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Chicago Mercantile Exchange Building

30 South Wacker Drive

22nd Floor

Chicago, IL 60606

INVESTMENT POLICY STATEMENT

for

Commonwealth Capital Income Fund I

 

I.  Purpose

The purpose of Commonwealth Capital’s Investment Policy Statement (IPS) is to establish guidelines for the investable assets to be included (the Portfolio) in our VC Fund; Commonwealth Capital Income Fund-I, LLC (CCIF-I).  This document shall apply to the Investment Committee, as well as all Investment Consultants and/or Fund Managers hired to assist with the management of the Portfolio.

QUALIFYING FOR INCLUSION ONLY INTO

COMMONWEALTH CAPITAL INCOME FUND I

1.  Prior to the pending official offer of securities, once the portfolio-company candidate has produced the required securities-offering document to the specifications outlined within this document, as well as internally in the Production Component within the Financial Architect System, has chosen the OPT-IN protocol for inclusion into the firm’s VC Fund, and has achieved a Diagnostics Rating which is acceptable to our firm’s Investment Policy Committee, the portfolio company candidate shall go through a final due diligence checklist to be presented to, and voted on, by the Investment Policy Committee for inclusion into Commonwealth Capital Income Fund-I. If approved for inclusion, the Executive Director of the Investment Policy Committee shall contact the portfolio company candidate for executing the proper agreements for Commonwealth Capital Income Fund-I inclusion. If included into Commonwealth Capital Income Fund-I, the portfolio-company candidate shall sell Commonwealth Capital:

  • 2% of the Authorized Common Equity, whether denoted in Common Class A Voting Shares “shares” (CORPS) or Common Class A Voting Membership Units “units” (LLCs) at a price of $0.01 a share or unit, no matter the size of the pending securities offering;

  • Warrants to purchase an additional 3% of the Authorized Common Equity, whether denoted in Common Class A Voting Shares “shares” (CORPS) or Common Class A Voting Membership Units “units” (LLCs) at a price of $0.01 a share or unit, no matter the size of the pending securities offering; and

  • 1,000 Shares or Units of the Convertible Participating Callable Preferred Equity with a par value of $100 per Share or Unit, at a price of $0.01 a share or unit, to be sold through the subsequent bona-fide securities offering, no matter the size of the pending offering.   

 

QUALIFYING FOR A DIRECT CASH INVESTMENT

2.  Once the portfolio company candidate has been included into Commonwealth Capital Income Fund-I, it becomes a Portfolio Company. Once the Portfolio Company has raised a minimum of $250,000 or maximum of $500,000 from personal and professional investor contacts using the securities offering documents, produced within the Financial Architect System™ to one of the following two specifications, the Portfolio Company becomes eligible for consideration by Commonwealth Capital’s Investment Policy Committee for the capital matching program. The capital matching program currently matches up to a minimum of $250,000 or maximum of $500,000 of the securities offered, AS SPECIFIED BELOW:  

 

II.  Investment Objectives & Constraints

 

​A. OBJECTIVES: The objectives of the Portfolio are listed below, in descending order of priority:

 

1.  To loan seed capital to start-up and early-stage companies that are willing to conduct two consecutive securities offerings as follows:

 

Stage One: 1-Year Note offering:

Security: SEED CAPITAL CONVERTIBLE BRIDGE NOTES.

  • 1-year Senior Secured Convertible Note “Notes” with Preferred Equity Kicker as defined within the Financial Architect Seed Capital Producer™.

Baseline Amount of the NOTE Offering: $1,000,000.

Minimum Matching CCIF-I Commitment: $250,000.

Maximum Matching CCIF-I Commitment: $500,000.

Terms of the Offering:

  1. Collateral. The Baseline Amount of the Notes to be 100% first lien security against company assets - excluding reasonable accounts payable. Lien to be perfected by a security agreement, as provided within the Financial Architect Seed Capital Producer™ and registered at the county level of the issuer by the issuer.

  2. Interest Rate. Notes to pay an annual interest rate determined by the Long-term composite 10-year U.S. Treasury Bond Rate plus 5% at the time of Note issuance, payable quarterly.

  3. Maximum Maturity. Notes, issued by the company, are to mature no more than 1 year from the date of the Seed Capital Convertible Notes offering’s original start date.

