RISK DISCLOSURE DOCUMENT
RISK FACTORS AND INVESTMENT CONSIDERATIONS
Investments in brands through 99 Proof Partners can be highly speculative and involve significant risks. An investment should not be made by any person who cannot afford the loss of their entire investment. The investment objectives of 99 Proof Partners are also highly speculative. Investors may be unable to realize a substantial return on their investment, or any return whatsoever, and may lose their entire investment. For this reason, each prospective investor should read this Memorandum and any investment documentation carefully and consult with their attorney, business, tax and investment advisors. Among other risks, prospective investors should specifically consider the following risks, investment strategies, and other factors before making a decision to invest in the Fund.
Investment Strategy Risk Considerations
Uncertainty related to COVID-19 Pandemic. The novel coronavirus disease (“COVID-19”) has resulted in significant disruptions to global business activity. Such disruptions currently include restrictions on elective medical procedures, travel restrictions, business closures, supply chain visibility, implementation of work-from home policies, and sharp drops in consumer and business spending. The impact of COVID-19, and pandemics that may arise in the future could further affect both the United States and global economies, the investments, and the Portfolio Company in ways that cannot necessarily be foreseen at the present time. A health crisis may exacerbate other pre-existing political, social and economic risks. Any such impact could adversely affect the Fund’s performance, resulting in losses to your investment.
Operating History. Most prospective brand investments at 99 Proof Partners lack significant operating or business history that investors can analyze to aid them in making an informed judgment as to the merits of an investment. There can be no assurance that the brand will be able to generate revenues, gains or income, or, even if it generates revenues, gains or income, that its investments will be profitable. Any investment should be considered a high-risk investment because investors will be placing their funds at risk in an unseasoned startup investment vehicle with the attendant unforeseen costs, expenses, and challenges to which a new business is often subject.
Risks Inherent in Investment Strategy. 99 Proof Partners has been newly organized to make multiple investments into Portfolio companies. The investments will be highly speculative and depend largely on the success of each investment. 99 Proof Partners’ strategy is to rely on information provided by the investments and on 99 Proof Partners’ independent research and judgment. The success of the investment will depend on the ability of 99 Proof Partners to recommend, negotiate, and consummate the investments based on information provided by the company as 99 Proof Partners will not have the resources to undertake extensive due diligence. No assurance can be given that information provided by third parties will be accurate or that the investment strategy will be successfully implemented.
Dependence on the Fund Manager. Under the LLC Agreement, the Members will have no right or power to take part in the management of the investment. 99 Proof Partners will act as the investment manager of the investment and will have the right to make all decisions with respect to the management of the investment. Accordingly, no person should invest in the investment unless such person is willing to entrust all aspects of the management of the investment (including the selection of all investments, and the timing and terms of all dispositions) to 99 Proof.
Dependence on the Principals. Because the investments will be managed exclusively by 99 Proof Partners, the operation and potential success of the investments might be adversely affected by the incapacity, death, or unavailability of Matt Brown, Mike Solow, and Tucker McCormack. In addition, Matt Brown, Mike Solow, and Tucker McCormack are and will be engaged in business activities apart from the investments. 99 Proof Partners and the key personnel will devote only so much of their time to the business and affairs of the investments as is reasonably required in their judgment to fulfill their obligations under the LPA. 99 Proof Partners may have conflicts of interest in allocating management time, services, functions, and available investments among the investments and any other investment vehicles that they may organize or operate in the future as well as any other business ventures in which they are or may become involved. 99 Proof Partners, however, believes that it and such personnel will have sufficient time to discharge fully their responsibilities to the investments and to other business activities (including other investment vehicles) in which they are or may become involved. 99 Proof Partners also believes given the investment objectives of the investments that outside business activities of the principals will be accretive to the investments. 99 Proof Partners may engage various additional personnel in the future as the activities of the investments and other business operations of 99 Proof Partners warrant. To the extent that such personnel have not been selected at this time, the Limited Partners will have no opportunity to evaluate the experience or other criteria of any such persons that may be engaged in the future.
Limited Capital Available. The ability of a brand to pursue its investment objectives will initially depend upon the success of the Offering. There can be no assurances that 99 Proof Partners will be able to secure investment capital in amounts sufficient to provide the brand with enough capital to enable it to meet its investment objectives. While 99 Proof Partners intends to make an investment even if only the minimum amount is raised, 99 Proof Partners may not be able to meet this objective or may not be able to invest in some investments due to it not being able to meet minimum investment requirements.
