HOW TO INVEST

                            

Investing directly with an Operating Sponsor

 

We structure Direct Investments using Regulation D 506c Offerings  

We recommend that you consult with your Accountant, Registered Investment Advisor or Lawyer to determine which, if any, of our investments are right for you before investing.

 

 In order to invest in a Regulation D, Section 506c securities offerings you must be an approved Member and an Accredited Investor.

 

We Syndicate Profit Participation Notes, Preferred Equity, & Distressed Debt

Theses alternative Direct Asset Investments have the potential to improve a portfolio’s overall performance while reducing volatility.

Our Member Only investor centric platform is geared towards syndicating preferred equity and when times dictate, distressed debt. Typically our investments have quarterly income streams, substantial profit participation and priority returns to our investors. We work with only experienced management teams and sophisticated investors.  We offer a broad range of real estate investments ranging from new construction to triple net leased income producing properties.  At any given time we have offline opportunities in our pipeline so please call us to find out more.

We only offer co-investments in  notes, and preferred equity where we have done  a reasonable amount of investigation to see if the economics of the transaction meets our investment requirements. This due diligence is no substitute for your own analysis and does not ensure that the investment will perform as indicated, it does however, limit the number of select investments presented.

 

About Us

Rule 506 of Regulation D

Section 201(a) of the JOBS Act requires the SEC to eliminate the prohibition on using general solicitation under Rule 506 where all purchasers of the securities are accredited investors and the issuer takes reasonable steps to verify that the purchasers are accredited investors.

To implement Section 201(a), the SEC adopted paragraph (c) of Rule 506. Under Rule 506(c), issuers can offer securities through means of general solicitation, provided that:

all purchasers in the offering are accredited investors,

the issuer takes reasonable steps to verify their accredited investor status, and

certain other conditions in Regulation D are satisfied.
An “accredited investor” includes a natural person who:

earned income that exceeded $200,000 (or $300,000 together with a spouse) in each of the prior two years, and reasonably expects the same for the current year, or

has a net worth over $1 million, either alone or together with a spouse (excluding the value of the person’s primary residence).
An “accredited investor” may also be an entity such as a bank, partnership, corporation, nonprofit or trust, when the entity satisfies certain criteria. The full definition of “accredited investor” is available hereThe JOBS Act requires that issuers wishing to engage in general solicitation take “reasonable steps” to verify the accredited investor status of purchasers. Rule 506(c) sets forth a principles-based method of verification which requires an objective determination by the issuer (or those acting on its behalf) as to whether the steps taken are “reasonable” in the context of the particular facts and circumstances of each purchaser and transaction. Among the factors that an issuer should consider under this principles-based method are:

the nature of the purchaser and the type of accredited investor that the purchaser claims to be;

the amount and type of information that the issuer has about the purchaser; and

the nature of the offering, such as the manner in which the purchaser was solicited to participate in the offering, and the terms of the offering, such as a minimum investment amount.
In addition to this flexible, principles-based method, Rule 506(c) includes a non-exclusive list of verification methods that issuers may use, but are not required to use, when seeking greater certainty that they satisfy the verification requirement with respect to natural person purchasers. This non-exclusive list of verification methods consists of:

verification based on income, by reviewing copies of any Internal Revenue Service form that reports income, such as Form W-2, Form 1099, Schedule K-1 of Form 1065, and a filed Form 1040;

verification on net worth, by reviewing specific types of documentation dated within the prior three months, such as bank statements, brokerage statements, certificates of deposit, tax assessments and a credit report from at least one of the nationwide consumer reporting agencies, and obtaining a written representation from the investor;

a written confirmation from a registered broker-dealer, an SEC-registered investment adviser, a licensed attorney or a certified public accountant stating that such person or entity has taken reasonable steps to verify that the purchaser is an accredited investor within the last three months and has determined that such purchaser is an accredited investor; and

a method for verifying the accredited investor status of persons who had invested in the issuer’s Rule 506(b) offering as an accredited investor before September 23, 2013 and remain investors of the issuer.
Rule 506(b) remains unchanged following the adoption of Rule 506(c) and continues to be available for issuers that wish to conduct a Rule 506 offering without the use of general solicitation or that do not wish to limit sales of securities in the offering to accredited investors.

Disclaimer

This website is neither an offer to sell nor the solicitation of an offer to buy any security. Only the Private Offering Memorandum can make such an offer. Therefore, a copy of the Private Offering Memorandum must be made available to you in connection with the offering. This advertising material must be read in conjunction with the Private Offering Memorandum in order to understand fully all of the implications and risks of the offering of securities to which it relates.

