Investment Policies & Procedures

CrowdOut strives to ensure transparency and trust, both for our borrowing companies and our investors. In addition to full disclosure in our Private Placement Memorandum, which investors receive during the investment process, below are some of our key investment policies and procedures:

Also, please note that the Notes (our investment vehicle) have not been approved or disapproved by the U.S. Securities and Exchange Commission or by any other U.S. federal or state securities commission or regulatory authority or any non-U.S. securities commission or regulatory authority. Furthermore, the foregoing authorities have not confirmed the accuracy or determined the adequacy of our Private Placement Memorandum, our loan materials, or any other materials presented on this website or anywhere else. Any representation to the contrary is a criminal offense. PLEASE REVIEW OUR PRIVATE PLACEMENT MEMORANDUM IN DETAIL BEFORE MAKING ANY INVESTMENT DECISIONS.

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Investment Process

CrowdOut specializes in loans to middle market and lower middle market companies, ranging in size from $2 million to $100 million or greater.  Most loans are secured by a first or second lien on the borrower’s assets (the Underlying Loan Collateral to our Notes), though some may be unsecured.  CrowdOut may fund loans from its own balance sheet, within the confines of state laws governing licensing, usury and fees, or through a third party partner such as a bank or other purchaser.

When the Company posts a new Note Offering to the Platform, you can make investments in that Underlying Loan by purchasing Notes until that Note Offering has received investments totaling the requested funding amount.  The minimum investment for each prospective Purchaser is one thousand dollars ($1,000).  

Prior to any Note Offering, CrowdOut undertakes a significant vetting process of its potential Borrowers.  Below is an overview of the investment process, both for the borrowing company and investors.

1 – CrowdOut identifies potential Borrowers.

2 – CrowdOut screens potential Borrowers for investment criteria.

3 – CrowdOut negotiates and signs term sheet with Borrower.

4 – CrowdOut syndicates loan to its sophisticated, proprietary investment network (includes banks, institutional investors and large family offices).

4.5 – CrowdOut and Borrower draft documents; CrowdOut performs confirmatory due diligence using third party professional service firms.

5 – Accredited investors are invited to participate in the syndicate via CrowdOut.com through the CrowdOut Notes.

6 – Final loan documents agreed to by Borrower and CrowdOut (all funds from Investors are ACH’d prior to close into CrowdOut’s account in preparation for the closing).

7 – Loan closed and funded.

8 – Post-Close: CrowdOut monitors and services loan.

9 – Post-Close: Investors receive interest and/or principal payments as received (typically on a monthly basis); account statements are prepared and issued monthly by a Third Party Administrator.

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CrowdOut Notes

Crowd Out Capital Platform LLC, a Delaware limited liability company (the Company, or we, us, our, or words to similar effect), is making a private offering to sell strictly to individuals and entities qualifying as accredited investors a class of special limited obligations of the Company referred to as Platform Notes (or Notes) issued by us.  Payments by the Company with respect to its obligations under each Note will be entirely dependent upon payments that the Company receives on one or more specific underlying borrower loans (sometimes referred to as Underlying Loans).

The Company will issue Notes through its online platform on an ongoing basis.  Each Note will correspond to an Underlying Loan that is made by the Company’s parent, CrowdOut Capital LLC (CrowdOut), or a third party institutional investor or bank (a Lender).  In the event that the Underlying Loan is funded by CrowdOut, the Company will purchase (a Loan Purchase) the loan documentation with respect to such Underlying Loan (the Underlying Loan Documents) from CrowdOut. If the Underlying Loan is funded by a Lender, the Company will purchase a participation right from the Lender representing the right to receive a portion of the principal and interest payments, and potentially other rights, with respect to the Underlying Loan (a Participation Purchase). CrowdOut intends that each Underlying Loan will be secured by the assets of the underlying borrower (the Underlying Loan Collateral) and that each Loan Purchase will be secured by a right to receive proceeds from the Underlying Loan. The Platform Notes, however, are unsecured obligations of the Company. Below is a graphical illustration of the process:

Notes may be offered with a disclosure supplement (which will be posted on this website (the Platform)) with information about the applicable Notes and the Underlying Loan for that Note, which we refer to as a Note Offering. Each Note Offering provides information about the Notes offered for sale and the Underlying Loan corresponding to such Note Offering, as well as other applicable or relevant information relating to the Notes then being offered for sale on the Platform.

