Operating Agreement
OPERATING AGREEMENT OF JARSY FLEX II LLC
THIS OPERATING AGREEMENT (“Agreement”) is entered into effective as of {{Date}} by and among the members who have signed below (individually a “Member” and collectively the “Members”).
ARTICLE I
NAME, PURPOSE AND TERM
Formation. The Members have formed a limited liability company (the “Company”) under the laws of the State of Delaware.
Name and Office. The name of the Company is: "JARSY FLEX II LLC".
Business. The sole purpose and business of the Company shall be to raise capital to purchase Interests (the “Investment Interests”) indirectly in Space Exploration Technologies Corporation (the “Investment”). The Company may also engage in any other lawful business activity in connection with the Investment or necessary to protect or enhance the assets of the Company (collectively, the “Business”).
Term. The term of the Company shall continue until dissolved and liquidated in accordance with the provisions of this Agreement.
Definitions. In addition to the terms defined elsewhere in this Agreement, the following definitions shall apply:
“Capital Account” means the capital account maintained and adjusted for each Member pursuant to Section 2.1, which, once adjusted shall be an “Adjusted Capital Account”.
“Capital Contribution” means the cash equity investment in the Company, made by a Member or all of the Members, as the case may be.
“Cash Flow” means the difference between the cash receipts of the Company attributable to Collected Interest (as defined in the Investment LLC Agreement), during any applicable period, less, to the extent paid with such cash receipts, payments on indebtedness of the Company, all cash expenditures made incident to the operation of the Business and purchases of capital assets, and all payments to Reserves.
“Class A Member” means an owner of Class A Units.
“Class A Units” means the class of membership interest granted to Class A Members in proportion to their Capital Contribution.
“Code” means the Internal Revenue Code of 1986, as it may be amended from time to time.
“Manager(s)” means Jarcy, Inc. or successors elected pursuant to Section 4.2.
“Membership Interest” is defined in Section 2.2(a).
“Net Cash Proceeds” means any and all cash realized by the Company, including through the Investment, other than Cash Flow, less, to the extent paid with such cash receipts, payments on indebtedness of the Company, all cash expenditures made incident to the operation of the Business and purchases of capital assets, and all payments to Reserves.
“Percentage Interest” means, with respect to a Member, the percentage that the number of Membership Interests owned by such Member bears to the total number of Membership Interests owned by all Members within each class of Membership Interest.
“Profits” and “Losses” means the ordinary income or loss of the Company for federal income tax purposes as well as related federal tax items such as capital gain or loss, credits, tax preference and depreciation recapture.
“Regulations” means the Treasury Regulations promulgated under the Code, as they may be amended from time to time.
“Reserves” means amounts set aside at the discretion of the Manager for Company expenses, liabilities and obligations which the Manager deems necessary or appropriate for the operation of the Business or the Company. For purposes of subsequent distribution of Reserves which the Manager determine to be no longer needed, Reserves which are funded from operations of the Business and which would have been distributed as Cash Flow shall be distributed as Cash Flow, and Reserves which are funded from Capital Contributions or operations of the Business and which would have been distributed as Net Cash Proceeds shall be distributed as Net Cash Proceeds.
ARTICLE II
CAPITAL
Capital Accounts. A separate Capital Account shall be maintained and adjusted for each Member on the books and records of the Company in accordance with the Code and the Regulations.
Members - Contributions to Capital.
The total interest of all the Members in the capital and profits of the Company shall be divided into 1000 Class A Units (each Class A Unit individually a “Membership Interest” and collectively “Membership Interests”) and distributed pursuant to Section 3.5 of this Agreement. The Percentage Interest and Membership Interests of each of the Members are described on Schedule I.
No Member shall be paid interest on any Capital Contribution.
Neither the Company nor any other Member shall be obligated to redeem or repurchase the Class A Units, and no Member shall have the right to withdraw from or terminate his, her or its membership in the Company, or receive any return of his, her or its Capital Contribution, if any, except upon the dissolution and liquidation of the Company or as specifically provided in this Agreement or the Act. No Capital Contribution may be returned in the form of property other than cash.
Additional Capital Contributions. After the initial Capital Contributions have been made, no Member shall be obligated to make any additional Capital Contributions to the Company.
ARTICLE III
CAPITAL ACCOUNTS; ALLOCATIONS; DISTRIBUTIONS
Classes of Units; Capital Contributions. There shall be two classes of units: Class A Units (collectively, the “Units”). The number of authorized Units of each class and the capital contributions made or to be made in exchange for such Units and the manner in which such Units shall be issued are as follows:
Class A Units. There is authorized for 1000 Class A Units. Class A Units shall be issued to the Class A Members, in the percentages shown on Schedule I, in consideration for each Member’s Capital Contribution.
Intentionally deleted.
Capital Accounts.
Capital Account Adjustment. A separate Capital Account will be maintained for each Member. Each Member’s Capital Account will be increased by (i) the fair market value of each Member’s additional Capital Contributions (net of liabilities secured by contributed property that the Company is considered to assume or take subject to under section 752 of the Code); and (ii) allocations to such Member of Profits of the Company. Each Member’s Capital Account will be decreased by (i) the amount of money distributed to such Member by the Company; (ii) the fair market value of property distributed to such Member by the Company (net of liabilities secured by such distributed property that such Member is considered to assume or take subject to under section 752 of the Code); and (iii) allocations to such Member of Losses. Each Member’s Capital Account shall be further adjusted to reflect such other items of income, gain, loss and deduction as required by section 1.704-l(b)(2)(iv) of the Regulations.
Transfer of Capital Account. In the event of a permitted sale or exchange of a Membership Interest in the Company, the Capital Account of the transferor shall become the Capital Account of the transferee to the extent it relates to the transferred Membership Interest in accordance with section 1.704-l(b)(2)(iv) of the Regulations.
Compliance with Code Section 704(b). The manner in which Capital Accounts are to be maintained pursuant to this Section is intended to comply with the requirements of section 704(b) of the Code and the Regulations promulgated thereunder. If, in the opinion of the Company’s accountants or attorneys, the manner in which Capital Accounts are to be maintained pursuant to the preceding provisions of this Section should be modified in order to comply with section 704(b) of the Code and the Regulations thereunder, then notwithstanding anything to the contrary contained in the preceding provisions of this Section, the method in which Capital Accounts are maintained shall be so modified; provided, however, that any change in the manner of maintaining Capital Accounts shall not materially alter the economic agreement between or among the Members.
Distributions Upon Liquidation, Sale or Refinancing of the Investment. Upon liquidation of the Company or the sale or refinance of the Investment (or of any Member’s Membership Interest), distributions will be in accordance with Section 3.7 herein.
Return of Capital Account. Except as otherwise expressly required in this Agreement or the laws of the State of Delaware, no Member shall have any liability to restore all or any portion of a deficit balance in such Member’s Capital Account.
Reduction of Members’ Contributions to Capital.
Payment of Company Liabilities. A Member shall not receive out of the Company’s property any part of its Capital Contribution until all liabilities of the Company, except liabilities to Members on account of their Capital Contributions, have been paid or there remains property of the Company sufficient to pay them.
Form of Payment. A Member, irrespective of the nature of its Capital Contribution, does not have any right to demand and receive a specific form of payment, other than cash, for his, her or its Capital Contribution.
Profits, Losses and Tax Credits.
Allocations. The net profit or net loss of the Company shall be allocated among the Members in accordance with any reasonable method selected by the Manager that takes due account of the Members’ economic interests in the Company and risk of loss as reflected by their capital contributions, rights to distributions and liability (direct and indirect) for the Company’s debts and other obligations.
Credit Allocations. All tax credits of the Company shall be allocated among all of the Class A Members in accordance with their respective Percentage Interests.
Limitation on Losses. The losses allocated to any Member pursuant to Section 3.3(a) shall not exceed the maximum amount of losses that can be so allocated without causing any Member to have an Adjusted Capital Account Deficit (as defined in the Regulations) at the end of any year. If some but not all of the Members would have Adjusted Capital Account Deficits as a consequence of an allocation of losses pursuant to Section 3.5(a), the limitation set forth in this Section shall be applied on a Member by Member basis so as to allocate the maximum permissible loss to each Member under the alternate test for economic effect set forth in section 1.704-l(b)(2)(ii)(d) of the Regulations. At such time as losses cause all Members to have an Adjusted Capital Account Deficit, losses shall thereafter be allocated among all of the Members in accordance with their respective Percentage Interests.