The Notes are NOT certificates of deposit or similar obligations guaranteed by any depository institution and are NOT insured by the Federal Deposit Insurance Corporation (FDIC) or any governmental or private insurance fund, or any other entity. Neither Open Source Capital LLC, nor Dequity Investments, LLC guarantees any notes or agrees to repay the Notes upon maturity.

To understand the Notes offering fully, you should read the entire Private Offering Memorandum carefully, including the “Risk Factors” sections, before making a decision to invest. Some of the more significant risks include the following: servicing of the Notes depends upon our ability to manage our business and generate adequate cash flows; the Notes are risky speculative investments; there will not be any market for the Note Participations; we can provide no assurance that any Notes or Note Participations will be sold; you will not have the benefit of an independent review of the final terms of the Notes; payment on the Notes is dependent on the Borrower and not Open Source Capital LLC, or Dequity Investments, LLC. If we lose or are unable to retain key personnel, we may be delayed or unable to implement our business plan; we have a limited operating history and limited experience operating as a company and our business is not diversified.

It is important to note that Dequity Mortgages are complex and best intended for sophisticated investors, and may have high costs of ownership, such as origination and brokerage fees. Dequity Mortgages carry certain unique risks which should be carefully considered and fully understood by individual investors before investing.
Dequity Mortgages are offered via a Private Placement Memorandum. You can requested these documents by sending an email to kmeyer@opensourcecap.com. Carefully review these documents prior to making an investment decision. For additional information please contact Open Source Capital at 954-650-6798. Dequity Mortgages are not suitable for all investors. Risks may include loss of principal or the possibility that at expiration the investor will own the reference asset at a depressed price. Dequity Mortgages often limit or cap upside participation in the reference asset, particularly if the mortgage pays an above-market rate of interest. Most Dequity mortgages contain an equity or profit sharing component whose profit emulates a sale of the asset. Even though Dequity Mortgages pay interest like debt securities, the potential loss of the principal for such loans may make them unsuitable for investors seeking alternatives to conventional debt securities. Securities discussed in this material are not registered with the SEC but are issued pursuant to an exemption from registration. Before Investors make any investment, they should read the prospectus and preliminary pricing supplement and all relevant offering documents for a more complete information about such issuer and the securities being offered. Investors should understand characteristics, risks, and rewards of each Dequity Mortgage as well as those of the reference asset before making a decision to invest in the security. Investors should contact their own accounting, tax or legal advisors to review the suitability of any investment. Dequity Mortgages are investment vehicles issued as non-registered securities. Non-registered securities are exempt from SEC registration and are issued under the JOBS ACT, Regulation D, Section 506(c).

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CONFLICTS OF INTEREST

The Company and Participants are subject to various conflicts of interest arising out of its relationship with the Manager.  These conflicts include, but are not limited to, the following:

  • The Manager receives a transaction Structuring Fee from each Equity Entity.  Additionally, the Manager receives a carried Membership Interest share in the Equity Entity.  The Structuring Fee payable to Managers and the carried Membership Interest was not determined by arm’s-length negotiations.
  • Management may form additional limited liability companies and other entities to engage in activities similar to and with the same investment objectives as the Company. The Managers may be engaged in sponsoring other entities at approximately the same time as the Company’s securities are being offered or its investments are being made.  The Manager may also originate, place, sell and service loans for individuals or unaffiliated entity investors.  These activities may cause conflicts of interest between such activities and the Company and the duties of the Managers concerning such activities and the Company.  Management will attempt to minimize any conflicts of interest that may arise among these various activities.
  • The Manager supervises and controls the business and affairs of the Company, locates investment opportunities for the Company and renders certain other services. The Manager devotes only such time to the Company’s affairs as may be reasonably necessary to conduct its business.  The Managers may be a general partner or manager of partnerships or limited liability companies and other business interests.  See “Management”.

RISK FACTORS

General

 There are significant risk factors associated with a purchase of an Equity Participation.  The following are some of the more common:

  • Your ability to sell or transfer your Participation is limited; no market currently exists, nor is one expected to develop. Securities laws restrictions apply to the Participation Interest.  Proposed transferees of Participation Interest must be Accredited Investors.  Consent of the Management to a transfer is required and may be withheld in the Manager’s discretion.
  • You must place total reliance on the Manager for operating the Company.
  • The Manager is subject to Conflicts of Interest with the Company.
  • Investments in a business loan carry risks; for example, defaults can occur in payments to be made by the Equity Entity.
  • The Equity Participations involve small real estate construction and development. Small construction and development projects are higher risk than other secured transactions.
  • The Company is not assured of obtaining any minimum amount of proceeds from this Offering and this transaction may not proceed.
  • n almost all cases, the Equity Entity uses leverage (borrowed funds) that are senior to the Equity, which increases the Company’s risk in the event of payment default by the Equity Entity. In addition, the rights of the Company and therefore the Participants are subordinate to the rights of the Equity Entity’s senior lenders.

