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Confidential Private Placement Memorandum
Verde Mountain Fund, LLC 200 Units at $12,500 per Unit
$2,500,000 Aggregate Offering Amount Minimum Investment - 2 Units or $25,000
This Offering will expire July 31, 2016 (unless extended by the Manager)
Funding Round No. 1
Verde Mountain Fund, LLC (the “Fund”), a Wyoming limited liability company, is hereby offering (this “Offering”) to
potential investors (“Investors”) two hundred (200) membership units (the “Units”) in the Fund at $12,500 per Unit for a
maximum aggregate offering price of $2,500,000. This Offering is a private placement intended to be exempt from registration
pursuant to Rule 506 of Regulation D promulgated under the Securities Act of 1933, as amended (the “Act”), and other
applicable exemptions from registration under the Act and applicable State laws. The Units are not listed on any national stock
exchange or other securities exchange. This Offering is being made only to (i) “accredited investors” as defined in Rule 501 of
Regulation D under the Act; and (ii) a limited number (not to exceed 35) of other potential Investors who meet the knowledge
and business requirements set forth in Rule 506 of Regulation D. This Offering is subject to the terms and conditions contained
in this Confidential Private Placement Memorandum (this “Memorandum”), the Operating Agreement of the Fund (the
“Operating Agreement”), a copy of which is attached to this Memorandum as Exhibit “A”, and the subscription documents
attached to this Memorandum as Exhibit “B”. The minimum investment in the Fund by any one Investor is $25,000 (2 units),
although the Manager of the Fund may lower this amount in its sole discretion. If a subscription for 10 Units ($125,000) has
not been received by the Fund by April 30, 2016 the Manager of the Fund, in its sole discretion, may terminate this Offering
and return all subscription funds received to the respective potential Investors.
This is the first round of Company membership units being offered by the Company to potential investors (this “Offering” or
the “First Round”). Although there can be no assurances, the Fund currently anticipates that at some time after the completion
of this Offering, it may offer additional Units to potential investors in one or more subsequent funding rounds at prices that are
higher than the purchase price of $12,500 per Unit offered in this Offering, reflecting what is anticipated to be an increase in the
value of the Fund.
THE UNITS OFFERED HEREBY ARE SPECULATIVE, INVOLVE A HIGH DEGREE OF RISK AND SHOULD NOT BE
PURCHASED BY INVESTORS WHO CANNOT AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. SEE SECTION II
BELOW, “RISK FACTORS”.
THE UNITS HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR
ANY STATE SECURITIES LAWS AND ARE BEING OFFERED AND SOLD ONLY PURSUANT TO AN EXEMPTION FROM
REGISTRATION REQUIREMENTS OF THE ACT AND EXEMPTIONS UNDER APPLICABLE STATE LAWS TO
INDIVIDUALS AND ENTITIES THAT QUALIFY AS “ACCREDITED INVESTORS” (AS DEFINED UNDER RULE 501 OF
REGULATION D UNDER THE ACT) OR OTHERWISE MEET THE QUALIFICATION REQUIREMENTS OF RULE 506 OF
REGULATION D, AND THAT EXECUTE AND DELIVER TO THE FUND CERTAIN SUBSCRIPTION DOCUMENTS
CONTAINING, AMONG OTHER THINGS, CERTAIN REPRESENTATIONS AND WARRANTIES OF THE INVESTOR. SEE
SECTION X.B BELOW, “INVESTOR SUITABILITY STANDARDS”.
Number of Units Offered (1)
Price to
Investors/Unit
Gross Proceeds
Selling Expenses &
Overhead(2) Net Proceeds to the Fund
200
$12,500 $2,500,000 $170,000 $2,330,000
(1) The Fund reserves the right to accept or reject subscriptions for Units in its sole discretion.
(2) Estimated to be 6.8% of gross proceeds.
Dated March 9, 2016
Verde Mountain Fund, LLC
c/o Avalon Management Group, Inc., Manager
970 W. Broadway, #446
P.O. Box 30,000
Jackson Hole, WY, 83002
800-914-2689
Email: Thom@VerdeMountainFund.com
(iii)
TABLE OF CONTENTS
NOTICES TO POTENTIAL INVESTORS ...................................................................................... 1
I. SUMMARY OF THE OFFERING ............................................................................................... 5
II. RISK FACTORS .......................................................................................................................... 10
A. General Risks Associated with an Investment in Units .................................................. 10
B. Risk Associated with Doing Business in the Legalized Cannabis Industry .................... 15
C. Tax Risks ......................................................................................................................... 18
III. THE FUND .................................................................................................................................. 20
A. Overview ......................................................................................................................... 20
B. Capitalization .................................................................................................................. 20
C. Potential Conflicts of Interest .......................................................................................... 20
D. Dilution ........................................................................................................................... 21
IV. PROPOSED BUSINESS PLAN ................................................................................................. 22
A. Introduction ..................................................................................................................... 22
B. Market Overview............................................................................................................. 26
C. Business Overview .......................................................................................................... 37
V. MARKET, POTENTIAL CUSTOMERS AND COMPETITORS .............................................. 49
A. Market ............................................................................................................................. 49
B. Competition ..................................................................................................................... 49
VI. TERMS OF OFFERING; DESCRIPTION OF UNITS.............................................................. 51
A. General ............................................................................................................................ 51
B. Offering Period ................................................................................................................ 51
C. Offering Terms and Conditions Determined by the Manager ......................................... 51
D. Terms of Units ................................................................................................................ 52
VII. MANAGEMENT ...................................................................................................................... 55
A. Role of the Manager ........................................................................................................ 55
B. Avalon Management Group, Inc. .................................................................................... 55
C. Thomas W. Garlock ........................................................................................................ 55
D. Compensation of Manager .............................................................................................. 56
E. Actions against the Fund and Affiliates .......................................................................... 58
F. Additional Personnel ....................................................................................................... 58
G. Other Activities of the Manager ...................................................................................... 58
H. Indemnification of Manager ............................................................................................ 58
VIII. SOURCES OF USE OF PROCEEDS ....................................................................................... 59
IX. CERTAIN TAX CONSIDERATIONS ...................................................................................... 60
X. PLAN OF DISTRIBUTION; INVESTOR SUITABILITY STANDARDS ................................ 63
A. Plan of Distribution..…...……………………………………….………………………63
B. Investor Suitability Standards ......................................................................................... 63
XI. HOW TO SUBSCRIBE; ADDITIONAL INFORMATION ...................................................... 64
A. How to Subscribe ............................................................................................................ 64
B. Additional Information .................................................................................................... 65
EXHIBIT A – OPERATING AGREEMENT ...................................................................................
EXHIBIT B – SUBSCRIPTION DOCUMENTS ..............................................................................
1
NOTICES TO POTENTIAL INVESTORS
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION (THE “SEC”) OR ANY STATE
SECURITIES COMMISSION, NOR HAS THE SEC OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
CONFIDENTIAL PRIVATE PLACEMENT MEMORANDUM. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. IN MAKING
AN INVESTMENT DECISION, POTENTIAL INVESTORS MUST RELY ON THEIR
OWN EXAMINATION OF THE TERMS OF THE OFFERING, INCLUDING THE
MERITS AND RISKS INVOLVED.
THIS MEMORANDUM SHOULD BE TREATED AS CONFIDENTIAL. ANY
REPRODUCTION OR DISTRIBUTION OF THIS MEMORANDUM, IN WHOLE OR IN
PART, OR THE DISSEMINATION OF ANY OF ITS CONTENTS WITHOUT PRIOR
WRITTEN CONSENT OF THE FUND, EXCEPT TO A POTENTIAL INVESTOR’S
LEGAL COUNSEL OR FINANCIAL OR TAX ADVISOR, IS PROHIBITED. EACH
POTENTIAL INVESTOR, BY ACCEPTING DELIVERY OF THIS MEMORANDUM,
AGREES THAT IN THE EVENT A POTENTIAL INVESTOR ELECTS NOT TO
SUBSCRIBE FOR THE UNITS DESCRIBED HEREIN OR THE OFFERING IS
TERMINATED, FOR ANY REASON WHATSOEVER, SUCH POTENTIAL INVESTOR
WILL PROMPTLY RETURN THIS MEMORANDUM AND ALL RELATED
DOCUMENTS TO THE FUND.
THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK INCLUDING
BUSINESS, TAX, LEGAL AND ECONOMIC RISKS, RISKS OF ILLIQUIDITY, AND
LIMITS ON TRANSFERABILITY OF THE UNITS OFFERED HEREBY. THIS
INVESTMENT IS SUITABLE ONLY FOR SOPHISTICATED AND EXPERIENCED
PERSONS WHO HAVE SUBSTANTIAL FINANCIAL RESOURCES, WHO ARE ABLE
TO BEAR THE ECONOMIC RISKS OF THE INVESTMENT, WHO DO NOT
ANTICIPATE THAT THEY WILL NEED TO LIQUIDATE ANY INVESTMENT
ACQUIRED HEREUNDER IN THE FORESEEABLE FUTURE AND UNDERSTAND
OR HAVE BEEN ADVISED WITH RESPECT TO THE TAX OR OTHER
CONSEQUENCES OF, AND RISK FACTORS ASSOCIATED WITH, THIS
INVESTMENT.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OTHER
THAN THAT CONTAINED IN THIS MEMORANDUM, OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN AS EXPRESSLY CONTAINED HEREIN, IN
CONNECTION WITH THE OFFERING MADE HEREBY, AND, IF GIVEN OR MADE,
SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR ITS MANAGER. NO
OFFERING LITERATURE, OTHER THAN THIS MEMORANDUM AND THE
EXHIBITS TO THIS MEMORANDUM, HAS BEEN AUTHORIZED BY THE FUND.
THIS MEMORANDUM SUPERSEDES AND REPLACES ALL OTHER PRIOR
WRITTEN COMMUNICATION BY THE FUND, WITH RESPECT TO ANY
OFFERING OF UNITS. THE FUND DISCLAIMS ANY AND ALL LIABILITIES FOR
2
REPRESENTATIONS OR WARRANTIES, EXPRESSED OR IMPLIED, OR ANY
OTHER WRITTEN OR ORAL COMMUNICATION TRANSMITTED OR MADE
AVAILABLE TO THE RECIPIENT. EACH INVESTOR WILL BE ENTITLED TO
RELY SOLELY ON THOSE REPRESENTATIONS AND WARRANTIES THAT MAY
BE MADE TO IT IN ANY SUBSCRIPTION AGREEMENT RELATING TO THE UNITS
HEREIN OFFERED.
EXCEPT AS OTHERWISE INDICATED, THIS MEMORANDUM SPEAKS AS OF THE
DATE APPEARING ON THE COVER PAGE HEREOF. NEITHER THE DELIVERY
OF THIS MEMORANDUM NOR THE PURCHASE OF ANY OF THE UNITS
OFFERED HEREBY SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE
FUND SINCE THE RESPECTIVE DATES AT WHICH THE INFORMATION IS
GIVEN HEREIN OR THE DATE HEREOF.
THERE IS NO PUBLIC MARKET FOR THE UNITS OFFERED HEREIN, AND IT IS
NOT ANTICIPATED THAT A PUBLIC MARKET WILL DEVELOP. THE UNITS
WILL NOT BE LISTED ON A STOCK EXCHANGE AND SHOULD ONLY BE
PURCHASED BY PERSONS WITH NO NEED FOR LIQUIDITY IN THEIR
INVESTMENT AND WHO ARE ABLE TO RISK THE ENTIRE LOSS OF THEIR
INVESTMENT. SEE SECTION II BELOW, “RISK FACTORS”.
General Notices
Potential Investors are urged to read this Memorandum and the accompanying Exhibits
carefully. This Memorandum is not all-inclusive and does not purport to contain all the
information that a potential investor may desire, or should consider, in determining
whether to invest in the Fund. Potential investors must conduct and rely on their own
evaluation of the Fund and the terms of this Offering, including, without limitation, the
merits and risks involved in making a decision to buy the Units offered. The Fund will
make available to potential investors, prior to the sale of Units described in this
Memorandum, the opportunity to ask questions of, and receive answers from the Fund’s
Manager concerning the terms and conditions of this Offering and to obtain any additional
information (including information made available to other potential investors) which may
be necessary to verify the accuracy of the information in this Memorandum; provided,
however, that the Fund possesses such information or can acquire it without unreasonable
effort or expense. The Fund may require potential investors to sign a Confidentiality
Agreement if investors wish to receive additional information that it deems proprietary.
Potential investors and their representatives, if any, will be asked to acknowledge in a
Subscription Agreement for Units in the Fund, that they were given the opportunity to
obtain additional information, and either did so or elected to waive the opportunity.
No representations or warranties of any kind are intended, nor should any be inferred with
respect to the economic viability of an investment in the Fund or with respect to any
benefits that may accrue to any investment in the Units. The Fund, its Manager, and its
Manager’s officers and employees do not in any way represent, guarantee or warrant an
economic gain or profit with regard to the Fund’s business, or that favorable income tax
consequences will flow there from. Neither the Fund nor its Manager in any way
represents or warrants the advisability of buying the Units offered herein. Certain of the
3
information contained herein concerning economic trends and performance is based upon
or derived from information provided by third parties and other sources. The Fund
believes that such information is accurate and that the sources from which it has been
obtained are reliable. The Fund cannot guarantee the accuracy of such information,
however, and has not independently verified the assumptions on which projections of
future trends and performance are based.
Potential Investors should not consider the contents of this Memorandum, or any prior or
subsequent communications from the Fund or its Manager regarding the Offering as legal,
accounting, business or tax advice. Prior to making the decision to buy the Units, potential
investors should carefully review and consider this Memorandum and should consult their
own attorneys, business advisors, accountants and tax advisors as legal, business,
accounting and tax matters concerning this Offering.
The Fund reserves the right, in its sole discretion and for any reason whatsoever, to modify,
amend, and/or withdraw all or a portion of the Offering and/or accept or reject, in whole
or in part, any or all of the offers to invest in the Units without obligation, or to allot to any
potential investor less than the amount of Units such investor desires to purchase.
Additionally, the Fund reserves the right to waive the minimum subscription amount, to
negotiate with one or more parties at any time, and to enter into a definitive agreement for
an equity investment in the Fund, without prior notice to the recipient or to other
prospective investors. The Fund also reserves the right to terminate, at any time,
solicitations or indications of interest in the Fund or the further participation in the
investigation and proposal process by any party.
Restriction on Use of this Memorandum
This Memorandum does not constitute an offer to sell to, or a solicitation of an offer to buy
from, anyone in any state or other jurisdiction in which an offer or solicitation is not
authorized, or to any person to whom it is unlawful to make an offer or solicitation. This
Memorandum is for review by the recipient (and its advisors) only. The recipient, by
accepting delivery of this Memorandum, agrees to return this Memorandum, all enclosed
or attached documents and all other documents, if any, provided in connection with the
Offering if the recipient does not undertake to purchase any of the Units offered hereby.
The sole purpose of this Memorandum is to assist the recipient in deciding whether a
potential investor wishes to commit to purchase all or any portion of the Units offered. The
Fund has not authorized any other use of this information. Any distribution of this
Memorandum to a person other than representatives of the original recipient of this
Memorandum is prohibited and any reproduction of this Memorandum or the divulgence
of any of its contents, without the prior written consent of the Fund, is prohibited.
Exclusive Nature of this Memorandum
Potential Investors should rely only on the information contained in this Memorandum.
The information contained in this Memorandum supersedes all other information provided
to potential Investors. The Fund has not authorized any person to provide any information
or to make any representations except to the extent contained in this Memorandum. If any
such representations are given or made, such information and representations must not be
relied upon as having been authorized by the Fund. The information in this Memorandum
4
is accurate as of the date on the front cover, but the information may have changed since
that date. The Fund does not intend to update the information provided in this
Memorandum.
Forward-Looking Statements
Certain statements in this Memorandum may constitute “forward-looking statements”. All
statements that address expectations or projections about the future, including statements
about expected expenditures and financial results, are forward-looking statements.
Some of the forward-looking statements may be identified by words like “may”, “believes”,
“expects”, “anticipates”, “plans”, “intends”, “projects”, “indicates”, “estimates”, “will”,
and similar expressions. Any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. These statements are not
guarantees of future performance and involve a number of risks, uncertainties, and
assumptions. Accordingly, actual results or performance of the Fund may differ
significantly, positively or negatively, form forward-looking statements made herein.
Unanticipated events and circumstances are likely to occur. Factors that might cause such
differences include, but are not limited to, those discussed under the heading “Risk
Factors”, which potential investors should carefully consider. This list of factors is not
exclusive. The Fund undertakes no obligation to update any forward-looking statements.
No representation or warranty, expressed or implied, is made by the Fund as to the
accuracy or completeness of the information contained herein or omitted from this
Memorandum.
Inquiries
For more information, inquiries may be directed to the Manager of the Fund:
Avalon Management Group, Inc.
Attn: Thomas Garlock, President
970 W. Broadway, #446
P.O. Box 30,000
Jackson Hole, WY, 83002
800-914-2689
Email: Thom@VerdeMountain.com
5
I. SUMMARY OF THE OFFERING
The following summary is qualified in its entirety by the detailed information appearing
elsewhere in this Memorandum, the Operating Agreement and all Exhibits attached hereto.
Each potential Investor is urged to read this Memorandum, as well as the Operating Agreement
as well as all other Exhibits attached hereto, in their entirety.
Issuer: Verde Mountain Fund, LLC (the “Fund”), is a Wyoming limited
liability company formed on February 26, 2016. See Section III
below, “The Fund.”
Offering: The Fund is offering two hundred (200) Units (membership
interests) in the Fund for $12,500 per Unit. The minimum
investment is 2 Units or $25,000, although the Manager reserves
the right to accept less than the minimum investment amount, in its
sole discretion. The maximum Offering amount is $2,500,000.
Risk Factors: The purchase of the Units offered hereby involves a high degree of
risk and should be considered only by potential Investors who are
able to sustain the total loss of their investments. See Section II
below, “Risk Factors”.
Investor Suitability
Standards: In order to purchase Units, potential Investors must qualify as
“accredited investors” within the meaning of Rule 501 of
Regulation D of the Act, or meet the knowledge and business
requirements set forth in Rule 506 of Regulation D, or other
applicable federal or state securities regulations. See Section X
below, “Investor Suitability Standards”.