Special Allocations. Notwithstanding Section 3.3 hereof:
Qualified Income Offset. Except as provided in Section 3.4(c), if any Member unexpectedly receives any adjustments, allocations or distributions described in section 1.704-l(b)(2) (ii)(d)(4), (5) or (6) of the Treasury Regulations, and such unexpected allocation creates or increases an Adjusted Capital Account Deficit of any Member, items of income and gain shall be specially allocated to each such Member in an amount and manner sufficient to eliminate, to the extent required by the Treasury Regulations, the Adjusted Capital Account Deficit of such Member as quickly as possible.
Gross Income Allocation. Except as provided in Section 3.6(c), if any Member has a deficit Capital Account at the end of any taxable year of the Company which is in excess of the sum of (i) the amount such Member is obligated to restore (pursuant to the terms of this Agreement or otherwise), and (ii) such Member’s share of minimum gain, as defined in Regulation section 1.704-2(d), each such Member shall be specially allocated items of income and gain in the amount of such excess as quickly as possible.
Minimum Gain Chargeback. If there is a net decrease in minimum gain, as defined in Regulation section 1.704-2(d), during any taxable year of the Company, each Member shall be allocated items of income and gain for that year equal to that Member’s share of the net decrease in minimum gain of the Company in accordance with sections 1.704-2(f) and (g) of the Treasury Regulations. This Section is intended to comply with the minimum gain chargeback requirement in such sections of the Regulations and shall be interpreted consistently therewith.
Code Section 704(b). It is the intent of the Members that each Member’s distributive share of profits, losses and credits shall be determined and allocated in accordance with this Agreement to the fullest extent permitted by section 704(b) of the Code and the Regulations thereunder. If the Company is advised that the allocations provided in this Agreement are unlikely to be respected for federal income tax purposes, the Manager is hereby granted the power to amend the allocation provisions of this Agreement, on advice of the Company’s accountant and/or legal counsel, to the minimum extent necessary to effect the plan of allocations provided in this Agreement.
Curative Allocations. The allocations set forth above (the “Regulatory Allocations”) are intended to comply with certain requirements of sections 1.704-l(b) and 1.704-2 of the Regulations. Notwithstanding any other provisions of this Agreement (other than the Regulatory Allocations), the Regulatory Allocations shall be taken into account (based upon advice of the Company’s accountant and/or legal counsel) in allocating other profits, losses and credits among the Members so that, to the extent possible, the net amount of such allocations of other profits, losses and credits and the Regulatory Allocations to each Member shall be equal to the net amount that would have been allocated to each such Member if the Regulatory Allocations had not occurred.
Distributions
Distributions of Cash Flow. Cash Flow, if any, shall be applied and distributed quarterly within 30 days after the end of such period to the Members in accordance with the following:
First, to creditors (including, to the extent permitted by law, Members who are creditors) in satisfaction of liabilities of Company;
Second, to establish reserves for contingent or unforeseeable liabilities or obligations which the Manager deem necessary or appropriate (unused reserves when determined by the Manager to be no longer needed shall be distributed in accordance with this section);
Third, to the Class A Members in proportion and to the extent of their unreturned Capital Contribution until their Capital Contribution has been reduced to zero; and
Fourth, the balance to be divided pro rata amongst Class A Members.
Distributions of Net Cash Proceeds. Distributions of Net Cash Proceeds will be made as follows:
First, to creditors (including, to the extent permitted by law, Members who are creditors) in satisfaction of liabilities of Company;
Second, to establish reserves for contingent or unforeseeable liabilities or obligations which the Manager deem necessary or appropriate (unused reserves when determined by the Manager to be no longer needed shall be distributed in accordance with this section);
Third, to the Class A Members in proportion and to the extent of their unreturned Capital Contribution until their Capital Contribution has been reduced to zero; and
Fourth, the balance to be divided pro rata to the Class A Members.
Limitation Upon Distributions. No distribution shall be declared and paid unless, after the distribution is made, the assets of the Company are in excess of all liabilities of the Company, except liabilities to Members on account of their contributions.
Accounting Principles. The Profits and Losses of the Company shall be determined in accordance with accounting principles applied on a consistent basis using the method of accounting selected by the Manager. It is intended that the Company will elect those accounting methods which provide the Company with the greatest tax benefits.
Accounting Period. The Company’s accounting period shall be the calendar year.
Records, Audits and Reports. The Company shall maintain records and accounts of all operations and expenditures of the Company. At a minimum the Company shall keep at its principal place of business the following records:
A current alphabetical listing of the full name and last known mailing address of each Member, both past and present, including the date the person or entity became a Member and the date, if applicable, on which the person or entity ceased to be a Member;
A copy of the Articles of Organization of the Company and all amendments thereto, together with executed copies of any powers of attorney pursuant to which any such Articles of Organization or amendment has been executed;
Copies of the Company’s federal, state, and local income tax returns and reports, if any, for the four most recent years and, if such returns are not prepared for any reason, copies of the information and statements provided to, or which should have been provided to, the Members in order to enable them to prepare their federal, state and local income tax returns for the four most recent years;
Copies of all operating agreements of the Company, including all amendments and any operating agreements no longer in effect, copies of any writings permitted or required with respect to a Member’s obligation to contribute cash, property or services, and copies of any financial statements of the Company for the three most recent years;
Minutes of every annual, special meeting and court-ordered meeting;
Any written consents obtained from Members for actions taken by Members without a meeting; and
A statement of each Member’s Adjusted Capital Account.
Financial Information. Within 90 days after the end of each year, the Manager shall send to each Member (a) a balance sheet as of the end of such year (which need not be audited) and (b) a statement of income for such year (which need not be audited), both of which shall be prepared in accordance with the method of accounting used by the Company for federal income tax purposes. In addition, upon request, the Manager shall provide Members with (y) a summary report as to the status of the Company within thirty (30) days after any calendar quarter setting forth the current financial status of the Company, and (z) a copy of any material correspondence from the Investment.
Returns and Other Elections. The Manager shall cause the preparation and timely filing of all tax returns required to be filed by the Company pursuant to the Code and all other tax returns deemed necessary and required in each jurisdiction in which the Company does business. Copies of such returns or pertinent information therefrom, shall be furnished to the Members within a reasonable time after the end of the Company’s Fiscal Year. The Manager shall timely file all annual tax returns and other tax forms. All elections permitted to be made by the Company under federal or state laws shall be made by the Manager in his sole discretion. Within 90 days after the end of each Fiscal Year, the Manager shall deliver to each Member all information necessary for the preparation of federal and state income tax returns for such Member.
Partnership Representative. The Manager shall constitute the “partnership representative” under Section 6223 of Chapter 63 of the Code (as in effect pursuant to the Bipartisan Budget Act), and the Manager shall take any and all action required under the Code or Treasury Regulations, as in effect from time to time, to designate itself the partnership representative. To the extent permitted by the Code and Treasury Regulations, the Manager, in its
capacity as partnership representative shall be bound by the obligations and restrictions imposed on the partnership representative pursuant to this Section. Upon the promulgation of Treasury Regulations implementing subchapter C of Chapter 63 of the Code (as revised by the Bipartisan Budget Act), the Manager will evaluate and consider options available with respect to preserving the allocation of responsibility and authority described in this Section, while conforming with the applicable provisions of the revised partnership audit procedures. Any action taken by the Manager pursuant to this Section, including any election permitted under the Bipartisan Budget Act, shall be made only with the consent of the Members.
ARTICLE IV
MANAGER
Generally.
