Face Fund Prospectus
The Fund seeks higher returns than the average of the world’s equity markets without a greater risk of loss.
Research Driven. The Fund is designed to remain continuously fully invested in, and exposed to all the risks and rewards of, SP500 and 10 Year Treasuries limiting the margin required to 5% of the portfolio NAV.
The Fund aims for 2x returns of a Benchmark comprised of 50% SP500 and 50% 10 Year treasury notes minus Libor.
Since the US dollar is the currency most commonly used in reporting on global equity funds, the financial statements of the Fund are prepared, its shares are priced and its returns and those of the Benchmark are presented in dollars.
Performance statistics for the Fund and its Benchmark calculated in other major currencies are available on request.
The Fund generally only invests in equities, US Treasuries and Futures linked to those instruments. No more than 5% in the value of the net assets of the Fund may be held as margin for a futures account.
Fund’s investment restrictions are measured at the time of investment. None of the investment limitations set out above shall be considered as being exceeded or breached if such investment limitation (i) was not exceeded or breached at the time of or immediately after making the investment or (ii) was exceeded or breached as a result of an event which was not within the control of the Fund.
For the sake of clarity, where any transaction is part of a series of transactions to be completed by the Fund within a 24-hour period the question of whether an investment restriction has been breached shall be determined by considering the series of transactions to have occurred at the same time.
The above objectives and methods are a summary of current intentions and should not be viewed as either exhaustive or invariable.
The investment program of the Fund is speculative and may entail substantial risks. Since market risks are inherent in all investments to varying degrees, there can be no assurance that the Fund’s investment objective will be achieved or that substantial losses will not be incurred. In fact, certain investment practices described above can, in some circumstances, increase any adverse impact to which the Fund’s investment portfolio may be subject. Review the “Certain Risk Factors” section for a discussion of the risks associated with investing in the Fund.
Management of the Fund
Bytelogics Inc., the investment manager of the Fund (the “Investment Manager”), was incorporated under the laws of New York in 1999. The Investment Manager is regulated by the New York State.
Under the terms of the Investment Management Agreement (as defined below), matters pertaining to the investment management of the Fund are delegated to the Investment Manager; the Investment Manager is therefore responsible for making all investment decisions relating to the portfolio of the Fund. The Investment Manager has the right to delegate all or a portion of its responsibilities with respect to the Fund to one or more third parties, including the respective affiliates thereof.
The Investment Manager bears all of its own operating expenses incurred in connection with the services that it will provide to the Fund. The fees charged by the Investment Manager may be more or less than the Investment Manager’s cost of providing such services to the Fund.
The directors and President of the Investment Manager are in alphabetical order below.
Keith Siilats, who is the sole owner and president of Bytelogics Inc. Keith Siilats received an economics degree from Cambridge University, Trinity College in 1999 and has worked at various financial and technology companies in the USA since.
Bytelogics Inc. is the General Partner of the fund.
Under the terms of the Partnership Agreement, the General Partner is responsible for the day-to-day operational management of the Fund. The General Partner has the right to delegate all or a portion of its responsibilities with respect to the Fund to one or more third parties, including the respective affiliates thereof.
The General Partner may in the future manage or advise other Partnerships, mutual funds or other investment vehicles.
While the Fund may trade in commodity futures and/or commodity options contracts, the General Partner is exempt from registration with the Commodity Futures Trading Commission as a commodity pool operator with respect to the Fund pursuant to Rule 4.13(a)(3) under the Commodity Exchange Act, as amended.
The administrator of the fund is Bytelogics Inc.
Bytelogics Inc serves as the custodian (the “Custodian”) of the Fund.
The Custodian, among other things: maintains a custody account or accounts in the name of the Fund; receives and delivers all assets for the Fund upon purchase and upon sale or maturity; collects and receives all income and other payments and distributions on account of the assets of the Fund; makes disbursements on behalf of the Fund; settles purchases and sales and engages in other transactions with respect to the securities; and forwards to the Fund certain notices relating to the securities held as well as information regarding ownership rights pertaining to such securities.
The Fund is not committed to continue its relationship with the Custodian for any minimum period and may, in its sole discretion, engage other custodians from time to time.
Custodian will open an account in Funds name with Interactive Brokers and Citibank.
CLASSES OF UNITS OFFERED
Currently, the fund offers one class of securities.
The General Partner may waive any minimum initial investment or minimum subsequent transaction amount.
Minimum Initial Investment
Minimum Subsequent Transaction Amount
The general partner has waived the management fee. This waiver will be automatically extended for further successive one-year periods unless the General Partner notifies the affected Partners that the waiver will not continue or will be altered at least two months prior to the expiry of the term, as extended.
SALES CHARGES AND EXPENSES
The Fund bears its own expenses such as investment expenses (e.g. brokerage commissions and interest expenses), legal expenses, accounting, auditing, and tax preparation expenses. A portion of the Fund’s expenses may be shared with other investment entities or accounts managed by Bytelogics Inc. on an equitable basis.
The General Partner has agreed that for the current calendar year, except for specified exclusions, operating expenses attributable to the Fund will be capped at the rate of 0.15% per annum. The cap will be automatically extended for further successive one-year periods unless the General Partner notifies the Partners that the cap will not continue at least three months prior to the expiry of the term, as extended. The General Partner will meet expenses incurred in excess of the cap and will not seek reimbursement from the Fund. The operating expenses that are capped are all third-party expenses excluding the Management Fee, the cost of buying and selling assets, interest and brokerage charges.
Expenses incurred by the Investment Manager and the General Partner in the operation of their respective businesses (e.g., salaries, office space and utilities, telephone and computer equipment, and services), are borne by such parties and not separately recovered from the Fund.
Bytelogics Inc has adopted a policy of refusing any “soft dollar credits” from brokers for the payment of third-party non-brokerage and research services unless such credits fall within the safe harbor provided by Section 28(e) of the Securities Exchange Act of 1934, as amended. A portion of research and brokerage expenses may be paid for using such credits (i.e., commission dollars and transaction fees generated through the execution of transactions for the Fund). See “Trade Allocations and Brokerage Commissions.”
With the exception of the Substantial Cash Transaction Levy described below, there are no sales or transaction charges on subscriptions or redemptions.
SUBSTANTIAL CASH TRANSACTIONS
Where the Fund receives a cash subscription or redemption request in an amount representing 20% or more of the Fund’s net asset value, calculated on the Dealing Day on which the transaction is processed before giving effect to such transaction (but after giving effect to any transactions in kind of securities on that Dealing Day), the Fund may levy a transaction fee of 0.40% of the value of that subscription or redemption (the “Substantial Cash Transaction Levy”). For purposes of the Substantial Cash Transaction Levy, multiple cash subscriptions or redemptions requests made by one Partner over a five Business Day period will be aggregated. The Substantial Cash Transaction Levy represents Bytelogics Inc’s estimate of the fiscal and purchase charges and the related market impact that would be incurred if the Fund were to increase or decrease its underlying investments pro-rata to allow for the transaction. The Substantial Cash Transaction Levy payable by any investor may be waived or modified by the General Partner in its sole discretion. For purposes of clarity, in the event, a Partner seeks to conduct a transaction in kind of securities, and the General Partner determines that a portion of such transaction cannot be transacted in kind of securities, such as for markets where transactions in kind of securities is not feasible, then such cash portion of that transaction shall not be subject to the Substantial Cash Transaction Levy.
Subscriptions and redemptions in securities rather than in cash are not subject to the Substantial Cash Transaction Levy.
The following outline summarizes the material provisions of the Partnership Agreement of the Fund that are not discussed elsewhere in this Private Placement Memorandum. This outline is not definitive and each prospective Partner of the Fund should have carefully read the Partnership Agreement in its entirety.
Matters pertaining to the organizational and operational management of the Fund as a partnership are vested exclusively in the General Partner. The Partners will have no part in the management of the Fund and will have no authority or right to act on behalf of the Fund in connection with any matter.
Subject to a commitment to devote so much of their time to the affairs of the Fund as is in their good-faith judgment the conduct of the Fund’s business shall reasonably require, the General Partner and any of its affiliates, may engage in any other business venture and neither the Fund nor any Partner will have any rights in or to such ventures or the income or profits derived therefrom.
The Partnership Agreement does not require the General Partner or any director, officer or employee of the General Partner to devote all or any specified portion of their time to managing the affairs of the Fund, but only to devote so much of their time as in their good faith judgment the conduct of such business shall reasonably require. The Partnership Agreement for the Fund does not prohibit the General Partner or its affiliates, directors, officers, and employees from engaging in any other existing or future business if such activity does not materially interfere with the business of the Fund or conflict with the obligations of the General Partner under the Partnership Agreement. Future activities by such persons may give rise to additional demands on the time of such persons.
The Partnership Agreement provides that the General Partner shall seek to comply and shall seek to cause the Fund to comply in all material respects with all material laws applicable to it or to the Fund as it carries out the objects and purposes of the Fund or as applicable to the conduct of the business of the Fund.
The Partnership Agreement provides that the General Partner and any of its affiliates shall not be liable to any Partner or the Fund for mistakes of judgment or for action or inaction which said person reasonably believed to be in the best interests of the Fund (unless such mistake, action or inaction constitutes gross negligence, willful misconduct, fraud, dishonesty or any intentional and material breach of the Partnership Agreement), or for losses due to the mistakes of judgment, the action or inaction or the negligence, dishonesty or bad faith of any broker or other agent of the Fund, provided that such broker or other agent was selected, engaged or retained by the Fund with reasonable care. The General Partner or an affiliate may consult with counsel and accountants in respect of Fund affairs and be fully protected and justified in any action or inaction which is taken in accordance with the advice or opinion of, or legal- or accounting-related information provided by, such counsel or accountants, provided they have been selected with reasonable care. The federal securities laws impose liabilities under certain circumstances, even on persons who act in good faith and neither the exculpation nor indemnification (described below) provisions of the Partnership Agreement constitute a waiver or limitation of any rights which a Partner may have under federal securities laws.
The Partnership Agreement provides that the Fund will indemnify and hold harmless the General Partner and each of its affiliates (an “Indemnified Party”) from and against any loss or expense suffered or sustained by it by reason of the fact that it is or was a general partner of the Fund or an affiliate, including without limitation any judgment, fine, settlement, reasonable attorneys’ fees and other costs or expenses incurred in connection with the defense of any actual or threatened action or proceeding, provided that such loss or expense was incurred in connection with the Fund and resulted from a mistake of judgment on the part of the Indemnified Party or from action or inaction which the Indemnified Party reasonably believed to be in the best interests of the Fund (unless such mistake, action or inaction constitutes gross negligence, willful misconduct, fraud, dishonesty or any intentional and material breach of the Partnership Agreement). The Partnership Agreement also provides that the Fund will advance to any Indemnified Party reasonable attorneys’ fees and other costs and expenses incurred in connection with the defense of any action or proceeding which arises out of such conduct provided that no such advance shall be made by the Partnership if the action is being brought solely by a majority in interest of the unaffiliated Partners. In addition, the Partnership Agreement provides that the Indemnified Party agrees to reimburse the Fund to the extent that it is determined that the Indemnified Party was not entitled to indemnification.