Offering Period: The offering period during which potential Investors may purchase
Units will commence on the date of this Memorandum and will
terminate on the earlier of (i) July 31, 2016 (subject to the
Manager’s right to extend this period, in its sole discretion); or (ii)
the date on which the Manager elects in its sole discretion to
terminate the Offering. If subscriptions for at least $125,000 (10
Units) have not been received prior to April 30, 2016, the Manager
may, in its sole discretion, terminate this Offering. and return all
subscription funds received to the respective potential Investors.
Business of the Fund: The Fund was organized in February 2016 with a focus on
providing financing to established companies in the legalized
cannabis (marijuana) industry in the form of debt financing
(hereinafter referred to collectively as “Fund Loans”) or equity
investments (hereinafter referred to collectively as “Equity
Investments”) or a combination of the two. See Section IV below,
“Proposed Business Plan.”
6
Use of Proceeds: The proceeds of this Offering will be used by the Fund to provide
financing to established companies in the legalized cannabis
industry by providing Fund Loans and/or Equity Investments to
such companies. See Section VIII below, “Sources and Uses of
Proceeds”.
Management: Avalon Management Group, Inc., a Wyoming corporation (the
“Manager”), is the manager of the Fund. As of the date of this
Memorandum, the Manager owns 1 Unit of the Fund as its original
Member. Pursuant to the Operating Agreement of the Fund, the
Manager will own a non-dilutive One Percent (1%) interest in the
Fund at all times as its carried interest in the Fund. Assuming that
all Two Hundred (200) Units offered hereunder are sold, the
Manager will own 2 Units (approximately 1% of 200 Units that
would then be issued and outstanding). The Manager may issue
Unit Certificates to itself from time-to-time hereunder to evidence
ownership of 1% of all issued and outstanding Units. The Manager
will be entitled to an amount equal to 20% of the Fund’s Gross
Adjusted Revenue (as defined below), as determined by the Fund’s
accountants, as its carried interest in the Fund. In addition, as
compensation for the management services provided to the Fund
by the Manager, the Fund will pay the Manager a management fee
of $120,000 per year , payable quarterly provided that funds are
available. The Fund will reimburse the Manager for expenses
incurred by it on behalf of the Fund, including, without limitation,
legal, accounting, organizational and payroll expenses. The
Manager also may purchase Units in this Offering on the same
terms and conditions as all other potential Investors.
Capitalization: The following table summarizes the Fund’s anticipated
capitalization and ownership immediately following this Offering,
assuming all Units offered in this Offering are sold:
(1) Ownership percentages have been rounded to one
decimal point.
Investors Capitalization Ownership(1)
Manager
Organizational,
management and
other services
2 Units
1.0%
Investors in this
Offering
$2,500,000
200 Units
99.0%
Total
$2,500,000 202 Units
100%
7
The following table summarizes the Fund’s anticipated
capitalization and ownership, assuming all Units offered in this
Offering are sold and assuming the Fund undertakes additional
rounds of equity financing in the future at increased Unit prices
based on the assumptions set forth below and all Units offered in
any such future rounds of financing are sold. There are no
assurances that all of the Units being offered in this Offering will
sold or that additional offering rounds will occur and, if so, all
Units offered in those rounds will be sold.
Investors Capitalization Ownership (1)
Manager (2)
Organizational,
management and
other services
6 Units
1.0%
Investors in
this Offering
(Round 1)
$2,500,000
200 Units
33.0%
Investors in
possible
Round 2
Offering (3)
$3,000,000
200 Units
33.0%
Investors in
possible
Round 3
Offering(4)
$2,000,000
100 Units
16.5%
Investors in
possible
Round 4
Offering(5)
$2,500,000
100 Units
16.5%
TOTALS
$10,000,000
606 Units
100.0%
(1) Pursuant to the Fund’s Operating Agreement, the Manager
is entitled to a number of Units equal to 1% of all issued
and outstanding Units, calculated immediately prior to the
issuance of the Units to the Manager (i.e., not taking into
account the Units to be issued to the Manager).
(2) Ownership percentages have been rounded to one decimal
point.
(3)
Assumes a per Unit price of $15,000.
(4)
Assumes a per Unit price of $20,000.
(5)
Assumes a per Unit price of $25,000.
8
Voting Rights: Each Unit is entitled to one (1) vote on all matters requiring
Member Approval. Member approval is required only for certain
extraordinary events. In all other instances, the Manager has the
authority and power to act without Member approval. See Section
VI below, “Terms of Offering; Description of Units.”
Cash Distributions: The Manager will distribute “Gross Adjusted Revenue” of the
Company to the Members as soon as practical after, and if, Gross
Adjusted Revenue shall become available for distribution, as
determined by the Manager in its sole discretion. Any such
distributions will be allocated as follows: eighty percent (80%) to
the Members in the aggregate (and among the Members in
accordance with their respective pro rata ownership in the Fund,
determined with reference to the total Units held by a Member
over the total Units issued and outstanding, reflected as a
percentage (“Percentage Interest”) and twenty percent (20%) to the
Manager. For these purposes, “Gross Adjusted Revenue” shall
mean all cash or proceeds received by the Fund including, without
limitation, interest income received from borrowers under Fund
Loans, dividends received from Equity Investments, proceeds from
the sale or other disposition of any assets of the Fund, including,
without limitation, the sale or other disposition of any Fund Loans
or Equity Investments, and any other cash or proceeds from the
Fund’s operations or any other source, less all Fund expenses and
liabilities and any reserves the Manager determines, in its sole
discretion, should be maintained by the Fund. To the extent that
funds are available for distribution, the Fund anticipates that it will
make quarterly distributions to the Members, although there is no
guarantee that this will occur. The Manager, in its sole discretion,
will determine when cash distributions will be made. The
Manager will endeavor, however, to make distributions to the
Members in amounts intended to enable the Members to discharge
any US federal, state and local income tax liabilities arising from
the allocations of the Fund income. The amount of any such tax
distribution will be determined by the Manager in its sole
discretion. The Fund expects that any cash available for
distribution would most likely result from principal and interest
payments by borrowers under the Fund Loans, although, from
time-to-time, the Fund could receive distributions from its Equity
Investments, which may also be a source of cash available for
distribution to the Members.
Withdrawal/Transfer
Restrictions: Members may not withdraw from the Fund unless their Units are
transferred in accordance with the provisions of the Operating
9
Agreement. No public market for the Units currently exists or is
expected to exist in the future and Investors will have limited
ability to sell or transfer their Units. Units may not be marketed,
sold, assigned or transferred without complying with the
restrictions on transfer contained in the Operating Agreement.
Sales, assignments, or transfers of Units that are affected without
compliance with the Operating Agreement of the Fund, will be null
and void and without any force and effect.
How to Subscribe: Potential Investors wishing to subscribe for the Units offered
herein may do so by delivering to the Manager the following:
1. A dated, completed and executed Subscription Agreement,
a copy of which is attached as Exhibit “B” to this
Memorandum;
2. A dated, completed and executed Investor Questionnaire, a
copy of which also is included with the Subscription
Agreement attached as Exhibit “B” to this Memorandum;
3. A dated, completed and executed Signature Page to the
Operating Agreement of the Fund, a copy of which is
included with this Memorandum;
4. A check made to “Verde Mountain Fund, LLC” for the
Units purchased or a wire transfer into an account held by
the Fund as payment for the Units. Upon request, the
Manager will provide potential Investors with wire transfer
instructions.
All subscriptions will be binding and irrevocable by the
potential Investor. The Fund may accept or reject any
subscriptions in its sole and absolute discretion. If a
subscription is rejected, the Fund will refund all
subscription funds received from the potential Investor.
10
II. RISK FACTORS
An investment in the Units offered hereby is highly speculative and is not an appropriate
investment for potential Investors who cannot afford the loss of their entire investment. Potential
Investors should be fully aware of the following Risk Factors and are urged to discuss with the
Fund and the Manager the nature and extent of the risks inherent with investing in the Fund.
The Fund’s returns may be unpredictable and, accordingly, an investment in the Fund is not
suitable as the sole investment vehicle for a potential investor. An investment in the Fund should
only be considered as part of an overall investment strategy and only if the Investor is able to
withstand the total loss of its investment.
A. General Risks Associated with an Investment in Units
1. The Fund has no operating history.
The Fund was formed on February 26, 2016 and has not yet begun operations. Although, through
affiliated entities, the Manager has extensive experience sponsoring and managing investment
funds, mainly in the real estate market, the Manager has no previous experience managing an
entity, like the Fund, that will provide financing to businesses that operate in the legalized
cannabis industry. The likelihood of the success of the Fund must be considered in light of the
problems, expenses, difficulties, complications and delays frequently encountered in connection
with a new business enterprise and the new industry in which the Fund will operate.
The legalized cannabis industry is a new industry that, as a whole, may not succeed, particularly
if the federal government changes course and decides to prosecute those engaged in the cannabis
industry under federal law, despite the fact that these activities may be legal under state law. If
that happens, there may not be an adequate demand for Fund Loans or acceptable business in
which to make Equity Investments. As a new industry, there are not established players whose
business models the Fund can follow or build upon. Similarly, there is limited information about
comparable companies available for potential Investors to review in making a decision about
whether to invest in the Fund.
Potential Investors should further consider, among other factors, the Fund’s prospects for success
in light of the risks and uncertainties encountered by companies that, like us, are in their early
stages. Should such risks arise, the Fund might not be able to successfully address these risks and
uncertainties or successfully implement the Fund’s business plan. If the Fund fails to do so, such
failure could have a significant and negative impact on the Fund’s business, operations and
financial condition.
2. No comparable businesses in the legalized cannabis industry.
To the Fund’s knowledge, there is no track record for companies pursuing our business plan in
the legalized cannabis industry. As a result, there is no guarantee that our business plan can be
implemented or, if implemented, will be successful or profitable. If our strategy is unsuccessful,
the Fund may fail to meet its objectives and not realize anticipated revenues or profits from the
Fund Loans and Equity Investments we anticipate making. Should this occur, it would have a
significant and negative impact on the Fund’s business, operations and financial condition.
11
3. Dependence on Limited Sources of Revenue.
Because the Fund has been formed and will operate for the main purpose providing debt and
equity financing through Fund Loans and Equity Financing to the legalized cannabis industry, it
will have a limited number of qualified investments to select from.
4. Investors will have limited management control or input.
Investors will take no part in the management or control of the Fund and the Fund’s operations,
including decisions regarding Fund Loans, Equity Investments and distribution of cash to
Investors. The Fund’s policies with respect to these activities are determined by the Manager
and may be changed from time to time at the discretion of the Manager without a vote of the
other Members of the Fund, including the Investors. No assurances can be given that such a
change would not be adverse to the interests of the Investors. In addition, the voting rights of the
Investors will be limited to approval of certain extraordinary matters such as dissolution of the
Fund, certain amendments to the organizational documents of the Fund and the sale of all or
substantially all of the Fund’s assets (e.g., sale of the Fund Loans and Equity Investments).
5. The Fund will be dependent on the Manager.
The Manager’s ability to manage the Fund’s business and other affairs successfully will depend
on the key management personnel described herein. See Section VII below, “Management.”
The death, resignation or incapacity of Thomas Garlock, the President and sole owner of
Manager, could have a material adverse impact upon the business of the Fund. There can be no
assurance that the Manager will remain as the manager of the Fund, or otherwise continue to be
able to carry on its current duties throughout the term of the Fund.
6. The Manager will have substantial discretion regarding the use of the proceeds
from this Offering.
The Manager will have considerable discretion in the application of the net proceeds of this
Offering. See Section VIII below, “Sources and Uses of Proceeds”.
7. The Fund will have little or no recourse against the Manager.
There are very limited circumstances in which the Manager of the Fund can be held liable to the
Fund. Generally, the Manager is not liable to the Fund, provided the Manager has acted (i) in
good faith and in a manner reasonably believed to be in, or not opposed to, the best interests of
the Fund; (ii) with respect to any criminal matter, with no reasonable cause to believe its conduct
was unlawful; and (iii) without gross negligence, fraud or willful misconduct that had a material
adverse effect on the interests of the Investors.
8. There is a limited market for the Units and there are restrictions on the transfer of
the Units.
Units will only be transferable in accordance with certain restrictions in the Operating
Agreement of the Fund, which include, without limitation, that any transfer of Units must be
approved by the Manager, which approval may be granted or denied in its sole discretion. The
12
Units have not been registered under the Securities Act of 1933, as amended, or any other state
securities laws and the Units cannot be sold unless they are subsequently registered or exempt
from registration. There is no public market for the Units. Such factors may affect the price that
a Member would be able to obtain for the Units if a transfer of those Units were approved and
otherwise in accordance with the terms of the Fund’s Operating Agreement, and most likely
would inhibit third parties from making any offers to purchase Units. Thus, Units cannot be
readily sold, exchanged for other property, or used as collateral for borrowings by a Member of
the Fund.
9. The offering price of the Units has been determined arbitrarily by the Fund.
The Fund arbitrarily has determined the offering price for the Units ($12,500 per Unit) and other
terms of this Offering. The offering price for the Units is no indication of any intrinsic value or
any standard evaluation process, such as book value, nor is it indicative of the price a purchaser
would be willing to pay for such Units.
10. The Fund may engage in business transactions with its affiliates.
The Fund may engage in business transactions with other businesses that may be affiliated with
the Manager. For example, administrative, clerical and other operational services may be
provided by an affiliate of the Fund, the cost of which will be allocated among several affiliates,
including, without limitation, the Fund, without mark-up. Any business transactions with
affiliates of the Fund may not be the result of arms-length negotiations and could result in
conflicts of interest. Nonetheless, in this respect, and all others with respect to the Fund, the
Manager is obligated to act in good faith and in a manner in which the Manager, in its sole
discretion, believes is in the best interests of the Fund.
11. The Fund is obligated to indemnify the Manager.
The Manager is entitled to indemnification out of the Fund’s assets for actions or failures to act
by the Manager on behalf of the Fund that are authorized under the organizational documents of
the Fund. In addition, the Manager may be entitled to advancement of expenses from the Fund
prior to a final determination as to whether it is entitled to indemnification. The assets of the
Fund will be available to satisfy any such indemnification obligations, should they arise.
12. The Manager has no obligation of full time service to the Fund.
The Manager and its officers and directors have no obligation to devote their full time to the
business of the Fund. They are only required to devote such time and attention to the affairs of
the Fund as they decide is appropriate, and they may engage in other activities or ventures,
including competing ventures and/or unrelated employment, which may result in various
conflicts of interest between such persons and the Fund.
13. Conflicts of interest may develop due to potential diversity of Members.
The Members are expected to include taxable entities and persons or entities resident of or
organized in various jurisdictions. As a result, conflicts of interest may arise in connection with
decisions made by the Manager that may be more beneficial for one type of Investor over
another type of Investor. In making such decisions, the Manager intends to consider the
13
investment objectives of the Fund as a whole, not the investment objectives of any individual
Investor.
14. The Fund and the Manager do not have separate legal representation.
Neither the Operating Agreement nor any of the agreements, contracts and arrangements
between the Fund, on the one hand, and the Manager on the other hand, were or will be the result
of arm’s-length negotiations. The attorneys and others who have performed services for the
Fund in connection with this Offering, and who will perform services for the Fund in the future,
have been and will be selected by the Manager. No independent counsel has been retained to
represent the interests of the Members (including the Investors), and the Operating Agreement
has not been reviewed by any attorney on their behalf. Each potential Investor is therefore urged
to consult that potential Investor’s own legal counsel and financial and other advisors as to the
terms and provisions of the Operating Agreement and all other related documents to this
Offering.
15. Securities regulation is dependent on the federal and/or state government or
particular divisions thereof and is subject to change and differing interpretation by regulators.
This Offering is intended to be a private placement of securities under federal and applicable
state laws. The offering of private placement, non-registered securities, is governed by the
Securities Act of 1933, as amended, and the “blue sky laws” of the states in which the Fund
offers or sells the Units. Though the Fund will strive to always be in compliance with federal
and state securities regulations, and the business plan of the Fund makes assumptions that its
operations will be in compliance, there is no guarantee that government regulators may interpret
the operations of the Fund as in contravention of certain provisions of the Act. If this happens,
the results could have negative implications for the profitability of the Fund. The Fund cannot
affect the interpretation of these regulations, but can only attempt to comply at all times.
16. Unidentified Fund Loan and Equity Investments.
The Fund was organized on February 26, 2016 and has not funded any Fund Loans, made any
Equity Investments or otherwise begun operations. As a result, it isn’t possible for potential
Investors to evaluate the Fund’s loan and investment portfolios at this time. In addition, since
the short-term investments in which Investor contributions to the Fund will be placed until they
are invested in Fund Loans or Equity Investments meeting the Fund's criteria, any returns during
the period prior to investing the contributions in Fund Loans and Equity Investments are likely to
be less than the amount that would be earned from investing in Fund Loans and Equity
Investments, any delay in investing the net proceeds of this Offering will, to that extent, reduce
the earnings of the Fund.
17. Phantom Income.
For any number of reasons, in any given year, the Members may be allocated taxable income in
excess of their share of cash distributions. This may occur, for example, if (i) an investment in a
Fund Loan with fixed or contingent interest that must be accrued for tax purposes before the
interest is actually received by the Fund, (ii) operating profits are placed in a reserve account or
are being used by the Fund for other purposes, or (iv) cash attributable to taxable income is spent
on non-deductible items, such as capitalized expenses.
14
18. Loan Defaults and Foreclosures.
The Fund will invest in both Fund Loans and Equity Investments. With respect to the Fund
Loans, the Fund bears the risks of defaults by borrowers. Many Fund Loans may be interest-only
loans providing for monthly interest payments with a large balloon payment of principal due at
the end of the term. Borrowers may be unable to repay such balloon payments out of their own
funds and may be compelled to refinance. Fluctuations in interest rates and the unavailability of
funds could adversely affect the ability of borrowers to refinance their loans at maturity. If
borrowers are unable to re-finance a Fund Loan, the borrower may default in repaying the Fund
Loan to the Fund.
The Fund will rely primarily on the real property securing the loans to protect its investment in
the Fund Loans. In addition, to a lesser extent, the Fund will be relying on the creditworthiness
of a particular borrower. There are a number of factors that could adversely affect the value of
the real property securing repayment of the Fund Loans, including, among other things, the
following:
(a) The Fund will rely on appraisals or the Manager’s discretion in order to
determine the fair market value of real property used to secure Fund Loans. In exercising that
discretion, the Manages will conduct reasonable due diligence to determine the fair market value
of the real property. No assurance can be given that any appraisals will, in any or all cases, be
accurate. Moreover, since an appraisal is based upon the value of real property at a given point in
time, subsequent events could adversely affect the value of real property used to secure a Fund
Loan. Such subsequent events may include general or local economic conditions, neighborhood
values, interest rates and other factors.