 

CROWDOUT OFFERINGS ARE HIGHLY SPECULATIVE AND INVOLVES A HIGH DEGREE OF RISK. THE NOTES ARE UNSECURED, LIMITED OBLIGATIONS OF THE COMPANY AND HAVE NOT BEEN APPROVED OR DISAPPROVED BY, AND THEY WILL NOT BE INSURED BY, ANY GOVERNMENTAL AGENCY. INVESTING IN THE NOTES SHOULD BE CONSIDERED ONLY BY PERSONS WHO CAN AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. PLEASE CAREFULLY REVIEW THE RISK FACTORS SET FORTH IN THE SECTION ENTITLED “RISK FACTORS AND CERTAIN CONFLICTS OF INTEREST” IN THE PRIVATE PLACEMENT MEMORANDUM.

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Investment Monitoring

CrowdOut Capital LLC (the servicer) will monitor each of the loans it services on an ongoing basis by assessing financial trends of each borrowing company to ensure that its financial performance is on track
to remain within the covenants set as a part of loan documentation. CrowdOut generally requires borrowing companies to provide annual audited financial statements, quarterly unaudited financial statements and covenant compliance certificates, and monthly unaudited financial statements. Using the materials received from the company, CrowdOut tests and reviews all financial covenants and relevant financial metrics that may or may not be included in the loan documents. When evaluating a borrower, CrowdOut may make non-GAAP adjustments to company financial statements to more accurately reflect the borrower’s current financial picture (for example, in the event of a merger, acquisition, disposition or a material change in the business).

CrowdOut monitors the performance of each loan through a variety of methods, including, but not limited to the following:

  • Adherence to positive and negative financial covenants in loan documents;
  • Regular review of financial statements, monthly and quarterly;
  • Trends in borrower financial performance, measured against relevant benchmarks;
  • Comparisons to other companies in the industry; and,
  • Regular contact with borrowing company management and, if applicable, the financial sponsor, to discuss financial position and company situation.

Additionally, CrowdOut  uses an investment rating system to characterize and monitor the expected level of return on each loan.

As part of its monitoring process, CrowdOut provides each loan an investment rating on a scale of 1 to 5; 1 represents those with the highest probability of returning interest and principal, and 5 represents those most likely to suffer a loss. While not an exact system, CrowdOut uses these ratings internally to estimate the probability of a default on a loan, as well as the prospects for recovery in the event of default.

Our internal investment rating system incorporates the following five categories:

Rating

Summary Description

1

The loan is performing at-or-above expectations. Full return of principal and interest is expected as described. All loans marked as a 1 are carried at par and all new investments are given this rating.

2

The loan is experiencing (or very likely to experience) a technical default, but not a payment default. Return of principal and interest are still expected, but loans in this category may require closer monitoring than those rated at 1.

3

The loan is experiencing a prolonged technical default and performing below expectations, prompting closer internal monitoring. It is expected that the full return of a loan may not be realized.

4

The loan has experienced a payment default and is performing significantly below expectations. CrowdOut has started the recovery process and expects that some or all of principal may occur.

5

The loan has experienced prolonged payment defaults and is in the recovery process; principal loss is expected to occur.

CrowdOut monitors and changes the investment ratings assigned to each loan, accordingly. In conjunction with the monitoring process, CrowdOut will review these investment ratings on a monthly basis, and our Board will affirm such ratings. The investment rating of a particular investment should not, however, be deemed to be a guarantee of the investment’s future performance.

Credit Committee Policies

All loans funded by CrowdOut and sold through the Platform will be approved by CrowdOut’s Credit Committee (Credit Committee or the Committee). Currently, the Committee is comprised of: Alexander Schoenbaum, CEO and co-founder; Brian Gilmore, President; and J. Sulester, Senior Vice President. From time to time, CrowdOut may change or augment the composition of its Credit Committee, including adding members of the Committee on a loan-by-loan basis for loans that warrant a particular expertise.