Day-to-day management authority of the Company shall be vested in the Manager. The Manager shall have full, exclusive and complete discretion in the management and control of the affairs of the Company, shall make all decisions affecting the Company affairs and may take such actions as it deems necessary to accomplish the purposes of the Company, and in connection therewith, the Manager may execute documents on behalf of the Company and thereby bind the Company, including, without limitation, the following actions. As the compensation for the Manager for its management contribution to the Company, the Manager will charge an one-time platform fee of 6% of the capital amount contributed by each Class A Member (the “Platform Fee”). In addition, in order to provide additional compensation to the Manager based on the performance of the Investment and the Company, upon a Member’s exit with a profit in excess of his or her corresponding [capital amount minus the Platform Fee] (herein after the “Investment Profit Per Member”), 5% of such Investment Profit per Member will be allocated to the Manager with the remainder paid back to the existing Member (the “Carried Interest to Manager”).
execute and deliver any and all documents necessary for the Company to acquire, own, hold and dispose of Investment Interests in the Investment, only as reasonably necessary to accomplish the purposes of the Company;
cause property acquired by the Company to be taken and held in the name of nominees, trustees, the Manager or in the name of the Company; provided that such property shall nevertheless be Company property subject to this Agreement;
bring, defend, settle, compromise, or otherwise participate in any actions, proceedings or investigations (whether at law, in equity or before any governmental authority or agency, and whether brought against the Company or a Manager) arising out of, connected with or related to the business and affairs of the Company or the enforcement or protection of interests in the Company;
acquire, own, manage, improve, lease or sell real and personal property in connection with the Company;
borrow money, procure temporary or permanent financing, on such terms and conditions and at such rates of interest as it may deem appropriate and in connection therewith if security is required therefor, to mortgage or subject to any other security interest any portion or all of the assets of the Company;
perform any and all other acts or activities customary or incidental to the acquisition, ownership, management, improvement, leasing and disposition of real property or the Business of the Company;
insure the activities or assets of the Company;
invest funds paid to or earned by the Company as it may deem prudent;
enter into agreements for accounting, legal services and other contracts or agreements and pay from Company funds the consideration required;
employ such persons, firms or corporations and fix their compensation as may be necessary for the preparation of the Company’s financial statements, tax returns and advice and to carry on the business and accomplish the purposes of the Company;
enter into agreements with affiliates of the Manager for the purchase of goods or services; and
perform any and all other acts or activities customary or incidental to the acquisition, ownership, sale or transfer of Investment Interests in the Investment.
Anything in this Agreement to the contrary notwithstanding, the Manager shall not have authority to do any act in contravention of this Agreement, as amended from time to time, or do any act which would make it impossible to carry on the ordinary business of the Company.
The Manager shall manage and control the business of the Company in accordance with generally-accepted business standards and shall devote such time to the Company business as it deems to be reasonably required. The Manager, or any affiliates of Manager, may engage in other business ventures of every kind, independently or with others, including, but not limited to, the ownership, operation or management of entities which compete with the Investment, or the ownership of assets or entities related to, or affiliated with, the Investment, and neither the Company nor the Members shall have any rights in such independent ventures or the income derived therefrom.
The Manager shall not be liable, responsible or accountable in damages or otherwise to the Company or to any Member for any acts performed or omitted by it except for acts or omissions performed or omitted fraudulently, in bad faith or with willful misconduct. The Manager shall be indemnified and held harmless by the Company, to the extent of the Company’s assets, against obligations and liabilities arising or resulting from or incidental to the management of the Company’s affairs, provided that no party shall be entitled to indemnification hereunder for acts or omissions performed or omitted fraudulently, in bad faith or with willful misconduct, nor shall such indemnification release the Manager from its fiduciary responsibility to the Company.
The Manager shall maintain the Investor List required under the Code and Matthew T. Stamborski shall be the initial “Registered Agent” of the Company, as defined in the Act.
Any of the duties and responsibilities of the Manager under this Agreement may be delegated, assigned or, subcontracted by the Manager at any time on whatever terms and conditions it deems to be acceptable, to any individual, corporation or other entity which, in the judgment of the Manager, is capable of performing such duties and responsibilities, including affiliates. The Manager may be reimbursed for the actual cost of goods and materials used for or by the Company and obtained from entities affiliated or unaffiliated with the Manager.
Resignation, Incompetency or Death of Manager. The Manager may resign from the Company. In the event the Manager (i) submits its resignation from the Company, or (ii) dies or is declared incompetent by a court of competent jurisdiction, any Member may nominate a “Successor Manager” and such nomination, or nominations, shall be submitted to the Members for approval. The Members shall elect a Successor Manager by affirmative vote of 75% of the outstanding Class A Membership Interests.
ARTICLE V
POWERS AND DUTIES OF THE MEMBERS
Restrictions on Powers of Members. No Member shall have any power or authority to bind the Company unless the Member has been authorized to act with respect to such matter in accordance with the terms of this Agreement as an agent of the Company.
Limitation of Liability. Each Member’s liability shall be limited to the maximum extent permitted under this Agreement, the laws of the State of Delaware, and other applicable law.
Company Debt Liability. A Member will not be personally liable for any debts or losses of the Company beyond his respective Capital Contributions and any obligation of the Member under this Agreement to make or restore Capital Contributions, except as required by law.
List of Members. Upon written request of any Member, the Company shall provide a list showing the names, addresses and Percentage Interest of all Members.
Company Books. The Company shall maintain and preserve, all accounts, books, and other relevant Company documents. Upon reasonable request, each Member shall have the right, during ordinary business hours, to inspect and copy such Company documents at the office of the Company.
Priority and Return of Capital. Except as may be expressly provided in Article III, no Member shall have priority over any other Member, either as to the return of Capital Contributions or as to Profits, Losses or distributions; provided that this Section shall not affect the right of a Member to receive payments of principal and/or interest with respect to working capital loans (as distinguished from Capital Contributions) which a Member has made to the Company.
[Intentionally Omitted.]
Special Meetings of the Members. Special meetings of the Members, for any purpose or purposes, unless otherwise prescribed by statute, may be called by any Class A Member or Class A Members holding at least 75% of the outstanding Class A Membership Interests. Members holding more than 75% of the outstanding Class A Membership Interests, represented in person or by proxy, shall constitute a quorum at any meeting of Members.
Amendment of the Operating Agreement. The Manager shall have the right, without the consent of the Members, to amend this Agreement as it deems necessary or desirable to comply with provisions of the Code, provided such amendment does not reduce the Percentage Interest of any Member or is not otherwise materially detrimental to any Member who has not consented specifically thereto. Any other amendment of this Agreement shall require the consent of (i) at least 75% of the outstanding Class A Membership Interests, and (ii) the Manager.
ARTICLE VI
TRANSFER OF MEMBERSHIP INTERESTS; ADMISSION OF ADDITIONAL AND SUBSTITUTE MEMBERS
General Restrictions on Transfers; Permitted Transfers. A Member may not sell, give, assign, bequeath, pledge, or otherwise encumber, divest, dispose of, or transfer ownership or control of all, any part, or any interest in, whether voluntarily or by operation of law, either inter vivos or upon death (“Transfer”), his, her or its Membership Interest to any person (a “Transferee”) except in accordance with the provisions of this Operating Agreement. Any Transfer, attempted Transfer, or a purported Transfer in violation of the terms and conditions of this Operating Agreement shall be null and void. Notwithstanding the foregoing, a Member may transfer all, or any part, or any interest in, his, her or its Membership Interest, either inter vivos or upon death, to any direct lineal descendant or spouse, or any entity or trust controlled by such family members, or to the Manager or another Member. The Member can also transfer the Member’s Membership Interest upon death, through his or her estate, to any named beneficiary.
Right of First Refusal.
Notice of Transfer. Except in the case of an Involuntary Transfer, defined below, any Member who proposes to Transfer his, her or its Membership Interest (a “Transferor”), shall send written notice to the Company (the “Notice of Transfer”), stating the portion of the Membership Interest proposed to be Transferred, the identity of the proposed Transferee, and the price and terms upon which the Transfer shall occur. The Company shall deliver the Notice of Transfer to the Manager.
Irrevocable Offer to Sell. The Notice of Transfer shall constitute an irrevocable offer to sell the portion of the Membership Interest proposed to be transferred to the Company and the other Members (“Non-Transferring Members”) for the price and upon the terms set forth in the Notice of Transfer.
Right of First Refusal. For a period of 5 days following the receipt of the Notice of Transfer, the Company shall have the right to purchase all or any portion of the Transferor’s Membership Interest proposed to be transferred.
Acceptance by the Company. In order to exercise the right of first refusal, the Manager, on behalf of the Company, must give written notice thereof to the Transferor and to the Members within 10 days following receipt of the Notice of Transfer.
Non-Transferring Members’ Right to Purchase on Lapse of Company’s Right of First Refusal. If the Company fails to exercise its rights of first refusal for all or any part of the Membership Interest proposed to be transferred, the Non-Transferring Members shall have, for a period of 5 days following the lapse of the Company’s right of first refusal, the right to purchase, on a proportional basis, all or any portion of the Transferor’s Membership Interest.