(b) If a borrower defaults, the Fund may have no feasible alternative other than to
repossess the property at a foreclosure sale. If the Fund cannot quickly sell such property, and
the property does not produce any significant income, the cost of owning and maintaining the
property will directly affect the Fund's profitability.
(c) Subsequent changes in applicable laws and regulations may have the effect of
severely limiting the permitted uses of the property, thereby drastically reducing its value.
(d) Due to certain provisions of state law applicable to real property secured
loans, in general, if the real property security proves insufficient to repay amounts owed to the
Fund, it is unlikely that the Fund would have any right to recover any deficiency from the
borrower. See Section IV(C)(1)(c) below, "Business Overview - Certain Legal Considerations
regarding Fund Loans").
(e) Some of the Fund Loans may be secured by junior deeds of trust, which are
subject to greater risk than first deeds of trust. In the event of foreclosure, the debt secured by the
senior deed of trust must be satisfied before any proceeds from the sale of the property can be
applied toward the debt owed to the Fund that are in junior positions. Furthermore, to protect its
junior security interest, the Fund may be required to make substantial cash outlays for such items
as loan payments to senior lien holder to prevent their foreclosure; property taxes; insurance and
15
repairs. The Fund may not have adequate cash reserves on hand at all times to protect its security
for a Fund Loan, in which event the Fund could suffer a loss of its investment in that Fund Loan.
See Section IV(C)(1)(c) below, "Business Overview - Certain Legal Considerations regarding
Fund Loans").
(f) The recovery of sums advanced by the Fund in making Fund Loans and
protecting its security may also be delayed or impaired by the operation of the federal
bankruptcy laws or by irregularities in the manner in which the Fund Loan was made. Any
borrower has the ability to delay a foreclosure sale for a period ranging from several months to
several years simply by filing a petition in bankruptcy that automatically stays any actions to
enforce the terms of the loan. It can be assumed that such delays and the costs associated
therewith will reduce the Fund’s profitability.
Since the Fund will be relying on real property security to protect its investment to a greater
extent than the creditworthiness of its borrowers, the Fund is likely to experience a borrower
default rate higher than would be experienced if its loan portfolio were more heavily focused on
borrower creditworthiness.
The Fund intends to comply fully with all applicable State and Federal laws, including applicable
lender, finance, consumer protection and loan servicing laws. However, these laws vary from
State-to-State and it is possible that the Fund may not be fully aware of all applicable laws.
Failure to comply with the laws and regulatory requirements applicable to our business and
making the Fund Loans may, among other things, limit our ability to make, collect on and
service the Fund Loans. In addition, any non-compliance could subject the Fund to damages,
revocation of required licenses or other authorities, lawsuits and enforcement actions.
19. The Fund may encounter unexpected risks that may adversely affect its
performance.
The risks listed in this Section II (A) and Sections II (B) and (C) below are not a complete list of
all potential risks facing the Fund or that may otherwise impact an investment in the Fund.
Significant risks may exist that are not as yet recognized or encountered and the Fund may not be
able to effectively respond to those unknown risks. There can be no assurance that the Fund will
be successful in addressing the risks or potential risks it faces or may face, and any failure to do
so could have a material and adverse effect on the Fund's financial condition and results of
operations.
B. Risk Associated with Doing Business in the Legalized Cannabis Industry
1. Cannabis remains illegal under federal law.
Although the Fund will not be engaged in the production, sale or distribution of legalized
cannabis itself, it anticipates proving funding through Fund Loans and Equity Investments to
business that do as well as businesses that provide products and services to such businesses (e.g.,
equipment providers, real property lessors, consultants, etc.). As a result, the legal status of
medical and adult recreational use of cannabis will directly impact the Fund’s business,
operations and financial condition. Cannabis remains illegal under federal law. It is a schedule-I
controlled substance. Even in those jurisdictions in which the use of medical cannabis has been
16
legalized at the state level, its prescription is, technically, a violation of federal law. The United
States Supreme Court has ruled in United States v. Oakland Cannabis Buyers’ Coop.
and Gonzales v. Raich that it is the federal government that has the right to regulate and
criminalize cannabis, even for medical purposes. Therefore, federal law criminalizing the use of
cannabis preempts state laws that legalize its use for medicinal purposes. Presently, despite
federal law, many states are maintaining existing laws and passing new ones in this area. This
may be because the Obama Administration has made a policy decision to allow states to
implement these laws and not prosecute anyone operating in accordance with applicable state
law. Regardless of the Obama Administration’s policy decision, the federal government may at
any time choose to enforce the federal law. Moreover, we face another presidential election
cycle in 2016, and a new administration could introduce a less favorable policy. A change in the
federal attitude towards enforcement could cripple the industry and the Fund’s proposed
business.
Although the Fund doesn’t produce, market or sell cannabis or cannabis-related products, there is
a risk that the Fund could be deemed to facilitate the selling or distribution of cannabis in
violation of the federal Controlled Substances Act, or be deemed to be aiding or abetting, or
being an accessory to, a violation of the Controlled Substances Act. Adverse actions taken by
the federal government may lead to delays of our business operations, disruptions to our revenue
streams, losses of substantial assets and potentially substantial litigation expenses. Furthermore,
the medical marijuana industry is our primary target market, and if this industry were unable to
operate, the value of Equity Investments made by the Fund and the ability of borrowers under
Fund Loans to repay the Fund Loans timely and otherwise in accordance with their terms would
be significantly and negatively impacted, which would have a significant and negative impact on
the Fund’s business, operations and financial condition.
2. Banking limitations negatively impact business in the legalized cannabis industry.
As discussed above, the possession and use of cannabis for any purposes is illegal under federal
law. Therefore, there is a strong argument that banks cannot, and they typically do not, accept
for deposit funds from the drug trade and therefore cannot do business with businesses engaged
in the production, sale or distribution of cannabis, as well as businesses that provide products and
services to these businesses, despite the fact that the activities these businesses are engage in may
be legal under applicable state law. On February 14, 2014, the U.S. Department of the Treasury
Financial Crimes Enforcement Network (“FinCEN”) released guidance to banks “clarifying
Bank Secrecy Act (“BSA”) expectations for financial institutions seeking to provide services to
cannabis-related businesses.” In addition, U.S. Rep. Jared Polis (D-CO) has stated he will seek
an amendment to banking regulations and laws in order to allow banks to transact business with
state-authorized medical marijuana businesses. While these are positive developments, there can
be no assurance this legislation will be successful, or that, even with the FinCEN guidance,
banks will decide to do business with businesses in the legalized cannabis industry, or that, in the
absence of actual legislation, state and federal banking regulators will not strictly enforce current
prohibitions on banks handling funds generated from an activity that is illegal under federal law.
The inability of businesses operating in the legalized cannabis industry to open accounts and
otherwise use the services of banks may make it difficult for such businesses to prosper and
expand, which could have a significant and negative impact on the Fund’s business, operations
and financial condition.
17
The Fund is trying to fill what it believes is a void left by traditional banking institutions by
providing Fund Loans to qualified borrowers and making Equity Investments in businesses that
the Manager, in its sole discretion, has determined would be appropriate for the Fund. As a
result, the Company will be engaging in a business that other well-funded financial institutions
deem risky. The Company’s lending activities may subject it to enforcement actions. Further,
enforcement actions related to the Company or a borrower could jeopardize the Company’s
collateral (e.g., real estate securing repayment of the Fund Loans). Lending to businesses
operating in the legalized cannabis industry is a high-risk business activity, and potential
Investors should consider this before investing in the Fund. Enforcement actions or other legal
proceedings involving a borrower under a Fund Loan or a business in which the Fund makes an
Equity Investment could have a significant and negative impact on the Fund’s business,
operations and financial condition.
3. Varying state laws.
Although the federal government has the right to regulate and criminalize cannabis, which it has
in fact done, state and municipal governments may adopt additional laws and regulations that
further criminalize or negatively affect cannabis businesses. States that currently have laws that
decriminalize or legalize certain aspects of cannabis, such as medical or adult recreational use
cannabis, could, in the future, reverse course and adopt new laws that further criminalize or
negatively affect the cannabis industry. Additionally, municipal governments in these states may
have laws that adversely affect cannabis businesses, even though there are no such laws at the
state level. For example, municipal governments may have zoning laws that restrict where
cannabis operations can be located and the manner and size of which they can expand and
operate. These municipal laws, like the federal laws, may adversely affect our ability to do
business, and adverse enforcement actions under these laws may lead to costly litigation and a
closure of the businesses with which the Fund has provided Fund Loans and businesses in which
the Fund has provided Equity Investments, which, in turn, could significantly and negatively
impact our business, operations and financial condition.
4. The alternative medicine industry faces strong opposition.
Although recent public opinion appears to support some form of legalized cannabis use, it is
believed that well-funded, significant businesses may have a strong economic opposition to the
medical cannabis industry as currently formed. For example, we believe that the pharmaceutical
industry clearly does not want to cede control of any compound that could become a strong
selling drug. For example, medical marijuana will likely adversely impact the existing market
for Marinol, the current “marijuana pill” sold by mainstream pharmaceutical companies. The
pharmaceutical industry is well funded with a strong and experienced lobby that greatly eclipses
the funding of the legalized cannabis movement (and most other movements or lobbies). Any
inroads the pharmaceutical industry makes in halting or rolling back the legalized cannabis
movement could have a significant and negative impact on the legalized medical marijuana
industry, the demand for Fund Loan and availability of acceptable Equity Investments for the
Fund and, consequently, on our business, operations and financial condition.
18
5. The Fund’s success is, in part, dependent on additional states legalizing medical
and/or adult recreational use cannabis.
Although the Fund believes that the demand in the legalized cannabis industry as it currently
exists for the type of financing the Fund intends to provide (i.e., Fund Loans and Equity
Investments) is strong and that there should be sufficient demand for Fund Loans and financing
through Equity Investments, continued development of the industry may be necessary in order
for the Fund to expand and potentially generate additional return for Investors. Continued
development of the legalized cannabis industry is dependent upon continued legislative
authorization of cannabis at the state level for medical purposes and, in certain states, based on
the specifics of the legislation passed in that state. Any number of factors could slow or halt that
development. Furthermore, while the current progress in the industry is encouraging, it is not
assured, and the process normally encounters setbacks before achieving success. While there
may be ample public support for legislative proposals, key support must be created in the
legislative committee or a bill may never advance to a vote. A numerous factors impact the
legislative process. Any one of these factors could slow or halt the progress and adoption of
marijuana for medical or adult recreation purposes, which could substantially and negatively
impact the Fund’s business, operations and financial condition.
C. Tax Risks
There are a number of federal income tax risks relating to the intended business of the Fund and
an investment in the Units of the Fund that could impact the advisability of a potential Investor
investing in the Fund. No rulings have been sought from the Internal Revenue Service (“IRS”)
with respect to any of the tax matters described in this Memorandum, and each potential Investor
should consult such potential Investor’s own tax advisor as to the relevant tax considerations and
as to how those considerations may affect its investment, and to determine whether an
investment in the Fund is a suitable investment for the potential Investor. Set forth below are
some of the tax risks relating to an investment in the Fund. This list is not intended to be all-
inclusive. INVESTORS ARE NOT TO CONSTRUE ANY OF THE CONTENTS OF THIS
MEMORANDUM, INCLUDING, WITHOUT LIMITATION, THE INFORMATION
PRESENTED BELOW, AS TAX ADVICE AND ARE URGED TO CONSULT WITH THEIR
OWN TAX ADVISORS CONCERNING THE TAX ASPECTS AND ALL OTHER MATTERS
RELATING TO AN INVESTMENT IN THE FUND.
Significant and fundamental changes in the federal income tax laws have been made in recent
years and additional changes are likely. Any such change may affect the Fund and the Investors.
Moreover, judicial decisions, regulations or administrative pronouncements could unfavorably
affect the tax consequences of an investment in the Fund.
Treasury regulations under section 7701 of the Internal Revenue Code of 1986, as amended (the
“Code”), provide that a domestic business entity, other than a corporation, may elect whether to
be treated as a partnership or an association taxable as a corporation for federal income tax
purposes. Treasury Regulation Section 301.7701--2 defines “corporations” to include
corporations denominated as such under applicable law, associations that elect to be classified as
such, joint stock companies, insurance companies and other business entities, but not including
limited liability companies. The Fund is a limited liability company. Under a default rule in the
Treasury Regulations, limited liability companies formed under a state statute, such as the Fund,
are treated as partnerships for federal income tax purposes, unless such entities affirmatively
19
elect to be treated as associations taxable as corporations. The Fund will not elect to be treated as
an association nor taxable as a corporation for federal income tax purposes.
The proper federal income tax treatment for all Fund items of income and loss will be
determined at the Fund level. Adjustments, if any, resulting from any audit of the Fund, should
the Fund ever be audited, will result in corresponding adjustments of Fund items of income and
loss reflected on the Investor’s own tax returns. In addition, the Manager is designated as the
“tax matters partner” of the Fund, and, as such, has primary responsibility for Fund level matters
involving the IRS, including the power to extend the statute of limitations for all Members of the
Fund, including, without limitation, the Investors, as to Fund items of income and loss.
Each Member, including, without limitation, the Investors in this Offering, must include in such
Member’s gross income for federal income tax purposes its distributive share of the Fund’s
income. Such income is subject to taxation without regard to whether any cash or property is
distributed to the Member. Taxable income may exceed distributable cash because of
differences in timing and possible expenditure of cash for nondeductible items. Taxable income
also may exceed distributable cash because of amounts paid by the Fund to lenders to repay
principal on any Fund borrowings (although the Fund doesn’t anticipate incurring any such
debt).
Potential investors should seek the advice and counsel of their own tax advisors. See also Section
IX below, “Certain Tax Considerations ”.
20
III. THE FUND
A. Overview
The Verde Mountain Fund, LLC (the “Fund”), is a Wyoming limited liability company
organized on February 26, 2016. Avalon Management Group, Inc., is the Manager of the Fund
and was formed in September of 2012 as a Wyoming corporation. The Manager was the original
Member of the Fund, owning one (1) Unit. The Manager is entitled at all times to a non-dilutive
One Percent (1%) of and all issued and outstanding Units, determined immediately prior to the
issuance of the Units to the Manager. Assuming that all Units offered hereby are sold, the
Manager will own 2 Units after completion of this Offering. Thomas W. Garlock is the
President and sole owner of the Manager.
The business address for the Fund and the Manager currently is:
970 W. Broadway, #446
P.O. Box 30,000
Jackson Hole, WY, 83002
Tel: 800-914-2689
Email: Thom@VerdeMountainFund.com
B. Capitalization
The Fund initially will be capitalized mainly with the proceeds of this Offering. Assuming that
this Offering is fully subscribed and all Units offered hereby are sold, the Company will receive
$2,500,000 in gross proceeds from this Offering. See Section I above, “Summary of the Offering
– Capitalization”.
C. Potential Conflicts of Interest
1. Other Investment Funds Managed by the Manager.
The Fund’s Manager is involved in, or may be involved in the future, with numerous other
businesses, funds and investment opportunities. Furthermore, the Manager may form additional
investment funds in the future, whether public or private, which may or may not have similar
business plans to that of the Fund. Although the Manager currently manages another investment
funds that are engaged in the business of making loans to or investing in other businesses, these
funds are focused on the real estate market. Currently, the Manager doesn’t manage any other
investment funds that focus on loans to and investing in businesses operating in the cannabis
industry. Nonetheless, through the efforts of the Manager, several of these other investment
funds are actively engaged in private placement securities offerings themselves, seeking equity
financing. A conflict may arise if a potential Investor must decided between investing in this
Offering or investing in one of the other investment funds currently managed by the Manager or
any of its affiliates, or which may be managed by the Manager in the future. See Section VII.C
below, “Management - Thomas W. Garlock”.
21
2. Legal Representation.
Legal counsel to the Manager also will serve as legal counsel to the Fund. In the event that any
controversy arises during or following the termination of the Offering in which the interests of
the Fund appear to be in conflict with those of the Manager, it may be necessary to retain other
counsel for one or both of these parties.
3. Transactions with Affiliates will not be Arms-Length.
Certain agreements and arrangements, including those relating to compensation between the
Fund and the Manager, have been established by the Manager and are not the result of arms-
length negotiations between unrelated parties. For its services in managing the Fund, the Fund
will pay the Manager a management fee of $120,000 per year, payable quarterly provided that
funds are available, as well as a number of Units equal to 1% of all Units then issued and
outstanding. In addition, the Fund may enter into other agreements and arrangements on terms
and conditions that the Manager believes are fair and reasonable to the Fund and its Members,
without any approval or input from the Members. The Manager may be deemed to have a
conflict of interest in making such decisions. See also Section VII.E below, “Compensation of
the Manager and Affiliates”.
D. Future Dilution
Although the Fund currently expects that any Units sold in any future offerings will be at prices
greater than $12,500 per Unit, and, as a result, no dilution in net tangible book value per Unit
should result from any such future offerings, there can be no assurance that Units issued in the
future will be issued at prices greater than $12,500 per Unit and that the net tangible book value
per Unit will not decrease for Investors in this Offering. See Section 1 above, “Summary of the
Offering - Capitalization”, regarding possible ownership dilution if the Fund issues additional
Units.
22
IV. PROPOSED BUSINESS PLAN
A. Introduction
The Fund will focus on providing financing to established companies in the legalized cannabis
(marijuana) industry in the form of Fund Loans or Equity Investments, or both. The legalized
cannabis industry is comprised of different business segments, including, without limitation,
businesses engaged in (i) cannabis cultivation, production, sales and distribution for medicinal
uses pursuant to applicable state laws; (ii) cannabis cultivation, production, sales and
distribution for adult recreational use pursuant to applicable state laws; and/or (iii) providing
equipment, products and services to business engaged in cannabis cultivation, production, sales
and distribution. Currently, the yield per acre on legal cannabis cultivation exceeds those of
many widely grown crops in the United States.
In 1996, California passed the nation’s first medical marijuana initiative known as Proposition
215, which permitted patients and their primary caregivers, with a physician's prescription or
order, to possess and cultivate cannabis for the treatment of AIDS, cancer, muscular spasticity,
migraines, and several other disorders. Since that time, companies seeking to enter the industry
offering both medicinal products and services faced a number of challenges, including access to
capital.
