What are the benefits of syndicates?
For Accredited investors:
- Gain access to quality deal flow with the ability to make investments in smaller increments than are required from typical angel investors.
- Create a diversified portfolio of choice investment. Some syndicates may allow investments as low as $1.000. However, typically investments will range from $2,500 to $10,000. They are able to build a diversified portfolio of early-stage companies across multiple market sectors and geographies.
- Participate with better deal terms because they are part of a greater whole (the syndicate). They participate in a fund that receives preferential deal terms, led by an experienced investor who is vested in the success of the syndicate and its investors.
For Syndicate Leads (“Leads”):
- Receive carried interest in return for their investment(s), providing due diligence and negotiating deal terms. This carried interest keeps them in synch with the goals of the syndicate shareholders.
- Create leverage. They get to lead investments that are five to 20 times their typical investment amount. This, in turn, gives them access to more deals, allows them to negotiate better terms and provides access to start-ups with higher minimum commitments.
- Draw on a much larger investor pool via our online network and additional access to their backers’ networks.
For Companies Seeking Capital Investment:
- Increase their access to capital – without having to deal directly with a large number of individual investors.
- Decreases costs –
- Legal costs are decreased as there are fewer contracts, term sheets and deal negotiations.
- Lowers the cost of shareholder management in both time and money while positioning the company favorably for later-stage investment by larger angel and venture capital organizations.
- TThey get the attention of a key investor who understands the industry and can connect them to new opportunities, markets and quality new team members.
- They gain access to the backers’ networks without putting each one on the cap table.
- Collect many small investments that aggregate into a larger funding round.
How do syndicates work?
Here’s an example.
Emily, a notable angel that is an approved CannaFundr marketing partner and Syndicate Leader,decides to lead a syndicate and back a company on which she has done her due diligence.
Emily asks the company for a $500K allocation, at favorable terms, for her syndicate. She invests funds in her syndicate and offers, to her network and the accredited investors on CannaFundr.com, an opportunity to the balance of the syndicate.
Investors invest in her syndicate by agreeing to invest, based upon the minimum requirements of her negotiated deal. Typically, a deal this size would require a $5,000 minimum investment from the accredited investors who wish to participate. Syndicates are formed under SEC guidelines, which allow for an investment fund to have up to 100 investors; so, a minimum is easily decided upon by taking the total amount of allocation and dividing it by 100.
Emily uses the standard subscription agreement and funding system managed by CannaFundr.com’s parent company, CrowdFundConnect (CFC). By using standard templates for these agreements, an investor and the lead always know their standing in ALL syndicates in which they invest, reducing the costs for all parties.
CFC manages the issuer and the syndicate using the automated systems provided by CFC for investor onboarding and shareholder management services. This reduces their costs, including legal expenses, as well as lowers the amount of time normally associated with these services. More money flows into the company, and they can focus their time and money on growing their business. This is a win/win situation for everyone!
The documents used are already accepted and understood by leading angel groups and the National Venture Capital Association, so later-round funding and due diligence is a simpler, lower-cost solution going forward, as the company goes after additional rounds of funding to grow and accelerate their business.
What is the SEC’s investor limit?
Due to securities regulations, the investment fund is limited to 100 total members.
Qualified purchasers investing through a different fund do not count toward this limit. Qualified purchasers include (1) individuals with more than $5M in investments and (2) trusts or companies with more than $25M in investments.
For example, a single syndicate can accept an infinite number of qualified purchasers investing through one fund and 99 non-qualified—but accredited—investors investing through another fund simultaneously. Why 99? Because the lead counts as a member of the fund, and has his/her interests aligned directly with the fund investors.
Who can see a syndicated deal?
While any member of CannaFundr.com can see the deal pages, some information may be hidden at the discretion of the syndicate lead and the company.
Regardless of who sees it, only accredited investors as defined by the SEC may invest.
How cost effective are CFC management services?
Let’s compare costs to FundersClub.com, a leading system that syndicates early-stage start-ups. FundersClub takes 10% of the amount funded and puts it aside for formation and ongoing management of the syndicate LLC. If they raise $500,000 for the syndicate, $450,000 goes to the company and $50,000 is put aside for fund administration costs.
With CannaFundr.com syndicates managed by CFC, the cost to set up the fund is fixed at $2,000, so the company would receive $498,000. The issuer receives more capital, and the investors receive more equity without dilution of their initial investment—definitely a winning combination!
Each year, the issuing company pays a guaranteed minimum dividend (or royalty), to the syndicate, of $2,000, or a percentage of fund revenues (whichever is greater), enough to cover all the services needed to administrate the syndicate. CFC has a minimum charge of $2,000 to make sure the syndicate LLC is registered properly and provides ongoing shareholder management services to the syndicate LLC and their shareholders, including, but not limited to, annual federal tax filings and appropriate K-1 for the limited partners.
CFC does not take carried interest, which increases the overall value for the syndicate lead and the investors in the syndicate LLC.
Are the deal terms, which were previously negotiated, attractive?
