WHAT IS THE iSELECT FUND?
iSelect Fund enables individual investors and their trusted financial advisors to create an individualized, diversified portfolio of the securities of early stage companies.
Each company in the iSelect Fund has gone through a rigorous selection and due diligence process before being placed in the Fund. Through iSelect’s virtual data room, investors and their financial advisors can access (1) an executive summary about each company in the Fund, (2) a comprehensive file of due diligence materials about each company, (3) a copy of each company’s private placement memorandum, or “PPM,” that describes the company and its offering and (4) a report written by an independent SEC registered broker-dealer that contains the results of the broker-dealer’s own due diligence review of the company.
iSelect maintains these materials in a separate file for each company that is available through iSelect’s virtual data room to qualified investors and their financial advisors (see HOW CAN I FIND OUT MORE ABOUT THE COMPANIES IN THE ISELECT FUND?). Investors and their advisors can use this information to perform their own evaluation of each company and create their own portfolio of venture capital investments. Thereafter, investors can use iSelect’s website to monitor their portfolio’s performance. In addition, investors can monitor iSelect’s website to find new companies to invest in as iSelect adds more portfolio companies to the Fund (see HOW DO I DETERMINE WHICH COMPANIES TO INCLUDE IN MY PORTFOLIO?)
WHY WAS THE FUND CREATED?
iSelect Fund was founded to provide access for accredited investors who do not have access to traditional venture capital funds for any number of reasons to invest in early-stage companies. iSelect helps solve two issues that prevent most investors from investing in venture capital: 1) lack of readily available information about early-stage companies and 2) the high ($1 million plus) minimum investment requirements imposed by traditional VC firms. Through its in-depth selection and due diligence processes, and the breadth and detail of the information iSelect makes available through its virtual data room, investors and their financial advisors have access to the information they need to make more reasoned investment decisions. Moreover, iSelect’s lower minimum investment requirement – $50,000 in aggregate with a minimum of $5,000 per company – enables investors to create a diversified portfolio of early-stage companies to manage risk.
WHO CAN INVEST IN THE iSELECT FUND?
Only accredited investors as defined by the U.S. Securities and Exchange Commission (SEC) can invest in an iSelect Fund. For individuals, an “accredited investor” is either (1) a natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase, excluding the value of the person’s primary residence or (2) a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year. (Trusts and other entities have different standards).
The SEC requires investment funds such as iSelect’s to verify that each investor meets the accredited investor requirements. All potential investors therefore must complete a financial status questionnaire before investing in an iSelect Fund. iSelect may also ask for additional information to validate that an investor meets the accredited investor criteria.
ARE THERE MINIMUM INVESTMENT REQUIREMENTS?
Yes. Investors must make an aggregate initial investment of $50,000 and allocate a minimum of $5,000 (less any applicable fees) to each company he or she selects. Thereafter, investors may make additional investments of as little as $5,000. These amounts are much lower than the minimum investment requirements of traditional venture capital funds. Furthermore, investors do not need to allocate their entire initial investment at once. Unallocated proceeds designated for investment via iSelect may be held at Millennium Trust, but funds deposited at Millennium Trust do not bear interest. Investors may request return of these funds at any time prior to investment in an iSelect portfolio company. Investors may also deposit unallocated funds in an account established for the investors benefit by the broker-dealer placing the investment with iSelect. Please also see ONCE INVESTED, HOW CAN I GET MY MONEY BACK OUT?
WHY SHOULD I INVEST IN THE iSELECT FUND?
We believe there are five compelling reasons for investors to consider investing in early-stage companies through iSelect:
- Historical performance data show that early-stage companies offer returns that are uncorrelated, i.e., move up and down at different times and/or greater or lesser degrees, with the returns of more traditional stocks. Therefore, they have the potential to enhance diversification and reduce portfolio risk;
- iSelect offers the opportunity to invest alongside established, proven, venture capital investors;
- iSelect’s in depth selection and due diligence processes help to improve the quality of the opportunities that are available to investors and to provide greater transparency;
- iSelect’s low investment minimums reduce the barrier to entry that has historically restricted investor access to private venture investing, allowing each investor to make a broader range of investments and effectively diversify his or her holdings; and
- iSelect’s online features enable each investor to monitor the companies in his or her portfolio.