Acceptance by Non-Transferring Members. In order to exercise his, her or its right to purchase a proportional share of the Membership Interest proposed to be transferred, a Non-Transferring Member(s) must give written notice thereof to the Transferor and to the Company within 15 days following the lapse of the Company’s right of first refusal.
Absence of Exercise of Right of First Refusal by the Company or Non- Transferring Members. Upon the rejection or lapse of the right of first refusal of the Company and the Non-Transferring Members as to all of the Membership Interest proposed to be transferred, the Transferor shall, for a period of 15 days, be free to transfer the portion of the Transferor’s Membership Interest not elected to be purchased by the Company or the Non- Transferring Members to the Transferee at the terms and conditions identified in the Notice of Transfer. Upon the completion of such Transfer, the Transferee shall become a Member of the Company provided (i) the Transferee agrees in writing to be bound by the terms and conditions of this Agreement and (ii) the Transferor and the Transferee both agree in writing to pay certain documentation and transaction assistance fee charged by the Company (in aggregate not to exceed 1% of the transfer price paid by the Transferee).
Lapse of Offer. No transfers of the Membership Interest proposed to be transferred shall be made after the end of the 15-day period referred to in Section 6.2(g), above, nor shall any change in the terms of Transfer be permitted without a new Notice of Transfer in compliance with this Agreement.
Transfers Without Notice. If any Transfer shall be made of any Membership Interest by any Member without giving prior notice as provided herein or before the time for acceptance of such offer expires, said Transfer shall be deemed to be an offer to sell the Membership Interest so transferred to the Company in accordance with the provisions hereof, and the provisions hereof shall be binding upon the Transferee of Transferees or subsequent Transferee or Transferees. The relevant time periods of acceptance or rejecting such offer to sell shall commence upon receipt by the Company of the Notice of Transfer.
Involuntary Transfer.
A creditor, receiver, trust or trustee, estate, beneficiary, or other person to whom Membership Interest are transferred by Involuntary Transfer (the “Involuntary Transferee”) will have only the rights provided in this section. Involuntary Transfer means any Transfer of Membership Interest by operation of law or in any transaction, proceeding, or action, including a Transfer resulting from the disassociation of a Member, by or in which a Member would, but for the provisions of this Section 6.3, be involuntarily deprived or divested of any right, title, or interest in or to the Member’s Membership Interest, including without limitation:
a Transfer on death, bankruptcy, dissolution of marriage or divorce;
any foreclosure of a security interest in the Membership Interest;
any seizure under levy of attachment or execution; or
any Transfer to a state or to a public office or agency pursuant to any statute pertaining to escheat or abandoned property or forfeiture.
The Transferor and the Involuntary Transferee shall each immediately deliver a written notice to the Company describing the event giving rise to an Involuntary Transfer; the date on which the event occurred; the reason for the Involuntary Transfer; the name, address, and capacity of the Involuntary Transferee; and the Membership Interest involved, which notice shall be deemed a Notice of Transfer in accordance with Section 6.2(a), above, and shall subject the Membership Interest involved to all of the provisions of Section 6.2, above.
Prior to the purchase by the Non-Transferring Members or the Company of Membership Interest involuntarily transferred as described in the Section 6.3, the Membership Interest transferred to an Involuntary Transferee shall be considered in all respects Membership Interest held by the Member from whom they were transferred for the purposes of this Operating Agreement, the non-management provisions of which will apply to the Involuntary Transferee as though it held the Membership Interest. Except as otherwise provided in this Operating Agreement, any actions that a Member takes or would be entitled to take with respect to Membership Interest, including, without limitation, votes, consents, offers, sales, purchases, options, or other deeds taken pursuant to this Operating Agreement, shall be taken by the Member for the Involuntary Transferee with respect to the Membership Interest held by the Involuntary Transferee. This Section 6.3(c) shall constitute an irrevocable and absolute proxy and power of attorney (the proxy and power being coupled with an interest) granted by each Involuntary Transferee to the Member to:
take such actions on behalf of the Involuntary Transferee without any further deed than the taking of action by the Member; and
sign any document or instrument evidencing such action for or on behalf of the Involuntary Transferee relating to the Membership Interest held by the Involuntary Transferee.
Time and Place of Closing. Except as otherwise agreed by the parties to any purchase and sale of Membership Interest, the closing of any Transfer pursuant to this Article VI shall occur at the Company’s principal office on such day as the Transferee shall select, pursuant
to the provisions to this Article VI. The Transferee shall notify the Transferor and the Company in writing of the exact date and time of the closing at least 10 days before the closing date.
Transfer. At the closing, the Transferor shall deliver the Membership Interest that is subject to the Transfer free and clear of any liens, security interests, encumbrances, charges, or other restrictions (other than those created pursuant to this Operating Agreement), together with all such instruments or documents of conveyance as shall be reasonably required in connection with the Transfer.
Guarantees. The Company and the Transferee shall use their reasonable best efforts to release the Transferor from any guarantees of Company indebtedness. If the Company and the Transferee cannot obtain a release of the Transferor from any guarantees of Company indebtedness, the Transferee shall indemnify and hold harmless the Transferor from any such liability.
Absolute Restrictions on Transfers. No Transfer of any Membership Interest may be made if, in the opinion of the Company’s legal counsel, the transfer or assignment:
will result in the Company’s being treated as an association for federal income tax purposes; or
will violate any applicable federal or state securities laws; or
would constitute a default under any agreement entered into by the Company with any Company creditor.
The Transferor shall pay its own legal fees.
Issuance of Additional Membership Interests; Admission of Additional Members.
No additional Membership Interests may be issued and sold by the Company, and no new Member (other than a Transferee admitted as a substituted Member as described below) may be admitted to the Company unless (i) such issuance or admission is approved by the Manager, or (ii) the Members are first accorded preemptive rights to purchase any additional Membership Interests and the existing Members do not subscribe for and purchase all of the additional Membership Interests.
Except as provided in 6.2(g) hereof, notwithstanding the Transfer of a Membership Interest, a Member shall not become a member of the Company without the consent of the Manager, which consent may be granted or withheld in the Manager’s sole and absolute discretion.
Except as provided in Section 6.6 hereof, on any Transfer of a Member’s Membership Interest, the Member shall not be released from any personal liability to the Company for contributions to the Company or any other amounts owed to the Company.
ARTICLE VII
DISSOLUTION AND TERMINATION
Dissolution.
Dissolution Events. The Company shall be dissolved upon the occurrence of any of the following events:
the unanimous written agreement of all Members to dissolve the Company;
the entry of a decree of judicial decision; or
upon the dissolution of the Investment.
Deceased or Incompetent Member. If a Member who is an individual dies or a court of competent jurisdiction adjudges him to be incompetent to manage his person or his property, the Member’s executor, administrator, trustee, guardian, conservator or other legal representative who succeeds to the management and control of the Member’s Membership Interest (collectively, “Representative”) may exercise all of the Member’s rights for the purpose of settling his estate or administering his property; provided that, except as provided below, no such Representative is entitled to become a Member of the Company or transfer the Member’s Membership Interest to any person except in accordance with Article VI.
No Withdrawal Power. No Member shall have the power to withdraw by voluntary act from membership in the Company without the unanimous written consent of the other Members.
Winding Up, Liquidation and Distribution of Assets.
Accounting. Upon dissolution, an accounting shall be made by the Company’s independent accountants of the accounts of the Company and of the Company’s assets, liabilities and operations, from the date of the last previous accounting until the date of dissolution. The Members shall immediately proceed to wind up the affairs of the Company.
Manager’s Dissolution Duties. If the Company is dissolved and its affairs are to be wound up, the Manager shall:
Sell or otherwise liquidate all of the Company’s assets as promptly as practicable;
Allocate any Profit or Loss resulting from such sales to the Members’ Capital Accounts in accordance with Article III hereof;
Discharge all liabilities of the Company, including liabilities to Members who are creditors, to the extent otherwise permitted by law, other than liabilities to Members for distributions, and establish such Reserves as may be reasonably necessary to provide for contingent or liabilities of the Company (for purposes of determining the Capital Accounts of the Members, the amounts of such Reserves shall be deemed to be an expense of the Company); and
Satisfy any distribution obligation to Members and former Members pursuant to Section 3.7.