All members of the Credit Committee have agreed to invest, through the Platform, in any loan for which they served on the Committee. Additionally, no member of the Credit Committee may be an equity holder (with the exception of a sub-5% shareholder in a public company) or manager of any Borrower.

We strive for transparency and the avoidance of conflicts of interest. However, there may be occasions when the CrowdOut and its affiliates will encounter potential conflicts of interest in connection with the Company’s activities. Please read the Conflict of Interest section of our Risk Factors, listed both on this website and in our Private Placement Memorandum, for more detail regarding potential conflicts of interest.

Recovery Policy for Loans in Default

In the event of a default with respect to a borrower’s obligations of an Underlying Loan, the Company or if applicable, a Lender, may, in its sole and absolute discretion, maintain the use of CrowdOut as the existing servicer, hire a special servicer or take actions on its own behalf to enforce the Underlying Loan obligations and/or recover the amounts owed to the Company or, if applicable, a Lender thereunder.

CrowdOut or a third party agent hired on CrowdOut’s behalf, will pursue whatever remedies CrowdOut deems necessary to protect the Company’s or, if applicable, a Lender’s interest in the Underlying Loan Collateral and/or recover amounts owed to the Company or a Lender by the borrower.  Pursuant to the terms of the applicable Underlying Loan, the borrower may have a grace period from the date that payments are due under the Underlying Loan. After the expiration of any grace period and/or in accordance with applicable state law, CrowdOut or its retained servicing provider will generally telephone and/or send a notice of delinquency to the delinquent borrower. If the borrower does not adequately respond to the notice of delinquency within a reasonable time (or within such time as required by applicable law), then CrowdOut or its retained service provider generally will record a notice of default (or similar instrument), if applicable, with respect to the Underlying Loan.  CrowdOut may exercise its discretion in the timing of the filing of the notice of default and taking all other actions against the borrower.     

In addition to the above, the Company and, if applicable, a Lender may in its sole and absolute discretion choose to amend, modify, sell to a third-party or charge-off the Underlying Loan at any time before or after its delinquency.

The Company and any Lender retain the authority to grant appropriate payment deferrals or other modifications based on the overall assessment of a borrower and market conditions generally by CrowdOut, the Company or any Lender. In such cases, the payment terms of the Notes will be correspondingly adjusted. If the Notes are adjusted, that may constitute a taxable event for federal income tax purposes, if it is a material modification.  The Company will advise you of the position it intends to take in such situations for tax and other purposes.

In the event of default, CrowdOut will advance the costs of default recoveries. As such, CrowdOut may collect all costs associated with default recoveries plus up to an additional thirty percent (30%) above such recovery costs.

The Notes represent unsecured, limited obligations of the Company.  This means that payments by the Company to investors are entirely dependent upon payments that the Company receives from the corresponding Underlying Loans.  Upon the occurrence of an event of default with respect to an Underlying Loan, investors have no recourse against CrowdOut, a Lender or the borrower of the Underlying Loan and only limited recourse against the Company.  Accordingly, an investment in the Notes is highly speculative and subject to a significant degree of risk.  Investing in the Notes should only be considered by persons who can afford the loss of their entire investment.  See “Risk Factors and Certain Conflicts of Interest” in our Private Placement Memorandum for more details.

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CrowdOut Fees

Our revenue is derived through fees related to the origination and servicing of loans. Broadly, our fees can be broken into two categories: fees charged to borrowing companies and fees charged to investors. For more details, please see our Private Placement Memorandum.

Fees Charged to Borrowing Companies

CrowdOut charges borrowers an origination fee (an Origination Fee) for loans that are funded by CrowdOut, and/or a referral fee (a Referral Fee) for loans or portions of loans that are made by other Lenders.  The Origination and Referral Fees may vary based on prevailing market rates, state and federal lending laws and other considerations identified by the Company. 