As with any investment, you should consult with your financial advisor to determine whether alternative investments should be part of your investment portfolio.
HOW CAN I FIND OUT MORE ABOUT THE COMPANIES IN THE iSELECT FUND?
iSelect maintains a virtual data room (VDR) that it makes available to qualified investors and their financial advisors. iSelect places due diligence materials it receives from portfolio companies in a separate file for each company, along with the company’s PPM and the broker-dealer’s report in a separate folder for each company. As iSelect receives updates from portfolio companies, it adds these to the VDR (see WHAT IS THE SELECTION PROCESS? WHAT IS THE DUE DILIGENCE PROCESS? and HOW CAN I MONITOR THE PERFORMANCE OF A COMPANY IN MY PORTFOLIO?)
WHO MANAGES THE FUND AND HOW IS THE MANAGER PAID?
iSelect Funds are managed by iSelect Fund Management, LLC. iSelect does not charge companies to apply to or to be in the Fund. Rather, iSelect’s revenue comes from two sources:
- iSelect charges investors a one-time account set-up fee and an annual management fee.
- iSelect receives a percentage (“Carried Interest”) of any excess distributions attributable to a company’s securities after the investor receives 100% of his or her principal investment in the company.
RETURNS (see also RISK)
ONCE INVESTED, HOW CAN I GET MY MONEY BACK OUT?
Investors will receive any proceeds on their investments only if there is either a “liquidity event,*” other distribution (e.g. dividends) or they are able to sell their securities in a secondary transaction. Investor suitability is therefore an important consideration before investing in early-stage company private placement opportunities. It is one reason why iSelect offers the iSelect Fund through financial advisors. In addition to being an accredited investor and being able to bear the loss of principal, investors must expect long holding periods and illiquidity. On average, venture capital and professional angel investments result in a traditional liquidity event, such as an IPO, only 10% of the time. Due to SEC regulations, pre-IPO investors must hold privately purchased shares for a minimum of six months and may be subject to additional lockup provisions, such as company rights of refusals. In addition, there is typically thin volume in secondary transactions due to low demand, few owners, and few market makers for small company securities (see, HOW DOES AN INVESTOR PROFIT FROM AN INVESTMENT IN THE ISELECT FUND?)
*An event that allows initial investors in a company to cash out some or all of their ownership shares . . . The most common liquidity events are initial public offerings (IPOs) and direct acquisitions by other corporations or private equity firms. http://www.investopedia.com/terms/l/liquidity_event.asp
HOW DOES AN INVESTOR PROFIT FROM AN INVESTMENT IN THE iSELECT FUND?
The return on an investor’s capital investment is directly related to the performance of the underlying companies included in the investor’s custom portfolio. The rate of investment return on an investor’s portfolio will relate directly to the number and size of “liquidity events” or other distributions (e.g., dividends) that occur with respect to his or her portfolio companies.
HOW ARE THE PROCEEDS FROM LIQUIDITY EVENTS DISTRIBUTED TO INVESTORS?
There cannot be any assurance as to any future rate of return on any investment in a portfolio company or that investors will receive any specific amount of cash distributions. Investors may even lose their entire investment.
To the extent cash distributions are received from a portfolio company, iSelect will distribute that cash to the investor that owns interests in the portfolio company within 30 days of receipt less any applicable fees and carried interest due iSelect (see FUND STRUCTURE: WHAT DOES AN INVESTOR OWN?).
In the event the securities of a portfolio company become saleable, either by virtue of registration or exemption from registration under applicable securities laws, investors who own such securities may notify iSelect that they wish to sell their securities. iSelect will execute such sale within five business days of receipt of such notice and distribute the sale proceeds, less any applicable expenses, to the investor.