No Liability. Notwithstanding anything to the contrary in this Agreement, upon a liquidation within the meaning of Section l.704-l(b)(2)(ii)(g) of the Regulations, if any Member has an Adjusted Capital Account Deficit (after giving effect to all contributions, distributions, allocations and other Capital Account adjustments for all taxable years, including the year during which such liquidation occurs), such Member shall have no obligation to make any Capital Contribution, and the negative balance of such Member’s Capital Account shall not be considered a debt owed by such Member to the Company or to any other person for any purpose whatsoever.
Termination of Company. Upon completion of the winding up, liquidation and distribution of the assets, the Company shall be deemed terminated.
Compliance with Law. The Members shall comply with any applicable requirements of applicable law pertaining to the winding up of the affairs of the Company and final distribution of its assets.
Return of Contribution Nonrecourse to Other Members. Except as provided by law or as expressly provided in this Agreement, upon dissolution, each Member shall look solely to the assets of the Company for the return of his, her or its Capital Contribution. If the Company property remaining after the payment or discharge of the debts and liabilities of the Company is insufficient to return the cash contribution of one or more Members, such Member or Members shall have no recourse against any other Member.
ARTICLE VIII
DISPUTE RESOLUTION
Arbitration. Unless otherwise specified for a particular provision of this Agreement, any controversy or claim arising out of or relating to this Agreement, including matters involving the valuation of the assets of the Company, matters which require unanimous consent if one party withholds his, her or its consent, and matters relating to the reasonableness of an action taken by a Member (including refusal to grant approvals or consents) or the Manager, shall be settled by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association. The arbitrator or arbitrators (whether one or more, the “Arbitrators”) shall be licensed attorneys or accountants; however, for controversies involving only the valuation of one or more assets, the Arbitrators shall be licensed appraisers. The Arbitrators shall determine the meaning of all terms and phrases in this Agreement which relate to the controversy, and no party shall look to a court to make such a determination. The scope of the arbitration shall be
limited to the specific matter in controversy as declared by the Member demanding arbitration. The Arbitrators shall issue their decision in writing. This Agreement to arbitrate shall be specifically enforceable, and judgment upon the award ordered by the Arbitrators may be entered in any court having jurisdiction over the controversy.
Specific Performance. A default by a Member or the Manager with respect to his, her or its obligations under this Agreement will cause irreparable harm, injury and damage to the Company and each other Member. Therefore, in the event of a default by a Member or the Manager of one or more of his, her or its obligations under this Agreement, each other Member may, if he, she or it so elects, by arbitration in accordance with Section 8.1 (or if such remedy is not available by arbitration, through other means of redress), seek to enforce specific performance of such obligation or obligations by the defaulting party, and the defaulting party agrees that he or she will not oppose any attempt to obtain specific performance on the ground that there exists adequate legal remedy (in damages or otherwise) for such default. The remedies referred to in this Subsection shall be nonexclusive, cumulative of and in addition to all other remedies of the parties to this Agreement.
Costs of Resolution. In the event of any litigation or arbitration proceedings between any two or more of the Members or the Manager, the “Prevailing Party,” as defined below, shall be awarded from the court or the Arbitrators their reasonable attorneys’ fees incurred in connection with such proceedings. The “Prevailing Party” shall be, as determined by the court or the Arbitrators, the party or parties whose position is found to be most correct.
ARTICLE IX
MISCELLANEOUS PROVISIONS
Notices. Any notice, distribution, demand or other communication required or permitted to be given under this Agreement shall be deemed to have been given for all purposes on the earlier of (a) the date when received (whether received by mail, personal delivery, courier, facsimile or other means) or (b) the second business day following the date of mailing if sent by registered or certified mail, postage prepaid, addressed, if to the Company at its principal office, and if to a Member, at his or her address as it appears in the Company’s records.
Entire Agreement. This Agreement contains the entire agreement among the parties and supersedes any prior understanding or agreements among them.
Successors in Interest. Except as otherwise provided, all provisions of this Agreement shall be binding upon, inure to the benefit of and be enforceable by and against the respective heirs, executors, administrators, personal representatives, successors and assigns of any of the parties.
Counterparts. This Agreement may be executed in several counterparts and each executed counterpart shall be considered as an original of this Agreement.
Captions. The captions at the beginning of the Articles, Sections, Subsections and Sub-subsections of this Agreement are not a part of the context, are merely labels to assist in the locating and reading of Articles, Sections, Subsections and Sub-subsections, and shall be ignored in construing this Agreement.
Severability. To the extent that all or any part of any provision of this Agreement is, or shall become, unenforceable or against public policy, or creates an obligation for the Members or the Company to pay corporate, rather than partnership or unincorporated organization, taxes, such provision or portion of a provision shall be severed from this Agreement, and this Agreement shall be interpreted as if such severed provision or portion of a provision did not exist. Additionally, at any time such a provision is discovered or is deemed to have been severed from this Agreement, the Members agree to execute any amendment to this Agreement necessary to clarify that such provision has been severed from this Agreement.
Application of Delaware Law. This Agreement, and the application of interpretation hereof, shall be governed exclusively by its terms and by the laws of the State of Delaware.
Waiver of Action for Partition. Each Member irrevocably waives during the term of the Company any right that it may have to maintain any action for partition with respect to the property of the Company.
Execution of Additional Instruments. Each Member agrees to execute such other and further statements of interest and holdings, designations, powers of attorney and other instruments necessary to comply with any laws, rules or regulations.
Waivers. The failure of any party to seek redress for violation of or to insist upon the strict performance of any covenant or condition of this Agreement shall not prevent a subsequent act, which would have originally constituted a violation, from having the effect of an original violation.
Rights and Remedies Cumulative; Opportunity to Cure Noncompliance. The rights and remedies provided by this Agreement are cumulative and the use of any one right or remedy by any party shall not preclude or waive the right to use any or all other remedies. Said rights and remedies are given in addition to any other rights the parties may have by law, statute, ordinance or otherwise. Prior to asserting any rights arising from noncompliance with this Agreement, a Member must first give the Company and the other Members written notice specifying the noncompliance and a 30-day opportunity to cure such noncompliance; provided that such cure period shall not prevent any action necessary to preserve the partnership tax status of the Company.
Creditors. None of the provisions of this Agreement shall be for the benefit of or enforceable by any creditors of the Company who are not Members.
Right to Counsel. Each Member has been advised to seek the advice of independent counsel and has had the opportunity to do so.
ARTICLE X
MISCELLANEOUS TERMS REGARDING THE MEMBERSHIP INTERESTS
Review of Agreement. Each Member acknowledges that, prior to signing this Agreement, he, she or it had the opportunity to consult with an attorney of choice. To the extent that a Member has chosen not to consult with an independent attorney so as to obtain a full explanation of the terms and legal significance of this Agreement, and the effect which they have or might have on any interest which he, she or it has in the Company, such Member does so knowingly and voluntarily. Each Member acknowledges that the drafter of this Agreement has not served as such Member’s attorney in the preparation of the Agreement.
Securities Laws. Each Member acknowledges that the Membership Interests have not been registered under the Securities Act of 1933 (the “Securities Act”) or under any other applicable state securities laws by reason of their issuance in a transaction exempt from the registration requirements of these statutes. No Member will transfer or otherwise dispose of the Membership Interests (a) an effective registration statement for the Membership Interests under the Securities Act and applicable state securities laws, or (b) an opinion of counsel satisfactory to the Company and its counsel to the effect that the proposed Transfer will not violate the Securities Act or applicable state securities laws.
Evaluation of Investment. Each Member is purchasing the Membership Interests for investment for his, her or its own account, not on behalf of others, and not with a view to resell or otherwise distribute the Membership Interests; and each Member understands that there is no market for the Membership Interests. Each Member, or manager/member of Member if such Member is a limited liability company, acknowledges and agrees that he, she or it is capable of evaluating the merits and risks of an investment in the Membership Interests. In addition, in the event that a Member does resell or otherwise distribute its Membership Interests to a Transferee in accordance with Article VI above, such Member, or manager/member of Member if such Member is a limited liability company, acknowledges and agrees that he, she or it is capable of evaluating the price and terms on which the Transfer will occur.