Today, there are a total of twenty-three (23) states and the District of Columbia that have passed
medical marijuana laws, including four (4) that have also passed adult recreational use laws.1
23
New and established businesses in the legalized cannabis industry continue to have difficulty
obtaining necessary financing and often seek alternative funding sources given the uncertainty
regarding federal banking laws, which, technically, prohibit banks and other traditional lenders
from engaging in any banking practices with businesses engaged in the legalized cannabis
industry. This uncertainty will continue to exist until, if at all, Congress enacts legislation that
removes cannabis from being classified as a Schedule 1 controlled substance.
1. Why was this plant ever made illegal?
The history of cannabis in the United States is complex. Many feel any examination of
this plant and its properties is motivated by prejudice and a campaign of deliberate deception that
continues to this day. However, the truth about this plant cannot be hidden forever. There is
currently a mountain of undeniable evidence that demonstrates that the harms of keeping
cannabis illegal far outweigh the benefits of legalization.
The prohibition of cannabis has never been about the inherent properties of the plant but instead
about the people who choose to use it. This plant is easily grown in almost any environment and
is useful for fiber, food, fuel and medicine.
24
Many poets, novelists, musicians and artists through the ages have prized cannabis for its ability
to catalyze the creative process. In fact, George Washington and many of the other Founding
Father grew cannabis. The Declaration of Independence was drafted on hemp paper; it was
widely reported that the first American Flag was woven from hemp fiber. Even the covers of the
Conestoga wagons and the homespun clothing American settlers wore as they travelled West
were largely made of hemp.
After its medical applications became more widely known in the 1800s, cannabis was officially
listed in the United States Pharmacopoeia and prescribed by numerous physicians. During this
time, most people viewed cannabis as a medicine or a raw material if they even thought about it
at all. Even though current United States federal government officials currently maintain that
cannabis has no medical benefits, the American government actually holds patents for the
medical use of the plant including US Patent 6630507 which is titled, “Cannabinoids as
antioxidants and neuroprotectants”. The use of this patent is assigned to the United States of
America, as represented by the Department of Health and Human Services.2
2. Cannabis Has Always Been a Medicine
While modern science has conclusively demonstrated the safety and medical efficacy of
cannabis, its close association with historically marginalized social classes has earned it the
suspicion of religious and political elites in many different times and places. In fact, cannabis
may be the most investigated therapeutic substance in history. More than 20,000 studies and
reviews regarding cannabis have been published in scientific literature. The vast majority prove
the plant’s active ingredients are uniquely safe and effective. Its side effects are relatively mild
and short-acting with no lethal dose. While it is possible for one to theoretically die of carbon-
monoxide poisoning if enough smoke is inhaled, there are no recorded deaths from ingesting too
much cannabis.
Indeed, cannabis is a medicine that was most likely used by human beings since the dawn of
civilization. In the thousands of years before the invention of modern chemistry, plants were the
only medicine available and were utilized to treat a number of medical ailments even when it
wasn’t fully understood why they were effective. When cannabis was first made illegal, it wasn’t
possible to understand the specifics of why it helped treat such a wide range of conditions. It
wasn’t until Raphel Medhoulam used gas chromatography in the 1960s that the first active
ingredients in cannabis were isolated.3
Since that time, scientists have discovered that cannabis is packed with a number of therapeutic
substances known as cannabinoids. To date, researchers have identified 85 different
cannabinoids but suspect there still are more to be discovered. Each of these cannabinoids
produces a distinct action in the human body; different combinations and ratios of cannabinoids
produce yet another range of distinct actions. THC is the best known of the cannabinoids and is
notorious for its psychoactive effects. Research shows this cannabinoid is powerfully effective
for many conditions including insomnia, chronic pain, cancer, PTSD, glaucoma, low libido and
many more. In fact, the impact THC has on the human mind is often viewed as its most
therapeutic contribution to the treatment of many different disorders.
25
By contrast, cannabidol (also known as CBD) is generally considered non-psychoactive. It
suppresses or balances the psychoactive effects of THC. Because of this, CBD is the primary
ingredient in the tinctures responsible for the remarkable recovery of thousands of epilepsy
patients. It is an extraordinarily potent anti-inflammatory, anti-spasmodic, and neuroprotective
substance that can dramatically reduce anxiety without impacting mental processes. CBD has
also been found effective for the treatment of rheumatoid arthritis, diabetes, alcoholism, PTSD,
antibiotic-resistant infections and neurological disorders.
Twenty years ago, scientists first discovered the presence of the endocannabinoid system.4 This
series of receptors serves as bridge between mind and body that researchers believe has been an
integral part of the evolution of the human brain and nervous system. This is, in part, because the
endocannabinoid system is part of the physiology of all creatures with the exception of insects. It
would be rational to conclude that the discovery of the endocannabinoid system would have
immediately ended all debate about the medicinal use of cannabis. However, the U.S.
government’s policy of classifying cannabis as a drug with high abuse potential and no
therapeutic use prevents medical schools from even offering courses in cannabis medicine. Dr.
Donald Abrams, Chief Oncologist for the UCSF Research Hospital, reports most doctors are not
even aware of the existence of the endocannabinoid system and its purpose as the largest
neurotransmitter system in the human body.5
Citations:
1https://frontierfinancials.com/solmm/
2 Steve DeAngelo The Cannabis Manifesto A New Paradigm for Wellness (North Atlantic Books-2015)
3 http://kalytera.co/dr-raphael-mechoulam/
4 http://www.medicalcannabis.com/cannabis-science/endocannabinoid-system/
5 http://www.medicalcannabis.com/about/faculty/donald-abrams/
26
B. Market Overview
1. National Market
2015 was a watershed year for the legal cannabis market. National legal sales grew to $5.4
billion (up from $4.6 billion in 2014) and were fueled by explosive growth in adult use market
sales, (See chart below) which grew from $351 million in 2014 to $998 million, an increase of
184%.1 Demand is expected to remain strong in 2016 with legal markets projected to grow to
$6.7 billion, a 24% increase over the previous year.
Source: New Frontier Research & Analysis 2016
Some Wall Street analysts estimate that, by 2020, legal market sales of cannabis will grow to
$21.8 billion, with adult recreational use sales comprising nearly two-thirds of the total market.2
Among the states where adult recreational use is currently legal, Washington is projected to be
the largest market by 2020 at $2.3 billion followed by Colorado at $2 billion. Collectively, the
top 5 states are projected to generate $5.5 billion in sales by 2020 and will account for 47% of
the total adult use market.
Source: New Frontier Research & Analysis 2016
27
However, these numbers are solely for the legalized sector of the market. It is estimated that the
cannabis industry today has annual revenues of over $50 billion if black market sales were also
included. It is estimated that, currently, only 10% of the industry has entered the legal sector.
This means that economic losses are being felt on many different levels.3
Because black market
cannabis sales are not legal, there is no tax revenue being generated on these sales. In addition,
other sectors of the field, such as testing labs and advertising, are losing out on the benefits that
legalized cannabis use could bring.
The medical marijuana market in California is expected to continue as the largest market in the
U.S. through 2020, although the combination of strict new medical regulations passed in 2015
and the anticipated legalization of adult recreational use in 2016 is expected to reduce the levels
of patient participation in the medical marijuana market in the coming years. Consequently,
California’s medical market is projected to shrink slightly from $2.7 billion in 2015 to $2.6
billion by 2020.
Many industry analysts project that those states where new legislation is pending (see map
below), will approve the medical use of marijuana within the next two years, while those states
permitting medical use today, will pass legislation that will permit adult use within the next five
years.
Source: New Frontier Research & Analysis 2016
2. 2015 State Market Statistics
According to the Denver Post, Colorado dispensaries recorded $996 million in medical and
recreational cannabis sales during 2015.3 Adult use recreational sales totaled $588 million while
medical marijuana revenues totaled $408 million. That’s an increase of nearly $296 million from
2014, the first full calendar year of recreational sales in Colorado when revenue totaled just
28
under $700 million. According to calculations from the state’s revenue department from 2015,
recreational cannabis sales via licensed retail stores grew 88% in Colorado.4
An equally
compelling story is tied to wholesale recreational cannabis sales, which increased by 163% in
2015 to hit $234 million. These wholesale numbers indicate a thriving market for companies
who cultivate cannabis for retailers, as opposed to retailers that only grow for their own needs.
The increase was somewhat expected. During the first nine months of adult use sales in Colorado
during 2014, retailers were required to cultivate at least 70% of their own cannabis. This limited
the potential size of the recreational wholesale market. When this requirement was removed in
October 2015 wholesale transactions naturally increased.
Until wholesale transactions were approved, however, the industry was never sure how large this
market would be. January 2016 figures from the state of Colorado indicate that demand for
wholesale cannabis continues to be strong. A robust wholesale market is a necessity in a market
like Colorado where retail outlets are abundant, consumer demand is high and retail competition
is growing. It’s simply not cost effective for every one of the state’s 400-plus retail stores to
cultivate all or even most of the cannabis they sell, nor is there enough commercial cultivation
space available at this time to meet the current market demand.
The growth in sales (see chart above) signals that Colorado’s market may not have yet reached
its full potential, even though many view the state as already saturated with retailers. One
question for the future of Colorado’s market is whether it will face more competition for
29
cannabis tourists if additional states such as Arizona, California, Nevada, and others legalize
adult recreational use in the November 2016 elections.
Washington also saw strong growth in monthly sales in 2015, growing by 299% from $18.8
million in January to $75.3 million in December. Oregon launched its adult recreational use
market with limited sales through existing medical dispensaries on October 1, 2015. Although
the state does not track adult recreational use sales, the Oregon Retailers of Cannabis Association
estimated that sales in the first week alone were $11 million. In their first 6 months, more than
300 dispensaries licensed to sell adult-use cannabis have exceeded over $200 million in
revenues. This is even more impressive since retailers are not yet allowed to sell edibles or
concentrates in the state.5
The state of Illinois opened its first medical marijuana dispensaries in November 2015.6 Since
then, medical marijuana sales in Illinois hit nearly $1.24 million in January 2016 (up almost 20%
from December 2015 sales of slightly more than $1 million). A little more than $1.1 million of
the sales during January were attributable to dried flowers, while concentrates and edibles
accounted for just $132,000. Illinois also added seven new dispensaries in January, bringing the
total in the state to 28. The state reported that 2,774 unique patients were served during the
month of January alone. Assuming each of those patients bought dried flowers, the price of
cannabis in the state averages a little more than $14 per gram. The state’s wholesalers produced
more than $946,000 in sales according to the state figures. According to the state’s medical
program, there are approximately 4,000 registered medical marijuana patients in Illinois.7
In Nevada, citizens started to apply for medical marijuana cards in December 2015. Applications
for this card have far exceeded expectations. The state’s medical marijuana program had to add
additional staff and funding to keep up with approximately 300 applications for medical card
per month.8 Currently, it is estimated that 60,000 Nevada citizens are able to use cannabis
medicinally. Florida is expected to vote on their own medical marijuana legislation in November.
If this legislation passes, Florida would be the second-largest market for medical marijuana
usage in the nation.9
States such as Arizona who have been able to legalize medical use of cannabis have seen much
economic growth and have demonstrated an ability to withstand legal challenges well. Arizona’s
cannabis dispensaries make nearly $100 million dollars a year in revenue and continue to grow.
The state has established large caps on the number of dispensaries and growers which has
allowed ample yet controllable business growth which is only expected to continue its robust
development.10
3. Legal Cannabis Sales are a Growing Revenue Source for States
Legal cannabis sales have been a boon for state coffers in markets like Colorado, (see chart
below) where the state collected more than $135 million in cannabis taxes and licenses fees in
2015 (a 77% increase over the $76 million the state received in 2014). That’s nearly double the
$42 million collected by Colorado in liquor taxes during the same period, as reported by Time
Magazine. In fact, more than $35 million of the taxes collected from cannabis sales are
earmarked for Colorado state school construction projects.11
30
Source: New Frontier Research & Analysis 2016
In Washington, the first year of legal cannabis sales generated $70 million in tax revenues from
sales of $257 million, a significant windfall even after product shortages and pricing instability
plagued the program during its early months. The state of Oregon began taxing the retail sale of
adult recreational use cannabis in January 2016 at a rate of 17%-20%, and has estimated a total
of approximately $10 million in tax revenue during 2016.9 Wholesale medical cannabis sales in
Illinois totaled about $1.5 million during the first two months of legal sales, meaning Illinois
collected about $107,000 in tax revenue during this time because wholesalers pay a 7% tax to the
state, as reported by the Associated Press.12
4. Job Creation in the Cannabis Industry
Currently, it is estimated (see chart above) that 46,000 to 60,000 Americans work in the
Cannabis industry,13
including those who grow cannabis, test for product quality and make
infused products, among other positions. When including those who provide services or ancillary
products for the cannabis industry, these numbers may increase by as much as 50%.
31
While some of these positions may be for low-skilled laborers, others may be retail jobs or
skilled positions as bookkeepers, attorneys or insurance agents providing specialized services to
the cannabis industry. (see chart below)
5. Majority Support for Legalization is Fueling a National Policy Shift
The industry's continued expansion was matched by equally strong growth in popular support for
cannabis legalization nationally. According to Gallup, 58% of Americans now support
legalization of cannabis for adult recreational use. This support is up from 36% in 2005.14
A
separate poll by Harris found 81% of Americans support legalization for medical use.15
While
support for cannabis law reform has risen across all age groups, it is highest amount adults age
18-34, 74% of whom now support legalization of adult recreational use.
32
Source: New Frontier Research & Analysis 2016
This broad base of support amount younger voters portends a generational shift in views that is
expected to fundamentally reshape the country's approach to cannabis regulation. (see chart
above)
Currently, 86% of Americans live in a state that allows some degree of legal cannabis use,
including CBD-only, medical and adult recreational use.16
The wide exposure of the majority of
Americans to evolving cannabis laws has been instrumental in shaping the public's increasing
acceptance of cannabis. By almost every metric, the legalization and regulation of adult
recreational use in Colorado and Washington has been a success. Many of the negative outcomes
threatened by prohibitionists have not come to fruition.
In states were cannabis is legal, crime is down, falling prices have made the legal market
increasingly competitive against the black market, diversity has increased and regulatory
compliance is high as businesses dare not risk losing their valuable licenses and product quality.
The success of these markets has provided the first clear evidence that legalization is a viable
alternative to prohibition, a fact-based counterpoint to the agreement that it is in society's best
interests to continue the prohibition of cannabis.
33
The shift in this debate is currently playing out in legislatures across the country (see chart
above) as well as on the national stage. The 2016 presidential election is the first time in U.S.
history that major party candidates have declared support for legal adult recreational use and
cannabis access.
In Congress, lawmakers have slashed the DEA's budget, prohibited the Justice Department from
spending resources to intervene in legal state markets that meet certain criteria, proposed
rescheduling of cannabis to enable more medical research and introduced the first-ever
legislation aimed to end federal cannabis prohibition altogether.17
Congress also took a more assertive stance in allowing states with legally regulated cannabis
markets to proceed without the threat of enforcement from the Drug Enforcement Agency
(DEA). Through a series of legislative actions, Congress prohibited federal agencies from
interfering in state-legal cannabis programs, renewed protections for state-legal hemp programs
and introduced protections for states with CBD programs. Congress has also started to strip the
DEA of funds used to enforce cannabis prohibition in states with legally operating markets. At
this time bills are also being put forth to completely remove funding for the cannabis eradication
program. Additionally, Congress cut the DEA’s budget by $23 million, a reduction that was seen
as a strong signal that the appetite for the aggressive approach to enforcement was falling out of
favor among legislators.
34
6. Medical Research Approval
Although full clinical research approval will likely only come through reclassification of
cannabis through the Controlled Substances Act (CSA), incremental changes to allowing
cannabis research have already begun. On December 23rd, 2015, the DEA eased some of the
regulatory requirements imposed by the CSA for those who are conducting FDA-approved
clinical trials on cannabidiol (CBD), which is an extract of the cannabis plant.18
These
modifications will streamline the exploration of CBD, a compound that has already shown
significant medicinal promise and has generated significant interest in exploring its therapeutic
potential. Of the possible congressional actions, reclassification of cannabis would have the
greatest impact on the cannabis industry as a whole. However, even with mounting scientific
evidence and completed research studies, the DEA does not appear to be interested in
reclassifying cannabis in the near future. It is possible that Congress may reschedule cannabis as
part of the current bills on medical cannabis use or on banking regulations for the cannabis
industry, although that is far from certain.
State Rankings for Medical Marijuana Patients Per Capita
The number of medical marijuana patients in any given state depends on a myriad of factors.
However, certain variables are more influential than others. An analysis of these factors can help
cannabis entrepreneurs evaluate the size and profit potential of a specific market.19
35
For example, consider the qualifying conditions list for usage of medical marijuana. By far,
Illinois has the longest list of specific conditions, yet it has one of the lowest MMJ patient
densities per capita at less than one per 1,000 adults. By comparison, Colorado has one of the
shortest conditions lists, yet has the second highest density per capita at 26 patients per 1,000
adults. So what’s driving this difference? When allowed, generalized severe and/or chronic pain
are by far the most commonly cited qualifying conditions for adult patients, while seizures takes
the top spot for minors. Colorado allows medical cannabis prescriptions for severe pain, whereas
Illinois does not. Other states at the top of the list (see chart above) for patients per capita –
including California, Oregon, Michigan and Washington State—all allow prescriptions to relieve
severe and/or chronic pain.
Post-traumatic stress disorder has also provided a healthy boost to patient counts when permitted.
For instance, in New Mexico this is currently the most commonly cited condition by patients.
However, qualifying conditions aren’t the only consideration. New York requires physicians to
undergo a state-approved training course before they are permitted to recommend medical
cannabis, thus limiting the number willing to do so. In turn, this lowers the number of patients
receiving medical cannabis in the state.
Illinois requires patients to undergo full background checks and fingerprinting, an invasive
application process which may limit the number of patients in the state. Other influential factors
which impact patient counts include state limits on the number of dispensaries and cultivation
facilities. In addition, local moratoriums can leave medical patients without legal access or can
prohibit home cultivation.
7. Conclusion
The legalized cannabis market is in its early stages of growth. It is predicted that with more states
passing adult recreational use legislation the market will only continue to expand. Existing state
sales data in places where cannabis is already legal is only a preview of the growth and point to
the industry’s full potential. Because of the large amount of tax revenue it provides, states
appreciate the new source of revenue that legalize cannabis use provides.