WHAT HAS BEEN THE HISTORIC RATE OF RETURN OF A DIVERSIFIED PORTFOLIO OF EMERGING GROWTH COMPANIES?
Though every diversified portfolio of emerging growth companies is distinctly different, the venture capital asset class, as a whole, has demonstrated superior long-term returns, as shown in the chart below.
Please remember that past performance does not necessarily indicate future results, and you could lose all of your investment.
Source: Cambridge Associates LLC
*Pooled-end return, net of fees, expenses and carried interest.
The Cambridge Associates LLC U.S. Venture Capital Index® is an end-to-end calculation based on data compiled from 1,589 venture capital funds, including fully liquidated partnerships, formed between 1981 and 2015. The Early Stage Index is a subset comprising 1,107 early-stage funds.
HOW DO I DETERMINE WHICH COMPANIES TO INCLUDE IN MY PORTFOLIO?
You and your financial advisor should determine which companies to include in your portfolio. , or elect the Auto Allocation option. In the Auto Allocation program, iSelect will allocate to companies on your behalf.
Studies conducted by the Ewing Marion Kauffman Foundation* and others indicate, however, that a portfolio should include 15 or more companies.
Always remember that, for every ten start-up companies, most will fail and positive returns will arise almost entirely from one or two companies. No one, no matter how skilled, can predict the winners ahead of time. Please also see WHAT CAN I DO TO MITIGATE THE HIGHER RISK ASSOCIATED WITH EARLY-STAGE COMPANIES?
WHAT INVESTMENT RISKS ARE INVOLVED?
There are many risks associated with private venture investing, including due diligence risk, underwriting risk, business valuation risk, business plan risk and execution risk. There are also extrinsic risks that are beyond any company’s control. While iSelect’s diligence process seeks to mitigate many of these risks, they remain systemic to private venture investing and are impossible to eliminate, which is why diversification is so important for even the most skilled investor. Potential investors should review the risk factors included in the private placement memorandum (PPM) in each portfolio company’s file as well as the Fund’s PPM before investing in the Fund. All PPMs can be found in iSelect’s virtual data room that is available to qualified investors through iSelect’s web site. In addition, investors should understand before investing that they could lose their entire investment.
ISN’T FRAUD A SIGNIFICANT RISK WITH THESE TYPES OF SECURITIES?
Unfortunately, fraud exists at every level of investment throughout the U.S. The SEC and FINRA (Financial Industry Regulatory Authority) are limited in their resources and the investment market is very broad. While a percentage of failure must be anticipated and expected when investing in early-stage companies, fraud involves malicious intent and therefore is less predictable. Micro-cap stocks have at times been a target for fraudsters due to the lack of available information about them and relatively poor liquidity. iSelect’s rigorous diligence process and the information it makes available to investors and their financial advisors, and the independent broker-dealer review that iSelect subjects each company to, attempts to reduce the risk of fraud. (See WHAT IS THE DUE DILIGENCE PROCESS?).
iSelect does not pay financial advisors. Any fees paid to financial advisors are solely determined by each financial advisor and investor. We also do not sell through offshore brokers. You select the financial advisor you want to work with. Most importantly, you select the companies you want to invest in. The decision is entirely yours.
Although iSelect’s in-depth review process and review procedures attempts to reduce the risk of fraud, intentional wrongdoing can never be eliminated altogether. Again, investors should share any concerns they may have with their financial advisors and ask them about the additional safeguards they can provide. And of course, investors and their financial advisors should utilize the information iSelect makes available to perform their own due diligence review.
*Read more at http://www.investopedia.com/articles/03/050803.asp#ixzz3WfTd69Gb
WHAT CAN I DO TO MITIGATE THE HIGHER RISK ASSOCIATED WITH EARLY-STAGE COMPANIES?
