Simply Explained: LendingRobot Series Private Placement Memorandum
LendingRobot Series is what is called a ‘pooled investment vehicle’. Like the name suggests, investors pool their money together into one big pot. This is called the “fund.” The money in the fund is then used to invest as if it were one big investor. A fund manager is hired by the fund to monitor and operate the investment activities of the fund, and profits are divided amongst the investors.
Typically there are rules about how that money can be used. One of the most important documents is called a “Private Placement Memorandum,” (shortened to PPM) that dictates the kind of investments that the fund will buy. Investors can read the PPM, and decide if they would like to join in and add their money to the pot.
PPMs are very detailed and, since lawyers help craft the document and are paid by the hour, can be quite long. Our own PPM for LendingRobot Series is over 84 pages.
If you’re interested in investing in LendingRobot Series, you should get a pot of coffee going and familiarize yourself with the entire document. For those that are curious about what is in the document but aren’t committed to investing, this is a very condensed version.
LendingRobot Series operates a bit different from most funds out there. This is because, rather than just a single pot of money, LendingRobot Series is a group of funds. Each fund is called a “Series,” with each series targeting a different investment goal.
Right now there are four series. Two make more conservative bets, while the other two invest in riskier borrowers in order to target a higher return. The funds are split along the types of investments, too, with two series investing in loans with shorter terms and two with longer terms.
An investor can buy into one or more Series. This means each investor can create a unique ‘fund’ that aligns with their specific strategies.
Types of assets
LendingRobot Series invests in notes that are ultimately backed by three types of loans:
- Real Estate
Most notes are what are called “Payment Dependent Notes” that are issued by a loan originator.
A payment dependent note is an abstract concept. A loan originator makes a loan to a borrower, and creates a security that is backed by the borrower’s payments. It then sells this security to investors. This means that the borrower does not owe money to the investor, but rather make payments to the loan originator, who then makes payments to the investors.
Despite the brevity of this risk summary, its important to know that lending money is risky and should not be undertaken by anyone who cannot afford to lose some or all of their investment, or who would depend on speedy liquidation of funds. There are a lot of things that can go wrong. Borrowers can stop making payments, loan originators can go out of business, the government can make new regulations that impact how you can invest, etc.
LendingRobot Series seeks to minimize risks by broadly diversifying across both types of loans and many originators, but lending is risky, and investors may lose up to the entirety of their investment.
Management and Fees
LendingRobot Series pays Algorithmic Inc. fees in exchange for operating and managing the fund.
There are two types of fees: management fees and fund expenses. Management fees are 1% of the fund’s asset value. Fund expenses are reimbursed to the fund manager, and are capped at 0.59% of fund assets.
Asset valuation is very important, so necessarily it is pretty straight forward.
Each loan is valued at an individual level, and discounted (i.e., the loan is valued at a lower amount) depending on how many days the borrower is late. If the borrower is current, the note is worth full value. If the borrower is late, we discount this amount by 1/60 times the number of days late.
At day 60, the late loan is considered worthless. Any money that is collected after this time is considered a windfall (bonus money) for the investors.
Redemptions (getting money out of the fund)
Loans are pretty illiquid, a term that means that you cannot easily turn your investment quickly into money. Usually investors can only withdraw money that a borrower has paid, which can take a long time.
LendingRobot Series tries to speed the process up. The premise is that only a portion of investors will want to withdraw at any given time.
If any investor wishes to cash out, a portion of a given series’ repayments are set aside to buy back that investor’s units of ownership in the fund’s Series’.
The minimum of one-third of payments will be used to buy back units. This means that if one-third or less of a given Series’ units wish to cash out, one-third of cash will be used to buy them out. If, say, 50% of investors wish to cash out, then 50% of the series’ cash will be used to buy back their units.
If there isn’t enough cash on hand to fully cash out an investor, the request will carry on to the next week.
Qualifications of Investors
In the past, a lack of government regulation led to a lot of regular people losing their money in bad investments. In order to protect the fiscal well being of its citizens, the United States places restrictions on who can invest in exotic or risky investments like LendingRobot Series.
Generally speaking, the government is okay with people who have a lot of money taking risks with that money. If you have a net worth of \$1M or more (not including the equity in your primary residence), personally make \$200k per year, or make \$300k in combination with a spouse, you’re considered to be rich enough to take chances with your money.
All income produced by LendingRobot Series is considered to be ‘ordinary income,’ or income that is considered to be the same as income earned from your regular job, and taxed at the same rate (but you don’t have to pay payroll taxes on this income). This is in contrast to other securities, like stocks, whose earnings are taxed at fixed rates depending on how long you have owned that security.
Restrictions on Transfer
The shares of LendingRobot Series (called Units) can only be traded with the fund itself. This means you cannot buy Units from the fund, and sell them to someone outside the fund.
A necessary legal addendum to this post
This post is meant to be informative, and is neither an offer to sell nor a solicitation of any offer to buy any securities, investment product or investment advisory services, including interests in the Fund. This blog post is subject to a more complete description and does not contain all of the information necessary to make an investment decision, including, but not limited to, the risks, fees and investment strategies of the Fund. Any offering may be made only pursuant to the relevant memorandum and relevant subscription documents, all of which must be read in their entirety. No offer to purchase interests will be made or accepted prior to receipt by a prospective member of these documents and the completion of all appropriate documentation. All prospective members must be “accredited investors” as defined in the securities laws before they can invest in the Fund. An investment in the Fund is speculative and involves substantial risks. There can be no guarantee that the Fund will achieve its investment objectives. This document is not, and may not be relied upon in any manner as legal, tax or investment advice. LendingRobot Series is being offered under SEC rule 506(c) under regulation D. Potential investors are encouraged go to https://lendingrobot.com/series/ for more information.
- Stephen Zentner
- March 16, 2017
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