  4. Minimum Maturity. 50% of Baseline Amount of the Notes principal is to be paid equally to all Note-holders once the company has raised the 1st $1,000,000 and the balance of 50% of Baseline Amount of the Notes principal is to be paid equally to all Note-holders once the company has raised the 2nd $1,000,000 in equity from Stage Two preferred equity offering, irrespective of time required. Pro rata amounts apply to larger Note issues.

  5. Subsequent Securities Offering. Once the candidate becomes a portfolio-company, it must engage in a subsequent securities offering of at least $5,000,000 in preferred equity, within 90 days of the start of the Senior Secured Convertible Note offering.

  6. Matching Clause. 25% or more ($250,000+) of the $1,000,000 1-year Note is to be sold to the entrepreneur’s personal and professional pre-existing contacts under Regulation D Rule 504 (and or alternatively under Title III); Regulation D Rule 506(b); or  Regulation D Rule 506(c) (Title II), in compliance with federal and state(s) securities laws, rules and regulations, first.  Once the initial $250,000 offering is completed by the portfolio company and verified by Commonwealth Capital, along with other due diligence protocols being met, the Fund (CCIF-I) will match a minimum of $250,000 up to a maximum of $500,000, dollar-for-dollar, raised by the portfolio-company.  After passing the investment policy committee review, the candidate then becomes funded and will be a portfolio-company of the Fund.

  7. Closing. Note financing closing date shall be on the day that portfolio-company receives the minimum of $250,000 up to a maximum of $500,000, for the purchase of the 1-year Notes from Commonwealth Capital Income Fund-I.

  8. Conversion Rights. The Baseline Amount of the Notes is to be convertible into the portfolio company’s common equity to further enhance return potential. The Notes are conversion into a percentage of the company’s common voting equity so that the projected IRR upon conversion is no less than 20% annually, if common equity remains privately held with full conversion.[1] Pro rata amounts apply to larger Note issues.

  9. Preferred Equity Kicker. The preferred equity issued as a kicker with the Baseline Amount of the Notes shall be a minimum of 3% or a maximum of 5% of the subsequent preferred equity to be issued during the Stage Two preferred-equity offering. The minimum Stage Two preferred-equity offering is $5,000,000.  Therefore, the Fund (CCIF-I) upon matching the capital contribution of others, shall receive half or 50% of the 3% equal to a minimum of $75,000 (50% of $150,000) or 50% of the 5% maximum of $125,000 (50% of $250,000) par value.  To account for a tax deferred capital gain, the preferred equity kicker shall be issued by the issuer at a cost basis of $.01 per preferred equity unit or share.  The preferred equity kicker is to be distributed, pre-preferred equity offering and within 89-days of the beginning of the Note offering. Pro rata amounts apply to larger Note issues.

 

The portfolio-company is to use the Financial Architect System’s Development Capital Producer™ with the following provisions:

 

Stage Two: Preferred Equity Offering:

Security: Participating Convertible Cumulative Callable Preferred Equity as defined within the Financial Architect Development Capital Producer™.

  1. The proceeds from the preferred equity offering are to replace the Baseline Amount of the Senior Secured Convertible Notes’ principal amount.

    • 50% of  Baseline Amount of the Notes principal is to be paid equally to all Note-holders once the company has raised the 1st $1,000,000 through the preferred equity offering, irrespective of time required to raise the amount; and

    • The balance of 50% of Baseline Amount of the Notes principal is to be paid equally to all Note-holders once the company has raised the 2nd $1,000,000 through the preferred equity offering, irrespective of time required to raise the amount.  

    • Pro rata amounts apply to larger Note issues.

  2. The preferred equity is to provide substantial cash flow from two types of dividends: a stated cumulative dividend that is to be paid (or accrued) irrespective of profitability and a participating cumulative dividend that “participates” in a percentage of net profits.

    • Issue preferred equity with a cumulative stated dividend rate of no less than the rate determined by the Long-term Composite 10-year U.S. Treasury Bond Rate plus 5% at the time of preferred equity issuance (cash distribution), paid quarterly— within 15 days of the end of the fiscal quarter.

    • Issue preferred equity with a cumulative participation dividend (cash distribution), paid annually— within 60-days of the end of the fiscal year, with a participation percentage rate sufficient so that the projected IRR is no less than 20% annually, if preferred equity remains privately held with no conversion. 

  3. The preferred equity shall replace and carry the first lien on assets for a period of 5-years to reduce financial risk.

  4. The preferred equity is to be convertible into the portfolio company’s common equity to further enhance return potential.

