, or other regulatory requirements or any anti-money laundering program established by the General Partner/Administrator or the Partnership, the Limited Partner will be required to provide the General Partner/Administrator with all requested information and documentation. By way of example, an individual may be required to produce, among other things, a copy of a passport or identification card duly certified by a public authority such as a notary public, the police or the ambassador in his country of residence, together with evidence of his address such as a utility bill or bank statement. In the case of corporate applicants, production of a certified copy of charter documentation, as well as the names and addresses of all directors, officers and/or beneficial owners may be required. This may result in Partnership Interests being issued on a date subsequent to the issuance date on which an investor initially wished to have Partnership Interests issued to him/her. Furthermore, the General Partner or the Administrator on behalf of the General Partner may, in its discretion, effect a mandatory withdrawal of a Limited Partner, or reject a subscription for Partnership Interests by an investor, in the event that the General Partner/Administrator does not receive satisfactory information or documentation, or if the General Partner/Administrator believes that it would be a violation of applicable laws or an established anti-money laundering program for such person to remain a Limited Partner or be admitted to the Partnership, as applicable.
Obtaining Investor Information
The Partnership/Administrator obtains personal information about its investors primarily through the following sources: (i) subscription forms, investor questionnaires and other information provided by the investor in writing, in person, by telephone, electronically or by any other means, which information includes name, address, nationality, tax identification number, and financial and investment qualifications; and (ii) transactions within the Partnership, including account balances, investments and withdrawals.
Disclosure of Nonpublic Personal Information
The Partnership does not sell or rent investor information. The Partnership does not disclose nonpublic personal information about its investors to nonaffiliated third parties or to affiliated entities, except in limited instances where appropriate to its business and as permitted by law. For example, the Partnership may share nonpublic personal information in the following situations: (i) to service providers in connection with the administration and servicing of the Partnership, which may include attorneys, accountants, auditors and other professionals, or the servicing or processing of Partnership
transactions; (ii) to affiliated companies in order to provide Limited Partners with ongoing advice and assistance with respect to the services provided through the Partnership and to introduce them to other services that may be of value to them; (iii) to respond to a subpoena or court order, judicial process or regulatory authorities; (iv) to protect against fraud, unauthorized transactions (such as money laundering), claims or other liabilities; and (v) upon consent of an investor to release such information, including authorization to disclose such information to persons acting in a fiduciary or representative capacity on behalf of the investor.
Protection of Limited Partner Information
The Partnership’s policy is to require that all employees, financial professionals and companies providing services on its behalf keep client information confidential.
The Partnership maintains physical, electronic, and procedural safeguards to guard investor nonpublic personal information. Access to investor nonpublic personal information is limited to those employees who need to know that information to provide products or services to the investor. Third parties with whom the Partnership shares investor information must agree to follow appropriate standards of security and confidentiality. The Partnership also conducts internal audits of its business practices and procedures in order to protect your personal information.
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