Spread your investment across multiple companies. Approximately 25% of all small businesses fail in their first year (see http://smallbiztrends.com/2008/04/startup-failure-rates.html). Some are more prone to do so than others (see http://smallbiztrends.com/2012/09/failure-rates-by-sector-the-real-numbers.html). This may result from changing market conditions, bad timing, competitive pressure, unsustainable economics or the inability to sustain product market fit. Each investor must recognize this high incidence of failure, which exists regardless of the quality of the skill of company management, and the quality of management’s business plan, before investing and recognize and be prepared to lose their entire investment.
Investors themselves can significantly reduce risk by recognizing that 80% of a typical venture capital fund’s returns are generated by 20% of its investments (see https://blog.wealthfront.com/venture-capital-economics/). This analysis advocates for diversification and spreading smaller investment amounts over more early-stage companies (see HOW DO I DETERMINE WHICH COMPANIES TO INCLUDE IN MY PORTFOLIO?). iSelect’s minimum investment requirements allow investors a greater opportunity to spread their investment out over more early-stage companies (see ARE THERE MINIMUM INVESTMENT REQUIREMENTS?).
Limit the amount you allocate to venture capital. Also, due to the relative illiquidity of venture capital investments (see ONCE INVESTED, HOW CAN I GET MY MONEY BACK OUT?), you should not invest money in venture capital that you may otherwise need for the foreseeable future. Because companies in your portfolio may have subsequent equity offerings that allow current shareholders to purchase shares at a discount, you should consider setting aside some of your allocation for such opportunities. As always, talk with your financial advisor and put careful thought into what you want to do. What to invest in and how much to invest is entirely up to you.
WHY DO PORTFOLIO COMPANIES PARTICIPATE IN THE iSELECT FUND?
The primary reasons portfolio companies offer their securities through iSelect are:
- Access to the capital necessary to take their business to the next level;
- Reduced capitalization table complexity;
- Access to some of the region’s best and brightest entrepreneurial advisors, mentors and venture investors; and
- Enhanced credibility in the eyes of the entrepreneurial and investment community by virtue of being identified as an iSelect portfolio company.
HOW DOES THE FUND IDENTIFY COMPANIES FOR CONSIDERATION?
Most potential portfolio companies are brought to the attention of iSelect through iSelect’s extensive network of civic partners, venture capital firms, incubators, accelerators, angel investors and entrepreneurs. It should be noted that, on occasion, a member of the Fund’s Selection Committee (see WHAT IS THE SELECTION PROCESS? (Phase II)) may identify companies that the Fund should consider. In such an instance, the member will not be permitted to participate in the review of the company during the selection process if the member (a) has a direct or indirect ownership in the company or other material economic interest or (b) serves as an officer, director, employee or consultant of the company. Any member of the Selection Committee, is permitted, however, to subsequently provide advice to a company, through employment or otherwise, if so requested by the company or to invest in the company.
WHAT IS THE SELECTION AND DILIGENCE PROCESS?
Overseen and managed by the Fund’s Investment Committee, selection and diligence proceeds in four distinct phases, each requiring Investment Committee approval to progress. They are:
- Initial Review;
- Selection Committee Review;
- Broker-Dealer Review;
- Investment Committee Approval.
Initial Review iSelect only considers companies that are referred by a trusted source – be they a Selection Committee or Investment Committee member, an investor in iSelect, or a fellow venture capitalist. While iSelect’s investment criteria are constantly evolving, portfolio companies must always:
- have previously raised more than $250,000 from Angel investors;
- be raising at least $1,000,000 in their current round led by a credible venture investor;
- demonstrate meaningful early traction;
- have proper industry, geography, and valuation fit;
- set clear milestones and have a path of follow-on capital;
- articulate a cogent exit strategy.
iSelect seeks to co-invest with venture capital firms, leading Angel investors, and Family Offices. Previously, iSelect has invested alongside the likes of Bold Capital Partners, Cultivation Capital, Hyde Park Venture Partners, Mercury Fund, and the North Coast Venture Fund – to name a few. Any referred company must submit a description of its business and a summary of offering terms before meeting with the Fund’s venture team. Based on this information and subsequent meetings with management, iSelect’s venture team, leveraging proprietary heuristics, makes a quantitative assessment of the business, specifically evaluating:
- the quality and depth of the company’s management team;
- the scope and viability of the business opportunity;
- the terms of the proposed offering;
- precedent transactions and pathway to liquidity.