We believe that our deal terms standards offer a winning deal for everyone involved: the company seeking funds, the syndicate lead and the investors in the syndicate LLC.
We use standard equity agreements that are accepted by the top angel groups and venture funds across the country. This equity agreement has one variation, which is that the issuing company will pay a minimum royalty and/or dividend annually to the syndicate LLC, in addition to equity participation.
Where did we come up this wonderful idea? It is commonly used on Shark Tank by Kevin O’Leary (Mr. Wonderful) and many other experienced investors. Royalties are considered normal for investing in oil and gas partnerships, investing in entertainment industry, the publishing industry and many others, while dividends are commonly used as a component of an investment return.
It has significant benefits for all parties involved –
- Royalties are negotiable.
- The issuing company does not report royalties or the equity as debt, which maintains their valuation moving forward and keeps their balance sheet free of debt.
- The issuing company in turn can negotiate less dilution of their equity as the investor risk is lowered with ongoing payments.
- The issuing company can plan for a fixed cost as a percentage that can fluctuate with their business growth and revenues.
- Once the original investment is paid back, the royalty is usually reduced, which increases the issuing company’s cash flows, which can further expedite company growth and increase the overall company valuation. This is negotiated by the syndicate lead for the fund.
- The syndicate, along with each and every one of the investors, may receive an annual cash return on their investment, which is managed and distributed by CFC, along with tax documents and other communications. This minimizes the overall investment risk, while allowing for increased returns to the investors as the company grows its business.
- The syndicate remains vested via their equity and royalties in the growth of the company and can share as revenues grow or as the company possibly gets an exit via acquisition, merger or an IPO.
What’s the legal structure for a syndicate?
Syndicate investors don’t invest directly in the company, but rather invest in a Special-Purpose Company Fund LLC (SPCF) that is created for each specific investment. Each fund is registered in Delaware and has a physical location for business in Florida.
The fund is administered by CrowdFundConnect Incorporated (CFC) and is advised and managed by the lead, an approved Syndicate Leader of CannaFundr.com.
The Syndicate Lead receives the carried interest as the general manager of the syndicate. Neither CannaFundr.com, nor its parent company CrowdFundConnect Incorporated, receive any equity or carried interest in the special purpose LLC.
The lead is required to advise the fund, tell the fund how they voted (or would vote) for their shares and if they buy or sell shares. The fund will generally follow unless there’s a good reason not to (e.g., conflict of interest).
All syndicate LLCs a use a standard operating agreement. This is much easier for investors, as they always know and understand the terms under which they are investing.
Does CannaFundr verify that investors are accredited?
CrowdFund Connect actually will put all syndicate investors through the appropriate accredited investor screening as required and outlined by the Securities and Exchange Commission (SEC).
What is carry?
Carry is shorthand for carried interest.
Carry is a percentage of the profit and capital returns to the fund, if any.
If the company has an exit via a merger, acquisition or IPO, as examples, the pro-rata proceeds of the exit are paid to the syndicate, and the syndicate lead receives a percentage of the profits paid, along with the syndicate investors. This keeps everyone’s interest properly aligned!
Is the carry for a syndicate calculated the same as a carry for a venture capital fund?
No. Carry for venture funds is calculated on the outcome of a portfolio, meaning the upside in some deals must first pay back the losses in other deals before any carry is paid.
In a syndicate, carry is calculated on the outcome of an individual company. This allows accredited investors to choose which companies and syndicate leads to invest in, while paying a small carry premium versus venture funds.
What happens if the syndicate is oversubscribed?
There are a couple of different scenarios that could happen in this case.
– The company may decide to increase their allotment to the syndicate
– We set as a standard first in, last out meaning investors that commit earlier will receive preferential treatment.
What is the cost of syndication?
Companies pay nothing to receive an investment from a syndicate. However, the company does agree to have their shareholder services and cap table management provided by CrowdFundConnect Incorporated (CFC), which allows the syndicate lead to have full transparency on any changes to equity, going forward. CFC fees are typically much less than a company would pay for this service to outside third parties, while providing services that include option and warrant tracking, proxy voting, document management and distribution, certificate management and more . . . all for less than $5 per day.
Backers pay no fees on their investment.
Out-of-pocket setup costs for each syndicate are paid out of the syndicate. Costs are currently set at $2,000 per fund and are deducted from the funds raised.
The syndicate lead does not receive any of this money – it is paid to CrowdFundConnect Incorporated, a Delaware registered corporation (CFC). CFC administrates the fund and pays as required any other third parties such as state regulatory agencies, payment processors, attorneys and accountants.
How can I become a marketing partner and become a Syndicate Lead?
To apply to become a marketing partner you will need to apply with CrowdFund Connect (CFC) d/b/a CannaFundr.com. You will be required to provide background information that establishes your ability to assist in raising capital for your fund(s) as well as mentoring and advising companies in the cannabis industry. CFC will do a background check on the individual or the general partner in the corporation seeking to become a marketing partner and Syndicate Lead. The lead, as a marketing partner, will sign an agreement with CrowdFund Connect.