Time Required to Maturity of Investment. It is anticipated that 99 Proof Partners will be required to hold the investment for a significant period of time in order to achieve its investment objectives. The investment will comprise “restricted securities” and 99 Proof Partners will not be able to readily liquidate. As a result, a substantial period of time may pass before 99 Proof Partners is able to realize its investment objective, if at all. There can be no assurance that 99 Proof Partners will realize any gain from its investment or that Limited Partners will receive a return on their investments. Additionally, as the investment is in a single company in a specific industry, there may be a limited number of potential acquirers, thus 99 Proof Partners runs the risk of a delayed exit.
Nature of Investments. 99 Proof Partners will be making an investment in a single company, thus all risks and returns are concentrated in a single asset class. Brands may require several years of operations prior to achieving profitability and may never achieve profitability. The single investment may remain illiquid and may not have realizable value for several years, if ever. In the event the single investment cannot generate adequate cash flow to meet debt service, all or part of the principal of the company’s debt may not be repaid and, in such event, the value of 99 Proof Partners’ investment could be reduced or eliminated through foreclosure on the assets of the company. The instituted level of leverage of the single investment may have an aggravated effect on other general business risks such as state and federal regulations, supply chain inefficiencies, commodity price volatility, labor problems, casualty losses, increases in operating expenses, disputes with suppliers or customers, acceptability of the single investment’s products in the market, and other problems that require additional resources.
Investment Risks. Although 99 Proof Partners’ investment may offer the opportunity for significant gains, the single investment will involve a high degree of business and financial risk that can result in substantial losses. The risk associated with the specific single investment include: sensitivity to commodity price volatility, dependence on a globalized supply chain, operational reliance on existing federal and state regulations, quality related issues associated with the production of consumable goods through direct or indirect fault, the possibility of operating at a loss or with substantial variations in sales results from period to period, and the potential need for substantial additional capital to support expansion or to achieve or maintain a competitive position. The company may face intense competition, including competition from companies with greater financial resources; more extensive development, manufacturing, marketing, and service capabilities; and a larger number of qualified managerial and technical personnel. Although it is intended that 99 Proof Partners will attempt to invest the capital in a single investment that it believes to have talented management, no assurance can be given that such management, or any new management, will operate an investment successfully. To the extent 99 Proof Partners determines to invest in brands, 99 Proof Partners will be entirely dependent upon the managers of such brands to make decisions regarding invested capital. Although 99 Proof Partners will monitor the performance of the investments, existing management of the investments and managers of 99 Proof Partners in which 99 Proof Partners may invest will have ultimate responsibility for the management of such companies. The success of any Portfolio Company is likely to depend on adequate marketing and support resources, both of which are very difficult to predict accurately. There can be no assurance that the marketing efforts of the company will be successful or that the products or services can be sold at a price or in volume that will be profitable. No assurance can be given that the products or services of any particular investment will not become obsolete or require significantly more capital to obtain or maintain an adequate market share.
Additional Capital Requirements. 99 Proof Partners expects that the single investment will require additional capital, the amount of which will depend upon the maturity and objectives of the company. It is anticipated that each round of funding will provide the existing investment with enough capital to reach the next major valuation milestone. If the capital provided is insufficient, or for other reasons, the company may be unable to raise the additional capital or may have to do so at a price unfavorable to the prior investors including 99 Proof Partners. The availability of capital also is a function of capital market conditions that are beyond the control of the Fund or any single investment. There can be no assurance that 99 Proof Partners or the investment will be able to predict accurately the future capital requirements necessary for success or that any additional funds will be available from any source.
Limitations on Liquidity of Investments; Effect on Value. 99 Proof Partners’ investment will consist of investment in a single company which may be subject to restrictions on sale by 99 Proof Partners because they were acquired from the issuer or a third party in “private placement” transactions, or because the 99 Proof Partners is deemed to be an affiliate of the issuer. Generally, 99 Proof Partners will not be able to sell the single investment publicly without the expense and time required to register the single investment.
Investment Valuation Determined by the Fund Manager. 99 Proof Partners will be responsible for the valuation of the investment in its Portfolio Companies that are not listed or otherwise traded in an active market. There is a wide range of values that are reasonable for an investment at a given time and, ultimately, the determination of fair value involves subjective judgment not capable of substantiation by auditing standards. In some instances, it may not be possible to substantiate, by auditing standards, the value of 99 Proof Partners’ investments.
