Step 1 - Company seeking Capital fills out application.
Step 2 - MCF reviews company information and conducts addtional research and inteviews key team members, vendors, and clients.
Step 3 - MCF negotiates on behalf of investors making loans to companies an agreement that includes:
An asset backed guarantee in the form of accounts receivables, real estate, and or stock.
Negotiates yearly Interest rate of 10% - 14% on amount of money loaned to company.
Negotiates monthly consulting agreement with MCF to optimize the results of the use of marketing budget approved and loaned.
Negotiates terms that will pay MCF commissions for acquiring new customers, sales, and strategic partners.
Negotiates equity in company for achieving defined milestones.
Advantages for Companies Seeking Growth Capital
Sponsor (Companies) can acquire capital at a relatively minimal return as compared with venture capital, mezzanine financing, etc. with “additional interest” only paid upon success. Yes…the Sponsor’s other ventures have to be pledged to the return of principle and the stated interest; BUT, a trustee is not as rapacious or litigious as a bank lender or third party lender that is looking to get a return of investment, but possible make a killing at the temporary default by a Sponsor. Plus…securities broker-dealers and high net worth investors love this structure.
1. $10 M asset-backed note offering for the development of one specified game and other games to be identified with parameters for consideration for future identification to investors.
2. These features are just for “placeholders’ only; percentages, splits, timelines and other items are completely open for discussion based on financials, more explicit projects and “crystal ball” back-and-forth: Financials still required to set the Preferred Return and the Participating Interest levels to yield an IRR of 25% (for now, mid-way between the perceived industry minimum of 20% and maximum of 30%):
a. 8% stated return
b. 15% plus “participating interest” based on a certain percent of defined “gross profit”
c. 4 year term for the note;
3. Additional security required to make this a “secured note” for marketing purposes…separate assets or assignment of cash flow to ensure interest payments in advance of each quarterly payment and a specified time (six months for talking purposes) before term in interest and principle have not been previously paid); also known as a “sinking fund”:
i.) A sinking fund is money, assets or pledge of future cash flow from sources separate from the assets to be acquired by the asset-backed not offering. These forms of collateral are accumulated at the beginning of the offering in a separate custodial account that is used to redeem the interest (and eventually the principle) of the offering. The offering will specify the dates on which actual cash must be converted from the asset sources into the sinking fund to pay periodic interest (usually three days before distributions); thus ensuring Noteholders that is offering is safer than bonds or preferred stocks for which the issuer must make payments without the benefit of a sinking fund of assets ready to convert to cash.
ii.) The assets of the sinking fund in this case could be made up of: real estate assets, ownership rights to current games, rights to cash flow from current games. The total sinking fund should be collateralized up to $10 M and one year of interest. Remember, the Issuer has the use of these assets and may make use of any interim interest from cash in other accounts or rents (for example) because the trustee only collapses on the sinking fund (other than drawing the period interest) in case of default.
iii.) The indenture agreement governs all the moving parts of the agreement, such as: form of the agreement, amount of the issue, property pledged, protective covenants, working capital minimums, current ratios, in this case no redemption or conversion rights or call privileges. The industry also provides for the appointment of a trustee to act on behalf of Noteholders, in accordance with the Trust Indenture Act of 1939 (available on Google).
iv.) The TIA 1939 applies to public offerings, but is essential in private offerings for marketability. The TIA provides for the appointment of a qualified trustee free of conflict of interest with the Issuer. The indenture contains financial reports, periodic updates and that the Issuer is liable for misleading statements.
d. Independent trustee (such as Wells Fargo) will act as trustee “FBO” (For the Benefit Of…) investors; this vastly increases marketability; allows for an indentured trust under the Trust Indenture Act of 1939; and increases marketability. It is important to note that the trustee is much more lenient than a banker or bankruptcy judge/referee because of the “FBO” provisions. The trustee, for example, gives great latitude for the issuer to “work out” problems or revise times with the approval Note holders because this almost always a better course of action than a bankruptcy, even a “pre-packaged” bankruptcy filing;
e. Investors only file 1099s, not costly K-1s;
f. Participating interest (again, for discussion purposes only…15%) is considered “additional interest” by the IRS and is taxed on a 1099, rather than recalculated backwards as an “equity participation;
g. At the end of the term, the Sponsor would pay the principle back (if any remains) and any preferred interest remaining from the discussed 8% and any gross profits according the stated split, if any and if any remains unpaid, during a “wrap up” period of something like six months to allow for billed but unpaid revenues from games sales to be settled;
h. IRAs Keoghs and Qualified Plans may invest;
i. Only Series 22 license is required for registered reps, not the higher Series 7