Each Partner of the Fund has a capital account established on the books of the Fund that will be credited with its capital contributions. A Partnership Percentage (as hereinafter defined) is determined for each Partner for each accounting period by dividing the amount of its capital account as of the beginning of such an accounting period by the aggregate capital accounts of all Partners of the Fund as of the beginning of such accounting period.
Each Partner’s capital account is increased to reflect any additional capital contributions made by such Partner and its share of net capital appreciation of the Fund’s assets and is decreased to reflect redemptions of capital and such Partner’s share of net capital depreciation of the Fund’s assets. No Partner will be required or obligated at any time to contribute any additional amount to its capital account. Partners may, with the consent of the General Partner, make additional capital contributions on a Dealing Day or at such other times as the General Partner shall determine, in its sole discretion.
ALLOCATION OF GAINS AND LOSSES
At the end of each “accounting period,” any “net capital appreciation” or “net capital depreciation” of the Fund is allocated to its Partners in proportion to each Partner’s capital account at the beginning of such “accounting period” (referred to herein as a Partner’s “Partnership Percentage”) provided, however, that any allocations with respect to Management Fees shall be made as described in Management Fees above and that net capital appreciation and net capital depreciation from “new issues,” as defined in the Financial Industry Regulatory Authority (“FINRA”) Rule 5130, or any successor provision thereto (“Rule 5130”), will be allocated only to Partners reasonably deemed by the General Partner, after inquiry of the relevant Partner, to not be “restricted persons” under Rule 5130 and eligible to participate therein pursuant to Rule 5130 and FINRA Rule 5131.
Each accounting period closes at the close of business on the earlier of (a) a Dealing Day, (b) the date when the Fund dissolves or (c) such other date as may be determined in the sole discretion of the General Partner. Each subsequent accounting period commences immediately after the close of the next preceding accounting period.
“Net capital appreciation” refers to the increase in the value of the Fund’s net assets, including unrealized gains, from the beginning of each accounting period to the end of such accounting period.
“Net capital depreciation” refers to the decrease in the value of the Fund’s net assets, including unrealized losses, from the beginning of each accounting period to the end of such accounting period.
In the event that the General Partner determines that, based upon tax or regulatory reasons, or any other reason as to which the General Partner and a Partner agree, such Partner should not participate in the net capital appreciation or net capital depreciation, if any, attributable to trading in any security, or type of security or to any other transaction, the General Partner may allocate such net capital appreciation and net capital depreciation only to the capital accounts of the Partners to whom such reasons do not apply. In addition, if for any of the reasons described above, the General Partner determines that a Partner should have no interest whatsoever in a particular security, type of security or transaction, the General Partner may set forth the interests in any such security in a separate memorandum account and the net capital appreciation and net capital depreciation for each such memorandum account shall be separately calculated.
For each fiscal year, items of income, deduction, gain, loss or credit shall be allocated for income tax purposes among the Partners in such a manner as to equitably reflect amounts credited or debited to each Partner’s capital account for the current and prior fiscal years (or relevant portions thereof). Allocations shall generally be made pursuant to the principles of Section 704 of the Internal Revenue Code of 1986, as amended (the “Code”) and in conformity, with Treasury Regulations (the “Regulations”) Sections 1.704-1, 1.704-2 and 1.704-3 promulgated thereunder, as applicable, or successor provisions to such Section and Regulations. Notwithstanding anything therein or herein to the contrary, in the event a Partner redeems all or part of the balance in its capital account, the General Partner, in its sole discretion, may specially allocate an amount of the Fund’s ordinary income/loss and/or capital gain/loss (including short-term capital gain/loss) for U.S. federal income tax purposes to a redeeming Partner to the extent that the Partner’s capital account exceeds such Partner’s U.S. federal income tax basis, or such Partner’s U.S. federal income tax basis exceeds such Partner’s capital account. No assurance can be given that, if the General Partner makes such a special allocation, the Internal Revenue Service (the “IRS”) will accept the allocation. If the allocation is successfully challenged by the IRS, the Fund’s income/gains or losses allocable to the remaining Partners would be increased or decreased, as the case may be.
Each Partner’s distributive share of income, gain, loss, deduction or credit (or item thereof) shall be determined in accordance with the Partner’s capital in the Fund (determined by taking into account all facts and circumstances) if (i) the Partnership Agreement does not provide as to the Partner’s distributive share of income, gain, loss, deduction or credit (or item thereof), or (ii) the allocation to a Partner under the Partnership Agreement of income, gain, loss, deduction or credit (or item thereof) does not have substantial economic effect.
Redemptions of Capital; Withdrawal as a Partner. Subject to the limitations set forth below, each Partner has the right to redeem any portion of its capital account and each Partner has the right to withdraw as a Partner, on each Dealing Day. To do so, a redemption form must be received by the Fund by 4:00 pm EST one Business Day prior to the requested Dealing Day.
Payment of the amount redeemed will be made as soon as practicable (generally within ten Business Days) having regard to market conditions and the aggregate amount of redemptions on such Dealing Day relative to the size of the Fund.
Notwithstanding the foregoing, if a Partner is redeeming its capital account in its entirety, the Partner may request to have its redemption request fulfilled within ten Business Days, regardless of market conditions and the aggregate amount of redemptions on such Dealing Day (a “Special Complete Redemption”). The General Partner may, in its sole election, pay a Special Complete Redemption in securities or in cash, but in either event, must pay such Special Complete Redemption within ten Business Days of the relevant Dealing Day.
In the event the Fund fails to pay a Special Complete Redemption within ten Business Days of the relevant Dealing Day, the General Partner has agreed in the Partnership Agreement to irrevocably instruct the Custodian to immediately deliver to, or to the order of, the redeeming Partner a pro-rata amount of each of the Fund’s securities that is capable of being delivered to the redeeming Partner, in fulfillment of the Special Complete Redemption.
With respect to any of the Fund’s securities that the Custodian cannot deliver to, or to the order of, the redeeming Partner under a Special Complete Redemption (the “Non-Transferrable Securities”), the Partner will be deemed to have requested payment in cash for the redeeming Partner’s pro-rata portion of the Non-Transferrable Securities and other Fund assets (subject to adjustment for the liabilities of the Fund), and the Non-Transferrable Securities and other
Fund assets will not be deemed part of the Special Complete Redemption. Payment in cash for the Non-Transferrable Securities and other Fund assets (subject to adjustment for the liabilities of the Partnership) shall be made by the General Partner as soon as practicable (generally within ten (10) Business Days) having regard to market conditions and aggregate redemptions on that date.
In the event of the bankruptcy, insolvency, termination or dissolution of the General Partner or the giving of notice of a withdrawal by the General Partner as the general partner of the Fund, the Partners shall receive notice of such event and may, upon written notice delivered to the Fund (“Partner Notice”) within 30 days after such notice regarding the General Partner has been received, elect to withdraw from the Fund concurrently with the General Partner.
Notwithstanding the foregoing, if the General Partner determines that the aggregate amount of capital to be redeemed pursuant to Partner Notices is significant, the General Partner may, in its sole discretion, elect to commence the orderly liquidation of the Fund. Upon such occurrence, the Partner Notices shall be null and void and all Partners will receive their pro-rata portion of the proceeds resulting from the liquidation of the Fund pursuant to the terms of the Partnership Agreement.
As set forth in the Partnership Agreement, the General Partner may require any Partner to redeem all of its capital account in cash or in-kind upon seven (7) days’ prior written notice under certain conditions, such as if litigation is commenced or threatened against the Fund or any Partners arising out of or relating to, the participation of such Partner in the Fund. To the extent reasonable under the circumstances, the General Partner shall consult with the affected Partner during the seven-day period referenced in the foregoing sentence to determine whether an alternative course of action that is mutually acceptable to both the affected Partner and the General Partner can be identified. In the event, a Partner is required to redeem all of its capital accounts under these conditions, and such redemption would have otherwise been subject to the Substantial Cash Transaction Levy, such redemption shall be subject to the lesser of (i) the Substantial Cash Transaction Levy or (ii) the transaction costs and negative market impact on the Fund associated with such redemption, as determined by the General Partner in its reasonable discretion, but subject to the restrictions set forth in the Partnership Agreement.
SUSPENSION OF REDEMPTIONS
Except in the instance of a Special Complete Redemption, the General Partner, by written notice to the Partners, may suspend the right of redemption, in whole or in part, (i) during the existence of any state of affairs as a result of which, in the opinion of the General Partner, acting reasonably, disposal of investments by the Fund or the determination of its net asset value, would not be reasonably practicable or would be seriously prejudicial to the non-redeeming Partners, (ii) during any breakdown in the means of communication normally employed in determining the price or value of the Fund’s assets or liabilities, or of current prices in any stock market, or when for any other reason the prices or values of any assets or liabilities of the Fund cannot reasonably be promptly and accurately ascertained, or (iii) during any period when the transfer of funds involved in the realization or acquisition of any investments cannot, in the opinion of the General Partner, acting reasonably, be effected at normal rates of exchange. In addition, the General Partner, by written notice to any Partner, may suspend payment of redemption proceeds to such Partner if the General Partner reasonably deems it necessary to do so to comply with anti-money laundering or anti-terrorism financing laws and regulations applicable to the Fund, the General Partner, the Investment Manager or their affiliates, subsidiaries or associates or any of the Fund’s other service providers.
ASSIGNABILITY OF PARTNER’S UNITS
A Partner may not assign, pledge, rehypothecate or transfer its Units in whole or in part, except by operation of law, nor substitute any other person as a Partner, without the prior written consent of the General Partner in its sole discretion. Notwithstanding the foregoing, the General Partner shall not unreasonably withhold consent from a Partner that seeks to assign, pledge, rehypothecate or transfer its Units toa transferee that is a wholly-owned subsidiary of the transferor Partner or the sole equity holder of such transferor Partner. The Partners have not been and will not be, granted the right to require the registration of the Units under the 1933 Act or any state securities laws and the Fund has no intention to so registering the Units.
REPORT TO PARTNERS
The auditors of the Fund (selected by the General Partner) will audit the Fund’s books and records as of the end of each fiscal year. Generally, within six weeks after each such audit date, the Fund prepares and makes available to its Partners, together with the report prepared by the Fund’s accountants, the Fund’s audited financial statements prepared in accordance with the U.S. generally accepted accounting principles (U.S. GAAP). At the end of each fiscal year, to the extent applicable, the Partners will be furnished certain tax information for the preparation of their tax returns. At the end of each month, the Fund prepares and distributes to each Partner an unaudited report setting forth, as of the end of such month, the net capital appreciation or net capital depreciation of the Fund for such month, such Partner’s capital account and such Partner’s Partnership Percentage. If the fund’s assets are under $100m at the end of the year and all income is obtained through the trading on the Interactive Broker’s account, then General Partner can, instead of auditing, prepare its own financial statements. If any Partner whose account is over $100,000 requires audited statements, then the General Partner will hire an auditor even if the fund’s assets are under $100,000,000.