Industry-Specific Risks (liquor)
COVID and economic recessions. 99 Proof Partners will be investing in a single company involved in the importation, manufacturing, and/or sales of liquor. Liquor is regarded as a luxury or non-essential good therefore it faces the risk of reduced consumption in times of crises and economic recessions. This could have a severe impact on revenue projections and lower profitability. Since the exit valuation relies heavily on sales and market reception, this poses a risk to the exit valuation. The volatility of the economic situation due to the continued effects of the COVID 19 pandemic poses the possibility that sales may not reach the intended level within the projected period of time.
Currency risk. The nature of some of 99 Proof Partners’ investments involves the importation of goods. As such it is subject to risks related to exchange rate fluctuations that could impact its profitability, and subsequently its exit valuation. 99 Proof Partners does not guarantee that initial value assumptions will hold despite exchange rate volatility.
Regulation risk. 99 Proof Partners’ investments in imported liquor products makes it vulnerable to changes in importation regulation and legislation related to liquor sales and consumption. The single investment carries the risk that sudden significant changes in regulation and legislation may inhibit their capability to carry out their functions of import and sales of the product. This could lead to an extension of the intended holding period, closure of operations, additional documentation costs, liquidity constraints, among others. This could potentially be detrimental to the investment’s value.
Market reception. The exit valuation of the single investment depends heavily on market reception. While the Fund and its partners will develop the market, no assurance can be given that the introduction of the product to the market will be received favorably, nor is there assurance that the target level of sales will be reached in the expected period of time.
Product Quality and Supplier Capacity. Success of the single investment relies heavily on its supplier’s capacity to produce and supply products of consistent quality that adheres to industry regulation. Any unforeseen circumstances that could adversely affect the supplier’s capacity to supply, including but not limited to natural disasters, raw material sourcing problems, supply chain obstacles, shipping and transportation issues, labor issues, among others, will have an aggravating impact on the investment’s value.
Ownership Risk Considerations
Lack of Diversification. 99 Proof Partners has a limited investment strategy that is to acquire and hold single investments, which consists of restricted securities in a private company. 99 Proof Partners will only hold this single investment. As a result, 99 Proof Partners’ assets may be subject to greater risks of loss than if 99 Proof Partners invested in multiple other securities or strategies.
Structure and Timing of Distributions. Except as otherwise provided in the LPA, distributable investment proceeds comprised of temporary investment income shall generally be distributed on annual basis and distributable proceeds other than temporary investment income, such as an exit from an investment, shall be distributed as soon as practicable after receipt by 99 Proof Partners but in all events within 45 days of receipt by 99 Proof Partners. Distributable proceeds will mostly be available for distribution when the investment is sold. The time that distributions are actually made will be solely dependent upon the timing of realization of proceeds from the single investment and the determination of 99 Proof Partners to distribute any such funds. 99 Proof Partners’ distribution and General Partner’s Carried interest are specified in the LPA.
General Partner Clawback. Th[3] e LPA contains a General Partner clawback to prevent the General Partner from receiving distributions in excess of the 20% of the Fund’s distributions. However, the clawback calculation is primarily conducted at the liquidation and final distribution of 99 Proof Partners. The General Partner may receive distributions in excess of 20% during the term of the investment, prior to the calculation of the clawback provisions in the LPA. Additionally, the General Partner shall ensure that each partner of the General Partner who is entitled to receive any portion of Carried Interest shall have entered into an undertaking in favor of the investment and for the benefit of the Limited Partners pursuant to which such partner of the General Partner shall be obligated to pay directly to the investment its pro rata share of any clawback amount. However, such obligations will be joint, not several and each partner of the General Partner may not be able to make such clawback contributions.
No Market for Securities. No market for the Securities exists, and it is not anticipated that one will develop. The Securities are not redeemable or transferable except as outlined in the LPA. Limited Partners will be required to bear the economic risk of their investment for an indefinite period of time. The Securities are not registered under the Securities Act or applicable state securities laws and may not be re-sold unless they are subsequently registered or an exemption from registration is available. Investors have no right to require, and 99 Proof Partners has no intention of effecting, such registration. Consequently, an investor may not be able to liquidate an investment. The Securities will not be readily marketable, and purchasers thereof may not be able to liquidate their investments in the event of an emergency.
Potential Conflicts of Interest. 99 Proof Partners, General Partner and their respective affiliates may face various conflicts of interest in connection with their respective relationships and transactions with the investment. 99 Proof Partners may be[4] the investment manager of funds other than the investment, within the limitations set by the LPA, and may also be the manager of various co-investment vehicles. 99 Proof Partners and its affiliates currently have other investments that may compete directly with other investment opportunities. In each case, 99 Proof Partners will allocate investment opportunities in a fair and equitable manner, acting in the best interest of 99 Proof Partners as determined by the 99 Proof Partners Executive Management’s sole discretion. 99 Proof Partners and its affiliates will not be prohibited from making additional investments or participating in business ventures outside of and independent of 99 Proof Partners. In addition, 99 Proof Partners and its affiliates may receive fees for the performance of various services for the investment, and for other companies unrelated to 99 Proof Partners.