    • Issue preferred equity with a conversion into a percentage of the company’s common voting equity so that the projected IRR upon conversion is no less than 20% annually, if the company’s common equity remains privately held with full conversion.   

  5. The preferred equity is to be callable to enable the portfolio company to re-finance with either a new series of preferred equity with a lower cost of capital or debt, (traditional bank debt or through the issuance of Notes or Bonds) the least expensive form of capital, to further enhance return potential.

    • Issue preferred equity with a Call Protection period that extends so that the projected IRR upon conversion is no less than 20% annually, if the company’s common equity remains privately held and the preferred equity is called.

IMPORTANT NOTE: All IRR calculations are easily accomplished simultaneously with the CapPro™ within the Financial Architect® program chosen.

 

 

B. INVESTMENT POLICY CONSTRAINTS: The Portfolio is also subject to the following constraints:

 

  1. Geographical Reach. The Portfolio shall only invest in U.S. based companies.

  2. Mandatory Securities Offerings. The Portfolio shall only invest in companies that management believes can conduct two consecutive securities offerings in compliance with federal and state(s) securities laws, rules and regulations.

  3. Financial Projections. The Portfolio shall only invest in companies that project a breakeven point by year 3 in their pro forma financial projections.

  4. Additional. The Portfolio shall only invest in companies that agree to the following:

    • Fiscal Year: Unless otherwise agreed to in writing by Commonwealth Capital, the fiscal year and fiscal quarters for the portfolio-company shall be based on a normal calendar year.

    • Accounting: During the period of Note holding, the books and records of the portfolio-company shall be compiled by a certified public accounting firm and audited once the Stage Two financing has closed. Annual, as well as quarterly financial statements are to be sent to Commonwealth Capital within 30 days of the close of each period.

    • Corporate Governance: Portfolio company shall hold normal annual shareholders’ meetings, which will include preferred equity holders. Commonwealth Capital does not request a board of directors (corp.) seat or managing member (LLC) position.

 

C.  Description of Responsibilities.

  1. The responsibilities of each party involved in managing the portfolio are defined below:

    • Investment Committee:  Each Investment Committee Member shall attend monthly portfolio meetings through online video conferencing or as otherwise specified by Commonwealth Capital.  The Investment Committee shall provide written investment instructions to the Fund Manager, who shall implement the instructions.

    • Fund Manager: Fund Manager shall follow the written directives of the Investment Committee.

    • Fund Manager: Fund Manager shall manage Fund Manager’s department within the budgets as established by Commonwealth, and in relative concert with the pro forma financial projections, as amended from time to time by Commonwealth.

 

D.  Fiduciary Duty.

 

  1. In seeking to attain the investment objectives set forth in the Investment Policy Statement, the Prudent Investor Rule shall apply, which states that the Investment Committee is under a duty to Commonwealth Capital Income Fund I to invest and manage the Portfolio as a prudent investor would, as described below:

    • The exercise of reasonable care, skill, and caution that is applied to investments not in isolation but in the context of the Portfolio and as part of an overall investment strategy, which should incorporate risk and return objectives reasonably suited to the Portfolio.

    • In making and implementing investment decisions, the Investment Committee, directed through the Fund Manager, has a duty to diversify the Portfolio unless, under the circumstances, it is prudent not to do so.

    • In addition, the Investment Committee must:

      • Conform to fundamental fiduciary duties of loyalty and impartiality;

      • Act with prudence in deciding whether and how to delegate authority and in the selection and supervision of agents (i.e., Investment Consultants and/or Fund Manager[s]);

      • Incur only costs that are reasonable in amount and appropriate to the management of the Portfolio and in relative concert with the budgets within the pro forma financial projections, as amended, by Management of Commonwealth Capital.

  2. The Prudent Investor Rule is based on the following five basic principles:

    • Sound diversification is fundamental to risk management and is therefore ordinarily required of the Investment Committee;

    • Risk and return are so directly related that the Investment Committee has a duty to analyze and make conscious decisions concerning the levels of risk appropriate to the purposes, distribution requirements, and other circumstances of the Portfolio;

    • The Investment Committee has a duty to avoid fees, transaction costs, and other expenses that are not justified by needs and realistic objectives of the Portfolio;

    • The fiduciary duty of impartiality requires a balancing of the elements of return between production of income and the protection of investment principal;

    • The Investment Committee has the duty and the authority to delegate as prudent investors would.