In addition, public opinion across the nation about legalization of cannabis is rapidly changing.
Over 50% of Americans support legalization of cannabis in some form.20
Because of this,
legislators are listening to their constituents and have slowly started to change the laws that
pertain to this market. This has allowed a growth in medical research on the benefits of cannabis
that is anticipated to encourage an increase in its prescribed medical uses. All of these factors
combined indicate that major changes in this market should occur in the next 10 years, perhaps
culminating in possible federal legalization.21
_______________________
Citations:
1http://www.cnbc.com/2016/02/01/legal-us-pot-sales-soar-in-2015.html
2https://www.newcannabisventures.com/wall-street-cannabis-report/
3http://www.thecannabist.co/2016/02/09/colorado-marijuana-sales-2015-reach-996-
million/47886/
36
4
https://www.colorado.gov/pacific/revenue/colorado-marijuana-tax-data
5http://mjbizdaily.com/oregon-dispensaries-seeing-huge-revenue-spikes-rec-sales-picture-not-
rosy/
6http://www.chicagotribune.com/news/local/breaking/ct-illinois-medical-marijuana-first-day-
met-20151108-story.html
7http://www.chicagotribune.com/news/local/breaking/ct-illinois-medical-marijuana-first-day-
met-20151108-story.html
8http://mjbizdaily.com/nevada-struggling-to-keep-up-with-mmj-card-applications/
9http://mjbizdaily.com/medical-cannabis-back-on-florida-ballot-for-2016/
10http://mjbizdaily.com/chart-week-arizonas-mmj-market-gaining-steam-infused-product-sales-
take-off/
11http://www.thecannabist.co/2016/02/09/colorado-marijuana-sales-2015-reach-996-
million/47886/
12http://extract.suntimes.com/news/10/153/11286/illinois-collects-more-than-100-thousand-
taxes-medical-marijuana-sales-first-two-months
13http://www.chicagotribune.com/business/ct-medical-marijuana-staffing-0707-biz-20150707-
story.html
14http://www.gallup.com/poll/186260/back-legal-marijuana.aspx
15http://www.theharrispoll.com/health-and-life/Americans-Ready-for-Legal-Marijuana.html
16http://www.arcviewmarketresearch.com/
17
http://www.usnews.com/news/articles/2015/06/03/house-votes-to-ban-some-pot-law-
enforcement-cut-dea-budget
18http://www.dea.gov/divisions/hq/2015/hq122315.shtml
19https://mjbizdaily.com/chart-week-state-rankings-medical-marijuana-patients-per-capita/
20http://www.gallup.com/poll/186260/back-legal-marijuana.aspx
21 http://www.theharrispoll.com/health-and-life/Americans-Ready-for-Legal-Marijuana.html
37
C. Business Overview
1. Diversification of Financing.
The Fund’s current business plan envisions allocating approximately sixty percent (60%) of its
capital, including, without limitation, the net proceeds from this Offering, into Fund Loans,
which will be secured by real estate, and allocating the remaining forty percent (40%) into
Equity Investments. This strategy should allow the Fund to generate interest income in the short
term from the Fund Loans and potential capital gains from the Equity Investments over the
longer-term. Additional diversification may be achieved from investing the Fund’s capital (in
the form of both Fund Loans and Equity Investments) into businesses in one or more of the
segments of the legalized cannabis industry, including, without limitation, business engaged in
(i) cannabis cultivation, production, sales and distribution for medicinal uses pursuant to
applicable state laws; (ii) cannabis cultivation, production, sales and distribution for adult use
pursuant to applicable state laws; and/or (iii) providing equipment, products and services to
business engaged in cannabis cultivation, production, sales and distribution.
(a) Fund Loans.
The cultivation of cannabis on a large scale is a capital-intensive business. Depending of the
region of the country, an indoor grow facility is estimated to have a construction cost of
approximately $90.00 per square foot, while a modern greenhouse facility may cost $50.00 per
square foot. In addition, both types of facilities require climate control, irrigation, security, data
management and processing systems that range between $40.00 and $65.00 per square foot,
depending on the climate where the facilities are located. Indoor facilities require lighting
systems while modern greenhouses require shading and additional screening to protect against
pests that can potentially harm the crop. Financially prudent cultivators realize they generate
their highest profits from investing in the cultivation of crops vs. owning land and buildings, so
they often look for debt financing to buy or construct their cultivation facilities.
Many cultivators have adapted to this lack of available financing by obtaining loans from private
lenders who typically charge interest rates and loan origination fees well above those charged by
banks and other traditional institutional lenders, who are restricted from making loans to an
industry that is not permitted to operate under federal law. Cultivators have become accustomed
to paying higher costs to obtain the capital they require to operate their businesses. The Fund
expects to market Fund Loans to this segment of the market when loans meet the Fund’s
established lending criteria, including, without limitation, Fund Loans must be sufficiently
secured by real property either used in cultivation or other, unrelated real property owned by the
borrower. See paragraph (b) below, “Lending Standards and Policies for Fund Loans”.
(b) Lending Standards and Policies for Fund Loans.
(i) General Standards for Fund Loans
Fund Loans will be made pursuant to a strict set of guidelines designed to set standards for the
quality of the security given for the loans. Such standards are summarized as follows:
(a) Priority of Mortgages. The lien securing each Fund Loan will
generally be a first (1st) position lien on real property which is to be used as security for the loan;
38
provided, however, that Manager, in its sole discretion, may accept a mortgage that is junior to
one or more other deeds of trust or mortgage encumbrances.
(b) Loan-to-Value Ratios. The Fund intends to make Fund Loans
according to the loan-to-value ratios set forth below. These ratios may be increased if, in the
judgment of the Manager, the loan is supported by sufficient credit worthiness of the borrower,
other collateral and/or desirability and quality of the property, to justify a greater loan-to-value
ratio. The word “value” as used in the term "loan-to-value ratio," shall mean the appraised value
of the security property as determined by an independent written appraisal, Broker Price Opinion
(“BPO”) or the Manager at the time the Fund makes the loan or which is "current" at the time the
Fund makes a loan. An appraisal or BPO will be considered to be "current" if the Manager has
inspected the security property and made a reasonable determination that the value of the
security property has not declined since the date of the appraisal or BPO. The term "loan"
includes both the amount of the Fund Loan and all other outstanding debt secured by any senior
deed of trust on the security property. The amount of the Fund Loan combined with the
outstanding debt secured by any senior deed of trust on the security property will not exceed a
specified percentage of the value of the security property as determined by an independent
written appraisal, BPO, or the Manager at the time the loan is made, according to the following
table:
Loan-to-Value Ratios Loan-to-Value Ratios
Type of Security Property
1st Trust Deeds
Junior Trust Deeds
Residential
75%
55%
Commercial 70%
50%
Vacant Land
65% 50%
The above loan-to-value ratios will not apply to purchase-money financing that may be offered
by the Fund to sell any real estate owned by the Fund (i.e., property which is acquired through
foreclosure) or to refinance an existing loan that is in default at the time of maturity. In such
cases, the Manager, in its sole discretion, shall be free to accept any reasonable financing terms
that he deems to be in the best interests of the Fund.
(c) Terms of Loans. Most Fund Loans will be for a term ranging
from one (1) year to five (5) years. Fund Loans originated whose term exceeds the life of the
Fund will be sold, at the best prevailing rate, on the open market upon or prior to the dissolution
of the Fund. Most Fund Loans will provide for monthly payments of principal and/or interest,
with many Fund Loans providing for payments of interest only and a balloon payment of
principal payable in full at the end of the term. These loans require the borrower to pay the full
amount at maturity.
(d) Interest Rates. Most Fund Loans will provide for a significantly
higher interest rate than the mortgage rates charged by institutional lenders that are prevailing in
the geographical area where the security property is located.
39
(e) Escrow Conditions. Fund Loans will be funded through an
escrow account handled by a title insurance company, public escrow company, attorney, or the
Manager. The escrow agent will be instructed not to disburse any of the Fund's funds out of the
escrow for purposes of funding the Fund Loan until:
(1) Title Insurance. Satisfactory title insurance coverage
has been purchased, with the title insurance policy naming the Fund as the insured and providing
title insurance in an amount not less than the principal amount of the Fund Loan. The Manager
shall select the nature of each policy of title insurance, including the selection of appropriate
endorsements affecting coverage. Title insurance insures only the validity and priority of the
Fund's deed of trust or mortgage, and does not insure the Fund against loss from other causes,
such as a loss in the value of the security property, appraisals, loan defaults, etc.
(2) Fire and Casualty Insurance. Satisfactory fire and
casualty insurance has been obtained for all loans containing improvements, naming the Fund as
a loss payee. Appropriate liability insurance will be obtained on all unimproved real property.
(3) Mortgage Insurance. The Manager does not intend to
arrange for mortgage insurance, which would afford some protection against loss if the Fund
foreclosed on a loan and there existed insufficient equity in the security property to repay all
sums owed. If the Manager elects in its sole discretion to obtain such insurance, however, the
minimum loan-to-value ratio may be increased.
(4) Payee and Beneficiary Name. All new loan origination
documents (notes, deeds of trust, etc.) and insurance policies shall have named the Fund as payee
and beneficiary. In addition, the Fund will make certain that the policy (ies) of fire and casualty
insurance insuring the security property provide that the holder of the loan and/or its assignee is
the loss payee.
(f) Purchase of Loans from Affiliates. Existing loans may be
purchased from Affiliates or third parties, provided, that such loans satisfy all of the foregoing
requirements, and provided that, with respect to loans purchased from Affiliates, the loan is
assigned to the Fund on the same terms as the Affiliate itself had obtained.
(g) Fractional Interests. The Fund may also participate in loans
with other lenders (including other entities controlled by the Manager), by providing funds for or
purchasing a fractional undivided interest in a loan meeting the requirements set forth above. The
Manager will treat the Fund equally with all other entities controlled by the Manager when
making such fractional loans.
(h) Diversification. Most loans will be between Twenty-Five
Thousand Dollars ($25,000) and One Million Dollars ($1,000,000). If and when the Fund raises
Two Million Five Hundred Thousand Dollars ($2,500,000), no Fund Loan will exceed twenty
percent (20%) of the Fund’s capital unless determined by the Manager to be in the best interest
of the Fund.
40
(i) Contingency Reserve Fund. A contingency reserve fund may be
established by the Manager in its discretion and maintained for the purpose of covering
unexpected cash needs of the Fund. Contingency reserve funds will be invested in federally
insured certificates of deposit or Treasury bills. Contingency reserve funds will not be invested
in Fund Loans or Equity Investments.
(ii). Credit Evaluations
The Manager will consider the income level and general creditworthiness of a borrower
to determine his, her, or its ability to repay the Fund Loan according to its terms, in addition to
considering the loan-to-value ratios described above and secondary sources of security for
repayment. Fund Loans may be made to borrowers who are in default under other obligations
(e.g., to consolidate their debts) or who do not have sources of income that would be sufficient to
qualify for loans from other lenders such as banks or savings and loan associations.
(iii) Loan Packaging
The Manager will assemble and/or obtain all necessary information reasonably required
in the sole discretion of the Manager to make a funding decision on each Fund Loan request. The
documents assembled and obtained for the purpose of making the funding decision will become
the property of the Fund.
(iv) Loan Underwriting and Servicing
It is anticipated that all Fund Loans will be underwritten and serviced (i.e., collection of
loan payments) by an outside service provider, the Manager or an affiliate of the Manager (in
any case, the "Servicer"). The Servicer will be compensated for such loan servicing activities.
See Section VII.E(3) below, "Management – Fees Payable in connection with Fund Loans and
other Compensation” regarding compensation payable to the Manager or an affiliate of Manager
if Fund Loans are underwritten and serviced by the Manager or an affiliate of the Manager.
The Fund anticipates that most Fund Loans will require monthly payments of principal and
interest, amortized over the life of the loan, although the Manager will have discretion to
determine payment, interest and other loan terms.
Borrowers will make their checks payable to the Servicer or the Fund. Checks payable to the
Servicer will be deposited in the Servicer's loan servicing trust account and, after deducting the
Servicer’s fees, the funds will be transferred to the Fund's bank account.
The Fund will require the Servicer to adhere to the following payment, delinquency, default, and
foreclosure practices, procedures and policies:
(a) Payments. Generally, payments will be payable monthly, on
the first (1st) day of each month. Interest is generally prorated to the first (1st) day of the month
following the closing of the loan escrow.
41
(b) Delinquency. Generally, Fund Loans will be considered
delinquent if no payment has been received within ten (10) days of the payment due date.
Borrower will be notified of delinquency by mail on the twelfth (12th) day after the payment due
date and a late charge will be assessed. The Servicer will refer to and rely upon the late charge
provisions in the applicable loan documents for each loan.
(c) Default. A Fund Loan will be considered in default if no
payment has been received within thirty (30) days of the payment due date. Foreclosure will
usually be initiated shortly after the thirty-first (31st) day after a default, with the exact timing in
the business judgment of the Manager. Any costs of this process are to be posted to the
borrower’s account for reimbursement to the Fund.
(d) Foreclosure. Statutory guidelines for foreclosures in each
state are to be followed by the Servicer until the underlying property is liquidated and/or the
account is brought current. Any costs of this process are to be posted to the borrower’s account
for reimbursement to the Fund. If a loan is completely foreclosed upon and the property reverts
back to the Fund, the Fund will be responsible for paying the costs and fees associated with the
foreclosure process, maintenance and repair of the property, service of senior liens if any, and
resale expenses.
(v). Sale of Fund Loans
The Fund may sell the Fund Loans (or fractional interests therein) when the Manager
determines that it would be advantageous to the Fund to do so. Decisions by the Manager
concerning the sale of Fund Loans will be based upon the business judgment of the Manager
considering prevailing market interest rates, the length of time that the loan will be held by the
Fund, the payment history on the loan and the investment objectives of the Fund.
c. Certain Legal Considerations regarding Fund Loans.
Each of the Fund Loans will be secured by, among other things, a deed of trust, mortgage,
leasehold deed of trust or leasehold mortgage, security agreement or similar instrument. The
Fund may hold a first deed of trust or a junior deed of trust. If a Fund Loan is secured by a
second or junior deed of trust or mortgage, the senior deed of trust or mortgage holder would
have to be paid or otherwise satisfied before the borrower’s obligations to the Fund can be
satisfied out of the property that is the subject of the deed of trust or mortgage. The deed of trust
or mortgage is the most commonly used real property security device. A deed of trust formally
has three parties; a debtor, referred to as the "trustor"; a third party referred to as the "trustee";
and the lender referred to as the "beneficiary." The trustor irrevocably grants the property until
the debt is paid, "in trust, with power of sale" to the trustee to secure payment of the obligation.
The trustee's authority is governed by law, the express provisions of the deed of trust and the
directions of the beneficiary. The Fund will be the beneficiary under all deeds of trust securing
the Fund Loans. In a mortgage loan, there are only two parties, the mortgagor (borrower) and the
mortgagee (lender). State law determines how a mortgage is foreclosed.
Foreclosure. In most states a statute known as the "one form of action" rule requires the
beneficiary of a deed of trust to exhaust the security under the deed of trust (i.e., foreclose on the
42
property) before any personal action may be brought against the borrower. There are two
methods of foreclosing a deed of trust:
(i) Foreclosure of a deed of trust is accomplished in most cases by a
non-judicial trustee's sale under the power of sale provision in the deed of trust. Prior to such
sale, the trustee must record a notice of default and send a copy to the trustor and to any person
who has recorded a request for a copy of a notice of default, and to the successor in interest to
the trustor and to the beneficiary of any junior deed of trust. The trustor or any person having a
junior lien or encumbrance of record may, during a three (3) month reinstatement period, cure
the default by paying the entire amount of the debt then due, exclusive of principal due only
because of acceleration upon default, plus costs and expenses actually incurred in enforcing the
obligation and statutorily limited attorneys' and trustee's fees. Thereafter, and at least twenty-one
(21) days before the trustee's sale, a notice of sale must be posted in a public place and published
once a week over such period. A copy of the notice of sale must be posted on the property, and
sent to the trustee, to each person who has requested a copy, to any successor in interest to the
trustor and to the beneficiary of any junior deed of trust, at least twenty-one (21) days before the
sale. Following the sale, neither the debtor/trustor nor a junior lien has any right of redemption,
and the beneficiary may not obtain a deficiency judgment against the trustor.
(ii) A judicial foreclosure (in which the beneficiary's purpose is
usually to obtain a deficiency judgment where otherwise unavailable) is subject to most of the
delays and expenses of other lawsuits, sometimes requiring up to several years to complete.
Following a judicial foreclosure sale, the trustor or his, her, or its successors in interest may
redeem for a period of one (1) year (or a period of only three (3) months if the entire amount of
the debt is bid at the foreclosure sale), and until the trustor redeems, foreclosed junior lien holder
may redeem during successive redemption periods of sixty (60) days following the previous
redemption, but in no event later than one (1) year after the judicial foreclosure sale. The Fund
generally will not pursue a judicial foreclosure to obtain a deficiency judgment, except where, in
the sole discretion of the Manager, such a remedy is warranted in light of the time and expense
involved.
Foreclosure statutes vary from state to state. Any Fund Loan foreclosed on by the Fund will be
foreclosed in compliance with the laws of the state where the real property collateral is located.
Other matters, such as litigation instituted by a defaulting borrower or the operation of the
federal bankruptcy laws, may have the effect of delaying enforcement of the lien of a defaulted
Fund Loan and may, in certain circumstances, reduce the amount realizable from sale of a
foreclosed property.
"Due-on-Sale" Clauses. The Fund's form of promissory notes and deeds of trust for Fund
Loans, like those of many lenders, will contain "due-on-sale" clauses permitting the Fund to
accelerate the maturity of a Fund Loan if the borrower sells, conveys or transfers all or any
portion of the property, but may or may not contain "due-on-encumbrance" clauses which would
permit the same action if the borrower further encumbers the property (i.e., executes further
deeds of trust). The enforceability of these types of clauses has been the subject of several major
court decisions and legislation in recent years.