If the business merits investment, iSelect’s venture team prepares a comprehensive investment opportunity summary for Investment Committee review, at which time the Investment Committee evaluates the summary and other relevant information to determine whether to advance the opportunity to the iSelect Selection Committee for qualitative review. Should a referred company warrant Selection Committee review, iSelect’s venture team works simultaneously with the company’s management to compile a complete due diligence file for investors, including:
- a confidential Private Placement Memorandum (“PPM”) that complies with the requirements of Rule 506 under Regulation D and meets the diligence standards established by iSelect;
- copies of material contracts, agreements, intellectual property filings, tax returns, financial statements, business plans, designs, concepts, and other information relevant to the business.
Selection Committee Review iSelect has established a Selection Committee composed of industry experts with experience founding, operating, advising, and investing in startup and emerging growth businesses. Selection Committee members include the founder of Shell Technology Ventures, the director of the USDA’s National Institute of Food and Agriculture, and the founder of CARFAX – among others. The Selection Committee is organized around principal industry segments in which iSelect focuses its investing.
Members of the Selection Committee meet with management of companies submitted by the Investment Committee, evaluate the venture team’s report, and determine:
- whether company management can successfully implement its business plan;
- if there are any necessary preconditions or milestones that should be met before investing;
- whether any material risks present in the business preclude iSelect investment.
Less a selection process than a rejection process, Selection Committee review is designed to be an in-depth, qualitative assessment by industry experts. If the Selection Committee does not reject the company or place conditions that prevent it from moving forward, the Investment Committee again evaluates the candidate. If the Investment Committee determines that the Fund’s criteria for investment have been met, it will submit the company’s diligence file for audit by a registered broker-dealer. Broker-Dealer Review iSelect’s diligence process is designed to comply with disclosure and suitability requirements of federal securities laws and the rules and pronouncements of FINRA, including FINRA Regulatory Notice 10.22. Before an investment is made available, a licensed broker-dealer reviews the prospective company’s diligence folder (or “VDR”). VDRs include detailed financial projections (including any and all payments to affiliates of the company), financial statements (unaudited) for the prior three years or such shorter period in which the company has had material operations, all material contracts of the business, all corporate organizational documents, complete biographies for each company officer and director, all intellectual property filings, designs, business plans and any other information relevant to making an investment in the company. In reviewing each folder, the licensed broker-dealer certifies that the diligence is complete, that the prepared PPM accurately represents the company’s business and meets the disclosure requirements under Rule 506 of Regulation D. Investment Committee Approval If the potential portfolio company and its diligence file are approved by the licensed broker-dealer, the Investment Committee meets one final time to review the company for investment. In its final review, the Investment Committee verifies whether:
- iSelect’s diligence process has been appropriately adhered to and documented;
- the diligence process has uncovered any items prohibiting investment;
- investing in the company is suitable as part of a diversified startup portfolio.
Any company that satisfies the foregoing criteria may be made eligible for investment via iSelect. The overall objective of the iSelect Fund is twofold: (1) provide investors with access to the compelling historical return profile of the venture capital asset class and (2) provide early-stage companies with the capital they need to grow. To increase the potential for favorable investment outcomes, iSelect thoroughly vets every venture company before it is placed in the Fund. As set forth in more detail below, after an initial inquiry conducted by iSelect’s venture team, each company is presented to the Fund’s Selection Committee for review. At the same time, iSelect begins its due diligence process.
- Phase I: The Initial Inquiry. A threshold question asked by iSelect as it begins its inquiry is who has already invested or has committed to invest in the company’s offering. iSelect will not make a company’s offering broadly available through the Fund unless a recognized co-investor, typically a venture capital firm (or firms), is also investing. Thereafter, iSelect sifts through the initial candidates in order to identify companies which meet specific regional, financing, market, and business model criteria, selecting only those that meet the criteria for further consideration. Only about 2% to 3% of the companies iSelect reviews move to Phase II of the process.
