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The
PrincipalProtector Strategies and Procedures
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There are strategies that can help
investment professionals invest in new
ventures and get results that are more
predictable and less volatile.
If you were investing in a new venture and
had the option of buying one share of stock
for ten dollars with principal protection or
two shares with no protection of principal,
what would you do? Take the protection or
the risk? Venture Funding Advisors (VFA),
using the PrincipalProtector™ principal
protection strategy, makes that option
possible because they provide financial
insurance that can guarantee to return an
amount equal to 100% of the principal
invested in an equity or debt funding.
The PrincipalProtector™ Principal Protection
Strategies
PrincipalProtector™ utilizes guaranteed insurance
products as collateral to enhance debt and
equity funding transactions for investment
professionals and entrepreneurs. The
strategies provide a hedge or principal
protection allocation model. The strategies
provide investment professionals and lenders
with asset allocation tools that return an
amount equal to their principal loan or
investment in speculative funding
arrangements, real estate transactions or
business transactions. Here are just a few
of the strategies available to clients.
Irrevocable Insurance Trust Strategy
An irrevocable insurance trust has proven to
be an effective estate-planning tool and can
also provide principal protection for
investment professionals while facilitating
the acquisition of capital for
entrepreneurs. Generally, when using a trust
for principal protection, one-half of all
monies raised through the debt/equity
funding is directed into the applicable
Irrevocable Insurance Trust.
This money is used to purchase contracts of
insurance that provide a fixed guarantee
from top rated insurance companies. The
lender(s) or investment professional
client(s) providing the funds is usually the
initial beneficiaries of the respective
Irrevocable Insurance Trust. The terms of
the guarantee are fixed upon funding of the
trust and are non-contestable during the
guarantee period. At the end of the
guarantee period, the trust distributes the
proceeds to all parties that hold or own a
beneficial interest.
The Guaranteed Contract of Insurance held in
the trust is owned entirely by the lender(s)
or investment professionals’ client(s). The
beneficial interest in the trust has
immediate value on the day the trust is
funded. With assignment provisions, the
beneficiary has the capacity to borrow
against or transfer outright the beneficial
interest at any time during the trust
period. The trust period and maturity is
dependent on the rates provided by the
insurance company at the time of funding.
When providing a loan with the Insurance
Trust, the lender receives multiple benefits
based on the fact that the loan will be at
least two times the traditional amount. The
increased loan provides the lender with
additional earnings from interest and
additional asset value from the increased
loan. In addition, since the lender also
owns the interest in the trust, the lender
may have approximately 50% more asset value
than under a traditional loan at the time of
funding.
The Insured Collateral Strategy
The Insured Collateral Strategy is used
primarily to provide collateral to guarantee
a loan in a debt transaction. Investment
professional clients or institutions,
brought forth by either the Client Company
or investment banking firm, purchase
guaranteed contracts of insurance (GIC)
which mature in 10 - 12 years. They are
insured/protected against
loss of their principal plus they may
actually receive gains from accumulated tax
deferred interest accumulation. The annuity
underwritten by an A.M. Best Aa or better
insurance company is subsequently assigned
to a bank as collateral, whereby the bank
will lend approximately 50% of the face
value of the contract of insurance to the
client company.
The assignment of the annuity to the bank is
on a deficiency basis, whereby the
guaranteed contract of insurance can never
owe back to the bank an amount greater than
the original loan amount less payments
received (interest and principal). Cash
value withdrawals may be made by the
insurance policy holder up to 10% per year,
which can either be taken in cash or used to
keep the bank loan current should the
company have a problem keeping it current.
Normally the guaranteed contract of
insurance is for 10 - 12 years and written
on a "bullet/end of term" basis. This
structure, given investment returns of
approximately 7% allows the client to obtain
100% of their investment principal, not
withstanding their stock holdings.
The GIC purchasers can negotiate with the
client company for a fee or revenue share
for basically providing the collateral to
the bank or lender that is making the loan
to the client company.
Normally, this transaction will cost the
client company no stock or less stock as
compared to a straight equity transaction.
The benefit to the client company is that
they are able to "reach" capital sources on
a debt basis that would otherwise not be
available to the company, and on cheaper
terms. This is an excellent device for risk
adverse investment professionals, bridge
financing, or permanent forms of financing.