(1) Due-on-Sale. Federal law now provides that, notwithstanding any
contrary pre-existing state law, due-on-sale clauses contained in mortgage loan documents are
43
enforceable in accordance with their terms by any lender. On the other hand, acquisition of a
property by the Fund by foreclosure on a Fund Loan may also constitute a "sale" of the property,
and would entitle a senior lien holder to accelerate its loan against the Fund (if the Fund were a
junior lender). This would be likely to occur if then prevailing interest rates were substantially
higher than the rate provided for under the accelerated Fund Loan. In that event, the Fund may
be compelled to sell or refinance the property within a short period of time, notwithstanding that
it may not be an opportune time to do so.
(2) Due-on-Encumbrance. With respect to mortgage loans on residential
property containing four or less units, federal law prohibits acceleration of the loan merely by
reason of the further encumbering of the property (e.g., execution of a junior deed of trust). This
prohibition does not apply to mortgage loans on other types of property. Although many of the
Fund’s mortgages could be on properties that qualify for the protection afforded by federal law,
some loans may be secured by small apartment buildings, commercial properties or other
properties. Any junior lien mortgage loans made by the Fund may trigger acceleration of senior
loans on properties if the senior loans contain due-on-encumbrance clauses, although both the
number of such instances and the actual likelihood of acceleration are anticipated to be minor.
Failure of a borrower to pay off the senior loan would be an event of default and subject the
Fund (as junior lien holder, if applicable) to the risks attendant thereto.
Prepayment Charges. Fund Loans originated by the Fund may provide for certain prepayment
charges to be imposed on the borrowers. The Manager nonetheless will reserve the right at its
discretion to waive the payment of any prepayment penalties.
Bankruptcy Laws. If a borrower under a Fund Loan files for protection under the federal
bankruptcy statutes, the Fund will initially be barred from taking any foreclosure action on the
real property security by an "automatic stay order" that goes into effect upon the borrower's
filing of a bankruptcy petition. Thereafter, the Fund would be required to incur the time, delay
and expense of filing a motion with the bankruptcy court for permission to foreclose on the real
property security ("relief from the automatic stay order"). Such permission is granted only in
limited circumstances. If permission is denied, the Fund will likely be unable to foreclose on its
security for the duration of the bankruptcy, which could be several years. During any such delay,
the borrower may or may not be required to pay current interest on the Fund Loan. The Fund
would therefore lack the cash flow it anticipated from the Fund Loan, and the total indebtedness
secured by the real property would increase by the amount of the defaulted payments, perhaps
reaching a total that would exceed the market value of the property. In addition, bankruptcy
courts have broad powers to permit a sale of real property free of any liens, including, without
limitation, any mortgage or deed of trust held by the Fund, to compel lenders to accept an
amount less than the balance due under the loan and to permit the borrower to repay the loan
over a term which may be substantially longer than the original term of the loan.
(d) Equity Investments.
While many of the states that have passed medical cannabis and/or recreational adult use laws
often restrict investment into the companies that hold a state-issued license to residents only,
there are far fewer investor prohibitions when investing in the companies that sell equipment,
products or services to the businesses engaged in cultivation. The majority of the companies that
44
cater to the needs of cultivators are relatively new businesses in the high growth stage of their
development, many of which are seeking expansion capital through the sale of equity or debt
securities that later convert into equity ownership. The Fund intends to invest in those
companies that appear to the Manager, in its reasonable judgment, to have advantageous risk to
reward ratios and hold these securities for long-term capital gains. There is, of course, no
guarantee that any Equity Investments made by the Fund in these companies, or any other
business, will result in long-term capital gains to the Fund and its Members, including, without
limitation, the Investors in this Offering.
(e) Possible Equity Investment Opportunities.
Following are examples of companies that have advised the Manager that they may be seeking
equity investments now or in the near future. Although there can be no assurances, if any of
these companies do, in fact, seek equity investments on terms determined by the Manager, in its
sole discretion, to be advantageous for the Fund, the Fund may consider any such companies for
an Equity Investment, including, without limitation, Equity Investments funded by the net
proceeds of this Offering. While each of the companies below have advised the Manager that
they are or may be seeking investments, there is no guarantee that an investment will be made by
the Fund in any of these companies. Some of these companies may complete their financing
before the Fund has an opportunity to invest. The Fund will have to do additional due diligence
on these companies, the result of which may be that the Manager determines that an Equity
Investment in one or more of these companies doesn’t meet the Fund’s investment criteria or
otherwise would not be advantageous to the Fund, in either case as determined by the Manager
in its sole discretion. The summaries provided below are based on information available on the
respective companies’ websites or otherwise based on supplied by the applicable company.
The Fund disclaims any responsibility for the accuracy or completeness of these summaries.
Compliant Cannabis, Inc.
Business: Software and Mobile Applications
Location: Denver, Colorado
Compliant Cannabis, Inc., is a software-as-a-service platform that increases profit and reduces
risk for the legal cannabis industry by minimizing human error, streamlining compliance
reporting to government agencies and empowering decision-making with real time, data driven
inventory management from seed to sale.
Compliant Cannabis provides a best-in-class software solution that helps cannabis cultivation
companies meet the challenges of strict regulatory requirements and an increasingly competitive
marketplace. Nearly all states that have legalized the medical use of cannabis, now require that
each plant be assigned a barcode tag that enables tracking from seed to eventual sale. Even a
small cultivation operation of 25,000 square feet would typically require 7,000 tags to be
scanned on a daily basis and that data reported to the state regulatory department. The Compliant
Cannabis software automates and streamlines inventory management and mandatory reporting,
reducing human error, costs and risk associated with compliance. The software transforms real-
45
time data into visual reports with actionable insights that improve decision making and boost
profitability.
For more information visit: www/compliantcannabis.com.
PathogenDX, Inc.
Business: Biotechnology / Pharmaceutical
Location: Scottsdale, AZ
PathogenDx develops and provides genetic level test kits for microbial contamination testing of
cannabis products. While over seventy five percent (75%) of the legal cannabis consumed in
2015 fell under the medical use category, patients and those prescribing the product demand
safety. The testing laws detailing the amount of product to be tested and the number of pathogens
required in each test are regulated by each state that has legalized cannabis. The importance of
testing cannot be overstated.
PathogenDx's business model is to sell testing kits to laboratories used by the cannabis industry
to test their products for safety and quality. Current microbial testing takes 3 to 7 days which
delays the sale of product and can be very expensive per test. PathogenDx’s PDxC test takes less
than 6 hours from leaf to data, at a fraction of the costs, and can run dozens of cannabis samples
simultaneously. Their customers can generate revenue faster, reduce cost, and ensure safety of
the product they produce.
Beginning in 2014, states began legislating testing requirements for recreational and medical
cannabis. The market in some states has experienced safety and quality issues. In nearly all
states, testing labs are struggling to keep pace with the demand from growers, medical
dispensaries and consumers to provide a third party validated product. PathogenDx sells test kits
to testing labs seeking efficiency, accuracy and higher profit margins. PathogenDx has
developed technologies into one kit that provides advance cannabis contaminant testing while
conducting multiple tests (48) of up to 44 pathogens simultaneously. PathogenDx’s test reduces
test turnaround time from 3 to 7 days to less than 6 hours, while reducing costs from
approximately $7-8 per test to approximately $4 per test.
To learn more visit: http://www.pathogendx.com
Tradiv, Inc.
Business: Software: Online marketplace for licensed cannabis companies
Location: Boulder Co.
Tradiv operates an online marketplace used by state-licensed cultivators and dispensaries to buy
and sell cannabis and cannabis-related consumer products in Colorado. The Tradiv online
marketplace is marketed to state-licensed cannabis dispensaries, cultivators, and manufacturers
of infused products, concentrates, and edibles that are medical, recreational, or hemp-based.
Tradiv drives transaction volume across its network and charges a transaction fee of 1.8% to
46
10% depending on a range of factors. Tradiv has adopted a decentralized distribution approach
that allows product sellers to bid up the percentage transaction fee they’re willing to pay for a
converted sale, similar to what Priceline does for hotels, and Google AdWords does for priority
placement of advertising. Transaction fees are expected to expand to 1.99% -20% over the
course of the next three years. Increased users are expected to increase the average order volume,
or frequency of orders, all leading to an increase in revenue and eventual profits.
Before the online trading platform was launched by Tradiv in 2015, cannabis cultivators and
dispensaries typically spent hours making phone calls or sending text messages to various
vendors or suppliers trying to buy or sell their products. Currently, Tradiv only serves Colorado-
based cannabis businesses, although it plans on expanding to other states, including Oregon,
Washington, Nevada, Arizona, and California, during 2016. Federal law currently prohibits
buying, selling or otherwise engaging in transactions involving cannabis or cannabis-based
products across state lines. As a result, if Tradiv does expand to other states, each state would
likely have its own, separate online marketplace.
To learn more visit: Tradiv.com
FlexMod Solutions, LLC
Business: Design and construction: Cultivation facilities & mobile extraction laboratories.
Location: Denver, CO
As a new industry projected to grow to $21B by 2020, cultivation facilities do not exist today in
most markets where demand will develop, nor are there sufficient facilities in existing legalized
markets today. FlexMod believes that increased demand for cannabis will drive the need for new
large-scale, high-production cultivation facilities and create a need to upgrade today’s smaller or
less productive facilities developed in the early phase of the industry. Most builders and
architects do not have knowledge and expertise specific to the cannabis cultivation industry. By
using a modular design and factory built wall systems assembled on-site, a cultivation facility
can be placed in operation faster and at a lower cost than traditional construction methods.
Today’s growers now have the unique opportunity to increase their “Speed to Market” with a
quality and functioning cultivation facility that includes a proven turnkey system solution with
integrated utility systems already installed. Our modular grow facility construction allows
cultivators to start producing revenue up to 70% faster than the conventional one-off
construction plans and save up to 20% or more over conventional construction costs.
All states that have approved medical or recreational adult use of cannabis to date, have laws that
require the product to be grown in the state where it will be sold. Testing the product before it is
consumed as well as taxing each phase of production and sale are the primary reasons that there
may never be a day when cannabis is grown in one state and then sold across state borders.
These laws will force the industry into requiring cultivation facilities in every state that adopts
legalization.
FlexMod has also introduced a line of mobile extraction laboratories, for cultivators who extract
the precious oils from their cannabis crop for use in medicine, edible products and topical
products. Medicine and Cannabis Infused Products (MIPS) made from the extraction of oils from
47
the harvested plant is the fastest growing sector in the cannabis industry. Extraction labs are sold
or leased for approximately $70,000 and delivered in three weeks vs. building a lab on-site at
costs exceeding $100,000.
To learn more visit: Flexmod.com
Plus Products California Cooperative, Inc
Business: Consumer Health Products
Location: Palo Alto, CA
Plus Products is a cannabis infused products company. Its first product, Plus Gum, is a cannabis
infused chewing gum that is fast-acting, low-calorie, and discreet. The company’s patent-
pending process provides a unique delivery mechanism of THC through sublingual absorption
that is five times as fast acting as a typical edible. The cannabis flavor is also removed from the
product so that it actually tastes like gum, while leaving the active ingredients intact.
Plus Gum is manufactured in California and is currently being sold throughout the state via
licensed dispensaries while the company plans to expand it’s manufacturing and marketing into
Colorado.
To learn more visit: http://plusgum.com
Librede, Inc
Business: Biotechnology Product Development
Location: San Diego, California
Librede is focused on using synthetic biology and metabolic engineering to produce chemicals
found in nature that have applications in the nutraceutical and pharmaceutical markets. Librede
has developed a yeast based cannabinoid production system and drug discovery platform to
create natural (from plants) and synthetic chemical compounds that target the endocannabinoid
system (ECS).
The company has developed and successfully demonstrated a versatile, low cost biosynthetic
cannabinoid production platform by genetically engineering natural cannabinoid-producing
enzymatic pathways which speeds cannabinoid production (days versus several months for
plants) and greatly minimizes separation and purification cost and effort. The company’s
breakthrough work is the first time cannabinoids have been biologically synthesized outside of
Cannabis sativa and enables a low cost, efficient, and environmentally friendly means of
48
producing large quantities of high purity cannabinoids for use in medicine and adult use
consumable products.
To learn more visit: http://www.librede.com
Kiva Confections, Inc
Business: Consumer Products
Location: San Leandro, California
KIVA Confections creates cannabis infused chocolate products and is one of the most
recognized medical cannabis companies in California. The company was born out of a need for
an edible product that was potent, consistent, and enjoyable for patients to consume.
Since its launch in 2010, the company has grown to encompass over a dozen varieties of
chocolate edibles with a loyal customer base throughout hundreds of dispensaries in California.
Its artisan confections have garnered multiple awards and recognition in the marketplace. With
over forty employees dedicated to quality, food safety and compassionate care, KIVA continues
to redefine the edible cannabis category and lead the way in developing premium quality, great
tasting products that deliver certified amounts of medicinal cannabis within a delicious, artisan-
inspired chocolate recipe.
To learn more visit: http://kivaconfections.com
2. Leverage.
It is not anticipated that the Fund will seek any debt financing at this early stage of its operations.
However, in the future, the Manager, in its sole discretion, may decide that borrowing funds
from a lending institution or others might be to the benefit of the Fund. All other factors being
equal, leverage increases potential risk to an investor, as well as possible return.
49
V. MARKET, POTENTIAL CUSTOMERS AND COMPETITION
A. Market
The Fund seeks to capitalize on the growing demand for capital as more states legalize medical
as well as the recreational adult use of cannabis. The year 2016 may be a watershed year for
cannabis legalization. Six states will be voting to allow adult recreational use in the November
elections including California, Arizona and Nevada in the southwest and Maine, Rhode Island
and Vermont in the northeast. Proponents of legalizing cannabis are actively pursuing initiatives
in four states - Florida, Ohio, Missouri and Pennsylvania, which would significantly expand
medical marijuana access in the eastern half of the U.S.
States voting on new cannabis laws in 2016 have a combined population of over 53 million
residents. When added to the 23 states where cannabis use is legal by prescription for medicinal
purposes or for recreational adult use, over one-third of the nation’s population may have legal
access to cannabis. While support for medical and adult recreational use legalization is high in
these states, the passage of the measures is not guaranteed.
The four states that have legalized adult recreational use (Colorado, Washington, Oregon and
Alaska) have experienced a significant increase in tax revenues not only from taxing the plant
each time there is a sale, but also from fees collected during the licensing process. Estimates in
Colorado for 2015 exceed $135 million from cannabis taxes and license fees, which was a 77%
increase over the $76 million the state collected in 2014. The reported $70 million collected by
the state of Washington during its first year with adult use laws exceeded estimates even after
product storages and licensing delays effected both cultivators, retailers and consumers in the
first few months of the year. Recreational adult use of cannabis was approved in the
Washington, D.C.; however, it is limited to personal cultivation and use. Sales and distribution
are not permitted.
As most states struggle to continue recovering from the recession that began in 2007, many see
passing legalized adult recreational use cannabis laws as an attractive alternative to raising taxes
in the traditional manners of the past.
B. Competition
Up until as recently as 2015, when a small number of venture capital firms announced their
initial investments, the cannabis industry was largely financed by start-up entrepreneurs, along
with friends and family members and a few wealthy individuals who funded early stage
companies.
Since 2015, however, a more sophisticated financing environment has emerged in the cannabis
industry comprised of two main categories of financing or value-adding service providers: (1)
venture capital firms that invest in the equity of companies operating in the cannabis industry
and, as with other equity investors, typically wait for a liquidity event to earn a return on their
investments; and (2) companies that offer advice and coaching in a wide variety of areas to
entrepreneurial businesses in the cannabis industry. These programs often are referred to as
incubator or accelerator programs. The services of these companies are typically provided in
exchange for a fee and often include an equity stake in the entrepreneurial business. Some of
50
these programs also provide start-up capital and introductions to sophisticated investors upon
successful completion of the program.
Following are a few examples of venture capital firms and companies offering incubator or
accelerator programs that are currently operating, or in the past have operated, in the legalized
cannabis industry. The Fund will be competing with these and others companies providing
financing and value-added services to businesses operating in the legalized cannabis industry.
These companies could be considered competitors of the Fund.
Venture Capital Firms:
Tuatara Capital
Tuatara Capital, L.P. (Tuatara) was founded in 2014 as a specialized alternative investment
manager to exclusively focus on the legal cannabis industry. Tuatara explores investment
opportunities in companies with strong financial profiles and sound business models that are
well-positioned to benefit from the long-term growth trends within the cannabis industry.
Tuatara will initially deploy capital across four distinct sub-sectors within the cannabis industry
including: research & testing, cannabis cultivation and processing, along with consumer products
and retailing.
For more information in Tuatara Capital visit: http://www.tuataracapital.com.
Privateer Holdings
Privateer Holdings (Privateer) was funded in 2010 by entrepreneurs in Seattle, Washington with
experience in investment banking and venture capital, in order to represent a group of investors
from around the world seeking to end cannabis prohibition and the social harms resulting from
this prohibition. Through a combination of acquisitions, investments and incubation, Privateer
focuses on building a portfolio of global brands with the goal of leading, legitimizing and
defining the future of the legalized cannabis industry.
The Privateer website describes its fundamental beliefs as: (1) Cannabis is a mainstream product
consumed by mainstream people; (2) The end of cannabis prohibition is inevitable; and (3)
brands will determine the future of the cannabis industry.
For more information on Privateer Holdings visit: http://www.privateerholdings.com.
Incubator or Accelerator Firms:
Canopy Boulder
Canopy Boulder is a seed-stage business accelerator firm located in Boulder, Colorado, which is
focused on ancillary products and services in the legalized cannabis industry. The firm provides
capital (up to $70k), a 16-week mentor-driven boot camp, and critical knowledge of the industry
in return for is typically a 6-9.5% equity stake in companies operating in the ancillary products
and services sector of the legalized cannabis industry. Canopy Boulder focuses on working with
both adult-use and medicinally focused companies. The firm’s primary focus is in assisting
entrepreneurs in the technology, data analytics, market research, sales, advertising, and
consumption device segments of the legalized cannabis industry.
51
For more information on Canopy Boulder visit: http://www.canopyboulder.co
Electrum Partners
Electrum Partners (Electrum) is a boutique consulting firm specializing in the legalized cannabis
industry in the United States. Founded by a former investment banker experienced in emerging
markets and technologies, the firm provides business services, strategic guidance and
introductions, license application support, and industry-specific expertise to early-stage
companies that are looking for an edge when navigating their entry into the legalized cannabis
industry.
