Stocks and Trading Thread - Channeling your inner Mono

[Admiral Yi]

Special Purpose Vehicle

[Jacob]

Special Purpose Vehicle

Thank you!

Now I can pretend I knew all along when I talk to my peeps

[Barrister]

So, the prof and his partner and investors had such a fund, it performed very well, they wrapped it up, and now they're doing it again. They're in the funding stage, with a minimum of $500K. I, alas, do not have $500K lying around to put into interesting investment funds on a lark. However, some of the prof's students and former students are discussing amongst ourselves to pool our money and meet the $500K min to invest.

Okay, so the reason there is a minimum investment is because of securities law.  Ordinarily if you're selling shares you need to prepare a prospectus - a document which outlines all the positives and negatives of the investment.  You also have to provide regular updated financial information.  This is all to protect small investors like yourself.

There is an exception however.  If someone can invest a very large sum like $500k (limit in BC is $150k) they are deemed to be a 'sophisticated investor' - they presumably have enough knowledge and sophistication that they don't need all of this corporate disclosure.

So here's what really worries me - you're not allowed to pool up investments in order to get to the $150k minimum.

Okay... so just going back to review.  The sophisticated investor exception is $150k in BC.  There are other exemptions as well: if there are no more than 50 shareholders, and shares are sold only to (amongst others) close friends and business associates.

So: I would want to make sure this fellow is in compliance with securities law, because it kind of sounds like they won't be.  But maybe I'm wrong and they are going to do up a prospectus (but then why the $500k minimum)?  Or maybe it will be limited to only 50 investors (but that counts everyone participating in the pool) and they figure former MBA students count as close business associates.


The other concern is this is going to be a very illiquid investment.  Your investment is going to be locked in until the company is wound up.  If you need that money?  Too bad.  There's no secondary market to sell into.

Proceed with caution.

[Admiral Yi]

Have you already researched how easily (or at all) you can use your Royal Ruritianian Services Policy money this way?

Now I don't know anything about the Canucklehead system, but do you have something like the maximum annual IRA contribution?

[Barrister]

Have you already researched how easily (or at all) you can use your Royal Ruritianian Services Policy money this way?

Now I don't know anything about the Canucklehead system, but do you have something like the maximum annual IRA contribution?

I believe an RRSP (registered retirement savings plan) works much like an IRA.  Money is not taxed when placed into an RRSP, but is taxed when withdrawn.  Yes there is a yearly maximum (which carries over).  No idea if the RRSP money could be invested in Jacob's professor's SVP.

[Jacob]

Have you already researched how easily (or at all) you can use your Royal Ruritianian Services Policy money this way?

Now I don't know anything about the Canucklehead system, but do you have something like the maximum annual IRA contribution?

There's a max contribution room, yeah, and I do have room. On the flipside, like I said, I'd be okay with cashing in some mutual funds and moving the money over into this thing.

Whether it's possible or not, I don't know, however. Maybe the fund doesn't want to deal with it (if there's something for it to deal with, I don't know), or maybe it's not eligible. That's something I'll have to figure out if I go ahead.

[Jacob]

...

Proceed with caution.

Thanks for the heads up on those issues. I'll make sure it's all on the up and up, but my assumption is that it's going to be. Like I said, there's a legit law firm attached, and I'm assuming they'll make sure there's no securities fraud involved.

As for it being illiquid, yeah I know. This would be a fire and forget (or fire and monitor). I would not expect to have access to those funds if I suddenly needed them.

[crazy canuck]

1.  I would like to see his funds total return first, not the industry average.

Agreed - based on what I understand, we'll have access to financial models and investor reports from the previous fund before we commit, so there'll be more due dilligence.

2.  The pooling of funds to create one joint account sounds like it might create legal issues.  Wouldn't you need to create a legal entity in who's name the money is invested?  How are decisions made about the joint funds?

Yeah, that's part of the plan. Apparently we'll be incorporating an SPV... though I don't know what SPV stands for

But agreed, there needs to be a clear and acceptable plan for handling the pooled funds.

Yi has misunderstood what this is.  It is not like a mutual fund.  Whatever the return to the investors in the other fund might have been has absolutely no relationship to the return of the new fund.  It could be that they got very lucky/unlucky with the businesses they choose to acquire.   Also, the fortunes of the acquired businesses can change quickly (for good or ill) once acquired.

The important thing to understand is this is a short term high risk proposition.  If the acquired business does not improve or a willing buyer who wants to purchase the business for a greater price cannot be found, you are kind of stuck.  Because these funds are set up on such short time lines (relatively speaking) what you are really trusting is the people running the show are able to negotiate a steal of a price on the buying end and negotiate a huge mark up when they sell the business.  All based on the assumption they can run the business better over the short term, making the financials look attractive and reel in the sucker.. I mean new purchaser.

I know folks who have made a LOT of money investing in these things.  I also have a friend who lost most of what he had. 

One thing to examine very carefully is what the people running this are paying themselves vs what your upside is.