Risks of Small Real Estate Construction and Development Investments

The Company is making small unsecured construction and development equity investments.  Therefore, it is subject to the risks usually associated with real estate investing, such as the following:

  • Return of an equity investment generally is dependent upon the ability of the property to produce cash flow and the ability of the Equity Entity’s ability to repay its senior lender.
  • Some of the factors that may affect the net operating income or value of a property can develop after the Company makes an investment and therefore could not be included in the factors considered in selecting the investment for the Company.
  • Net operating income of the financed project can be volatile and may be insufficient to cover debt service on the Equity Entity at any given time.
  • Net operating income of the Equity Entity and book value of the property may be affected adversely by a large number of factors, such as:
  • design and quality of the property;
  • attractiveness of the property;
  • adequacy of the Equity Entity management;
  • demand for the Equity Entity product or service;
  • general market conditions; or
  • interest rates.

Participating Equity Investments (those which the Company generally makes) are substantially riskier than first mortgage loans because of:

  • Their subordinate position in the event of default;
  • The potential default of a senior loan, which, if not satisfied, could cause the Company to lose its entire Membership Interest investment.

Risks of Default by Equity Entity

 Since a Participant is participating in only a single specific equity investment, defaults by the Equity Entity on its senior financing can have adverse consequences to the Participants, who have no recourse to either the Equity Entity, the Company, or the Manager.  Some examples of things that can cause a loss include the following:
  • The proceeds from sales of foreclosed collateral may be less than the Company’s initial Membership Interest investment;
  • Adverse general and local market conditions;
  • High operating costs and high costs of complying with changes in laws and regulations pertaining to taxes, use, zoning and environmental protection, in each case for indeterminate periods; and
  • Possible liability for injury to persons and property.

Investing in construction transactions is riskier than investing in transactions secured by operating properties or with companies with a long operating history.

No Equity Interest

Your Equity Participation is an investment in the specific Equity Entity only.  You will have no equity interest in the Company.

Risks of Incorrect Original Valuation

 Appraisals are obtained from certified third party appraisers on all transactions.  However, there is a risk that the appraisals prepared by these third parties are incorrect, which could result in defaults and/or losses related to construction/development loans if the amount realized upon a sale of the underlying property turns out to be insufficient to cover the outstanding loan balance.

Because values can quickly decline below their appraised values during the term of the associated Company’s Equity Investment, there is no assurance that the LTV ratios used by the Company will be adequate to protect the Company’s Equity Investment.  Material declines in values could result in the Company’s Equity Investment being under-valued and lost.

Risks Related to Short Term Investments

The Manager intends that the Equity Investments will generally mature within twelve to thirty six months.  For that reason, absent special circumstances, the Manager does not expect to regularly examine the Equity Entity to see if the original appraised values are being maintained.  Instead, it will review an Equity Entity if there is a delinquency on a debt or indication of possible decline in the market value of the investment property. Because the investment may not be monitored as frequently as a longer-term investment would be, the Company may not necessarily be aware of changes in the following factors relating to its investment, which could materially and adversely affect the Company’s results of operations:

  • Physical evaluation of the investment property and area where it is located; and
  • Financial stability of the Equity Entity.

Risks Related to Change in Market Interest Rates

  • It is expected that at least for the foreseeable future the return on an Equity Investment will be structured based on a fixed base rate of return. Market interest rates on investments comparable to the Company’s Equity Investments could materially increase above the general level of the Company’s fixed rate base return rate.
  • Risk related to interest rate shifts increases as the length of maturity of a Company Equity Investment increases.

Risks of Uninsured Losses

  • The Equity Entity will normally carry adequate hazard and liability insurance for the benefit of the Membership Interest of the Equity Entity. Some events are, however, either uninsurable or insurance coverage is economically not practicable.
  • If an Equity Entity allows insurance to lapse, an event of loss could occur before the Company and other Members know of the lapse and have time to obtain insurance to protect their collective interests.
  • Insurance coverage may be inadequate to cover property losses, even though the Equity Entity purchases insurance that it believes is adequate.

Risks of Lack of Control of Company

Management consequently has the sole power to:

  • Control the Company and its operations;
  • Control the allocation of revenue related to loan pricing and operating expenses;
  • Dissolve the Company;
  • Change the nature of the Company’s business;
  • Amend the Operating Agreement of the Company;
  • Remove and replace the Managers; or
  • Approve a merger or sale of all or substantially all of the assets of the Company.