- Phase II: The Selection Process. The next step involves iSelect’s Selection Committee. The Selection Committee is composed of venture investors, entrepreneurs and professionals with experience in evaluating, advising, and investing in early-stage growth companies. iSelect invites companies that have cleared the initial inquiry to meet with members of iSelect’s Selection Committee who have the most specific industry expertise relevant to the company (the “review panel”). iSelect’s venture team prepares an analysis of the company and its offering and sends it to each member of the review panel. The panel then meets with members of the company’s management team meet (in person or by teleconference) to review and discuss, among other things, the company’s business plan, the industry and financial results and to identify any areas of concern and possible remedies. Following their review, members of the review panel issue a consensus report of their findings to iSelect. Investors should understand that, unlike a traditional fund model and despite its name, the role of the Selection Committee is not to select the companies that will receive investment funds. Rather, the Selection Committee’s role is to methodically evaluate each venture company, specifically its management team and business plan, and identify any intrinsic risks (and, if possible, help the company to eliminate those risks) that might prevent the company from using the proposed offering amount to take the company to its next level of development.
- Phase III. Third Party Due Diligence Verification. Following its receipt of the Selection Committee review panel report, and upon conclusion of the Fund’s internal due diligence review process, iSelect determines whether the company, and the documents gathered during the internal due diligence review, should be sent to the independent broker-dealer for review and verification. Upon receipt of the information, the broker-dealer conducts its own review of the company’s private placement memorandum (PPM) and other information related to the financial, operational and legal status of the company, as well as reviewing the background of the current management team (see What IS THE DUE DILIGENCE PROCESS?). Upon completion of its review, the broker-dealer issues a report, listing any information missing from the due diligence materials and identifying any additional risk factors it believes should be disclosed to investors. Assuming the due diligence materials are complete, the report is placed in the company’s file in the virtual data room available through the iSelect website.
WHAT DOES IT COST A COMPANY TO PARTICIPATE IN THE iSELECT FUND?
Nothing. iSelect absorbs the cost of the selection and due diligence processes.
DOES THE iSELECT FUND TAKE A BOARD SEAT WITH ITS PORTFOLIO COMPANIES?
Typically, iSelect Fund has observer rights for all Board Meetings that occur during any offering in which iSelect Fund is participating. If the iSelect Fund invests more than $500,000 in a portfolio company, it will request the right to have an observational seat on the company’s board of directors as long as it holds its investment. Typically board seats allocated to the securities offered in financings in which iSelect Fund participates are occupied by representatives of the venture capital funds that partner with iSelect Fund. iSelect Fund typically will not take a board seat unless a member of the iSelect team offers unique expertise that is critical to the business of the company offering the board seat.
HOW CAN I MONITOR THE PERFORMANCE OF A COMPANY IN MY PORTFOLIO?
During any time that the iSelect Fund holds securities or warrants in a portfolio company, the portfolio company is required to report material events that impact the value of the underlying securities. Within 30 days after the end of each fiscal quarter, every portfolio company must submit an update form, setting forth any material developments that occurred during the prior quarter. iSelect will upload the information to the portfolio company’s file that is available to investors through iSelect’s virtual data room (see HOW CAN I FIND OUT MORE ABOUT THE COMPANIES IN THE ISELECT FUND?)
In addition, until expiration of iSelect’s warrant to purchase the company’s securities, each company is required to provide an income statement and balance sheet to iSelect within 30 days of the end of each fiscal quarter and within 90 days of the end of the fiscal year. iSelect does not require that these statements be audited but they must be certified by company management.
[expand title=”TO WHAT EXTENT ARE DEAL TERMS FOR EACH PORTFOLIO COMPANY NEGOTIATED?”]