VALUATION OF FUND ASSETS
The valuation of the Fund’s assets and liabilities is determined by the General Partner as of each Valuation Day. The valuation of the Fund’s assets and liabilities is determined as of 4:30 pm New York time on each Valuation Day. The General Partner may delegate certain responsibilities for making valuation determinations to its affiliates or to third parties, subject to the General Partner being responsible therefor. See the section “Administrator” above for further information.
All valuations will be calculated by reference to the prices appearing to the General Partner to be the latest available on the principal securities market for such securities at 4:30 pm New York time on the date of determination, provided that if the General Partner in its discretion considers that the prices ruling on an approved market other than the principal securities market provide in all the circumstances a fairer criterion of value in relation to any such investment, the General Partner may adopt such prices.
The assets and liabilities of the Fund at any date will be determined on the accrual basis of accounting utilizing U.S. GAAP as a guideline. If and whenever the quoted listed or available price of a security is a single price, such price will be taken as the mean between the lowest available market dealing offered price and the highest available market dealing bid price.
The value of any cash on hand or on deposit, bills, demand notes, accounts receivable, prepaid expenses, cash dividends, and interest declared or accrued and not yet received will be deemed to be the full amount thereof, unless the General Partner shall have determined that any such deposit, bill, demand note or account receivable is not worth the full amount thereof in which event the value thereof will be deemed to be such value as the General Partner shall deem to be the reasonable value thereof.
The Partnership Agreement provides further details on the valuation of other securities and investments. Valuation of assets not specifically described in the Partnership Agreement shall be as determined in the sole reasonable discretion of the General Partner.
The General Partner reserves the right to change the valuation methodology described in the Partnership Agreement to any other commercially reasonable methodology. Notwithstanding the foregoing, if in the reasonable judgment of the General Partner due to market, regulatory, or other factors, the valuation of any securities or other property pursuant to the rules above does not fairly represent its market value, it may require that such security be separately valued.
The General Partner may suspend the calculation of the Fund’s net asset value under the same circumstances as it may suspend the redemption of Units by Partners, even where the General Partner has chosen not to suspend redemption rights.
PURCHASES OF “NEW ISSUES”
From time to time the Fund may purchase equity securities in initial public offerings. Financial Industry Regulatory Authority (“FINRA”) Rule 5130, or any successor provision thereto (“Rule 5130”), covers all initial public offerings of public equity securities (“New Issues”) and provides a definition of persons that are restricted from participating in New Issues (“Restricted Persons”). Restricted Persons include FINRA members, other broker-dealers and their affiliates, certain personnel of broker-dealers, certain finders and fiduciaries and portfolio managers of certain entities and accounts, including collective investment accounts (which include hedge funds).
Rule 5130 permits a collective investment account (the “Account”), such as the Fund, that desires to purchase New Issues to segregate the interests of Restricted Persons from non-Restricted Persons so that Restricted Persons do not participate in New Issues purchased by the account. However, FINRA did not prescribe a particular manner for segregating such interests. The Fund may utilize such “carve-out” mechanisms as are necessary to comply with Rule 5130 to permit the Fund to participate in New Issues without allowing Restricted Persons to benefit therefrom. The Fund may charge interest to the Partners participating in New Issues and such interest will be credited to all of the Partners in the Fund in accordance with their capital accounts as of the beginning of the accounting period.
Rule 5130 contains a de minimis exemption to accommodate accounts with only a small percentage of Restricted Persons. This exemption will permit an account to purchase New Issues without employing the carve-out mechanisms described above if Restricted Persons, in the aggregate, own less than 10% of the account.
In addition, FINRA Rule 5131(b) restricts allocating shares of New Issues under certain conditions to any account in which an executive officer or director of a public company or a covered non-public company, or a person materially supported by such executive officer or director, has a beneficial interest. If the General Partner determines that a Partner is a covered person under FINRA Rule 5131(b), the General Partner may utilize mechanisms to exclude such Partner from participating in such New Issue.
The procedures and policies of the Fund regarding New Issues may be changed from time to time in the General Partner’s sole discretion, including based upon the General Partner’s evaluation of FINRA rules and relevant interpretations.
PUBLIC DISCLOSURE OF PARTNERS
None of the Fund, the General Partner, the Investment Manager or any of their respective affiliates, agents or representatives shall issue any press release or other public disclosure using the name of any Partner, such Partner’s direct and indirect equity holders or any of their affiliates, and will not otherwise disclose to a person who is not an affiliate or service provider for the Fund the identity of any Partner or any of their direct and indirect equity holders or affiliates (whether in connection with the Fund or otherwise) without obtaining such Partner’s prior consent. Nothing in the immediately preceding sentence shall prevent any disclosure of the name of the Partner or its affiliates (a) in any financial statements or reports distributed to the Partners or any side letter, or in any other communications with Partners to the extent that the General Partner reasonably determines such disclosure to be appropriate in connection with the Fund’s activities or (b) to the extent required by applicable laws, rules or regulations, including any money laundering or anti-terrorism laws, rules or regulations, or pursuant to a governmental request or (c) if required by a trading counterparty or service provider of the Fund as part of a know-your-client process, anti-money laundering process, or similar process, provided that such counterparty or service provider is subject to confidentiality obligations substantially similar to those set out in the Partnership Agreement. For the avoidance of doubt, the foregoing shall not prohibit the General Partner or the Fund from including a Partner’s name in any securities filing or other disclosure to any regulatory body.
The General Partner shall not (knowing it to be material non-public information) provide, and it shall cause its affiliates and its and their respective personnel, agents and representative not to provide, any material non-public information to any Partner about or relating to a publicly-traded company, or any other company with securities admitted to trading on a recognized investment exchange or traded on an over-the-counter market, unless it may do so without it, its affiliates and its and their respective personnel, agents and representative breaching any applicable laws, regulations or contracts and (i) the Partner requests such information or (ii) the Partner provides prior written consent to the receipt of such information.
AMENDMENTS TO PARTNERSHIP AGREEMENT
The Partnership Agreement may be modified or amended at any time and from time to time by the General Partner sending not less than 60 days’ prior written notice thereof to each Partner; provided, however, that without the specific written consent of a majority in interest of the affected Partners, no modification or amendment to the Partnership Agreement may (a) reduce the capital account of any Partner or its rights of allocation, contribution or redemption, (b) increase the amount paid to the Investment Manager or the General Partner or allocated to the Fee Reserve Partner (if not completely set off by an equal and opposite reduction in fees to another of these entities), or (c) amend the provisions of the Partnership Agreement relating to amendments or (d) amend the investment restrictions of the Fund, unless (i) the General Partner reasonably determines that amendments to the investment restrictions are reasonably necessary for the Fund to comply with the laws and regulations of countries where interests in the Fund are offered or sold. Furthermore, the General Partner shall not amend the investment restrictions to permit the Fund to invest in or hold securities of a corporation or other entity that has a governing body similar to a board of directors to which are attached more than thirty percent of the votes that may be cast to elect or remove the members of the board of directors, board of managers or similar governing body of such corporation or other entity (the “30% Rule”), without the specific written consent of each Partner that would incur negative tax, regulatory or other similar consequences if the Fund were to exceed the 30% Rule.
Notwithstanding the foregoing, the Partnership Agreement may be amended at any time solely upon the written consent of the General Partner for the purpose of: (a) reflecting new Partners; (b) changing the name of the Fund or the location of its office; (c) creating and admitting one or more additional classes or series of Partners or Units; (d) correcting ambiguities, inconsistencies or incompleteness in the Partnership Agreement; (e) conforming the Partnership Agreement and Fund operations to federal or state tax, legal, securities or other requirements or regulations, including amendments necessary to preserve the Fund’s qualification to be taxed as a partnership, to preserve the Fund’s eligibility to purchase New Issues and to prevent the Fund from in any manner being deemed an “investment company” subject to the provisions of the 1940 Act; (f) reflecting changes validly made in the membership of the Fund and the capital subscriptions and Units of the Partners; (g) making a change in any provision of the Partnership Agreement that requires any action to be taken by or on behalf of the General Partner or the Fund pursuant to applicable New York law if the provisions of applicable New York law are amended, modified or revoked so that the taking of such action is no longer required; and (h) effecting such other amendments as may be deemed by the General Partner to be necessary and/or desirable to conduct the Fund’s business and not adverse in any material respects to the interests of existing Partners.; provided, however, that, notwithstanding clauses (a) through (h), no such amendment or modification may materially adversely affect any Partner without such Partner’s prior written consent.
The General Partner generally has unlimited liability for Fund obligations to third parties not otherwise satisfied by the Fund. A Partner is not liable for Fund obligations except to the extent of its capital in the Fund in the fiscal year (or portion thereof) to which such debts and obligations are attributable. A Partner or former Partner shall not be obligated to make any additional contributions to the Fund, except that a Partner or former Partner shall be liable to the Fund for an amount not exceeding the aggregate amount of redeemed funds or received distributions to the extent required under the New York Revised Uniform Partnership Act, as amended from time to time.
TAX MINIMIZATION STRUCTURING AND INFORMATION
The General Partner shall, in cases it deems appropriate, obtain professional tax advice on behalf of the Fund prior to making an investment in a jurisdiction in which the Fund has not previously traded.
The Fund shall use reasonable best efforts not to knowingly make any investment in a non-U.S. jurisdiction that would cause any Partner, solely as a result of its status as a Partner in the Fund, to be required to pay income tax on a net basis in such non-U.S. jurisdiction or to be obligated to file an income tax return in such jurisdiction (other than any form or declaration required to establish the right to a benefit under an applicable tax treaty or an exemption from or reduced rate of withholding). If notwithstanding the foregoing, the General Partner receives any notification from a governmental, regulatory or tax authority or otherwise has actual knowledge that a Partner is required to file an income tax return in any jurisdiction in which the Fund has made an investment solely as a result of the Partner’s status as a partner in the Fund, the General Partner shall promptly inform such Partner and shall provide in a timely fashion to the Partner all necessary and reasonably available tax-related information required for the Partner to make such tax filing.
Furthermore, upon request by any Partner, the General Partner shall use commercially reasonable efforts to, at the Partner’s expense, furnish to the Partner any information reasonably necessary to enable the Partner to obtain any available tax refunds, exemptions from withholding, material benefits of any applicable tax treaties or similar relief with respect to any taxes imposed on the Partner as a result of the Fund’s activities or investments so long as complying with any such request for information in connection therewith is not unreasonably burdensome or adverse to the interests of the Fund.