Certain Regulatory Matters. 99 Proof Partners is not, and does not propose in the future to be, registered as an investment company under the Investment Company Act. 99 Proof Partners is not, and does not in the future propose to be, registered as an investment adviser under the Advisers Act, or any other securities law, in reliance on exemptions from those requirements. The Securities will be sold in reliance upon certain exemptions from registration under the Securities Act and state securities laws.
Limitations on Transfer, Pledge, Mortgage, or Encumbrance. No Limited Partner will be permitted to transfer, pledge, mortgage, or encumber any Units except as outlined in the LPA. Such consent may be withheld in the sole discretion of 99 Proof Partners. 99 Proof Partners will not permit a transfer that will cause a termination of the investments as a partnership for federal income tax purposes, is not appropriate under applicable securities laws or otherwise adversely impacts the investments. 99 Proof Partners will also not permit any transfer that would cause the investments to lose its exemption under the Investment Company Act. 99 Proof Partners may require an opinion of legal counsel to be obtained by a holder of Units in connection with any such transfer.
Indemnification. The LPA includes indemnification of 99 Proof Partners, General Partner, and their respective affiliates, employees, and agents, to the fullest extent provided under applicable law. Generally, neither 99 Proof Partners, General Partner, nor their respective officers, affiliates, employees and agents will be liable to the investments or the Limited Partners for errors in judgment or other acts or omissions in connection with the business of the Fund. To the extent that the indemnification provisions of the LPA are invoked, the assets of the investments would be reduced.
Limited Partner Giveback. Subject to the terms of the LPA, the investment may require the Limited Partners to return distributions to satisfy all or any portion of the indemnification and other obligations of the investment pursuant to indemnification within the LPA. A Limited Partner’s aggregate giveback liability under the LPA is limited to an amount equal to the lesser of (i) 30% of all distributions received by such Limited Partner from the Fund, and (ii) 25% of such Limited Partner’s Commitment.
Lack of Separate Counsel. The investments have not been independently represented in connection with this Offering. 99 Proof Partners, General Partner and the investments are represented by the same law firm with respect to this Offering and 99 Proof Partners and its affiliates may be represented by this law firm with respect to other offerings and other matters. No independent legal due diligence has been conducted by 99 Proof Partners on behalf of any investors with respect to this Offering. Investors are encouraged to engage independent legal counsel at their expense to advise them with respect to this Offering.
Registration Exemptions Risk. The limited partnership interests have not been registered under the Securities Act or the securities laws of the jurisdictions in which they are proposed to be offered and sold in reliance on Rule 506(b) of Regulation D and Section 4(a)(2) of the Securities Act. These claimed exemptions from federal registration are complex and require strict compliance with certain specific conditions. In particular, Rule 506(b) sets forth specific conditions on the private offering of unregistered securities, namely that the securities sold in such offerings be made only to accredited investors. The investments and 99 Proof Partners have controls in place that are designed to ensure that offerings are made only in compliance with the specific conditions of Rule 506(b). However, it may be difficult for 99 Proof Partners and the investments to ensure that such controls are adhered to in every instance. Complicating factors, such as the potential for purchasers to provide misleading information regarding their accredited investor status, may arise. This could result in the investment being required to suspend its Offering and operations for an indefinite period of time, which could potentially result in substantial costs to Limited Partners, as well as other adverse effects. If, for any reason, the investments or 99 Proof Partners is subject to civil liability, or the legal expense of defending an action or proceeding challenging the availability to the investment or 99 Proof Partners of such exemptions, the investment and its Limited Partners could be materially and adversely affected.
Ability to Participate in Investments Dependent upon Status as an Accredited Investor. The acquisition of the single investment by 99 Proof Partners will generally be dependent upon the status of all Limited Partners as “accredited investors” within the meaning of Rule 501(a) of Reg D promulgated under the Securities Act. The Units are being offered solely to accredited investors. If at any time a Limited Partner ceases to be an accredited investor, the Limited Partner will be required under the terms of the LPA to immediately report the Limited Partner’s change in status. Additionally, 99 Proof Partners, as Manager of the investment, may require each Limited Partner to certify from time to time that such Limited Partner remains an accredited investor. If a Limited Partner fails to maintain its status as an accredited investor during the term that the investment is making investments, the Limited Partner will not be able to participate in investments made by 99 Proof Partners after the Limited Partner no longer qualifies as an accredited investor. In such a case, 99 Proof Partners may require the Limited Partner to withdraw from the investment or take other actions with respect to the Limited Partner’s interest as provided in the LPA.