The paragraphs that follow outline the
common steps for determining and structuring
a PPT Strategy that is most appropriate for
your situation.
The PrincipalProtector™ strategy (PPS)
was developed to help provide safety and
security for investors investing in new or
emerging companies. This strategy
encourages investors to invest in ventures
that they previously would have avoided
because of the risks involved. Entrepreneurs
that have utilized similar PrincipalProtector™
strategies have found it easier to raise
capital because of the benefits offered to
investors.
What is the PrincipalProtector™ Strategy (PPS)?
The PPS does not use surety bonds,
bank guarantees or some type of dubious
foreign insurance leverage instrument often
referred to as a Form 4081. The PPS
is based upon the concept of setting aside a
portion of invested capital to provide a
hedge, or insurance, against loss or total
loss if a venture is unsuccessful. The
capital that is set aside is sometimes
referred to as a sinking fund. This sinking,
or side fund, is invested in insurance
products that offer a fixed and variable
rate of return that will enable this fund to
eventually grow to an amount equal to the
original principal investment.
In the past, investment bankers utilizing
this sinking fund concept have invested
these side funds in zero-coupon bonds and
other conservative fixed products. Although
these strategies offer an attractive asset
allocation model there are several
disadvantages. The first is if the fund is
not structured or segregated properly it is
subject to bankruptcy or attack by creditors
and it lacks tax favorable portability or
transferability for exchange or option
purposes. Second, the investment products
utilized in the sinking fund either provide
low yields to maturity or they are subject
to current taxes or accretion… all of which
extend the time period of the fund to reach
the required or desired maturity value.
The concept of setting something aside, or
establishing a reserve or accumulation fund
as a form of insurance is nothing new. The
first recorded case of a hedge or reserve
fund is told in Genesis 41:46-54 where
Joseph stored up grain in Egypt during the
years of plenty to provide for the years of
famine. Investment professionals have been
using reserve funds to provide additional
security for investors and credit
enhancement for lenders for some time.
Note:
The Rule of 72 goes back to Biblical days
told in
the Gospels of story The Parable of the
Talents where the master gave his servants
money and the servants were instructed to
“do business” with the money entrusted to
them. The element of time was applied, as
the man goes to another country, stays a
long time, and then returns. It states two
of the servants doubled the money his master
entrusted to him.
So what makes the PPS unique?
The PPS is unique because it utilizes
a trust and insurance collateral to
segregate and/or guarantee the value of the
side fund or loan. The funds are invested in
guaranteed contracts of insurance offered by
top-rated Aa and better insurance companies
rather than lower yielding products that are
subject to greater market risk. The PPS
also offers transfer options that provide
significant benefits for investors and
entrepreneurs.
What is a trust?
A trust is a fiduciary relationship in which
property is held by one or more persons for
the benefit of one or more persons. The
person creating a trust is generally called
the grantor. The grantor typically executes
a trust document and transfers property to
the person who will be responsible for
administering the terms of the trust who is
called a trustee. The person for whose
benefit the trustee administers the trust is
called a beneficiary. The property held in
trust is often called the trust corpus or
trust assets. The trust may provide for
management of property, accumulation or
distribution of income to beneficiaries,
distribution of trust assets to
beneficiaries, withdrawal powers for
beneficiaries and other powers of
appointment.
The grantor typically creates a trust by
executing a trust document and transferring
property to the trustee. The trust is
created for the benefit of beneficiaries.
A trust must have a trustee of legal
capacity. A trust must have assets; that
is, it must hold property. A trust must
have a custodian of the assets such as a
bank or other legal entity. A trust must
have one or more beneficiaries of legal
capacity or the trust does not come into
existence. A beneficiary may be either a
specified person, a member of some
ascertainable class of persons, or a
charity.
How does the PrincipalProtector™
Insurance Trust Strategy (PPS) work?
The trust document, which explains the
responsibilities of the parties, is a legal
document. At the investor's option, an
entrepreneur utilizing the PPS agrees
to set aside a portion of an investor's
investment and deposit it into a trust which
purchases guaranteed contracts of insurance.