Investors who invest in companies through iSelect invest alongside established, proven, venture capital investors. Because of this, the terms of an offering have already been established and generally are not subject to negotiation, although the terms of the offering are independently evaluated by iSelect as part of its review process.
HOW MANY COMPANIES CAN AN INVESTOR SELECT?
You may invest in as many companies in the iSelect Fund as you wish, as long as the $5,000 minimum investment threshold is met for each portfolio company, and the total amount of your initial investment is at least $50,000. You are not required to invest your entire initial investment all at once (see ARE THERE MINIMUM INVESTMENT REQUIREMENTS?).
CAN AN INVESTOR CHOOSE ONLY ONE COMPANY?
Yes; however, the most likely way to lose all of your investment in early-stage companies is to invest in just one or only a few companies. All of the long-term research and performance data on venture and early-stage company investing, which includes skilled and experienced venture capital investors, indicates that investors who maintain a broader and more diversified exposure to venture capital are more likely to experience the superior long-term performance returns of the venture asset class. With this in mind, iSelect has set a per-company investment minimum of $5,000, which is much lower than the investment minimums set by traditional venture capital funds (see DOES THE ISELECT FUND MITIGATE THE RISK OF FAILURE?).
WHAT FEES ARE INVESTORS PAYING?
For the individual investor, the iSelect Fund currently assesses an annual management fee. In addition, the Fund charges a “carried interest” incentive fee on any investment profits in each portfolio company (above the investor’s initial investment amount) that are distributed to the investor. iSelect will make the specific amount of the fees available to investors as part of the total mix of information available to them before investment. In general, iSelect’s fees are lower than the fees assessed by traditional venture capital funds. Investors should also recognize that each investor’s financial advisor may charge commissions or other costs on any investment.
HOW IS iSELECT’S CARRIED INTEREST FEE ASSESSED?
Any distributions with respect to any individual company’s securities within an investor’s portfolio that exceed the amount of any unpaid management fees due from the investor for that company to iSelect are allocated first to the investor until the investor recovers 100% of his or her principal investment attributable to those individual securities. Thereafter, any distributions attributable to those securities are given primarily to the investor, but similar to traditional venture capital funds, iSelect retains a percentage of the distributions for its own account. The amount retained by iSelect is “carried interest.” Because iSelect participates in the distributions of the individual company alongside the investor, iSelect may receive distributions before the investor realizes any return on his or her investments in other companies within the investor’s portfolio.
LEGAL & TAX
FUND STRUCTURE: WHAT DOES AN INVESTOR OWN?
As most investors in mutual funds know, investors do not actually own the securities in which the fund invests; rather, they own shares in the mutual fund itself. Similarly, iSelect purchases the securities (through warrants held by iSelect) of each company selected by an investor and holds them for the benefit of the investor. The investor’s beneficial interest, along with his or her beneficial interests in all other companies in which the investor chooses to invest, are allocated to a Delaware “series” LLC established in the individual name of each investor. The investor owns the rights to all distributions from the series established for that investor, subject to iSelect’s management fee and carried interest in each company and any fees payable to the investor’s financial advisor, as agreed to by the investor and his or her advisor (see FEES).
ARE THERE ANY FORMS OR OTHER DOCUMENTS THAT I MUST FILL OUT AND SIGN?
Yes. Before making an investment in the iSelect Fund, each investor must complete a subscription agreement, specifying which company offerings the investor wants to purchase. The subscription agreement requires the investor to provide certain information that is necessary to confirm the investor’s status as an “accredited investor” (see WHO CAN INVEST IN THE ISELECT FUND?). In addition, the subscription agreement sets forth fees and other transactional terms related to the investment and includes an investment allocation form for the investor to complete to indicate his or her investment choices. The subscription agreement also includes a form that establishes the investor’s personal series LLC, which will hold the securities of the companies selected by the investor (see FUND STRUCTURE: WHAT DOES AN INVESTOR OWN?). Your financial advisor may require other documentation.
Please note the answers contained in these FAQs are for general descriptive purposes only, and that the terms and conditions set forth in the documents described above will control in all instances. iSelect may also amend the documents in its sole discretion.