[Jacob]

The important thing to understand is this is a short term high risk proposition.  If the acquired business does not improve or a willing buyer who wants to purchase the business for a greater price cannot be found, you are kind of stuck.  Because these funds are set up on such short time lines (relatively speaking) what you are really trusting is the people running the show are able to negotiate a steal of a price on the buying end and negotiate a huge mark up when they sell the business.  All based on the assumption they can run the business better over the short term, making the financials look attractive and reel in the sucker.. I mean new purchaser.

Yeah... I think I do trust them to do that, but it's a very good point. I don't think they're looking to reel in suckers, but to genuinely improve value and performance.

I know folks who have made a LOT of money investing in these things.  I also have a friend who lost most of what he had.

Fair caution, thank you. I'm not going to invest most of what I have and can afford to lose. While I may down prioritize other spending that I'd otherwise enjoy, I'm not going to invest anything I can't manage if it all goes away.

One thing to examine very carefully is what the people running this are paying themselves vs what your upside is.

Another good point. The stated answer is: 2% management fee, and 20% carry on capital gain - European Waterfall (investments paid back before carry kicks in), against a 5.5x of the invested capital for investors (that's the average return of Search Funds in 2019 according to Stanford, excluding the top 5). That's for the fund. I don't know anything about the SPV, as that hasn't been discussed yet.

My wife is reading up on it now too  and she's inveighled her company's investment manager into a meeting on Wednesday to give it a look with us. So it looks like we'll be getting professional investment advice on this.

For anyone interested, here's a bit on Search Funds from Stanford University:
https://www.gsb.stanford.edu/faculty-research/centers-initiatives/ces/research/search-funds
https://www.gsb.stanford.edu/faculty-research/case-studies/2020-search-fund-study-selected-observations

Looks like there'll be a zoom call Tuesday evening where the prof will field questions. I believe the person who's organizing the SPV will be there as well. I'll keep you guys posted if you're interested.

[Jacob]

@BB - it looks like being accredited investor is not about the amount you invest but your net worth and/ or income: https://accreditedcapitalcorp.com/cadosc45.php

[Barrister]

@BB - it looks like being accredited investor is not about the amount you invest but your net worth and/ or income: https://accreditedcapitalcorp.com/cadosc45.php

Its either.  You can be exempt by either investing $150k or being an accredited investor.

[Josquius]

https://www.cnbc.com/2021/04/15/theres-a-single-new-jersey-deli-doing-35000-in-sales-valued-at-100-million-in-the-stock-market.html

HWIN
-0.51 (-3.78%)

Hedge fund manager David Einhorn warned of dangers for retail investors that he sees in the market, and one of his main examples was a tiny New Jersey deli with a market capitalization of more than $100 million.

The Paulsboro, New Jersey-based Your Hometown Deli is the sole location for Hometown International, which has an eye-popping market value despite totaling $35,748 in sales in the last two years combined, according to securities filings.


"Someone pointed us to Hometown International (HWIN), which owns a single deli in rural New Jersey ... HWIN reached a market cap of $113 million on February 8. The largest shareholder is also the CEO/CFO/Treasurer and a Director, who also happens to be the wrestling coach of the high school next door to the deli. The pastrami must be amazing," Einhorn said in a letter to clients published Thursday.

Hometown, which appears to have begun trading in 2019, according to FactSet, has shares that trade over the counter and rarely has more than a few hundred shares change hands per day. Often, there are no trades logged in an entire trading day.

Still, the company's market cap is just over $100 million, according to FactSet.

Hometown did not immediately return a request seeking comment made to the phone number listed in the company's securities filings. A manager was not available to comment at the deli's phone number.

According to the company's latest 10-K filing, the company's single location was closed from March 23 to September 8 of last year because of the coronavirus pandemic. During that time, the company's stock price rose to $9.25 per share from $3.25 per share. It last traded at just under $14 per share.


The company sold 2.5 million shares last year and has about 60 total shareholders, according a filing.



Hometown reported more than $600,000 in expenses last year, up from about $154,000 in 2019. The company also reported a net cash gain of $2.2 million from financing activities, such as selling stock, in 2020.

Einhorn's highlighting of Hometown comes as politicians, regulators and high-profile investors have publicly fretted about the boom in certain types of stocks over the past year.

As a new wave of retail investors joined the market in recent months, special purpose acquisition companies have launched at a record pace and some stocks, like GameStop and Discovery, have seen wild swings after being bid up by traders on Reddit or hedge funds.

The over-the-counter stock market, often referred to as pink sheets and penny stocks, have historically been a risky place for investors. Shares of penny stocks have also soared in recent months.

[Admiral Yi]

My first thought was a boiler room.

Anyone ever gotten a boiler room call?

[DGuller]

I think this is what happens during the last stages of a bubble.

[Jacob]

I think this is what happens during the last stages of a bubble.

Pandemic, major power relations getting worse, nationalism and authoritarianism on the rise, the characteristics of a bubble present in the stock market and real estate (and elsewhere?).

Sounds vaguely familiar. I wonder how concerned I should be....?