The insurance contracts guarantee to pay the
investor an amount equal to his or her
principal investment in a specified number
of years whether or not the entrepreneur's
company succeeds or fails.
Unlike zero-coupon bonds and other financial
instruments, guaranteed contracts of
insurance offer tax-deferred accumulation
and higher yields thereby accelerating the
trust's growth. A custodian or bank holds
the trust, and the investor’s beneficial
interest in the trust is not subject to
bankruptcy or creditor claims of other
investors, the entrepreneur or the company
issuing its shares. Additionally, the
beneficial interest in the trust can be
transferred to accommodate a number of
investor-entrepreneur benefits without
liquidating the guaranteed contract of
insurance and precipitating unfavorable tax
consequences.
The PPS eliminates the worst-case
investment scenario... full loss of
principal with no return or income. It
enables investors to have the best of both
worlds...safety and potentially significant
returns from new venture investments.
Additionally, the flexibility of the trust
allows for numerous exit strategies by the
investor. These options and benefits
encourage investors to invest in ventures
that heretofore they might have avoided.
The PPS offers flexibility
Once established, the trust flexibility
provides for the assignment of beneficial
interest, assignment of trustee, change in
custodian and early exit strategies.
Some of the many early exit strategies
include a stock exchange option for
investors, a deferred compensation option
for entrepreneurs and early trust
distribution options for the benefit of both
parties.
“The real genius of the
program is a provision that lets investors
opt out of the trust and double down
on their investment at the original share
price if the start-up looks like it's going
to succeed. It almost sounds too good
to be true."
Well-known Broker Dealer from an Investor’s
Business Daily article.
How can I use these strategies?
You could develop strategies similar to the
PPT and implement a trust and purchase
guaranteed contracts of insurance or you can
utilize our consulting services and save a
lot of time and money. Over two years and $2
million went into developing and perfecting
the documents and procedures for the PPT and
the due diligence requirements and approval
of the regulatory authorities, the financial
services industry and the media have been
met.
You might be able to do it a little cheaper
and a little faster than $2 million and two
years, but are you willing to face the
hassle of dealing with regulatory issues and
authorities? But why spend your time trying
to reinvent the wheel and dealing with
regulators when our professionals can help
you implement the right principal protection
strategy and give you the marketing and
sales support you need to start your funding
process in about a week for only $5,000. We
can also help you structure your funding
deal with a private or public placement
memorandum with a highly marketable deal
structure.
Additionally, we can save you the time and
expense of finding a trustee, third party
administrator, custodian and insurance
provider. We also help investors save money
on trustee, administration and custodial
fees.
Our PrincipalProtector™ Trust offers a turnkey
principal protection strategy in a fraction
of the time and at a fraction of the cost
that you could do it for on your own. It
just makes sense to utilize the PPT proven
strategies in funding transactions. We want
to help investors and entrepreneurs get
together.
We are
helping investors and entrepreneurs to fund
new ventures
Investors and entrepreneurs have
successfully utilized the PPT to fund new
ventures, and the program has been featured and recognized
in the financial media and promoted by Inc,
Fast Company, Entrepreneur and The Wall
Street Journal.
Jed Graham in a December 19, 2001 article in
Investor’s Business Daily said, “The
plan
gives ultimate safeguard: money-back
guarantee. And now, despite the risk-averse
funding climate, the
program, is already helping start-up firms
raise cash.”
The program is also appealing to Angel
investors, venture capital firms and
investment professionals. Bruce Blechman,
co-author of Guerrilla Financing and
founder of The Capital Institute, America's
largest financing advisory firm for small
business says, "The
program is the first I've seen that takes the risk out of risk
capital.”
The PrincipalProtector Program connects
entrepreneurs and investors
By proactively promoting and informing
investors of the options they have through
the utilization of the PPS, we
significantly increase the funding resources
for entrepreneurs and provide new investment
opportunities for investors. No other
organization has as powerful of a proven
strategy to serve as a compelling catalyst
in bringing entrepreneurs and investors
together.
The PPS strategies are being exclusively
marketed and distributed by Venture Funding
Advisors (VFA)
VFA consultants and affiliates also serve as
investment banking advisors and provide
funding products, tools and resources for
new ventures and opportunities for
investors. By implementing an PPT strategy a
business can get connected to an
international network of capital resources
or investment opportunities.