Notwithstanding any provision to the contrary contained in the Partnership Agreement, the General Partner shall use reasonable efforts to cause the Fund not to engage in any transaction that, as of the date the Fund enters into a binding contract to engage in such transaction, would cause a Partner that is a “tax-exempt entity” (as defined in Code Section 4965(c)) to become a party (within the meaning of Section 4965(a) of the Code) to a “listed transaction” or a “prohibited reportable transaction” (each as defined in Code Section 4965(e)). If the General Partner reasonably determines that the Fund has engaged directly or indirectly in a transaction that is a listed transaction, a prohibited reportable transaction, or a “reportable transaction” as defined in Treasury Regulation § 1.6011-4(b)(1), it shall promptly notify each affected Partner of such determination and shall use its reasonable efforts to cooperate with the Partners so as to ensure, to the extent practicable, that Partners that do not wish to become a party to a listed transaction or a prohibited reportable transaction do not become or continue as such a party.
The Fund shall continue until the termination by the General Partner at any time on 90 days’ prior notice to each Partner or termination upon the bankruptcy, insolvency, dissolution or termination of status or withdrawal of the General Partner unless within 90 days of notice to the Partners of such an event the remaining Partners owning a majority in interest (exclusive of the General Partner and any Partners that affiliate) (measured by capital account value, not number of Units) agree to continue the Fund.
DEATH, DISABILITY, ETC. OF A PARTNER
In the event of the death, disability, adjudication of incompetency, termination, declaration of bankruptcy, insolvency or dissolution of a Partner, the legal representative of such Partner shall succeed as assignee to the Partner’s Units but shall not be admitted as a substitute Partner without the consent of the General Partner. In the event of the death, disability, incompetency, bankruptcy, insolvency or dissolution of a Partner, the Units of such Partner shall continue until the Dealing Day in respect of which formal notice of redemption is received by the General Partner.
BOOKS AND RECORDS
The General Partner agrees to make available to any Partner the Partnership Agreement and all amendments thereto and the financial and accounting records and supporting documents pertaining to the Fund that the General Partner maintains during the period the Partner is invested in the Fund and for a minimum of five (5) years thereafter. The foregoing sentence is subject to the Partner providing reasonable advance notice to the General Partner and paying any out of pocket expenses associated with such inspection. Furthermore, the General Partner in its reasonable discretion may restrict access by Partners to such records and supporting documents, in the event the General Partner determines such disclosure could have a material adverse effect on the Fund or any Partner, such as in the event a Partner requests disclosure of the non-public portfolio holdings of the Fund.
INVESTMENT MANAGEMENT AGREEMENT
The Fund has entered into an Investment Management Agreement with the Investment Manager to provide investment management and other services to the Fund. Terms of the Investment Management Agreement include the following:
TERM AND INDEMNIFICATION
The Investment Management Agreement will continue in effect until such time, if any, as (i) the Fund and the Investment Manager mutually agree to terminate the Investment Management Agreement or (ii) it is terminated unilaterally by the Fund upon not less than sixty (60) days’ written notice to the Investment Manager. The Investment Management Agreement recognizes that the Investment Manager and its affiliates, members, directors, officers, and employees may be associated with other investment entities and may engage in investment management for others.
Except to the extent necessary to perform its obligations under the Investment Management Agreement, the Investment Manager and the affiliates, members, directors, officers and employees thereof are not limited or restricted from engaging in or devoting time and attention to the management of any other business, whether of a similar or dissimilar nature or to rendering services of any kind to any other corporation, firm, individual or association.
The Fund will indemnify the Investment Manager and each member, director, officer and employee of the Investment Manager from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses (including legal fees) or disbursements of any kind or nature whatsoever (other than those resulting from their own fraud or dishonesty) which may be imposed on, incurred by or asserted against the Investment Manager or any member, director, officer or employee of the Investment Manager in performing (or assisting the Investment Manager in performing) its obligations or duties hereunder. Any payment to be made by the Fund for any such liabilities, obligations, etc., will be made on an “as incurred” basis, provided that any such payment will be repaid in full to the Fund if the recipient of such payment is found by a court of competent authority to have incurred such liabilities, obligations, etc., as a result of their own fraud or dishonesty.
DIRECTORS’ AND OTHER CONFLICTS OF INTEREST
The directors and/or officers of the General Partner, the Investment Manager, the Portfolio Manager, may be directors and/or officers of other Bytelogics Inc funds or entities. Directors are expected to act in the best interest of the Bytelogics Inc’s fund or entity when undertaking their director duties relative to that Bytelogics Inc’s fund or entity, to disclose any conflicts and to recuse themselves from decisions when the conflict warrants.
Bytelogics and its directors, officers and shareholders are involved in other financial investment and management activities, including managing and advising Bytelogics’ and other clients, dealing in securities in which the Fund may invest for Bytelogics’ own account and on behalf of others and providing seed capital to one or more Bytelogic’ funds.
Bytelogics has a Managing Conflicts of Interest Policy. Policies and procedures established by Bytelogics to prevent or manage conflicts, such as the Managing Conflicts of Interest Policy, Allocation Policy, Crossing Policy, and Personal Account Trading Policy, may not be sufficient to ensure, with reasonable confidence, that the risk of damage to the interests of one or more Bytelogics funds will be eliminated.
Bytelogics employees may have relationships with employees of investors in Bytelogics funds, employees of companies in which the Bytelogics funds invest or other individuals whose interests conflict with those of the Fund. Such an employee’s relationship could influence the employee’s decision-making at the expense of the Fund’s interests. The Bytelogics Managing Conflicts of Interest Policy requires employees to report all potential conflicts. These are reviewed by the members of the Bytelogics compliance team which, when it is considered necessary, implements controls to mitigate the risk.
Bytelogics employees may be exposed to the Bytelogics Fund’s investment information while also being able to trade through personal accounts. There is a risk that, if an employee could place a trade of sufficient size, this would adversely affect the price at which the Fund transacts. Bytelogics has implemented a Personal Account Trading Policy which requires that employee trading in relevant securities must be pre-approved.
Investments in the Fund by Bytelogics related parties or by other clients could create an incentive for Bytelogics to favor one Bytelogics fund or clients over others. On any given Dealing Day, Bytelogics related parties may be subscribing for or redeeming interests in the Fund or may cause another Bytelogics fund to subscribe or redeem shares of that fund. In so doing, the related party may have access to information pertaining to the Fund or its Partners not available to all Partners, which could result in an advantage for those parties. Such transactions may offset all or some of the subscriptions or redemptions to the Fund by unrelated parties on that day. All such transactions are made at the prevailing Net Asset Value per Unit of the relevant Fund.
The Fund’s Management Fee may be different from the fee applicable to other Bytelogics funds. One Bytelogics entity may receive payments from another Bytelogics entity for services related to the distribution of one or more Bytelogics funds or financial products offered by the Sub-Portfolio Manager and/or its affiliates. These activities may on occasion create a conflict of interest between Bytelogics’ management of the Fund and other Bytelogics funds and other roles undertaken by members of Bytelogics, including an incentive to favor one Bytelogics fund or client over another. Each member of Bytelogics will use reasonable efforts to ensure that in undertaking its various duties, any conflicts that arise will be resolved fairly and in the interests of each fund, to the extent it is practical to do so while having regard to its other obligations, including those to other Bytelogics funds and clients. Bytelogics follows policies and procedures designed to ensure that conflicts are managed in a manner fair to all parties to whom duties are owed. However, situations may arise where those policies and procedures are not sufficient to prevent actions adverse to the interests of one or more Funds.
From time to time, the Fund may, in the ordinary course of business, invest in (i) securities issued by investors in the Fund or other Bytelogics Funds or securities of issuers that are managed, advised or controlled by Bytelogics or (ii) other funds that invest in securities of issuers that are managed, advised or controlled by Bytelogics. From time to time, securities of or being dealt in by the members of Bytelogics or their clients (each a “Connected Party”) may, in the ordinary course of business, be purchased or sold by another Connected Party.
Bytelogics has certain responsibilities with respect to valuing securities (see “Partnership Agreement – Valuation of Fund Assets”). A conflict may arise with respect to this responsibility given the Management Fee to be earned by the Investment Manager is based on such valuations.
On any issue involving a conflict of interest, the General Partner will be guided by its good faith judgment as to the best interests of the Fund and shall take such actions as are determined by the General Partner to be reasonably necessary or appropriate to eliminate, mitigate, or otherwise address such conflict of interest.
The foregoing does not necessarily constitute a comprehensive list of all potential conflicts of interest.
CERTAIN RISK FACTORS
The Fund may be deemed to be a speculative investment and is not intended as a complete investment program. The Fund is designed only for sophisticated persons who are able to bear the risk of an investment in the Fund. The following does not purport to be a summary of all of the risks associated with an investment in the Fund. Rather, the following describes certain specific risks to which the Fund (and, therefore, the Partners) is subject and with respect to which the General Partner and the Investment Manager strongly encourages potential investors to carefully consider and to consult regarding the same with their professional advisors, as they deem necessary.
As part of our investment process, we consider tax impacts to the Fund in our investment case for a particular investment. However, we do not actively undertake any specific steps designed to maximize any particular outcome in respect of tax matters. We make no assurance that optimal tax treatment will be achieved in any particular circumstance.
MARKET AND INVESTMENT RISKS
INVESTMENT AND TRADING RISKS
An investment in the Fund involves a high degree of risk, including the risk that the entire amount invested may be lost. No guarantee or representation is made that the Fund’s investment program will be successful. The Investment Manager will be investing substantially all of the Fund’s assets in securities, some of which may be particularly sensitive to economic, market, industry and other variable conditions. No assurance can be given as to when or whether adverse events might occur that could cause immediate and significant losses to the Fund. In particular, since the fund uses leverage and allocates 50% of the risk in SP500 and 50% risk in US 10 year treasuries if the interest rates rise and the stock market falls at the same time, the losses will be magnified.
Derivative instruments, or “derivatives,” include futures, options, swaps, structured securities and other instruments and contracts that are derived from, or the value of which is related to, one or more underlying securities, financial benchmarks, currencies or indices. Derivatives allow an investor to hedge or speculate upon the price movements of a particular security, financial benchmark, currency or index at a fraction of the cost of investing in the underlying asset.
The value of a derivative depends largely upon price movements in the underlying asset. Therefore, many of the risks applicable to trading the underlying asset are also applicable to derivatives of such assets. However, there are a number of other risks associated with derivatives trading. For example, because many derivatives are leveraged and thus provide significantly more market exposure than the money paid or deposited when the transaction is entered into, a relatively small adverse market movement may expose the Fund to the possibility of a loss exceeding the original amount invested.
Derivatives may also expose investors to liquidity risk, as there may not be a liquid market within which to close or dispose of outstanding derivatives contracts. Swaps and certain options and other custom instruments are subject to the risk of non-performance by the swap counterparty, including risks relating to the creditworthiness of the swap counterparty.