Company Representations. Each Member and his, her or its representatives, if any, have been furnished with all requested materials relating to the Company and its proposed business activities and have been afforded the opportunity to (a) ask questions of, and receive answers from, the Company’s authorized representatives concerning these materials, and (b) obtain any additional information necessary to verify the accuracy of any information provided to such Member or representatives. No representations or warranties of any nature have been made to any
Member regarding the ultimate economic or tax consequences of his, her or its investment in the Membership Interests, and each Member is relying solely upon his, her or its evaluation of these matters or upon the advice of his, her or its independent advisors.
[End of Agreement]
SIGNATURE PAGE
Sign here: {{Signature}}
Dated as of the date first written above.
MEMBER NAME:
{{Name}}
SCHEDULE I
CLASS A MEMBERS
SCHEDULE II
MANAGER’S ACCEPTANCE
The undersigned accepts appointment by JARSY FLEX II LLC as its “Manager,” as such term is defined in the foregoing Operating Agreement, and agrees to be bound by the terms thereof.
Signature:
Name: Han Qin
Title: CEO of Jarsy Inc
Date : 07/01/2024
EXHIBIT A
RISK FACTORS
THE COMPANY’S INVESTMENT, PURSUANT TO THE CERTAIN OPRATING AGREEMENT DATED [DATE] WILL INVOLVE RISKS NOT ASSOCIATED WITH OTHER INVESTMENT ALTERNATIVES. ALTHOUGH THE MANAGER MAY SEEK TO REDUCE THE RISKS ASSOCIATED WITH THE COMPANY AND THE INVESTMENT, PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER, AMONG OTHER FACTORS, THE RISKS DESCRIBED BELOW. SUCH RISK FACTORS ARE NOT MEANT TO BE AN EXHAUSTIVE LISTING OF ALL POTENTIAL RISKS ASSOCIATED WITH THE COMPANY. THERE CAN BE NO ASSURANCE THE COMPANY’S OBJECTIVE WILL BE ACHIEVED, OR THAT THERE WILL BE ANY RETURN OF CAPITAL. INTERESTS ARE POTENTIALLY SUITABLE INVESTMENTS ONLY FOR SOPHISTICATED INVESTORS WHO, IN CONSULTATION WITH THEIR OWN INVESTMENT AND TAX ADVISORS, FULLY UNDERSTAND AND ARE CAPABLE OF ASSUMING THE RISKS OF AN INVESTMENT IN THE INTERESTS, INCLUDING THE POTENTIAL RISK OF LOSING ALL OF THEIR INVESTED CAPITAL.
GENERAL RISKS
General. The Company will be subject to numerous risks generally related to investing in securities and other investments, including potentially, the additional risks associated with investing in non- marketable securities and non-public companies. Many of the risks associated with the Investment will also apply to the Company. The securities or other interests acquired by the Company will have restrictions on resale and, even in the absence of such restrictions, may not be marketable. The ability of the Company to profit from its investments will be highly dependent upon the ability of its investments to generate income or appreciate in value. Numerous factors may impede or prevent an investment from reaching this point, including inadequate capital, unfavorable competitive developments, and adverse legislation at the national, state, or local level. The Company may face significant capital shortfalls for a wide variety of reasons. For example, resource development may prove more expensive, or take more time, than anticipated, and the growth in revenues may be slower than expected. In any such event, the Members may be asked to provide additional capital. If the Members are unable or refuses to provide the additional capital, the Company may obtain the needed funds from another source (including co-investments from one or more Members or affiliates of any Members, or the Manager and/or its affiliates), diluting, potentially substantially, the earlier investment. However, in the event that the Company is unable to obtain any needed financing, the inability to obtain funds may result in the failure of such investment and a loss of the Company therein.
Limited Operating History. The Company was recently formed. The Company has limited operating history upon which a prospective Member may evaluate to determine whether to purchase an Interest in the Company. The investment target may be newly established with little to no operating history or have limited public information available upon which the Manager may rely on prior to making the Company. As a result, no prior performance or results of the Manager and the investment target can be relied upon or expected to be indicative of the Company. The Company will be dependent upon the Manager, which in turn will rely on its personnel. No guarantees can be made that the Manager and its personnel will be able to operate effectively or that the respective efforts of such persons will be beneficial to the Company. Moreover, no assurance can be made that any or all of such persons will remain employed by the Manager.
General Market Factors. General fluctuations in the economy may affect the value of the Company. The value of the Company can be volatile and price movements may be influenced by, among other factors, changing supply and demand relationships (including, among other factors, labor market conditions, increases or decreases in wages and changes in oil prices), political and economic events and/or changes in related policies, and adverse regulatory developments. The investment target may be susceptible to economic slowdowns or recessions. An economic slowdown may affect the ability of the investment target to repay loans or engage in a liquidity event such as a sale, recapitalization, or initial public offering. The amount of nonperforming assets may increase and the value of the Company may decrease during these periods. These conditions could lead to financial losses to the investment target and the Company.
INVESTMENT RISKS
Risks Inherent in Investing in Private Companies. the Company will be directly or indirectly invest in the investment target set forth in the Company Schedule that will significantly invest all of its capital in the investment target. The investment target can be a private emerging growth company. Investment into the investment target involves a high degree of risk. Many emerging growth companies go out of business every year and it is difficult to know whether companies will grow, if at all, or what factors may impact their performance. There can be no assurance that the Company will be adequately compensated for risks taken and it is possible for a Member to lose his or her entire investment. It is also difficult to understand the timing of profit realization and it is likely that the Company will incur losses before it has an opportunity to realize a profit, if at all.
Lack of Diversification and Concentration of Investment. the Company will be highly concentrated, and its aggregate return may be affected substantially by the performance of the investment target. Additionally, the Company may become susceptible to fluctuations in value resulting from adverse business or economic conditions affecting a particular industry, industry segment or region. the Company will not provide Members with a broad investment portfolio and adverse events in the investment target’s industry will have a disproportionately adverse effect on the portfolio companies in comparison with a broadly diversified portfolio.
Lack of Information for Monitoring and Valuing the Company. The Manager may only be able to obtain limited information about the investment target and, in some cases, may not be able to obtain information beyond the information that is publicly available. Generally, the investment target will determine the best way to keep the Company informed on the progress of the business so the Manager may not be aware of any adverse changes that have occurred with respect to certain of its investments. Additionally, privately held companies are not subject to the same disclosure and reporting obligations of publicly traded companies. The value of the Investment could be significantly negatively affected by any such event. Further, the Manager may have to make valuation determinations without the benefit of an adequate amount of relevant information. Prospective investors should be aware that as a result of these difficulties, as well as other uncertainties, any valuation made by the Manager may not represent the fair market value of the Company. The Manager does not assume any responsibility for the accuracy of completeness of such information.
Minority Investment. The Company will be a minority stake in the investment target, which will have a minority stake in the investment target. As is the case with minority holdings in general, such minority stake will not have control or valuation premiums commonly associated with majority or controlling stakes. the Company will not have the right to exert any influence over the investment target. Likewise, the Company will not have the right to appoint a director of the investment target or otherwise exert significant influence over the investment target. the Company will be reliant on the management team for the investment target, which will be reliant on the existing management and board of directors of the investment target, which may include investors with whom the Company is not affiliated with and whose interests may conflict with the interests of the Company.
No Reserve; Dilution Risk. The Company may be subject to direct and/or indirect dilution. The Company may not intend to reserve capital for follow-on investments in the investment target and therefore may be unable to take advantage of attractive follow-on or other investment opportunities or to protect its existing investments from dilutive or other punitive terms associated with “pay-to-play” or similar provisions. Therefore, if the Company’s investment in the investment target is diluted, the Company may depreciate in value. If the Company does not fund a follow-on investment in the investment target, the Company’s membership interests in the investment target will be subject to proportional dilution relative to other investment target’s members who do fund such amounts. Any new investment target membership interests may also allow for certain preferential rights. If such rights are exercised by new investors this may work to the Company’s disadvantage. If the investment target grants options (or similar rights to acquire membership interests) to employees, service providers, or certain other parties or individuals then the Company may be subject to dilution. Likewise, if the investment target takes similar action, the Company’s direct investment in the investment target may experience similar dilution.