Income Tax Risk Considerations
General Tax Considerations. A general discussion of certain United States federal income tax consequences of being a Limited Partner is provided in the section titled Certain Legal, Tax and Regulatory matters. That discussion is provided solely to describe the anticipated United States federal income tax consequences. 99 Proof Partners and Limited Partners are subject to current tax laws and further changes in the tax laws that may result through future legislative action, judicial decisions, or administrative interpretations. Numerous changes in the federal tax law have increased the tax risks associated with an investment in the Fund.
Diverse Limited Partner Group. The Limited Partners may have conflicting investment, tax and other interests with respect to their investments. The conflicting interests of individual Limited Partners may relate to or arise from, among other things, the nature of the single investment made by 99 Proof Partners, the structuring or the acquisition of the single investment and the timing of disposition of the single investment. As a result, conflicts of interest may arise in connection with decisions made by 99 Proof Partners, including with respect to the nature or structuring of the single investment, that may be more beneficial for one investor than for another investor, especially with respect to investors’ individual tax situations. In selecting and structuring the single investment, 99 Proof Partners will consider the investment and tax objectives of 99 Proof Partners and its Limited Partners as a whole, not the investment, tax or other objectives of any specific Limited Partner.
Carried Interest. Under the terms of the LPA, the General Partner will be entitled to receive distributions as the Carried Interest out of all distributions made in excess of the aggregate amount of Limited Partners’ capital contributions and accrued preferred interest related thereto for the single Investment. The Carried Interest is provided for in connection with the General Partner, through 99 Proof Partners, serving as the investment manager and as an incentive for profitable operation of the Fund.
Tax Distributions. Under the terms of the LPA, the General Partner may receive distributions of distributable cash in order to meet tax obligations arising from income allocated to the General Partner under the LPA (“Tax Distributions”). Any tax distributions received by the General Partner will reduce the amount of distributions to pay the Carried Interest; however, under certain circumstances the General Partner’s receipt of Tax Distributions may result in the General Partner receiving distributions of cash in excess of the amount to which it would otherwise be entitled from the Carried Interest.
Payment of Expenses. 99 Proof Partners may be reimbursed for all of investment costs, including office staff and overhead, legal, accounting, and other professional fees and expenses; compensation and expenses; and travel and due diligence costs incurred with respect to investigating, reviewing, and monitoring a Portfolio Company.
Conflicts of Interest
The investment is subject to various conflicts of interest arising out of its relationships with 99 Proof Partners and its affiliates. Because the investments will be organized and operated by 99 Proof Partners, these conflicts will not necessarily be resolved through arm’s length negotiations, but through the exercise of the judgment of the 99 Proof Partners’ management, consistent with 99 Proof Partners’ responsibility to the Limited Partners, and subject to the advisory committee and terms of the LPA. The General Partner and 99 Proof Partners will not, directly or indirectly knowingly undertake any conduct constituting an actual or potential conflict of interest between the single Investment or Portfolio Company without the prior written consent of 99 Proof Partners’ advisory committee.
These conflicts include:
Competition for Management Services. 99 Proof Partners will devote only so much of their resources to the business of the investment as in their judgment is reasonably required by the LPA. 99 Proof Partners will manage additional entities and will do so in the future. 99 Proof Partners will have conflicts of interest in allocating management time, services, functions, and investment opportunities among the investments other present and future entities that it may organize or be affiliated with, as well as other business ventures in which it is or may become involved. 99 Proof Partners, and their affiliates may engage for their own account, or for the accounts of others, in other business ventures, including the single investment, and neither the investments nor any Limited Partner will be entitled to any interest therein.
Provision of Services by Affiliates. 99 Proof Partners and its affiliates are not prohibited from providing services to, and otherwise dealing or doing business with, the investments, although there are no present paying arrangements with respect to any such services.
Lack of Separate Representation. It is anticipated that counsel to 99 Proof Partners will continue to represent 99 Proof Partners after the Offering. Such counsel has not acted independently on behalf of the investors. Potential investors should consult with and rely on their own legal counsel with respect to analyzing the terms of its investment and any future matters related to 99 Proof Partners.