Futures positions may be illiquid because certain commodity exchanges limit fluctuations in certain futures contract prices during a single day by regulations referred to as “daily price fluctuation limits” or “daily limits.” Under such daily limits, during a single trading day, no trades may be executed at prices beyond the daily limits. Once the price of a contract for a particular future has increased or decreased by an amount equal to the daily limit, positions in the future can neither be taken nor liquidated unless traders are willing to effect trades at or within the limit. This could prevent the Fund from promptly liquidating unfavorable positions and subject the Fund to substantial losses.
The fund only trades on the SP500 and 10 Year Treasury futures, they are generally very liquid futures instruments. Furthermore, the fund limits the daily margin on the futures positions to 5% of the fund’s capital. Futures also limit the counterparty risk by requiring daily settlement of any profit and loss, but with a leveraged position, Fund may be required to close Futures positions on a do stay within the 5% margin limit, which would increase the transaction costs.
MONEY MARKET INSTRUMENTS
The Investment Manager may invest, for defensive purposes or otherwise, a portion of the Fund’s assets in high-quality fixed-income securities, money market instruments, and foreign money market mutual funds, or hold cash or cash equivalents in such amounts as the Investment Manager deems appropriate under the circumstances.
Money market instruments are high quality, short-term fixed-income obligations, which generally have remaining maturities of one year or less and may include U.S. Government securities, commercial paper, repurchase agreements, certificates of deposit and bankers’ acceptances issued by domestic branches of U.S. banks that are members of the Federal Deposit Insurance Corporation. However, there can be no assurances that such investments will not be subject to significant risks.
The fund invests in SP500 and Treasuries, which are quite broad-based instruments.
Such strategy may expose the Fund to losses disproportionate to those incurred by the market in general if the areas in which the Fund’s investments are concentrated are disproportionately adversely affected by price movements, such as when small-cap stocks significantly outperform, or when yield curve moves in a way that causes losses to 10 Year Treasuries but gains in other maturities.
GENERAL ECONOMIC AND MARKET CONDITIONS
The success of the Fund’s activities will be affected by general economic and market conditions, such as interest rates, availability of credit, credit defaults, inflation rates, economic uncertainty, changes in laws (including laws relating to taxation of the Fund’s investments), trade barriers, currency exchange controls and national and international political circumstances (including wars, terrorist acts or security operations). These factors may affect, among other things, the level and volatility of securities’ prices, the liquidity of the Fund’s investments and the availability of certain securities and investments. Volatility or illiquidity could impair the Fund’s profitability or result in losses.
The Fund may maintain substantial trading positions that can be materially adversely affected by the level of volatility in the financial markets — the larger the positions, the greater the potential for loss.
RISKS ASSOCIATED WITH THE FUND
DEPENDENCE ON KEY PERSONNEL
The success of the Fund will depend upon the ability of the personnel of the Investment Manager to maintain investment strategies that achieve the Fund’s investment objectives. The past performance of the Investment Manager and its affiliates and the funds it manages are no guarantee of future performance.
LIMITATIONS ON PARTNER REDEMPTIONS AND TRANSFERS
As set forth in the Partnership Agreement, a Partner may have restrictions on its ability to redeem all or any portion of its capital account from the Fund. Further, there can be no assurance that the Fund will be able to liquidate investments at the time of such redemption requests at favorable prices.
In addition, transfers of Units will be permitted only at the discretion of the General Partner. Accordingly, Units should only be acquired by investors willing and able to commit their funds for an appreciable period of time.
A PARTNER MAY BE REQUIRED TO REDEEM ITS CAPITAL
Under the Partnership Agreement, the General Partner may, at its sole discretion at any time, require any Partner to redeem all or a portion of such Partner’s capital from the Fund upon prior written notice. Such mandatory redemption may create adverse tax and/or economic consequences to the Partner depending on the timing thereof.
PARTNERS DO NOT PARTICIPATE IN MANAGEMENT
Partners do not participate in the management of the Fund or in the conduct of its business. Moreover, Partners have no right to influence the management of the Fund, whether by voting or otherwise.
LIABILITY OF A PARTNER FOR THE RETURN OF CAPITAL CONTRIBUTIONS
If the Fund should become insolvent, the Partners may be required to return, with interest, any property distributed that represented a return of capital, repay any distributions wrongfully made to them and forfeit any undistributed profits.
The Fund typically expects to distribute cash to a Partner upon a redemption request. However, redemption proceeds to Partners may be paid in cash or in-kind (or in a combination thereof), at the General Partner’s sole discretion, subject to the paragraph below. Should the Partner receive an in-kind distribution, the risk of loss and delay in liquidating the securities received will be borne by the Partner, with the result that such Partner may receive less cash than it would have received as of the redemption date.
In the event redemption proceeds are to be paid in kind to a Partner, the Partner may direct that such proceeds be paid in kind to a transition manager on its behalf, and the General Partner shall pay those redemption proceeds in kind to such transition manager unless the General Partner reasonably determines that paying the proceeds to the transition manager instead of the Partner would disadvantage the other Partners. In connection with such payment, there will be no Substantial Cash Transaction Levy or other amounts charged to the Partner other than reasonable out-of-pocket expenses of the Fund related to the payment of such proceeds in kind to the transition manager.
Furthermore, in the event the General Partner pays redemption proceeds in kind, the General Partner shall not distribute to such redeeming Partner more illiquid securities than its pro-rata share of illiquid securities held by the Fund, unless specifically requested by such redeeming Partner.
The Fund relies extensively on computer programs and systems to trade, clear and settle the Fund’s securities transactions, to evaluate securities based on real-time trading information, to monitor net capital and to generate risk management and other reports that are critical to oversight of the Fund’s activities. In addition, certain of the Fund’s operations interface with or depend on systems operated by third parties, including the Fund’s market counterparties. A defect or failure in any of these systems could have a material adverse effect on the Fund.
In the event that there are substantial redemptions from the Fund, it could be more difficult for the Fund to generate the same level of profits operating on a smaller capital base. A substantial redemption may occur, among other ways, if another pooled investment vehicle managed by the Investment Manager or one of its affiliates invested in the Fund reallocates a portion of its capital in the Fund to another investment vehicle. In the event that there are substantial redemptions on any date from the Fund, the Investment Manager might be required to liquidate positions at an inappropriate time or on unfavorable terms in order to provide sufficient funds to pay redemptions from the Fund.
The use of brokerage commissions to obtain research related products and services creates a conflict of interest between the Investment Manager and the Fund. This may result in the Fund paying higher brokerage commissions than might be paid if transactions were effected through brokers that do not provide such services. To the extent that the Investment Manager is able to acquire these products and services without expending its own resources or at reduced prices, the Investment Manager’s use of soft dollars would tend to increase its profitability. In addition, the availability of these non-monetary benefits may influence the Investment Manager to select one broker rather than another to perform services for the Fund. It is anticipated that any use of soft dollars to pay for research products or services will fall within the safe harbor created by Section 28(e) of the Securities Exchange Act of 1934, as amended. See “Trade Allocations and Brokerage Commissions.”
Valuation of the Fund’s securities and other investments may involve uncertainties and judgmental determinations and if such valuation should prove to be incorrect, the net asset value of the Fund could be adversely affected. In the event a valuation of a financial instrument is not readily available from any financial institution or pricing service, such financial instruments will be assigned a value by the General Partner and accounted for by the Administrator.
Valuation determinations made by the General Partner will be conclusive and binding and may affect the amount of the Management Fee. In general, the instruments that the Fund trades are the most liquid instruments, but even then, there could be a bad price at the close of the market.
FEDERAL INCOME TAX RISKS
The Fund has not requested a ruling from the IRS or an opinion of legal counsel as to any tax matters, including whether the Fund will be treated as a partnership (and not as an association taxable as a corporation) for U.S. federal income tax purposes. If the Fund were to be treated as a corporation rather than as a partnership for U.S. federal income tax purposes, among other things (i) the Fund itself would be taxed on its taxable income at corporate tax rates, (ii) Fund distributions generally would be taxable as dividends and (iii) distributions to Non-U.S. Partners would be subject to withholding tax. Under present laws and regulations and judicial interpretations thereof, the General Partner believes the Fund would be classified and treated as a partnership for U.S. federal income tax purposes and not as an association taxable as a corporation. See “Certain U.S. Federal Income Tax Considerations.”
The Fund has not requested a ruling from the IRS or an opinion of legal counsel as to any tax matters, including whether the Fund will be treated as a partnership (and not as an association taxable as a corporation) for U.S. federal income tax purposes. If the Fund were to be treated as a corporation rather than as a partnership for U.S. federal income tax purposes, among other things (i) the Fund itself would be taxed on its taxable income at corporate tax rates, (ii) Fund distributions generally would be taxable as dividends and (iii) distributions to Non-U.S. Partners would be subject to withholding tax. Under present laws and regulations and judicial interpretations thereof, the General Partner believes the Fund would be classified and treated as a partnership for U.S. federal income tax purposes and not as an association taxable as a corporation. See “Certain U.S. Federal Income Tax Considerations.”
Investors that are exempt from taxation (or that are entities composed primarily of tax-exempt U.S. persons) may be subject to U.S. federal, state and local laws, rules and regulations, which may regulate their participation in the Fund or they’re engaging directly or indirectly through an investment in the Fund in investment strategies of the types which the Fund may utilize from time to time. Each type of exempt organization may be subject to different laws, rules and regulations and prospective investors should consult with their own advisors as to the permissibility, advisability and tax consequences of an investment in the Fund. See “Certain U.S. Federal Income Tax Considerations.”
AUDIT ADJUSTMENT RISK
Pursuant to the Bipartisan Budget Act of 2015, if the IRS makes audit adjustments to the Fund’s income tax returns for tax years beginning after 2017, it may collect any resulting taxes (including any applicable penalties and interest) directly from the Fund. The Fund generally should have the ability to shift any such tax liability to the Partners in accordance with their interests in the Fund during the year under audit, but there can be no assurance that such an election will be available or effective in all circumstances. If the Fund is required to make payments of taxes, penalties or interest as a result of audit adjustments, the amount of cash available for distribution to Partners might be substantially reduced. See “Certain U.S. Federal Income Tax Considerations.”
BENEFIT PLAN REGULATORY RISKS
If 25% or more of any class of the Units are owned, directly or indirectly, by an “employee benefit plan” (as defined in Section 3(3) of the U.S. Employee Retirement Income Security Act of 1974, as amended (“ERISA”)) that is subject to Title I of ERISA, a “plan” subject to Section 4975 of the Code, or any entity whose assets are treated as assets of any such plan (each, an “ERISA Plan”), the assets of the Fund will be deemed to be plan assets subject to ERISA and Section 4975 of the Code. If this happens, transactions involving the assets of the Fund could be subject to the fiduciary responsibilities of ERISA and to the prohibited transactions provisions of Section 4975 of the Code, and, in certain instances, the fiduciary of an ERISA Plan which is responsible for the ERISA Plan’s investment in the Units could be liable for any ERISA violations by the General Partner or the Investment Manager. See “Certain ERISA Considerations.”