No Assurance of Investment Return. The task of identifying investment opportunities and managing such investments is difficult. Many organizations operated by persons of competence and integrity have been unable to make such investments successfully. The Company may invest in private securities where there is no publicly traded market and there is no guarantee that the underlying private securities will increase in value. the Company is long-term in nature and it may take many years before a return is realized, if at all. An investment in the securities offered hereby is therefore only appropriate for investors with a long-term investment horizon and a capacity to absorb a loss of some or all of their investment. There is no assurance that the Company’s investment objectives will be attained, or that the value of the Company will not decline, or that there will be any return of capital. The Company may not always be able to realize upon its investments in a manner that produces the maximum return on such investments. The Company may elect or be required to remain invested in a manner that does not maximize returns on a given investment because of the inherent unpredictability involved in evaluating the point at which such returns are maximized.
Limitations on Ability to Exit Investments. The Manager expects to exit from its investments in two principal ways: (i) private sales (including acquisitions of the investment target) and (ii) initial and secondary public offerings. At any particular time, one or both of these avenues may not be open to the Company, or timing with respect to these exit mechanisms may be inopportune. As such, the ability to exit from and liquidate portfolio holdings may be constrained at any particular time.
Absence of Liquidity and Public Markets; Illiquidity of the Interests. The Company will be a private, illiquid holding in the investment target that holds private, illiquid holdings in the investment target. As such, there will be no public markets for the securities held by the Company and no readily available liquidity mechanism at any particular time for the Company. The Manager expects that the Company will be subject to transfer restrictions that will prohibit or restrict their transferability to secondary buyers while the investment target, if applicable, remains private. In addition, the realization of value from any investments will not be possible or known with any certainty until the Manager elects, in its sole discretion, to sell the Company and subsequently distribute the proceeds to its investors or to distribute securities to investors in lieu of cash. In addition, Members will not be entitled to withdraw their capital contributions. Accordingly, the Interests constitute highly illiquid investments. Voluntary withdrawals of the Interests are not permitted except under certain limited circumstances for legal and regulatory reasons.
Recall of Distributions. Distributions (or, returns of unused capital contributions, which will be made in the Manager’s sole and absolute discretion) to Members, may be recalled from time to time from such Members, subject to certain limitations, which may adversely affect the return of the Company in the Company made by Subscribers. Such recalled distributions may be used, pursuant to Delaware law, to satisfy unpaid debts of the Company that were in existence at the time the distributions were made.
Use of Borrowed Funds. Subject to the limitations set forth herein and in the Operating Agreement, the Company may for liquidity purposes enter into one or more lines of credit secured by available Capital Commitments of the Members, in an aggregate amount not to exceed aggregate Capital Commitments of the Members. Such borrowing increases both the possibilities for profit and the risk of loss. The amount of borrowings by the Company and the interest rates on such borrowings, which may fluctuate, could have a significant effect on the Company’s profitability.
Mandatory Transfer and Withdrawal. Under certain circumstances, Members may be required to transfer their Interests to another person or completely or partially withdraw from the Company to the extent that the Manager determines it to be necessary or desirable in order to comply with applicable law or regulations, or to avoid a material adverse effect on the Company, the other Members or the Manager.
Disposition of Investments. Part or all of one or more investments made by the Company may not be completely disposed of prior to the dissolution and liquidation of the Company, in the event of which the Company may make in-kind liquidation distributions to the Members of securities in the Company’s portfolio that have not been disposed of.
Platform Fees. As disclosed in the Operating Agreement, the Company includes a Platform Fee to be paid to the Manager of the Company, which may reduce the return of the investment to a Member. It is possible that an investment in another vehicle may result in a greater return for investors than the Company. Prospective members should consider whether alternative investments are available prior to purchasing Interests in the Company.
BUSINESS AND INDUSTRY RISKS
Financial Crises and Effects on Global Financial Markets. World financial markets have in the past experienced and may in the future experience extraordinary market conditions, including, among other things, extreme losses and volatility in securities markets and the failure of credit markets to function. In reaction to these events, regulators in the U.S. and several other countries previously have taken and may in the future take regulatory actions. However, global financial markets may remain volatile, and it is uncertain whether regulatory actions will be able to prevent losses and volatility in securities markets. It is possible that regulatory actions might increase the possibility of future volatility. Regulations may increase market fragmentation and decrease the global flow of capital as it may be too difficult for the Company and other market participants to comply with multiple regulatory regimes. There may be significant new regulations that could limit the Company’s activities and investment opportunities or change the functioning of capital markets, and there is the possibility of regional and/or worldwide economic downturn. Consequently, the Company may not be capable of, or successful at, preserving the value of its assets, generating positive investment returns or effectively managing its risks.
Cyber Security Breaches and Identity Theft. The information and technology systems of the Manager, its affiliates, the Company, the Company, and their service providers and their portfolio companies may be vulnerable to damage or interruption from computer viruses, network failures, computer and telecommunication failures, infiltration by unauthorized persons, other security breaches and/or usage errors by their respective professionals. The techniques used to obtain unauthorized access to data, disable or degrade service, or sabotage systems change frequently and may be difficult to detect for long periods of time. Hardware or software acquired from third parties may contain defects in design or manufacture or other problems that could unexpectedly compromise information security.
Although the Manager and/or its affiliates have implemented, or expect to implement, measures to manage risks relating to these types of events, if these systems are compromised, become inoperable for extended periods of time or cease to function properly, the Manager, its affiliates, the Company, their service providers and/or their portfolio companies may have to make a significant investment to fix or replace them. The failure of these systems for any reason could cause significant interruptions in such parties’ operations and/or a failure to maintain the security, confidentiality or privacy of sensitive data, including personal information relating to investors (and the beneficial owners of investors). Such a failure could harm the reputation of the Manager, its affiliates, the Company and/or their portfolio companies, subject any such entity and their respective affiliates to legal claims and/or otherwise affect their business and financial performance. Specifically, cyberattacks and the failure of such systems may interfere with the processing of Member subscriptions or withdrawals, impact the Company’s ability to value its assets, cause the release of confidential information and/or subject the Company to regulatory fines, penalties or financial losses, reimbursement, or other compensation costs, and/or additional compliance costs. The Company also may incur substantial costs for cyber- security risk management to prevent any cyber incidents in the future. The Company and the Members could be negatively impacted as a result.
Business Continuity and Disaster Recovery. The business operations of the Manager, its affiliates, the Company, and the investment target may be vulnerable to disruption in the case of catastrophic events such as fires, natural disaster (e.g., tornadoes, floods, hurricanes and earthquakes), terrorist attacks or other circumstances resulting in property damage, network interruption and/or prolonged power outages. Although the Manager, and/or its affiliates have implemented, or expect to implement, measures to manage risks relating to these types of events, there can be no assurances that all contingencies can be planned for. These risks of loss can be substantial and could have a material adverse effect on the Company and the Members’ investments therein.
Risk of Financial Counterparty Distress Events. The Federal Deposit Insurance Corporation (“FDIC”) was appointed as receiver for each of Silicon Valley Bank and Signature Bank in March 2023 and for First Republic Bank in May 2023 following a major outflow of deposits at each bank. The failures of these banks underscore the risk that the Company and/or its investments’ financial counterparties (such as banks or lenders) (each, a “Financial Counterparty”) may fail to perform their obligations in a timely manner or experience bankruptcy or another financial adverse event or difficulty (each, an “Distress Event”), similar to those experienced by Silicon Valley Bank, Signature Bank and First Republic Bank. Many factors may trigger a Distress Event, including large bank withdrawals, negligence and market issues. If a Financial Counterparty experiences a Distress Event, the Manager, the Company and/or one or more of its investments may not be able to access their deposits, borrowing facilities or other services from such Financial Counterparty for an indeterminate amount of time. Although assets held by regulated Financial Counterparties in the United States are often insured for a certain amount by, for example, the FDIC in the case of U.S. banks, amounts in excess of the respective insured amount are subject to risk of total loss, and any non-U.S. Financial Counterparties that are not subject to similar regimes are also subject to increased risk of loss. Neither the Manager nor the portfolio companies are obligated to maintain account balances at or below the relevant insured amounts or utilize a minimum number of Financial Counterparties.