For more information on Electrum Partners visit: http://electrumpartners.com
VI. TERMS OF OFFERING; DESCRIPTION OF UNITS
A. General
Subject to the terms and conditions set forth in this Memorandum, the Fund is offering and
selling up to 200 Units in the Fund at $12,500 per Unit for maximum proceeds from this
Offering of up to $2,500,000. The minimum number of Units that a potential Investor may
purchase is 2 Units for a minimum investment of $25,000; however the Fund reserves the right
to waive the minimum investment amount, or to allocate to any potential Investor a subscription
amount less than the minimum investment. The Units are being offered to and may be sold to
only accredited investors and a limited number of other qualified Investors meeting certain
statutory requirements. See Section X.B below, “Plan of Distribution; Investor Suitability
Standards.” Currently, the Manager owns 1 Unit in the Fund and, at all times going-forward,
will own a non-dilutive One Percent (1%) of all then issued and outstanding Units at any given
time. The Manager also may purchase additional Units in the Offering at any time, as long as the
Offering remains open to investment.
B. Offering Period
The subscription or offering period for the Offering (the “Offering Period”) commenced on the
date of this Memorandum and will terminate on July 31, 2016, subject to the Manager’s right to
extent the Offering Period or terminate this Offering in the Manager’s sole discretion. If
subscriptions totaling at least $125,000 (Ten (10) Units) have not been received by the Fund
prior to April 30, 2016, the Manager may, in its sole discretion, terminate the Offering and all
funds received by the Fund from potential Investors will be refunded to them.
C. Offering Terms and Conditions Determined by the Manager
All questions and determinations with regard to this Offering, including which potential
Investors will be entitled to purchase Units, the time of receipt of the Subscription Agreement
and Investor Suitability Questionnaire, the suitability of potential Investors to purchase Units in
this Offering, the validity of payments made for subscriptions, compliance with subscription
procedures, the satisfaction of the conditions of the Offering, and the termination of the Offering,
will be made by the Manager, in its sole and absolute discretion, and shall be final and binding.
52
D. Terms of Units
1. Units.
As of the date of this Memorandum, 1 Unit has been issued to the Manager, as the Fund’s initial
Member. If this Offering is fully subscribed and all Units being offered hereunder are sold, there
will be a total of 202 Units issued and outstanding, including the Units issued to the Manager,
who is entitled to a non-dilutive 1% interest in the Fund at all times. Issuance by the Fund of
additional Units will result in dilution of any then-existing Member’s ownership interest in the
Fund, including the interest of the Investors in this Offering.
2. Duration; Termination; Dissolution.
Unless terminated or dissolved earlier in accordance with the provisions of the Operating
Agreement, the period of duration of the Fund will be perpetual. The death, withdrawal,
resignation, expulsion, bankruptcy or dissolution of a Member will not terminate the Fund.
Upon any termination or dissolution of the Fund, after liquidation of all property of the Fund and
payment of all creditors, the net profits and losses and any available cash balance will be
distributed to the Members in the same manner summarized in Subsection 4 below.
3. Capital Accounts; Additional Capital Contributions.
A separate capital account (each, a “Capital Account”) will be established and maintained for
each Member. In general, a Member’s Capital Account (i) will be increased by that Member’s
cash contributions (including, without limitation, the purchase price paid for that Member’s
Units), the agreed upon fair market value of any property contributed by that Member to the
Fund and all items of income or gain allocated to that Member; and (ii) will be decreased by any
cash distributed to that Member, the agreed upon fair market value of any property distributed to
that Member and all losses or deductions allocated to that Member. Capital Accounts will bear
no interest, and no Member has the right to withdraw or receive any return of such Member’s
capital contribution.
4. Allocations of Net Profits and Net Losses from Operations.
Subject to special allocations required under the Code and except as otherwise may be provided
in or required by the Code, net profits, net losses, and other items of income, gain, loss,
deduction and credit shall be apportioned eighty percent (80%) to the Members in the aggregate
(and among the Members in accordance with their respective Percentage Interests) and twenty
percent (20%) to the Manager with respect to its carried interest.
5. Cash Distributions.
The Manager will distribute “Gross Adjusted Revenue” of the Company to the Members as soon
as practical after, and if, Gross Adjusted Revenue shall become available for distribution, as
determined by the Manager in its sole discretion. Except as may otherwise be provided in the
Operating Agreement, any such distributions shall be allocated as follows: eighty percent (80%)
to the Members in the aggregate (and among the Members in accordance with their respective
Percentage Interests) and twenty percent (20%) to the Manager as its carried interest. For
purposes hereof, “Gross Adjusted Revenue” shall mean all cash or proceeds received by the
Fund, including, without limitation, interest income received from borrowers under Fund Loans,
53
dividends received from Equity Investments, proceeds from the sale or other disposition of any
assets of the Fund, including, without limitation, the sale or other disposition of any Fund Loans
or Equity Investments, and any other cash or proceeds from the Fund’s operations or any other
source, less all Fund expenses and liabilities and any reserves the Manager determines, in its sole
discretion, should be maintained by the Fund.
6. Limitations on Distributions.
Notwithstanding any other provision in this Agreement, including, without limitation Section
5above, no distributions shall be declared and paid unless, after the distribution is made, the
Fund’s assets are in excess of all Fund liabilities, except any liabilities to Members relating to
their capital contributions.
7. Voting Rights of Members.
Management of the Fund will be vested almost exclusively in the Manager. See, Section VII
below, “Management”. Notwithstanding this fact, the prior approval of the holders of a majority
of all of the Fund’s issued and outstanding Units will be required for the following actions:
a. Material alteration of the business of the Fund as such business has been
described in this Memorandum;
b. Dissolution and/or liquidation of the Fund;
c. Amendment of the Fund’s Certificate of Formation;
d. Amendment of the Fund’s Operating Agreement; or
e. Merge or consolidate, or agree to merge or consolidate, with any other
entity or acquire, or agree to acquire, all or substantially all of the business
or assets of any other person or entity.
The Manager may be removed and replaced with the vote of Members holding at least Sixty-Six
and 2/3 percent (66-2/3%) of all issued and outstanding Units, excluding Units held by the
Manager.
8. Issuance of Additional Units.
After this Offering has been completed, the Fund may issue additional Units and new Members
may be admitted into the Fund at the discretion of the Manager. The amount of capital to be
contributed by any new Members will be determined by the Manager.
9. Restrictions on Transfer of Units; Disassociation of a Member.
The Units have not been registered under the Securities Act of 1933, as amended (the “Act”) or
under any state securities laws and constitute restricted securities under applicable law. The Fund
is offering the Units in reliance upon certain exemption from registration contained in the Act
and applicable state laws. As a consequence, Investors may not sell the Unit unless they are
54
subsequently registered under the Act and applicable state laws, or an exemption from such
registration is available. In addition, although a Member may sell or transfer such Member’s
Units, any assignee of a Member’s Units shall not become a Member of the Fund, but shall only
be entitled to the economic benefits of Unit ownership as agreed to between the transferring
Member and the assignee, unless approved by the Manager, which approval may be given or
withheld in the Manager’s sole discretion. A person will cease to be a Member upon (i) the
withdrawal of the Member with the consent of the Manager, which consent may be given or
withheld in the Manager’s sole discretion; (ii) the bankruptcy of the Member; or (iii) the death of
a Member or the entry of an order by a court of competent jurisdiction that the Member is
incompetent. See the Fund’s Operating Agreement, a copy of which is attached to this
Memorandum as Exhibit “A”.
10. Reports to Members.
The Fund will provide all Members, including, without limitation, the Investors in this Offering,
with annual reports that will include unaudited financial information.
11. No Expert or Legal Opinions.
No expert has prepared or certified any part of the Memorandum or any report or valuation for
use in connection with this Memorandum and the Fund has not requested counsel to give, nor
has it received, an opinion upon the validity of the Units being offered in this Offering or upon
any other legal matter in connection with this Offering.
12. Legal Proceedings.
Neither the Fund nor the Manager is now or have within the past five (5) years been involved in
any material litigation or arbitration.
In August 2012, however, two funds managed by the President of the Manager (The Income
Fund, LLC, and Trail Creek Crossing, LLC), entered into Consent Decrees with the Arkansas
Securities Commissioner. Pursuant to these Consent Decrees, these entities agreed to pay small
fines to the Arkansas Securities Department to settle allegations made by the Department that
these entities did not comply fully with Arkansas law regarding the registration of securities or
an exemption therefrom in connection with the offer and sale of securities by these entities to
residents of Arkansas. To avoid the time and expense that would have been involved in
contesting these allegations, The Income Fund, LLC and Trail Creek Crossing, LLC entered into
these Consent Decrees and paid the required fines.
Also, in December 2013, the President of the Manager received a Subpoena from the U.S.
Securities and Exchange Commission requiring the production of documents relating to the
offering of securities by other funds managed by the President of the Manager. The parties
involved, including the President of the Manager, fully complied with the SEC’s request and
delivered all documents requested n the Subpoena. The SEC closed its investigation without any
further action.
Neither the Fund nor the Manager is a party to, and neither of them is subject to, any pending
legal proceedings.
55
VII. MANAGEMENT
A. Role of the Manager
The Manager of the Fund is Avalon Management Group, Inc., a Wyoming corporation. The
Manager will have full management control over the Fund, pursuant to the Operating Agreement
of the Fund. Thomas W. Garlock is the President, sole director and sole shareholder of Avalon
Management Group, Inc. The Manager will be compensated as described below in Section
VII.D, “Management - Compensation Payable to the Manager and Affiliates.” The Manager
will own a non-dilutive One Percent (1%) interest in the Fund (Units) at all times.
B. Avalon Management Group, Inc.
Avalon Management Group, Inc., was organized on September 5, 2012 as a Wyoming
corporation.
The President and sole shareholder of Avalon Management Group, Inc. is Thomas W. Garlock.
Mr. Garlock will oversee all activities and operations of the Fund and will have significant
authority with respect to the day-to-day operations of the Fund. Please see Mr. Garlock’s
biography below. Mr. Garlock will be assisted by Phillip A. Baudour, who will serve as a
project manager for the Fund. See Mr. Baudour’s biography below.
C. Thomas W. Garlock
Thomas W. Garlock, 59, began his career in 1982 building portfolios of hard assets for private
clients seeking alternative investment diversification in oil and gas, precious metals, and real
estate assets. He has been active as a real estate investor and developer in the Jackson, Wyoming
area and in Southern California since 1985. A Jackson Hole resident since 1995, Mr. Garlock
appreciates the natural beauty of Wyoming along with its outdoor activities. Mr. Garlock,
directly or through the Manager, currently is the manager of several other investment funds,
including, without limitation, Teton Land & Development Group, LLC, Fiver Rivers Property
Fund, LLC Trail Creek Crossing, LLC, The Income Fund, LLC; Total Return Income Fund,
LLC; and Global Food Security Fund, LLC, all of which (other than the Global Food Security
Fund, LLC, which is engaged in disaster relief products and services) is a real estate
development or real-estate related company operating in the Jackson Hole, Wyoming market.
During the last five (5) years, Mr. Garlock also has sponsored and been the manager of numerous
other real estate development companies, including, Trail Creek Partners, LLC, Teton Property
Fund II, LLC, Grand Teton Property Fund, LLC, and Four Peaks Property Fund, LLC.
For the past 34 years, Mr. Garlock has organized ventures in real estate as well as numerous
wireless communication fields, including cellular telephony, PCS, and wireless data networks.
Mr. Garlock has been the principal in a variety of communications license-based ventures that
have held and developed 55 MSA metropolitan cellular telephone licenses, 9 RSA rural cellular
telephone licenses. In 2013, Mr. Garlock and his wife Karen formed the World Food Crusade, a
501(c)(3) non-profit charity that focuses on educating the public on issues of food security and
healthy food choices.
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Mr. Garlock is the author of “The Ultimate Guide to Self-Directed Retirement Plans” released in
2012 and the co-author with Richard Lackey of the bestselling book: Radical Response- Free
Market Solutions to Global Crisis. Mr. Garlock completed coursework (Business
Administration) at the University of California at Los Angeles (1976-1978) and coursework
(Business Administration) at Kent State University (1974-1976).
D. Phillip A. Baudour
Phillip A. Baudour,55, began his career in California, where he resided and worked for 30 years,
attending all schooling primary thru graduate. His primary professional field was Application
Engineering in the Manufacturing & Aerospace industry. Supporting fields were Sales &
Marketing. Mr. Baudour is an accomplished technical publications writer and editor.
He retired from the Application Engineering and Manufacturing Aerospace industry in 1991,
when he became involved in Aviation Transportation, Education, Consultation and Marketing.
With relocation to Texas in 1993, His interest and areas of specialization were commanding
helicopter ambulance flights throughout the United States, commanding search and rescue
missions in both the United States & Middle East, drug enforcement operations, and global
aviation, education & consulting to first and third world countries. Mr. Baudour has also served
as an aviation consultant and educator to foreign military commands. Additional areas of
expertise include 30 years’ involvement in real estate, property management, property
renovation, small business entrepreneurship, and computer applications software education.
Mr. Baudour is a Board Member and Treasurer with the World Food Crusade. In his spare time,
he enjoys sailing, trekking, bicycling, culinary arts, metallurgical manufacturing, antique
restoration, and international travel. Mr. Baudour is conversant in Russian, French, and English
languages.
Mr. Baudour has been an investor in projects managed by the Fund’s Manager and its affiliates
for over ten years and in 2015 joined the Fund’s Manager on a part-time and as-needed basis as a
Project Manager focusing on opportunities for the Fund in the legalized cannabis industry. He
relocated his home to Colorado Springs, Colorado in 2015.
E. Compensation Payable to Manager and Affiliates
The Manager is entitled to a Management Fee equal to $120,000 per year, payable in quarterly
installments provided that funds are available to pay this Fee.
The Manager also is entitled to a non-dilutive one percent (1%) interest in the Fund such that, at
all times, the Manager will own one percent (1%) of all issued and outstanding Units, calculated
before taking into account the Units to be issued to the Manager.
The Manager will be entitled to 20% of all cash distributions made by the Fund as its carried
interest. See Section VI.D(5) above, “Terms of Offering; Description of Units – Cash
Distributions”.
57
If the Manager or an affiliate of the Manager provides underwriting services with respect to the
Fund Loans or services the Fund Loans, the Manager or an affiliate of the Manager will be
entitled to the following fees and compensation for such services as described below. Other fees
and compensation payable to the Manager or an affiliate of the Manager also are described
below.
Form and Recipient of
Compensation
Estimated Amount or Method of Compensation
Loan Purchase Fee
on Existing Notes
Paid to LLC Fund, Managers or Affiliates
If the LLC Fund purchases an existing loan from a third party, the
Managers or an Aaffiliate may be paid a fee comparable to a loan
origination fee. This fee will not exceed the discount received by the
LLC Fund for the purchase of said loan and the loan terms and
conditions will be comparable or better than those for originating
loans.
Real Estate Commissions to
Managers or Affiliates
Upon Resale of Any Property
Acquired through
Foreclosure Paid to Managers
or Affiliates
The Managers or an Affiliate may operate a real estate sales
department that may handle the resale of properties taken back in
foreclosure by the LLC Fund. If the Managers or an Affiliates elects to
act as the listing agent with respect to any such properties, its
compensation shall not exceed the prevailing rate in the area where the
real property is located. Such fees are approximately 4-6% of the sales
price depending upon the size of the loan, cooperating brokers, and a
variety of other factors. With respect to any real property not located in
Wyoming a local state real estate broker will be engaged by the LLC
Fund and paid the prevailing commission.
Loan Servicing Fee to
Managers, Affiliates, or a Third
Party
The Managers, its Affiliates or a third party servicer will supervise the
servicing of loans owned by the LLC Fund. This consists of billing and
collecting on the Subject Fund Loans (not including attorneys' fees,
foreclosure fees and court costs, if needed). It is anticipated that these
fees will approximate the following, which will be paid to the Manager
or affiliates of the Manager or a third party that provides this service:
(a) 1/12th of 0.5% to 1.0% of the principal amount of each LLC Fund
Loan, payable monthly (i.e. 0.5% to 1.0% per year). This fee shall be
collected monthly from the payments received by the LLC Fund from
the borrowers. This fee may vary from loan to loan.
(b) 10% of any late charges collected from borrowers. The Managers
reserves the right to waive collection of any late charges or reduce the
percentage retained.
(c) 10% of any prepayment penalties collected from borrowers. The
Managers reserves the right to waive collection of any prepayment
penalties or reduce the percentage retained.
(d) 10% of any default interest. The Managers reserves the right to
waive collection of any default interest or reduce the default interest
rate.
(e) 10% of any extension fees. The Managers reserves the right to
waive collection of any extension fees.
(f) 10% of other fees collected from the borrower as authorized by the
terms of the loan documents for work performed.
58
The Managers reserves the right to waive collection of any such fees.
Managers’ Share of Profits
from the Sale of Subject Fund Loans
The Managers shall be entitled to retain ten percent (10%) of the net
profits from the sale of any Subject Fund Loans.
F. Actions against the Fund and Affiliates
No material administrative, civil or criminal actions have ever been brought against the Fund, the
Manager or Thomas W. Garlock, nor are any of such actions anticipated. See Section VI(D)(10)
above, Terms of Units – Legal Proceedings.
G. Additional Personnel
The Fund has no employees at this time. The Fund may employ personnel or enter into
independent contractual arrangements with additional personnel in the future, as needed.
Administrative, clerical and other operational services of the Fund may be provided by an
affiliate of the Fund, the cost of which will be allocated among several affiliates, including,
without limitation, the Fund, without mark-up.
H. Other Activities of the Manager
The Manager is not required to manage the Fund as its sole and exclusive function. The Manager
and Mr. Garlock, President and sole shareholder of the Manager, may and do engage in other
business activities, including activities that may be competitive with the Fund, and are only
required to devote such time to the Fund as the Manager deems necessary to accomplish the
purposes of the Fund. See Section VII(C) above, Management – Thomas W. Garlock”.
The Manager, Mr. Garlock and any other employees or agents of the Manager or the Fund may
serve as members, partners, stockholders, directors, officers, employees or contractors of other
business entities at their sole discretion, including entities which may compete with the Fund.
I. Indemnification of the Manager
Pursuant to the Fund’s Operating Agreement, the Fund will indemnify and hold harmless the
Manager from and against any and all losses, claims, demands, costs, damages, etc., in
connection with any claims arising out of the business of the Fund, to the fullest extent permitted
under applicable law.
Insofar as indemnification for liabilities under the Securities Act of 1933, as amended, may be
permitted to the Manager or any other persons pursuant to the Operating Agreement or
otherwise, the Fund has been informed that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the Act and is
therefore unenforceable.