Additionally, CrowdOut may charge borrowers its fees and expenses associated with originating and underwriting a loan. Often CrowdOut will require a prospective borrower to submit a non-refundable deposit. The deposit will be retained by CrowdOut and used to cover fees and expenses (including, without limitation, legal fees and appraisal costs) incurred by CrowdOut during its underwriting process.

To the extent that the CrowdOut (or an affiliate or a third party) charges the borrower Origination or Referral Fees, the principal amount of the loan may be increased, which may adversely affect the ability of the borrower to repay the Underlying Loan.

CrowdOut generally will charge and retain all or a portion of the fees charged by CrowdOut to borrowers for beneficiary statements and demands, late charges, postponement and extension fees, processing fees, forbearance fees, inspection fees, administrative fees, and any other payments or fees due from the borrower of the Underlying Loan corresponding to the Note Offering (Other Fees).

When collected, one hundred percent (100%) of the Origination, Referral and Other Fees and expenses will be retained by CrowdOut or paid to its affiliates or other third parties.  Purchasers will not share in any profit derived from the Origination, Referral or Other Fees and expenses.

Fees Charged to Investors

CrowdOut charges loan servicing fees (Servicing Fees) to its investors equal to ten percent (10%) of interest collected. In the case of a Participation Purchase, a separate Servicing Fee may be charged to the Lender of the corresponding Notes. It is likely that the Servicing Fee charged to the Lender will be different than the Servicing Fee charged to Purchasers. CrowdOut also retains the right to charge large Purchasers a lower Servicing Fee on per loan basis as a volume discount. A portion of the Servicing Fee with respect to each Underlying Loan will be retained by CrowdOut and its affiliates while some or all of the Servicing Fee may be paid to third party servicing agents that CrowdOut engages from time to time to service the Underlying Loans on its behalf. The amount of the Servicing Fee retained by CrowdOut and its affiliates will vary with each Note.

In the event of default, CrowdOut will advance the costs of default recoveries. As such, CrowdOut may collect all costs associated with default recoveries plus up to an additional thirty percent (30%) above such recovery costs.

Risk Factors

AN INVESTMENT IN THE NOTES IS HIGHLY SPECULATIVE AND INVOLVES A HIGH DEGREE OF RISK, INCLUDING WITHOUT LIMITATION THE RISK OF A PARTIAL OR TOTAL LOSS OF A PURCHASER’S ENTIRE INVESTMENT. AN INVESTMENT IN THE NOTES IS SUITABLE ONLY FOR SOPHISTICATED INVESTORS WHO FULLY UNDERSTAND AND ARE CAPABLE OF BEARING THE RISKS INVOLVED IN INVESTMENTS GENERALLY AND IN AN INVESTMENT IN THE NOTES IN PARTICULAR, INCLUDING, BUT NOT LIMITED TO, THOSE CERTAIN RISKS SUMMARIZED BELOW. THE ORDER IN WHICH THE FOLLOWING RISKS ARE DISCUSSED IS NOT INTENDED TO BE INDICATIVE OF THEIR RELATIVE IMPORTANCE. NO GUARANTEE OR REPRESENTATION IS MADE THAT THE COMPANY WILL ACHIEVE ITS INVESTMENT OBJECTIVES OR THAT PURCHASERS WILL RECEIVE ANY RETURN ON THEIR INVESTMENT. THEREFORE, THIS OFFERING IS INTENDED ONLY FOR INVESTORS WHO CAN AFFORD TO LOSE ALL, OR SUBSTANTIALLY ALL, OF THEIR INVESTMENT.

FOR A DETAILED DESCRIPTION OF RISK FACTORS, PLEASE REVIEW OUR PRIVATE PLACEMENT MEMORANDUM.

Risks related to investment can be broadly grouped into the following categories:

  • Risks related to borrower and company default;
  • Risks relating to the terms of the note;
  • Risks related to CrowdOut, the company and the platform;
  • Risks related to compliance and regulation;
  • Risks related to conflicts of interest; and/or,
  • Certain unforeseen risks.

Additional detail can be found in our Private Placement Memorandum and here: Risk Factors.