Distress Events could negatively impact the Manager’s ability to manage the Company, and the ability of the Manager, the Company and any investment to maintain operations. Financial Counterparties often require that their customers maintain a certain amount or percentage of their respective accounts or assets with the Financial Institution, which heightens the risks that could be borne by the Manager, the Company and/or an investment associated with a Distress Event. A Distress Event could result in the inability of the Company to acquire or dispose of investments at a fair value or fulfill one or more of its contractual obligations. A Distress Event could also result in the inability for in investment to fulfill one or more of its obligations (including, but not limited to, the ability to meet payroll, place orders for supplies, fulfill product orders, consummate financial transactions, and/or to meet other financial obligations). If a Distress Event leads to a partial or total loss of access to a Financial Counterparty’s services, the Company, the Manager and/or an investment may have to seek alternative services, and there may be delays in procuring such services and/or such services may be on less favorable terms than the terms entered into with the prior Financial Counterparty. Furthermore, if a Financial Counterparty utilized by Members or one of the Company’s non-financial counterparties becomes subject to a Distress Event, such Distress Event could have a material adverse effect on the Company and its investments. Although the Manager intends to exercise any available contractual remedies under agreements with Financial Counterparties in the event of a Distress Event, there can be no assurance that such remedies will be successful or avoid losses or delays.
Delayed Schedules K-1. The Manager will endeavor to provide Members with estimates of the taxable income or loss allocated to their investment in the Company on or before March 15 of the year after the calendar year concerned, but the final Schedule K-1 may not be available until completion of the Company’s annual audit, if an audit is performed. Members may be required to obtain extensions of the filing date for their income tax returns at the federal, state, and local levels.
Diverse Member Group. The Members may have conflicting investment, tax and other interests with respect to their investments in the Company. The conflicting interests of Members may relate to or arise from, among other matters, the acquisition or structuring of investments and the timing and disposition of investments. As a consequence, certain decisions made by the Managing Manager may be more beneficial for some Members than for others. The Company may also make investments that have a negative impact on investments made by one or more Members separately from the Company. While the Manager plans, subject to the requirements of the Operating Agreement, to consider the Company and tax objectives of the Members as a group, rather than the tax or other objectives of any Member individually, the Manager may enter into separate agreements with Members which require the Manager to take actions to address the separate interests of these Members which may adversely affect the interest of other Members.
MANAGEMENT RISKS
Dependence on the Management. All management decisions will be made by the Manager. Accordingly, no person should invest in the Company unless he, she, or it is willing to entrust all aspects of the management and investment of the Company to the Manager, who will have considerable discretion in the types of companies and/or securities in which the Company will invest. The Company will be dependent upon the skill, judgment and expertise of the Manager and its members, managers, partners, employees, and affiliates. Additionally, the Company is subject to the management discretion of the investment target with all aspects of the management of the investment target.
Projections. The Company may rely upon projections developed by the Manager, or the investment target, concerning the investment target’s performance and potential cash flows. Projections are inherently subject to uncertainty and factors beyond the control of the Manager or the investment target. The inaccuracy of certain assumptions, the failure to satisfy certain financial requirements or the occurrence of other unforeseen events could impair the ability of a portfolio company, and hence the Company, to realize projected values and cash flow.
Lack of Control. Members will have no opportunity to control the day-to-day operations of the Company, including investment and disposition decisions of the Company. In order to safeguard their limited liability for the liabilities and obligations of the Company, the Members must rely entirely on the Manager to conduct and manage the affairs of the Company. The Company will have no opportunity to control the day-to-day operations of investment target, including its investment-related decisions. While the Company may be granted certain contractual rights to protect any such investments (which may be set forth in a shareholders agreement or other similar agreement and may include redemption and registration rights and/or information and access rights), the Company will not have control over such investment target(s).
Indemnification of Certain Persons. The Operating Agreement contains broad indemnification and exculpation provisions that limit the right of a Member to maintain an action against the Manager and its affiliates to recover losses or costs incurred by the Company as a result of such persons’ actions or failures to act.
Third Party Litigation. the Company investment activities are subject to the normal risks of becoming involved in litigation initiated by third parties. The expense of defending against claims by third parties and paying any amounts pursuant to settlements or judgments would, absent fraud, willful misconduct, or gross negligence by the Manager, be borne by the Company (to the extent not borne by the investment target) and would reduce net assets or could require Members to return to the Company distributed capital and earnings. The Manager and others are indemnified in connection with such litigation, subject to certain conditions.
REGULATORY RISKS
Business and Regulatory Risks of Private Investments Funds. The regulatory environment for investment is evolving, and changes in the regulation of private funds and their investing activities may adversely affect the ability of the Company to pursue its investment program and the value of the Company. There has been an increase in governmental, as well as self- regulatory, scrutiny of the alternative investment industry in general. It is impossible to predict whether changes in regulations may occur, but any regulations that restrict the Company’s activities could have a material adverse effect on the Company, including, without limitation, changes to regulatory and tax matters that may have an adverse impact on the Company’s investment activities. In addition, regulatory scrutiny may increase the Company’s exposure to potential liabilities and to legal, compliance and other related costs. Increased regulatory oversight may also impose additional administrative burdens on the Manager, including, but not limited to, responding to investigations and implementing new policies and procedures. Such burdens may divert such persons’ time, attention, and resources from the Company’s activities.
ERISA Considerations. In order to avoid holding “plan assets” within the meaning of ERISA (as defined below), the Company may be restricted or precluded from making certain investments. In addition, it could be necessary for the Manager to liquidate the Company at a disadvantageous time in order to avoid holding ERISA “plan assets,” resulting in lower proceeds to the Company than might have otherwise been the case. If the assets of the Company are deemed to include ERISA plan assets, there may be certain negative consequences to the Company.
The Company is not a Registered Fund. The Company is not expected to be registered under the Investment Company Act, pursuant to an exception from registration set forth in Section 3(c)(1) thereunder.
The Company and the Manager are not Registered as Investment Advisers. Neither the Company, nor the Manager or their respective affiliates are registered with the Securities and Exchange Commission as an investment adviser. The Company, and/or the Manager may be required to register as an investment adviser in the future.
Future Regulatory Developments. This document cannot address or anticipate every possible current or future regulation that may affect the Manager, the Company, or their respective businesses and operations. Such regulations may have a significant impact on the Company, including but not limited to, restricting the types of investments the Company may make, or requiring the Company to disclose certain confidential information regarding its terms, investments, or the Members. The Manager, in its sole discretion, may cause the Company to be subject to certain regulations if it believes that an investment or business activity is in the Company, even if such regulations may have a detrimental effect on one or more Members. Prospective investors are encouraged to consult their own advisors regarding the Company.
Possible Adverse Tax Consequences. The Company should be classified as a partnership for U.S. federal income tax purposes, and not as an association taxable as a corporation. No representation or warranty of any kind is made with respect to the tax consequences of the Company, or the allocation of taxable income or loss, as provided in the Operating Agreement. Potential investors are advised to consult their own tax advisors with respect to the tax consequences to them of the Company, including if the Company is treated as other than a partnership for tax purposes.
In certain circumstances, to the extent permitted by the terms of the Operating Agreement, the Manager may decide not to make distributions of certain of the Company’s profits, but to retain such profits for the Company’s expenses or re-investments. Since the Company generally does not separately pay taxes, subject to the New Audit Rules (discussed below, each Member is required to report such Member’s ratable share of the taxable income and losses of the Company and to pay any taxes resulting therefrom. Accordingly, a Member may be required to pay taxes on his, her, or its share of the Company’s taxable income, even though he, she, or it has not received any cash from the Company with which to cover such liability. Moreover, the recognition of income, gains, and losses in any year for tax purposes may not match the economic performance of the Company.
Members that qualify as tax-exempt entities may experience adverse federal income tax consequences as a result of the Company. In particular, the Company may generate “unrelated business taxable income” (“UBTI”) with respect to a tax-exempt entity, upon which federal income tax may be levied. UBTI generally would arise if (a) the Company (or a partnership or other “pass-through” entity in which it invests) were to utilize leverage in its activities or were engaged in a trade or business unrelated to the exempt purposes of the relevant tax-exempt entity, or (b) the tax- exempt entity were to leverage its investment in the Company. A non-U.S. investor may be treated as engaged in a trade or business in the United States, be taxed on his, her, or its share of income that is treated as effectively connected with such U.S. trade or business, and be subject to U.S. tax return filing obligations. As such, U.S. tax-exempt and non-U.S. investors are advised to consult their own tax advisors with respect to issues involving unrelated business taxable income and income effectively connected with a U.S. trade or business.
Reviewed and Accepted by Member: {{Signature}}
Name: {{Name}}
Date: {{Date}}
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