Insurance Trust
Implementation Procedures
What is the PrincipalProtector™ Insurance Trust Strategy
The PrincipalProtector™ Insurance
Trust strategy offers a financial capital
protection product that provides an
insurance guarantee and utilizes the
formation of a collateral trust backed by
insurance to guarantee a loan or an amount
equal to the principal investment in a
financial transaction. The PrincipalProtector™
program offers investors and lenders safety
or a guaranteed return of principal when
investing in speculative funding
arrangements, real estate transactions or
business transactions.
Generally, one half of all monies raised
through the debt/equity offering by an
PrincipalProtector™ client company is directed
into the applicable Irrevocable Insurance
Trust. This money is used to purchase the
Contract of Insurance that provides the
guarantee. The lender(s) or investor(s)
providing the funds will be the initial
beneficiaries of the respective Irrevocable
Insurance Trust. The terms of the guarantee
are fixed upon funding of the trust and are
not contestable during the guarantee
period. At the end of the guarantee period,
the trust distributes the proceeds to all
parties that hold or own a beneficial
interest.
The guarantee provided under the
PrincipalProtector™ strategy is a Guaranteed
Contract of Insurance held in a collateral
trust that is owned entirely by the
lender(s) or investor(s). The beneficial
interest in the trust has immediate value on
the day the trust is funded. With the
assignment provisions, the beneficiary has
the capacity to borrow against or transfer
outright the beneficial interest at any time
during the trust period. Generally the
trust period will be for a period of 10 – 12
years, for the doubling of funds to occur.
The duration is dependent on the growth of
the funds.
When providing a loan with the
PrincipalProtector™ strategy, the lender receives
multiple benefits based on the fact that the
loan will be at least two times the
traditional amount. The increased loan
provides the lender with additional earnings
from interest and additional asset value
from the increased loan. In addition, since
the lender also owns the interest in the
trust, the lender may have approximately 50%
more asset value than under a traditional
loan at the time of funding. Equity
investors may also receive the beneficial
asset valuation treatment when the Insurance
Trust secures their investment.
Steps involved in Implementing the
PrincipalProtector Insurance Trust Strategy
PrincipalProtector Strategies Consulting
Agreement is completed and the appropriate
fee is paid. Upon receipt of the Strategies
Consulting Agreement and payment of the
consulting fees, VFA will prepare the
applicable PrincipalProtector Trust Agreement.
The consulting agreement is an agreement
between the company receiving the funds
(borrower) and VFA Any other party that is
involved in the transaction that is not an
employee of the company/borrower must sign
an PrincipalProtector confidentiality
agreement. This applies to lenders,
intermediaries and advisors such as
attorneys and accountants.
VFA or its affiliate shall receive due
diligence information about the company
receiving funds. Such information shall
include business plans, draft loan
agreements (if a lender), offering documents
and subscription agreements (if equity),
collateral information (if debt) and any
other pertinent information that will be
needed to conduct a presentation to the
Fund.
For a lending transaction, the company that
is borrowing the funds will have to
demonstrate that there is sufficient
collateral (temporary or permanent)
available to make the initial loan. This
information shall be required as part of the
due diligence information. After the loan
is closed, the proceeds will be used to fund
the Guaranteed Contract of Insurance that is
placed in the collateral trust with the
lender as beneficial owner. Upon funding of
the trust and the purchase of the insurance,
the collateral used to close the loan may be
released (or reduced if needed to protect
the lender for payment of interest).
For a lending transaction, VFA or its
affiliates shall provide the lender with
addendum provisions that need to be included
in a loan document in order to authorize the
Insurance Trust implementation and to
discuss the treatment of any principal
payments made by the company receiving the
funds.
VFA shall make an application for the
Guaranteed Contract of Insurance to the
insurer. The presentation shall include the
due diligence information obtained from the
client. Insurance Companies providing
products for the PrincipalProtector Insurance
Trust Strategies are rated “excellent” or
better by insurance rating bureaus, have in
existence sufficient reinsurance
arrangements to cover any Insurance Trust
transaction and must be members in the
appropriate State Insurance Guaranty Fund.