Risks of Default by Equity Entity and Real Estate Ownership after Foreclosures

A default by an Equity Entity can have adverse consequences to the asset value and expected income.  Examples of these are the following:

  • Operation of foreclosed properties may require the investors to spend substantial funds for an extended period;
  • Subsequent income and capital appreciation from the foreclosed properties may be insufficient to meet any remaining expenses or surviving debt service;
  • The proceeds from sales of foreclosed properties may be less than the Company’s initial Membership Interest investment in the Equity Entity;
  • Adverse general and local market conditions;
  • High operating costs and high costs of complying with changes in laws and regulations pertaining to taxes, use, zoning and environmental protection, in each case for indeterminate periods; and
  • Possible liability for injury to persons and property.

Hazardous or Toxic Substance Risks

Various federal, state and local laws can impose liability on owners, operators, and sometimes lenders for the cost of removal or remediation of certain hazardous or toxic substances on property.  Such laws often impose liability whether or not the person knew of, or was responsible for, the presence of the substances.

When the Company obtains a Membership Interest in the Equity Entity, it becomes an owner of the Equity Entity property.  As an owner, the Members, under some circumstances, could become liable for remediating any hazardous or toxic contamination, which costs could exceed the value of the property and Membership investment.  Other costs or liabilities that could result include the following:

  • Damages to third parties or a subsequent purchaser of the property;
  • Loss of revenues during remediation;
  • Loss of tenants and rental revenues;
  • Payment for clean up;
  • Substantial reduction in value of the property;
  • Inability to sell the property; or
  • Default by a borrower if it must pay for remediation.

Any of these could create a material adverse effect on a foreclosed asset and/or transaction profitability.

THE EQUITY PARTICIPATION INTERESTS ARE TIED TO THE PERFORMANCE OF A SPECIFIC INVESTMENT IN AN EQUITY ENTITY. THE COMPANY WILL SELL EQUITY PARTICIPATION INTERESTS FOR EACH MEMBERSHIP INTEREST IN AN EQUITY ENTITY THAT IS BEING ACQUIRED. THE RETURN OF EACH MEMBERSHIP INTEREST INVESTMENT IS DEPENDENT FOR PAYMENT ON PERFORMANCE OF THE CORRESPONDING EQUITY ENTITY. THESE MEMBERSHIP INTERESTS ARE UNSECURED INVESTMENTS. INVESTING IN THE EQUITY PARTICIPATIONS SHOULD ONLY BE CONSIDERED BY PERSONS WHO CAN AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT.

Investment Objectives

The Company’s objectives are:

  • To maximize cash flow and pay Distributable Amounts to the Participants; and
  • To preserve, protect and return a Participant’s investment.
 INVESTOR SUITABILITY STANDARDS

You must be an “Accredited Investor” to purchase an Equity Participation.  In addition, the Company has restrictions on the resale or transfer of a Participation Interest.  A Participant must review the Subscription Agreement (Exhibit D) prior to executing it, and will be deemed to have made representations as to being an Accredited Investor.

The Manager reviews and screens all Subscription Agreements, and rejects Subscription Agreements from investors not meeting the criteria.

The Company cannot accept subscriptions from any person or entity where the representations required are either not provided or are provided but inconsistent with the determination that the subscriber is accredited.  The Manager has the unconditional right to accept, or reject, any subscription in whole or in part for any reason, or no reason.

A Participation Interest represents an investment with limited liquidity.  You may not be able to liquidate your investment in the event of an emergency or for any other reason.  A Participation Interest will be sold to a Participant only if the Participant is an Accredited Investor as defined in the Subscription Agreement.

You may transfer your Participation Interest only to persons who are Accredited Investors and only with the consent of the Manager.  A Participant must carefully read the requirements in connection with a re-sale in the “No Sale or Transfer of Interests” of the Subscription Agreement.

Due to the nature of the Participation Interest, it is likely that all of the income attributable to the return on a Participation Interest will be miscellaneous income taxed at ordinary income tax rates.

You should obtain the advice of your attorney, tax advisor, and/or business with respect to the legal, tax and business aspects of this investment prior to subscribing for a Participation Interest.

ASSIGNMENT AND TRANSFER OF AN EQUITY PARTICIPATION

There is no public market for the Equity Participations and none is expected in the future.  Participants have only a restricted and limited right to assign their Equity Participations.  Holders may transfer their Equity Participations only by written instrument satisfactory in form and substance to the Manager and only to an Accredited Investor.  You may make no transfer of an Equity Participation or a fractional Participation, and no transfer in the absence of consent of the Manager (other than a Participant transferring all of his or her Participation by operation of law).  Any transfer must comply with then-current laws, rules and regulations of any applicable governmental authority.