FEE PAYABLE TO THE INVESTMENT MANAGER
The Investment Manager will receive a fee from the Fund that will be based, in part, on unrealized investment gains that may never be realized in the event of adverse changes in the value of such investments. Such compensation arrangement may create an incentive for the Investment Manager to make investments that are riskier or more speculative than would be the case if such were not in effect and that such risk-taking may place the interests of the Investment Manager in conflict with the interests of the Partners. Valuation determinations made by the Investment Manager, which will be conclusive and binding, may affect the amount of the fee.
ABSENCE OF CERTAIN STATUTORY PROTECTIONS
The Fund will not be registered as an investment company under the Investment Company Act of 1940, as amended (the “1940 Act”), in reliance upon certain exemptions from such registration requirements. Accordingly, the Fund will not be subject to the various statutory and SEC regulatory requirements applicable to registered investment companies. For example, the Fund is not required to maintain custody of its securities or place its securities in the custody of a bank or a member of a U.S. securities exchange in the manner required of registered investment companies under rules promulgated by the SEC. None of the General Partner, the Investment Manager, is currently registered in the U.S. with the SEC or any other state regulatory agency as an investment adviser under the Investment Advisers Act of 1940, as amended, or any state laws or regulations. Bytelogics was registered as NY State Advisor in 2014 and will re-register either as state or federal advisor once the amount in the fund exceeds the exemption threshold.
Under certain circumstances, the Fund may find it necessary to establish a reserve for contingent liabilities or withhold a portion of the Partner’s proceeds at the time of redemption. If the reserve is subsequently determined to have been excessive, such excess amount shall be returned to the net assets of the Fund, but the amount paid upon a prior redemption will not be adjusted. Conversely, if the reserve is subsequently determined to have been insufficient, the net assets of the Fund will be used to pay such amounts and the Fund shall have no right to recover any excess redemption proceeds from a Partner.
THE FOREGOING RISK FACTORS DO NOT PURPORT TO BE A COMPLETE EXPLANATION OF ALL OF THE RISKS INVOLVED IN THE OFFERING. POTENTIAL INVESTORS SHOULD READ THIS PRIVATE PLACEMENT MEMORANDUM IN ITS ENTIRETY BEFORE DETERMINING WHETHER TO SUBSCRIBE FOR UNITS. CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of certain U.S. federal income tax consequences of the acquisition, ownership, and disposition of Units by a Partner that is a U.S. tax-exempt organization or a Non-U.S. Person (as defined below). The discussion does not take into account any considerations that may relate to special classes of taxpayers, including, among others, U.S. taxable investors, dealers in securities (or other persons not holding Units as capital assets or that have elected mark-to-market treatment), investors receiving Units as compensation, banks or other financial institutions, insurance companies, regulated investment companies, real estate investment trusts, S corporations, investors that are subject to the alternative minimum tax or the net investment income tax, investors that hold, directly or indirectly, a ten percent (10%) or greater interest in any entity in which the Fund holds a direct or indirect interest, investors whose functional currency is not the U.S. dollar, investors who hold Units as part of a straddle, hedge, conversion or other integrated transaction, investors classified as partnerships or other pass-through entities for U.S. federal income tax purposes (or persons holding indirect interests in the Fund through such investors), governments or agencies or instrumentalities thereof. This discussion also does not take into account any considerations that may be relevant to investors acquiring Units other than pursuant to the offering described in this Private Placement Memorandum.
The summary is based on the tax laws of the United States, including the Code, its legislative history, existing and proposed regulations thereunder, published rulings and court decisions, all as currently in effect and all subject to change at any time, possibly with retroactive effect. The Fund has not applied for or obtained a ruling from the IRS as to any tax matters, nor has it obtained any opinions of counsel with respect to any U.S. federal tax issue, including whether it will be classified as a partnership for U.S. federal income tax purposes.
The Fund will furnish each Partner with the necessary information for inclusion in their U.S. federal tax returns. It will be each Partner’s responsibility to prepare and file all appropriate tax returns which may be required to file as a result of its participation in the Fund. The General Partner and the Fund assume no responsibility for the tax consequences of a Partner’s investment.
The discussion below is not intended to constitute tax advice or to be a complete description of the tax effects of investing in the Fund. It is provided solely as a partial illustration of certain tax matters and issues which may arise as a result of an investment in the Fund. No attempt has been made to ensure that all applicable interpretations or applicable provisions are described herein, or to provide any evaluation of the likelihood or effect of any of the concerns described below. This summary does not discuss all aspects of U.S. federal income taxation that may be relevant to a particular Partner in light of its personal investment circumstances or to certain types of Partners subject to special treatment under the Code. This summary also does not discuss any aspects of state, local, foreign or non-income tax laws that may be applicable to a Partner. Accordingly, a prospective Partner is urged to consult its own tax advisor regarding an investment in the Fund. On December 22, 2017, the President of the United States signed into law new tax reform legislation (H.R. 1) (the “Tax Reform Act”), which makes significant changes to the United States income tax rules applicable to both individuals and entities, including partnerships. There is still uncertainty as to the impact of this legislation on the Fund or an investment in the Fund. Partners are urged to consult with their tax advisors with respect to the impact of the Tax Reform Act and any other regulatory or administrative developments and proposals and their potential effect on an investment in the Fund.
The Fund has been formed under the New York Consolidated Laws, Partnership Law and has been structured to qualify for U.S. federal income tax purposes as a partnership, and not as an association or “publicly traded partnership” taxable as a corporation. The General Partner shall use its reasonable best efforts to ensure that the Fund is classified at all times as a partnership for U.S. federal tax purposes.
An entity that would otherwise be classified as a partnership for U.S. federal income tax purposes will nonetheless be classified as an association taxable as a corporation if it is a publicly-traded partnership. A publicly traded partnership is any partnership in which the interests or Units are traded on an established securities market or which are readily tradable on a secondary market (or the substantial equivalent thereof). Units in the Fund will not be traded on an established securities market. Regulations concerning the classification of partnerships as publicly traded partnerships provide certain safe harbors under which interests or Units in a partnership will not be considered readily tradable on a secondary market (or the substantial equivalent thereof). The Fund will not qualify for one of the safe harbors under the Regulations if the Fund has more than 100 partners. The Fund expects that it will have fewer than 100 partners. However, even if interests or Units were treated as readily tradable on a secondary market (or the substantial equivalent thereof), the Fund may, in any event, be exempt from classification as a publicly traded partnership taxable as a corporation under an exemption that would apply if 90% or more of its gross income consisted of passive-type “qualifying income” generally including, among other categories, dividends, interest, gains from the disposition of capital assets held for the production of dividends or interest, and, under certain circumstances, income and gains from commodities or futures. If it were determined that the Fund should be treated as an association or a publicly traded partnership taxable as a corporation for U.S. federal income tax purposes, among other things: (i) the taxable income of the Fund would be subject to corporate income tax when recognized by the Fund; (ii) distributions of such income (other than with respect to certain redemptions or other reductions of a Partner’s Unit holdings in the Fund) would be treated as dividend income when received by the Partners to the extent of the current or accumulated earnings and profits of the Fund (as determined for U.S. federal income tax purposes); and (iii) the gross amount of any such dividends payable to Partners who were Non-U.S. Persons would be subject to withholding tax at a rate of 30% (or such lower rate as may apply under an applicable tax treaty).
An organization that is classified as a partnership for U.S. federal income tax purposes is not itself subject to U.S. federal income tax, although it must file an annual information return. The treatment of an entity as a partnership for U.S. federal income tax purposes may not be determinative of its treatment for a certain state, local or non-U.S. tax purposes. The remainder of this discussion assumes that the Fund will be treated as a partnership for U.S. federal income tax purposes.
TAXATION OF PARTNERS ON PROFITS AND LOSSES
The Fund, as an entity (assuming that it is treated as a partnership for U.S. federal income tax purposes), is a “pass-through” entity and is not subject to any U.S. federal income tax. As a result, each Partner, in computing its own U.S. federal income tax liability for a taxable year, is required to take into account its allocable share of all items of income, gain, loss, deduction or credit from the Fund, regardless of whether such Partner has received any distributions from the Fund. Each item generally will have the same character (e.g., as capital gain or ordinary income) and source (e.g. as U.S. or foreign) to a Partner as though the Partner realized the item directly. Under the Partnership Agreement, the General Partner has the discretion to specially allocate an amount of the Fund’s ordinary income and/or capital gain (including short-term capital gain) and ordinary loss and/or capital loss (including long term capital loss) for U.S. federal income tax purposes to a redeeming Partner to the extent that the Partner’s capital account exceeds, or is less than, as the case may be, its U.S. federal income tax basis. If the allocations provided by the Partnership Agreement (either regular or special allocations) are not accepted by the IRS for U.S. federal income tax purposes, the amount of income or loss, if any, allocated to any Partner for U.S. federal income tax purposes may be increased or reduced.
ADJUSTED TAX BASIS OF INTERESTS
A Partner may not deduct its allocable share of the Fund’s losses to the extent it exceeds the amount of its adjusted tax basis. Generally, the adjusted tax basis equals the amount paid by a Partner reduced (but not below zero) by the Partner’s allocable share of cash distributions from the Fund, losses, charitable contributions and foreign taxes incurred by the Fund, and increased by its share of the Fund’s income and indebtedness.
The General Partner may, in its sole and absolute discretion, make any or all elections which the General Partner is entitled to make on behalf of the Fund and the Partners for U.S. federal, state and local tax purposes, including without limitation, an election pursuant to Section 754 of the Code.
U.S. TAX-EXEMPT INVESTORS
UBTI. Income recognized by tax-exempt entities is generally exempt from U.S. federal income tax, except to the extent it constitutes unrelated business taxable income (“UBTI”). Additionally, a charitable remainder trust that has UBTI is subject to an excise tax equal to 100% of that income. UBTI can arise from a trade or business regularly carried on by the entity, directly or through a partnership, which is unrelated to its exempt purpose, and can also arise from the entity holding certain debt-financed property, the use of which is unrelated to the entity’s exempt purpose. The income of the Fund is expected to consist primarily of dividends and gains from the sale of investments in U.S. corporations, and, except as noted above under “Investment Restrictions—Borrowing”, the Fund does not intend to borrow money or acquire property subject to indebtedness. Accordingly, it is not anticipated that a tax-exempt entity investing in the Fund will receive material amounts of UBTI (if any) as a consequence of its investment unless the exempt entity has itself incurred borrowings to finance its investment in the Fund.