The lender or the investor will receive any
requested due diligence information
regarding the Insurance Company to be used
in the transaction.
In general, when the presentation to the
insurance company includes sufficient due
diligence information, the review and
acceptance by the insurance company may be
completed in as little as 72 hours and
possibly less. Generally, the presentation
will be conducted at the end of the lenders
review process. VFA or its affiliates will
work with the lenders during the process to
make sure that terms of the loan and terms
of the trust arrangement included in the
PrincipalProtector Strategy are consistent
The Insurance Company providing the
Guaranteed Contract of Insurance that will
be placed in the trust will issue a
commitment letter to the lender or investor
within 24 hours prior to fund closing. The
commitment letter shall detail the terms of
the Guaranteed Contract of Insurance
including the duration, the amount needed to
fund the trust and the amount paid at
maturity.
VFA or its affiliates shall coordinate any
necessary communication needed between the
insurance company and the lender or
investor. All questions concerning the
details of the PrincipalProtector Strategy and
trust implementation will be addressed prior
to closing. No funds will be transferred
until the lender/investor understands the
transaction and signs a statement to that
effect. The statement will be attached to
the appropriate trust agreement as Schedule
A.
Prior to closing, the Trustee of the
applicable Irrevocable Insurance Trust shall
establish a bank account at the lender’s
institution or at a location as directed by
the party providing the funds.
Prior to closing, the Trustee shall be
listed as an authorized representative to
provide any instructions to the escrow agent
that handles funds at the time of closing.
Upon closing of the loan, the first funds to
be transferred under any arrangement shall
be the amount needed to fund the trust
acquisition of the Guaranteed Contract of
Insurance. The appropriate amount (that is
determined prior to closing) is transferred
to the Trust Bank Account. The funds are
immediately transferred to the Insurance
Company’s bank account via wire transfer.
Assuming that the funds are received by
10:30 AM EST by the Insurance Company Bank,
the Contracts of Insurance and the related
guarantee will be effective upon receipt.
Upon confirmation of the receipt of the
appropriate funds by the Insurance Company,
the Insurance Trust and Guaranteed Contract
of Insurance is in place. As such, other
funds will be distributed according to
prearranged terms. Such other funds shall
include IH fees, custodial fees,
administration fees, bank fees, other broker
fees and any other prearranged fees. The
net funds remaining shall be available to
the borrower in accordance with the terms of
the loan agreement.
Immediately after the closing, VFA or its
affiliates will contact the insurance
company in order to receive formal
documentation regarding the Guaranteed
Contract of Insurance. The Custodian of the
Assets will maintain the actual Guaranteed
Contract of Insurance in the Trust. The
Custodian of the Assets shall be responsible
for handling all funds that are received at
maturity. Such funds shall be distributed
to beneficiaries at the time of
distributions in accordance with the trust
terms and at the direction of the Trustee
and Third Party Administrator.
IH will provide all beneficiaries of the
trust with a copy of the Guaranteed Contract
of Insurance, trust agreement with the
pertinent Schedule A and any other pertinent
information supporting the beneficiary’s
beneficial interest in the trust. The
beneficiary shall also receive information
concerning the assignment provisions and
assignment procedures.
In a situation where there is a sole
beneficiary, the beneficiary shall have the
ability to request changes in the Trustee.
Depending on the facts surrounding the
transaction and the appropriate parties
involved, there may be a possibility to
change the Custodian of the Assets of the
Trust. Any of these changes would occur
after the initial close of the transaction.
Participating Subordinated
Guaranteed Convertible Debenture
The PrincipalProtector™ Convertible Debenture (IHCD)
is a funding instrument that offers
guarantees and opportunities for investors
while providing a variety of flexible
financing options for entrepreneurs seeking
capital.
The IHCD alleviates issues regarding the
need to raise multiples of capital because
funds raised in excess of working capital
provide the collateral for retiring the
debenture (paying off the loan) or
converting it to equity. Additionally, if
interest on the debenture is structured as a
participation in revenues, both the investor
and the company are afforded attractive cash
flow options. Specifically, the investors
can benefit from increases in revenues while
the company is not strapped with interest
payments during startup or during the
absence of revenues. A win-win situation.
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