WHAT INFORMATION ABOUT INVESTORS DOES THE FUND GATHER AND SHARE?
Before investing, investors must provide identification information including the investor’s name, address, telephone, social security number, employer and date of birth. Also, so that the Fund can fulfill its obligation to confirm that an investor is an “accredited investor” (see WHO CAN INVEST IN THE ISELECT FUND?), each investor must provide information about his or her income, investment portfolio and indebtedness. iSelect may also obtain a credit report to verify the amount of an investor’s debt in order to verify his or her net worth.
The Fund does not sell any investor’s personal information, or the fact that any individual is or may become an investor, to anyone.
WHAT ARE THE TAX IMPLICATIONS FOR INVESTORS?
As with any investment, each potential investor in the iSelect Fund should consult with his or her own tax professional about the tax consequences of an investment in an iSelect Fund. The following tax information is for general purposes only and is not specific tax advice for any person.
Each iSelect Fund is a Delaware limited liability company (LLC). Limited liability companies such as the iSelect Fund that do not elect to be treated as a corporation for tax purposes are generally not subject to U.S. federal income tax at the company level. As a result of owning a series within the iSelect Fund (seeFUND STRUCTURE, WHAT DOES AN INVESTOR OWN?) each investor is a “member” of the iSelect Fund. The investor, as a member of a limited liability company, includes the iSelect Fund’s items of taxable income, gains, losses, deductions, and credits attributable to the companies within the member’s series LLC in determining the member’s taxable income, whether or not cash is actually distributed to the investor. Consequently, an owner of a series of the iSelect Fund may be allocated taxable income even though he or she has not received a cash distribution in respect of such income (similar to a typical mutual fund). All such items are deemed to pass from the iSelect Fund to investors on the last day of the taxable year of the iSelect Fund (currently December 31). iSelect requires that portfolio companies agree to make distributions to cover any tax liability attributable to investors in the portfolio company. Investors must recognize, however, that such distributions can be made only to the extent that the portfolio company has cash available to distribute.
DUE DILIGENCE PROCESS
WHAT IS THE DUE DILIGENCE PROCESS?
Before companies are placed into the iSelect Fund, they must undergo an intensive round of financial and legal due diligence review by members of the iSelect team. The information and materials gathered during iSelect’s internal review are then submitted, along with the company’s private placement memorandum (PPM), which sets forth the terms of the offering, for a second round of review by an SEC registered broker-dealer. The independent broker-dealer performs its own review relying on the materials and any other information it needs to perform its review. The broker-dealer’s review is an intensive process mandated by best practices and industry protocols designed to protect securities dealers’ and investors’ interest and includes examination of corporate materials and financial information, the company’s PPM and performance of background checks on key company managers, as set forth more fully in the broker-dealer’s report that is included in the company’s file that is available through iSelect’s website. The ultimate objective of this phase is to receive an independent assessment affirming that the portfolio company is in good standing, that the portfolio company is operating a legitimate business, that the portfolio company has met legal and regulatory requirements, and that representations made by company principals are not materially misleading.
MAY AN INVESTOR OR ADVISOR SPEAK TO A REPRESENTATIVE OF A PORTFOLIO COMPANY AS PART OF DUE DILIGENCE?
Despite the extensive amount of diligence and evaluation materials that each investor has access to as a result of the initial evaluation and ongoing monitoring process, an investor or his or her financial advisor may have additional questions for a portfolio company in order to complete their personal investment decision. Any such questions should be routed through iSelect. Upon receipt of an inquiry, iSelect will contact the portfolio company and forward the company’s response to the investor. Company management may also make themselves available to small groups of investors, within their own discretion.
WHAT IF I HAVE OTHER QUESTIONS?
If you have not found answers to all your questions about the iSelect Funds, please feel free to talk with your financial advisor or give us a call. Better yet, send us your questions and we will add them to a list along with answers, which other people can see and read. Our phone number and email address appear under Contact Us on our website.