59
VIII. SOURCES AND USES OF PROCEEDS
Upon receipt, the Manager will deposit the proceeds received from potential Investors into the
business account of the Fund. It is not anticipated that the Fund will utilize the services of any
brokers-dealers or other qualified sales agents in offering and selling the Units in this Offering.
Accordingly, the fund does not anticipate paying any sales fees or commissions to anyone in
connection with the offer and sale of the Units. It is anticipated that Thomas W. Garlock,
President of the Manager, will offer the Units for sale on behalf of the Fund. Mr. Garlock will
receive no sales fees, commissions or any other amounts in connection with offering for sale and
selling the Units on behalf of the Fund.
Provided that the Fund has received the minimum subscription amount of $125,000 by April 30,
2016 the Fund will begin pursuing Fund Loans and Equity Investments for the Fund. Proceeds of
this Offering also may be used for the Fund’s administrative purposes that do not increase the
Fund's profitability or market value. The Manager will have considerable discretion in the
application of the net proceeds of this Offering.
Assuming that this Offering is fully subscribed and all Units offered are sold, the Fund will
receive approximately $2,330,000 in net proceeds from this Offering, calculated as follows:
Number of Units
Offered (1)
Price to
Investors/Unit
Gross Proceeds
Selling Expenses &
Overhead (2)
Net Proceeds to the Fund
200
$12,500 $2,500,000 $170,000 $2,330,000
____________________
(1) The Fund reserves the right to accept or reject subscriptions for Units in its sole discretion.
(2) Estimated to be approximately 6.8%.
The net proceeds from this Offering will be used by the Fund in order to make Fund Loans, to
invest in Equity Investments, for administrative expenses and to fund reserves determined to be
necessary by the Manager in its sole discretion. Assuming all Units offered for sale in this
Offering are sold, the Fund estimates that the net proceeds of this Offering will be used as
follows:
Fund Loans $1,400,000
Equity Investments $800,000
Reserves $130,000
Net Proceeds $2,330,000
Although the Fund anticipates that the Manager may use the proceeds of this Offering to, among
other things, provide Fund Loans to borrowers and fund Equity Investments, the Manager, in its
sole discretion may delay or forego making Fund Loans and/or Equity Investments, based upon
the perceived market demand and potential profits that might result from these investments at
any given time, as determined by the Manager in its sole discretion.
60
IX. CERTAIN TAX CONSIDERATIONS
CAUTION: NOTHING STATED IN THE BRIEF DISCUSSION THAT FOLLOWS IS OR
SHOULD BE CONSTRUED AS TAX ADVICE TO A PROSPECTIVE INVESTOR,
INDIVIDUALLY. THE FOLLOWING DISCUSSION IS INTENDED TO PROVIDE
PROSPECTIVE INVESTORS WITH GENERAL INFORMATION ON CERTAIN U.S.
FEDERAL INCOME TAX MATTERS. THE MATTERS DISCUSSED BELOW ARE
COMPLEX AND THE IRS MAY NOT AGREE WITH THE INFORMATION PRESENTED
BELOW. ALL POTENTIAL INVESTORS ARE ENCOURAGED TO DISCUSS THE TAX
AND OTHER RAMIFICATIONS OF AN INVESTMENT IN THE FUND WITH THEIR TAX
AND LEGAL ADVISORS.
To ensure compliance with Treasury Department Circular 230, potential Investors are
hereby notified that: (a) the following discussion was not intended or written to be used,
and cannot be used, by any taxpayer for the purpose of avoiding any United States federal
tax penalties that may be imposed on such taxpayer; (b) such discussion was written to
support the promotion or marketing of the Units; and (c) each taxpayer should seek advice
regarding an investment in the Units based on its particular circumstances from an
independent tax advisor.
Each potential purchaser of Units in the Fund is urged to consult its own tax advisors concerning
the potential federal, state, local, and foreign tax consequences of an investment in the Fund,
with specific reference to its own tax situation, prior to any investment in the Fund.
Fund Classification.
Under Treasury Regulations, a U.S. domestic entity, such as a limited liability company, that has
two or more members and that is not organized as a corporation under U.S. federal or state law
will be classified as a partnership for U.S. federal income tax purposes, unless it elects to be
classified as an association taxable as a corporation. Therefore, the Fund should be taxable as a
partnership for U.S. federal income tax purposes.
The following discussion assumes that the Fund will be classified as a partnership for U.S.
federal income tax purposes.
Taxation of the Fund and Investors Generally.
Under the Code, the Fund is not subject to U.S. federal income tax, but is required to file a
partnership tax information return each year. In general, a character of each Member’s share of
each item of income, gain, loss, deduction, credit and tax preference is determined at the Fund
level and retains such character when allocated among the Members. Each Member will be
allocated a distributive share of such tax items in accordance with the terms of the Operating
Agreement and applicable provisions of the Code in a manner intended to correspond to the
sharing of economic profits and losses by the Members. Although the allocations provided for in
the Operating Agreement are intended to comply with applicable tax requirements, potential
Investors should note that their respective shares of the Fund's tax items could be adjusted by the
IRS if the Fund's allocations were found not reflect the Members’ respective economic interest in
the Fund.
61
Each Member will be required to include its share of the Fund's tax items in its income for any
taxable year of the Fund ending within or with the taxpayer year of the Member, without regard
to whether the Member has received or will receive any cash distribution from the Fund. The
Code requires the Fund to adopt the taxable year of the Members owning a majority interest in
the Fund capital and profits. It is anticipated that the Fund will adopt a calendar taxable year
under this provision.
Cash distributions, if any, from the Fund are generally not the equivalent of Fund income for tax
purposes. If the cash distributed to a Member exceeds such Member’s share of Fund taxable
income for the year, the excess will constitute a return of capital. A return of capital is applied
first to reduce the adjusted tax basis of the Member’s Units in the Fund and is not taxable to the
extent of such Member’s adjusted tax basis. Any amounts in excess of such adjusted tax basis
will generally be treated as a capital gain from the sale of all or a portion of such Member’s Unit
in the Fund. Such capital gain or loss will be long- or short-term, or potentially in part long-term
and in part short-term, depending on each members holding period for his Unit in the Fund.
Initially, the tax basis of a Member’s Units in the Fund for federal income tax purposes will be
the amount paid by such Member for its Units in the Fund. In general, each Member's tax basis is
increased or decreased by the amount of such Member’s allocable share of the Fund's taxable
income or loss for each year and by such Member’s share of any increase or decrease in any
Fund liabilities. Each Member's tax basis is also reduced by the amount of any cash distributions
made to such Member during the year and is increased by any subsequent cash contributions.
The dissolution and liquidation of the Fund generally will not result in any gain or loss being
recognized by the Fund. Each Member will recognize gain, however, to the extent that the sum
of money received, which includes any decrease in a Member’s share of Fund liabilities, exceeds
such Member’s adjusted tax basis in its interest in the Fund. Subject to the rules concerning
“unrealized receivables” and “substantially appreciated inventory items” (“Section 751
property”), such gain will be capital gain.
Capital loss will be recognized by Members if only “money”(which includes a reduction in the
Member’s share of Fund liabilities), and Section 751 property are distributed, and only to the
extent a Member's adjusted tax basis for its interest in the Fund exceeds the sum of such money
and tax basis to the Member of its share of Section 751 property. If the liquidating distribution
includes property other than money and “Section 751 property”, no loss will be recognized.
At-Risk Rules.
The so-called “at risk” rules contained in Code Section 465 generally provide that a Member
cannot claim its distributive share of the losses incurred by the Fund to the extent such losses
exceed its amount “at risk” in the business activity undertaken, as determined at the close of the
taxable year of the entity. The “at risk” rules of Code Section 465 are applicable only to
individuals (including individual Members in a limited liability company such as the Fund),
estates, trusts, shareholders of an S corporation, and certain closely held “C” Corporations in
which five or fewer individuals own more than 50% of the stock.
An investor generally will be treated as “at risk” under Code Section 465 to the extent of: (i) the
non-borrowed cash and the adjusted basis of other property it contributes to the entity's business
activity; (ii) the Investor’s share of amounts borrowed for use in the entity’s business activity if
62
the Investor is personally liable therefore, or has pledged its property (other than property used in
the entity's business activity) as security for the borrowed amount; and (iii) certain “qualified
nonrecourse financing”. An Investor will not be considered “at risk” with respect to amounts
borrowed from a person who has an interest in the activity or from a person related to a person
(other than the taxpayer) with an interest in the activity. Further, an Investor will not be
considered “at risk” with respect to any amounts as to which it is protected against loss through
nonrecourse financing, guarantees, stop loss or reimbursement agreements, insurance or other
similar arrangements; however, special rules are provided for “qualified nonrecourse financing”.
An Investor is considered at risk with respect to “qualified nonrecourse financing” that is secured
by the real property used in the activity. To the extent that the Fund incurs any debt financing,
the Manager will use its best efforts to obtain qualified nonrecourse financing, although it is not
obligated to do so.
Fund losses deducted by a Member will reduce that Member’s amount “at risk”, and this reduced
“at risk” amount would then be carried forward to the succeeding taxable year. The “at risk”
amount will also be reduced by any cash distributions of the Fund to the Member. If deductions
are suspended due to an insufficient amount “at risk”, the suspended amount will be available to
the Member as a deduction in subsequent taxable years, subject to the “at risk” limitations.
Suspended amounts will be the deductible no later than the taxable year in which a Member
disposes of its interest in the Fund. If the amount “at risk” of a Member is reduced below zero,
the Member must include as income the amount of previously allowed losses to the extent of the
negative amount “at risk”. This recaptured amount would be taxable to the Member as ordinary
income in the subject taxable year.
Passive Activity Rules.
Section 469 of the Code denies a taxpayer the use of deductions and credits generated by
“passive” activities against income from other activities until the taxpayer disposes of the interest
in the passive activities. The passive activity loss rules apply to individuals, estates, and trusts.
They also apply to personal service corporations and closely held “C” corporations that have five
or fewer individuals holding more than 50% of the stock.
The determination of whether or not an activity is “passive” is defined by the statute based on
whether or not a taxpayer “materially participates” in the activity and the activity involves the
conduct of a trade or business. The material participation test divides taxpayers into “active”
participants and “passive” participants. The active/passive determination must be made
separately for each taxpayer and for each activity in which a taxpayer participates. To
“materially participate” in an activity, a taxpayer must be involved in operations on a sufficiently
regular, continuous, and substantial basis. Members in a limited liability company, such as the
Fund, are presumed to be not materially participating in the relevant activity, subject to certain
exceptions.
Potential Investors should consult their own tax advisors for further information about
federal, state, local and other tax consequences of investing in the Fund.
63
X. PLAN OF DISTRIBUTION; INVESTOR SUITABILITY STANDARDS
A. Plan of Distribution
The Units will be offered through the efforts of the Manager on behalf of the Fund. The
Manager will not receive any sales fees, commissions or other fees based upon or determined
with reference to the sale of Units. The Fund does not anticipate engaging any registered broker-
dealers or other qualified sales agents to assist in the Offering.
B. Investor Suitability Standards
The Units offered hereby have not been registered under the Securities Act of 1933, as amended
(the “Act”), and may not be offered or sold within the United States or to U.S. Persons (as such
terms are defined under the Act) except pursuant to an exemption from, or in a transaction not
subject to, the registration requirements of the Act. The Units are being offered and may be sold
only to (i) “accredited investors” (as defined in Rule 501(a) of Regulation D under the Act); and
a limited number (not to exceed 35) of qualified investors that meet the knowledge and business
requirements set forth in Rule 506 of Regulation D, or other applicable federal or state securities
regulations. All potential Investors must execute and return to the Fund executed copies of the
Subscription Agreement, Investor Questionnaire and the Fund’s Operating Agreement, copies of
which are attached to this Memorandum.
In order to qualify as an “accredited investor”, a potential Investor, if a natural person, must (i)
be a director or executive officer of the Fund or the Manager; or (ii) have an individual net worth
or joint net worth with his/her spouse in excess of $1 million at the time of the purchase of the
Units (excluding the value of primary residence and any associated mortgage debt) or (iii) have
had individual income in excess of $200,000 in each of the most two recent years or joint income
with his/her spouse in excess of $300,000 in each of those two years and has a reasonable
expectation of reaching the same income in the current year.
Organizations or entities that wish to purchase Units offered hereby must fall within one of the
following definitions:
1. Any (i) bank as defined in Section 3(a)(2) of the Securities Act, or any savings and loan
association or other institution as defined in Section 3(a)(5)(A) of the Securities Act
whether acting in its individual or fiduciary capacity; (ii) broker or dealer registered
pursuant to Section 15 of the Exchange Act; (iii) insurance Fund as defined in Section
2(13) of the Securities Act; (iv) investment Fund registered under the Investment Fund
Act of 1940 or a business development Fund as defined in Section 2(a)(48) of the
Investment Fund act of 1940; (v) Small Business Investment Fund licensed by the U.S.
Small Business Administration under Section 301(c) or (c) of the Small Business
Investment Act of 1958; (vi) plan established and maintained by a state, its political
subdivisions, or any agency or instrumentality of a state or its political subdivisions, for
benefit of its employees, if such plan has total assets in excess of $5 million; or (vi)
employee benefit plan within the meaning of Title I of the Employee Retirement Income
Security Act of 1974 (“ERISA”), if the investment decision is made by a plan fiduciary,
as defined in Section 3(21) of ERISA, which is either a bank, savings and loan
association, insurance Fund, registered investment advisor, or if the employee benefit
64
plan has total assets in excess of $5 million, or if it is a self-directed plan, with
investment decisions made solely by persons that are accredited investors;
2. Any private business development Fund as defined in Section 202(a)(22) of the
Investment Advisers Act of 1940;
3. Any organization described in Section 501(c)(3) of the Internal Revenue Code,
corporation, Massachusetts or similar business trust, or partnership not formed for the
specific purpose of acquiring interests offered, with total assets in excess of $5 million;
4. Any trust with total assets in excess of $5 million, not formed for the specific purpose of
acquiring the Units offered, whose purchases directed by a sophisticated person as
described in Rule 506(b)(2)(ii) of regulation D; or
5. Any entity in which all of the equity owners are accredited investors.
The Fund also may offer and sell Units to a limited number of potential Investors who, although
they are not accredited investors, are sophisticated investors who, either alone or with a
purchaser representative, have sufficient knowledge and experience in financial and business
matters to make them capable of evaluating the merits and risks of an investment in the Fund.
The suitability standards discussed above represent minimum suitability standards for potential
Investors. The satisfaction of such standards by potential Investors does not necessarily mean
that the Units are a suitable investment for such potential Investors. Potential Investors are
encouraged to consult their financial, legal, and tax advisors to determine whether an investment
in the Units is appropriate. The Fund may reject subscriptions, in whole or in part, in its absolute
discretion.
XI. HOW TO SUBSCRIBE; ADDITIONAL INFORMATION
A. How to Subscribe
Potential Investors who wish to purchase Units in the Offering must deliver to the Fund (i) an
executed copy of the Signature Page to the Operating Agreement attached hereto as Exhibit “A”;
(ii) an executed copy of the Subscription Agreement attached hereto as Exhibit “B”, (iii) an
executed copy of the Investor Questionnaire also attached hereto as Exhibit “B”, and (iv) a check
payable to “Verde Mountain Fund, LLC” for the total purchase price of the Units being
purchased by the Investor. Funds also may be wired to the account of the Fund pursuant to wire
transfer instructions that potential Investors can obtain from the Manager. Delivery of the
documents and payment (unless sent via wire transfer) required should be made to the following
address:
Verde Mountain Fund, LLC
c/o Avalon Management Group, Inc.
970 W. Broadway, #446
P.O. Box 30,000
Jackson Hole, WY, 83002
The Manager will, in its sole discretion, determine whether to accept or reject subscriptions
received from potential Investors. Subscriptions will be not be effective unless and until accepted
by the Fund. If a potential Investor's subscription for Units is not accepted, funds received from
such Investor will be returned to the Investor promptly upon such determination.
65
If the Fund does not receive the Minimum Offering amount of $125,000 (ten (10) Units) in this
Offering by April 30, 2016, then this Offering will be terminated without liability to the Fund
and all subscription funds received by the Fund will be returned promptly to the respective
potential Investors.
The Fund reserves the right, in its sole discretion and for any reason whatsoever, to modify,
amend, and/or withdraw all or a portion of the Offering and/or accept or reject, in whole or in
part, any or all of the offers to invest in the Units without obligation, or to allot any potential
Investor less than the amount of Units such potential Investor wishes to purchase. Additionally,
the Fund reserves the right to waive the minimum subscription amount of 2 Units ($25,000) on a
case-by-case basis. The Fund also reserves the right to terminate, at anytime, solicitations or
indications of interest in the Fund. If the Fund does not accept all or a portion of a subscription, it
will return any collected portion of the unaccepted portion of the subscription funds to the
prospective Investor promptly, without interest.
B. Additional Information
The information contained in this Memorandum regarding the contents of any agreement or
document described herein are not necessarily complete, and all information presented herein is
qualified in its entirety by reference to such agreements or documents. Copies of all agreements
or documents referred to or described herein applicable to the Fund that are not included as
Exhibits to this Memorandum are available from the Manager at:
Thomas W. Garlock, President
Avalon Management Group, Inc.
970 W. Broadway, #446
P.O. Box 30,000
Jackson Hole, WY, 83002
Tel: 800-914-2689
Thom@VerdeMountainFund.com
The Manager is available to all potential Investors and/or their in order to answer all reasonable
inquiries from potential Investors and/or their advisers relating to this Offering and will provide
potential Investors the opportunity to obtain any additional information (to the extent the
Manager possesses such information or can acquire it without unreasonable effort or expense)
necessary to verify the accuracy of the information set forth in this Memorandum. Potential
Investors may be required to sign non-disclosure agreements to protect confidential information
prior to receiving information.
Potential Investors should not construe any statement made in this Memorandum to be made by
anyone other than the Fund. Management has not engaged the services of any individual, entity,
law firm, agent or other party to verify the accuracy or completeness of the statements contained
herein, nor has any such third-party approved or disapproved of the information contained in this
Memorandum. No person is authorized to give any information with respect to the Fund and its
operations other than that contained in this Memorandum or documents or other information
furnished by the Fund or the Manager.
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Exhibits:
Exhibit A: Subscription Agreement and Investor Questionnaire
Exhibit B: Operating Agreement
Recommended