 

E.  Conflicts of Interest.

 

  1. Any person or organization involved in the oversight or management of the Portfolio (a Covered Party) should adhere to the following guidelines regarding conflicts of interest:

    • No person on the Investment Committee, including the Fund Manager, shall have a direct or indirect ownership interest in any portfolio-company candidate prior to funding.

      • Direct interest shall be constituted by an ownership interest in a portfolio-company or portfolio-company candidate by an Investment Committee Member (or intimate or extended family members) or trust on their behalf.

      • Indirect interest shall be constituted by an ownership interest in another entity that has an ownership interest in a portfolio-company or portfolio-company candidate by an Investment Committee Member’s (or intimate or extended family members) or trust on their behalf.

 

F.  Investment Philosophy

 

  1. The basic tenets upon which the Investment Policy Statement is based include the following:

    • Return of investment (Note) principal within 1 year of investment;

    • Obtain preferred equity kicker from portfolio company;

    • Introduce portfolio company to broker dealers to further the success of achieving Stage Two preferred equity offering;

    • Direct, through securities offering document templates in the Financial Architect System™ as part of the EPEC Platform™, broker dealer marketing support, internal controls, and corporate governance.

 

G.  Asset Allocation Guidelines.

 

  1. The Portfolio’s asset allocation strategy, including permissible asset classes and applicable guidelines, is described below.

    • Strategic Asset Allocation: Strategic Asset Allocation based on expected returns, volatility, and the unique risk of each portfolio company and candidate. There is no allocation based on any specific criteria or need of any individual investor in the Fund.

    • Tactical Asset Allocation: Tactical Asset Allocation: Strategic Asset Allocation based on expected returns, volatility, and the unique risk of each portfolio-company and candidate. There is no allocation based on any specific criteria or need of any individual investor in the Fund.

    • Asset Class Constraints: The weighting of each asset class shall be constrained within +/- 20 % of the Strategic Asset Allocation targets.  This constraint serves as a trigger to rebalance the portfolio, as well as a constraint within which tactical shifts to the portfolio must remain.

    • Rebalancing:  A rebalancing of the portfolio shall take place if the weighting of any asset class is outside of the Asset Class Constraints, annually or when prudent.  A rebalancing of the portfolio should bring the weightings of each asset class listed above back in line with its Strategic Asset Allocation target, unless there has been a tactical change within an asset class, for which the rebalancing shall bring the weighting back to the target Tactical Asset Allocation for that asset class.  Various costs of rebalancing will be considered prior to rebalancing the entire portfolio.

 

H.  Asset Class Definitions.

 

  1. U.S. Fixed Income: Non-Investment Grade Debt

    • Eligible Securities:

      • 1-year Senior Secured Notes or 1st Mortgage Notes with preferred equity kickers of the issuing entity, i.e. the portfolio-company.

    • Excluded Investments:

      • Debt in mineral extraction companies – as they are not eligible for Regulation D Rule 504 or Title III exemption from registration.

      • Any company involved in improper use of media, film, press or otherwise determined by the Investment Policy Committee. Improper use would include but not necessarily be limited to: pornography, political propaganda, etc.

 

I.  Monitoring Portfolio Investments & Performance.

  1. The portfolio company shall prepare an annual report and quarterly performance reports, which should include the company’s financial performance, with the appropriate financial statements compiled by a CPA firm, and securities compliance report addressing all applicable guidelines defined in the Investment Policy Statement and prepared by portfolio company’s securities lawyer.

  2. Fund Manager(s) may be terminated for any of the following reasons:

    • Collusion with any portfolio company that is in conflict with any of the provisions of the Investment Policy Statement;

    • Breach of any provision within this Investment Policy Statement.

    • Breach of any provision within the Executive Compensation Agreement in regard to portfolio-company confidentiality. 

 

J.  Investment Policy Statement Review

  1. Any of the following shall trigger a review of the Investment Policy Statement:

    • A change to the Fund’s Investment Objectives.

    • In the absence of any change to the Fund’s Investment Objectives, the Investment Policy Statement shall be reviewed by the Investment Policy Committee annually.

 

INVESTMENT POLICY STATEMENT SUBJECT TO CHANGE

AT MANAGEMENT’S SOLE DISCRETION AND WITHOUT NOTICE

– END OF INVESTMENT POLICY STATEMENT 

 

 

[1] IRR calculations per the CapPro™ in use within the Financial Architect System™ program chosen.

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