Private foundations and their managers are subject to excise taxes if they invest “any amount in such a manner as to jeopardize the carrying out of any of the foundation’s exempt purposes”. This rule requires a foundation manager, in making an investment, to exercise “ordinary business care and prudence” under the facts and circumstances prevailing at the time of making the investment, in providing for the short-term and long-term needs of the foundation to carry out its exempt purposes. The factors that a foundation manager may take into account in assessing an investment include the expected rate of return (both income and capital appreciation), the risks of rising and falling price levels, and the need for diversification within the foundation’s portfolio. In addition, in order to avoid the imposition of another excise tax, a private foundation may be required to distribute on an annual basis its “distributable amount”, which includes, among other things, the private foundation’s “minimum investment return”. A private foundation’s “minimum investment return” for this purpose is defined as 5% of the excess of the fair market value of the foundation’s non-functionally related assets (generally, assets not used or held for use in carrying out the foundation’s exempt purposes), over certain indebtedness incurred by the foundation in connection with those assets. A private foundation’s investment in the Fund will likely be treated as a non-functionally related asset for this purpose, which could result in cash flow problems for the foundation, since under these rules the foundation may be required to make annual distributions in an amount determined in part by reference to any unrealized appreciation in the value of its interest in the Fund. However, this should not be a material issue if the value of the private foundation’s investment in the Fund is not significant in relation to the value of other assets held by the foundation.
In some instances, an investment in the Fund by a private foundation may be restricted or prohibited by the “excess business holdings” provisions of the Code. For example, a private foundation may be considered to have “excess business holdings” to the extent it acquires (directly or together with certain “disqualified persons”) more than 20% of the capital or profits interest of the Fund. If this occurs, the foundation may be required to divest itself of all or a portion of its Units in the Fund in order to avoid the imposition of an excise tax. No excise tax will apply in these circumstances if at least 95% of the Fund’s gross income is considered to be from passive sources for U.S. federal income tax purposes. However, there can be no assurance that the Fund will meet this 95% gross income test.
A substantial percentage of investments of certain “private operating foundations” may be restricted to assets directly devoted to their tax-exempt purpose. Otherwise, generally, rules similar to those discussed above govern their operations.
QUALIFIED RETIREMENT PLANS
In general, investment in the Fund by employee benefit plans subject to the provisions of ERISA may be limited. Prospective investors who are (i) employee benefit plans subject to ERISA or comparable rules, (ii) Individual Retirement Accounts or (iii) Keogh Plans, are urged to consult their advisers as to whether they may invest in the Fund, and the possible implications of any such investment, and to refer to “Certain ERISA Considerations” below.
Investment managers of endowment funds should consider whether the acquisition of Units is legally permissible. This is not a matter of federal law, but rather is determined under state statutes. It should be noted, however, that under the Uniform Management of Institutional Funds Act, which has been adopted, in various forms, by a large number of states, participation in investment partnerships or similar organizations (such as the Fund), in which funds are commingled and investment determinations are made by persons other than the governing board of the endowment fund, is generally permitted.
For purposes of this discussion, a “Non-U.S. Partner” is a Partner who is a Non-U.S. Person. A “Non-U.S. Person” means any corporation, partnership, individual or estate or trust that, for U.S. federal income tax purposes, is (i) a foreign corporation, (ii) a foreign partnership all of whose partners are Non-U.S. persons, (iii) a non-resident alien individual or (iv) a foreign estate or trust all of whose beneficiaries are Non-U.S. persons. Special rules may apply to a Non-U.S. Partner that is, for U.S. federal income tax purposes, a controlled foreign corporation, a passive foreign investment company, a corporation that accumulates earnings to avoid U.S. federal income tax or an individual who is a U.S. expatriate and therefore subject to special treatment under the Code. Non-U.S. Partners should consult their own tax advisors to determine the U.S. federal, state, local and other tax consequences that may be relevant to them.
A foreign person considering acquiring Units should consult his or its own tax advisers as to the U.S. federal, state and local tax consequences of an investment in the Fund, as well as with respect to the treatment of income or gain received from the Fund under the laws of his or its country of citizenship, residence or incorporation. The previous general discussion of the taxation of Partners may not be applicable to foreign investors. The U.S. federal income tax treatment of a foreign investor in the Fund will depend on whether that investor is found, for U.S. federal income tax purposes, to be engaged in a trade or business in the United States as a result of its investment in the Fund. Generally, a Partner would be deemed to be engaged in a trade or business in the United States and would be required to file a U.S. federal tax return (and possibly one or more state or local returns) if the Fund is so engaged.
EFFECTIVELY CONNECTED INCOME
As long as the Fund’s principal activity is investing and/or trading in stocks, securities and commodities for its own account and it is not a dealer in these items, a “safe harbor” would apply that would exempt foreign persons owning Units from being treated as engaged in a United States trade or business as a result of the Fund’s stocks, securities, and commodities trading activity, even if that activity otherwise constitutes a U.S. trade or business, provided that the foreign persons are not themselves dealers in stocks, securities or commodities. Accordingly, such foreign persons owning Units in the Fund should be eligible for the safe harbor and would be exempt from U.S. federal net taxation on the Fund’s activities that fall within the safe harbor (other than for gains on certain securities reflecting interests in United States real property). The Fund expects that it will not be engaged in a U.S. trade or business for U.S. federal income tax purposes. However, if the Fund were to be treated as so engaged in any year, then a Non-U.S. Partner generally would be (i) subject to withholding by the Fund on the Non-U.S. Partner’s distributive share of the Fund’s income effectively connected with the U.S. trade or business, (ii) required to file a U.S. federal income tax return for such year reporting its allocable share, if any, of income or loss effectively connected with the trade or business and (iii) required to pay U.S. federal income tax at regular U.S. federal income tax rates on any such income. Any amounts withheld by the Fund or transferee pursuant to the above rules would be creditable against the Non-U.S. Partner’s U.S. federal income tax liability, and the Non-U.S. Partner could claim a refund to the extent that the amount withheld exceeded the Non-U.S. Partner’s U.S. federal income tax liability for the taxable year. Additionally, gain or loss from the sale or exchange of Units on or after November 27, 2017, will be considered to be effectively connected with a U.S. trade or business to the extent that the transferor would have had effectively connected gain or loss had the Fund sold all of its assets at fair market value as at the date of sale or exchange. For sales or exchanges that take place on or after January 1, 2018, any such gain may also be subject to withholding by the transferee at a rate of 10%.
Moreover, a Non-U.S. Partner that is a corporation for U.S. federal income tax purposes might be subject to a U.S. branch profits tax on its allocable share of the Fund’s effectively connected income. In addition, if the Fund were treated as engaged in a U.S. trade or business for U.S. federal income tax purposes, Non-U.S. Partners would also be viewed as so engaged, and as maintaining an office or other fixed places of business in the United States. As a consequence, a certain other income of a Non-U.S. Partner could be treated as effectively connected income as a result of the Non-U.S. Partner’s investment in the Fund.
In general, assuming the Fund is not engaged in a U.S. trade or business (which the Fund expects to be the case), neither the Fund nor any Non-U.S. Partners who are not themselves engaged in a U.S. trade or business, will be subject to any U.S. tax with respect to gains from the sale of equity securities held for investment (other than from the sale of equity securities of U.S. real property holding corporations, as discussed below under “Non-U.S. Partners – U.S. Real Property Income”). However, a non-resident individuals present in the United States for 183 or more days in the taxable year of the sale would be taxed by the United States on any such gain if either (i) such individual’s tax home for U.S. federal income tax purposes was in the United States or (ii) the gain was attributable to an office or other fixed places of business maintained in the United States by such individual. If a foreign individual owns Units at the time of his death, the foreign individual’s Units in the Fund or its assets may be subject to U.S. estate taxation unless provided otherwise by the applicable treaty. The identity of a Non-U.S. Partner may be disclosed on the Partnership’s U.S. federal tax return.
U.S. SOURCE DIVIDENDS AND INTEREST
Since the Fund will invest in shares of U.S. corporations, it expects to receive U.S. source dividends. The Fund does not expect to receive material amounts of interest (if any) from U.S. sources. Assuming the Fund is not engaged in a U.S. trade or business (as discussed above), U.S. source dividends received by the Fund will generally be subject to withholding tax at a 30% rate, except to the extent that these dividends are allocable to a Non-U.S. Partner that is entitled to a reduced rate of withholding under an applicable double tax treaty with the United States. U.S. source interest received by the Fund will also be subject to 30% withholding unless the interest qualifies as portfolio interest, or is eligible for benefits under a tax treaty. Portfolio interest generally includes (with certain exceptions) interest paid on registered obligations with respect to which the beneficial owner provides a statement that it is not a U.S. person.
The portfolio interest exemption is not available with respect to interest paid to a 10% shareholder of the issuer of the indebtedness and is subject to some other limitations. Non-U.S. Partners who wish to claim tax treaty benefits with respect to dividends or interest received by the Fund will be required to timely provide the Fund with a properly completed IRS Form W-8. U.S. Real Property Income. If the Fund makes any investments in interests that are treated as interests in real property or in “United States real property holding corporations” for U.S. federal income tax purposes (together, “U.S. real property interests”), any gain realized by the Fund upon disposition of those interests will, to the extent any such gain is allocable to a Non-U.S. Partner’s Units in the Fund, be subject to U.S. federal income tax. Additionally, any gain realized by the Non-U.S. Partner from the sale of all or any portion of its Units in the Fund, would, to the extent such gain was attributable to U.S. real property interests owned by the Fund, also be subject to U.S. federal income tax. In either case, the Non-U.S. Partner will be treated as engaged in a U.S. trade or business with respect to these gains, and therefore subject to U.S. filing and withholding requirements, and, if the Non-U.S. Partner is a corporation for U.S. federal income tax purposes, possible branch profits tax, all as described under “Effectively Connected Income” above.
SALE OR DISPOSITION OF UNITS
In general, Non-U.S. Partners who are not themselves engaged in a U.S. trade or business will not be subject to U.S. federal income tax with respect to gains from the sale or other disposition (including redemptions) of Units, provided that those gains are not attributable to (i) assets used in a U.S. trade or business by the Fund (in which case, any gain realized by a Non-U.S. Partner upon the sale or other disposition of its Units could be treated as effectively connected income from a U.S. trade or business, which income would be subject to U.S. federal income tax as described above under “Non-U.S. Partners—Effectively Connected Income”), or (ii) U.S. real property interests (as discussed above, under “Non-U.S. Partners—U.S. Real Property Income”). Additionally, a non-resident individuals present in the United States for 183 or more days in the taxable year of the sale would be subject to U.S. federal income tax on any such gain if either (a) the individual’s tax home for U.S. federal income tax purposes were in the United States or (b) the gain were attributable to an office or other fixed place of business maintained by the individual in the United States.
TAX REPORTING REGIMES
The following is a general description of the tax reporting regimes potentially applicable to the Fund. Each of these regimes is extremely complex, and Partners and beneficial holders are urged to consult their own tax advisors to obtain a more detailed explanation of the applicable rules and to learn how they might affect the Fund and Partners or beneficial holders in their particular circumstances.
U.S. Foreign Account Tax Compliance Provisions (FATCA). Sections 1471 through 1474 of the Code (“FATCA”) impose a reporting regime and potentially a 30% withholding tax with respect to certain U.S. source payments (including dividends and interest) to any non-U.S. financial institution (a “foreign financial institution”, or “FFI” (as defined by FATCA)) that does not become a Participating FFI by entering into an agreement with the IRS to provide the IRS with certain information in respect of its account holders and investors, or is not otherwise exempt from or is deemed compliance with FATCA under the Code or an applicable intergovernmental agreement between the United States and the FFI’s home jurisdiction.
As a result, the Fund may be required to withhold on some U.S. source payments to any Non-U.S. Partner that is not a Participating FFI or otherwise exempt from or in deemed compliance with FATCA. Non-U.S. Partners will be required to timely provide the Fund with a properly completed IRS Form W-8 to allow the Fund to determine the FATCA status of each Non-U.S. Partner. The OECD Common Reporting Standard. The OECD has proposed rules for the Automatic Exchange of Information in Tax Matters, which provides due diligence and reporting rules for financial institutions in participating jurisdictions. Together, these rules comprise the “Common Reporting Standard”, or “CRS”. The CRS, which is based in large part on the U.S. FATCA rules, provides a uniform set of guidelines that addresses (i) the types of information to be exchanged by participating jurisdictions, (ii) the time and manner of exchange and (iii) the confidentiality of data and safeguards that must be respected. Financial institutions in a participating jurisdiction that adopts these rules will need to file annual information reports with their local tax authorities, which authorities will then exchange with the tax authorities in other participating jurisdictions. The Fund qualifies as a financial institution for this purpose.
The CRS became effective on January 1, 2016, for countries on the “early adopters” list, and the first information reports were exchanged in 2017. Currently, the U.S. does not participate in the CRS. In consequence, the Fund will be required to disclose its “Controlling Persons” if it invests in a company that is tax-resident in a participating jurisdiction. Conversely, if the U.S. ever does become a participating jurisdiction, then the Fund may be required to disclose to the IRS account information about any Partners (and in some cases, beneficial holders) that are tax-resident in one or more participating jurisdictions (which information the IRS may then share with the tax authorities in those other participating jurisdictions).
CONSENT TO REPORTING
As a condition to opening an account with the Fund, all Partners will be required to consent to the disclosure and reporting of certain account information under FATCA and CRS. As a result, Partners (and, in some cases, beneficial holders) will be required to provide any information that the Fund determines is necessary to allow the Fund to comply with its obligations under these regimes. Tax Shelter Reporting
An investment in the Fund is not intended to generate tax losses or credits and the Fund will not be registered as a “tax shelter” under the applicable provisions of the Code. Under certain Treasury regulations, however, the activities of the Fund may include one or more “reportable transactions” (as defined in Treasury Regulation Section 1.6011-4(b)), requiring the Fund, and in certain circumstances, Partners to file information returns, as described below. In addition, the General Partner and other “material advisors” to the Fund may each be required to maintain for a specified period of time a list containing certain information regarding the reportable transaction and the Fund’s investors, which information may be inspected, upon request, by the IRS.
If the Fund engages in a reportable transaction, the Treasury regulations require the Fund to complete and file Form 8886 with its tax return for each taxable year in which the Fund participates in such reportable transaction. Each Partner treated as participating in a reportable transaction of the Fund is also required to file Form 8886 with its tax return. The Fund intends to notify those Partners that it believes (based on information available to the Fund) are required to report a transaction of the Fund and intends to provide such Partners with any available information needed to complete and submit Form 8886 with respect to the Fund’s transactions. Failure to disclose (i) a listed transaction will result in a $100,000 penalty in the case of a natural person and a $200,000 penalty for all others, and (ii) all other reportable transactions will result in a $10,000 penalty for natural persons and a $50,000 penalty for all others. Under the above rules, a Partner’s recognition of a loss upon its disposition of Units could also constitute a “reportable transaction” for such a Partner. Prospective investors should consult with their advisors concerning the application of these reporting obligations to their specific situations.
STATE AND LOCAL TAXES
Prospective investors should consider, in addition to the U.S. federal income tax consequences described, potential state and local tax consequences of investing in the Fund, which consequences are not addressed herein.
The foregoing statements are not intended as tax advice or as a substitute for careful tax planning, particularly since certain of the income tax consequences of an investment in the Fund may not be the same for all taxpayers. In addition, the foregoing does not discuss state and local tax, estate tax, gift tax or other estate planning aspects of the investment. There can be no assurance that the Fund’s or a Partner’s tax returns will not be audited by the IRS, or that no adjustments to the returns will be made as a result of such an audit. Accordingly, prospective investors in Units of the Fund are urged to consult their tax advisors with specific reference to their own tax situations under federal law and the provisions of applicable state laws before subscribing for Units.
CERTAIN ERISA CONSIDERATIONS
If 25% or more of any class of Units are owned, directly or indirectly, by ERISA Plans, the assets of the Fund will be deemed to be plan assets subject to ERISA, in which case the General Partner and the Investment Manager will be considered fiduciaries subject to ERISA, transactions involving the assets of the Fund may be subject to the fiduciary responsibility provisions of ERISA and the prohibited transaction provisions of ERISA and Section 4975 of the Code, and under certain circumstances, the fiduciary of an ERISA Plan responsible for the plan’s investment in the Units could be liable for any ERISA violations by the General Partner and Investment Manager. The Fund intends to limit investment by ERISA Plans so that less than 25% of any class of Units are beneficially owned by ERISA Plans.
In addition, Section 406 of ERISA and Section 4975 of the Code prohibit certain transactions involving the assets of an ERISA Plan and certain persons (referred to as “parties in interest” or “disqualified persons”) having certain relationships to such Plan, unless a statutory or administrative exemption applies to the transaction. There can be no assurance that any exemption will be available with respect to any particular transaction involving the Units, or that, if an exemption is available, it will cover all aspects of any particular transaction. Any ERISA Plan fiduciary that proposes to cause an ERISA Plan to purchase Units should consult with its counsel regarding the applicability of the fiduciary responsibility and prohibited transaction provisions of Section 406 of ERISA and Section 4975 of the Code to such an investment, and to confirm that such investment will not constitute or result in a prohibited transaction or any other violation of an applicable requirement under ERISA or the Code. By its purchase and holding of any Units, any ERISA plan will be deemed to have represented and agreed that its purchase and holding of the Units will not result in a prohibited transaction under Section 406 of ERISA or Section 4975 of the Code.
If at any time, the General Partner reasonably believes that there is a material risk that existing participation in the Fund by ERISA Plans is or would become significant, the General Partner reserves the right to redeem (in whole or in part) the Units held by any such ERISA Plans to the extent necessary to reduce the participation by ERISA Plans to a level where that risk is no longer believed to be material.
SECURITIES LAW MATTERS
LIMITATIONS ON TRANSFERABILITY
Each purchaser of a Unit in the Fund must bear the economic risk of its investment for an indefinite period of time (subject to the limited right to redeem capital from the Fund) because the Units have not been registered under the Securities Act of 1933, as amended (the “1933 Act”) and, therefore, cannot be sold unless they are subsequently registered under the 1933 Act or an exemption from such registration is available. It is not contemplated that any such registration will ever be affected, or that certain exemptions provided by rules promulgated under that Act (such as Rule 144) will ever be available.
The Partnership Agreement provides that a Partner may not assign its Units (except by operation of law) without the prior consent of the General Partner, which consent may be withheld for any reason. The foregoing restrictions on transferability must be regarded as substantial and will be clearly reflected in the Fund’s records.
The General Partner’s intention is to accept subscriptions for Units solely from individual and institutional investors that meet the following requirements: (1) qualify as “accredited investors” as defined in Rule 501 of Regulation D promulgated under the 1933 Act, (2) qualify as “qualified purchasers” as defined in Section 2(a)(51) of the 1940 Act, and (3) whose participation in the Fund would not require the Fund to register or qualify the Units for offer or sale under state securities laws.
In addition, as a condition of eligibility each US Partner must submit to the General Partner if required satisfactory evidence that it is a section 501(c) organization under the US Internal Revenue Code of 1986, as amended (the “Code”), or otherwise is eligible for an exemption from US federal income tax, and each non-US Partner must submit to the General Partner either (1) a properly completed W-8BEN-E certifying as to the Partner’s eligibility under an applicable double tax treaty with the United States and claiming a zero percent (0%) rate of withholding on the Partner’s share of income comprising dividends and interest or (2) a properly completed IRS Form W-8EXP certifying as to the Partner’s status as a foreign government or other entity eligible for an exemption from US withholding tax on investment income pursuant to section 892 of the Code.
Each prospective investor must complete the Account Opening Form included in the subscription materials and meet certain criteria that the Fund has established. The Account Opening Form provides for certain representations and undertakings to be given by prospective investors, including an agreement to indemnify and hold harmless the Fund, the General Partner, the Investment Manager, and their members, directors, officers, employees, agents and other representatives against any loss, liability, cost or expense (including attorneys’ fees, taxes, and penalties) that may result, directly or indirectly, from any misrepresentation or breach of any warranty, condition, covenant or agreement set forth therein or in any other document delivered by the subscriber to the Fund.
An investment in the Fund is suitable only for sophisticated investors for whom an investment in the Fund does not constitute a complete investment program and who fully understands and has the financial resources necessary to assume the risks involved.
Each subscriber will also be required to acknowledge in its Account Opening Form that the Fund, the General Partner, the Investment Manager and/or the Administrator may disclose to each other and their affiliates, to any other service provider to the Fund or to any regulatory body copies of the subscriber’s subscription application and any information concerning the subscriber provided by the subscriber to the Fund, the General Partner, the Investment Manager and/or the Administrator and any such disclosure will not be treated as a breach of any restriction upon the disclosure of information imposed on such person by law or otherwise.
The General Partner may waive any of the eligibility requirements set forth above, or impose additional requirements, in its absolute discretion.
The Fund is not registered as an investment company under the Investment Company Act of 1940, as amended (the “1940 Act”). The Fund relies on the exception from the definition of “investment company” provided in Section 3(c)(7) of the 1940 Act. None of the General Partner, the Investment Manager, is currently registered with the Securities and Exchange Commission (the “SEC”) or any other state regulatory agency as an investment adviser under the Investment Advisers Act of 1940, as amended, or any state laws or regulations.
In order to comply with applicable regulations aimed at the prevention of money laundering and terrorist financing, the Fund or its designees may require information and materials such as verification of identity from all prospective investors and current Partners from time to time, a permanent address and information relating both to the source of the monies to be invested and to others having direct or indirect beneficial ownership of the Units. The Fund or its designees also reserve the right to request such identification evidence as is necessary for respect of a transferee of a Unit. In the event of delay or failure to produce any information required for verification purposes, the Fund may refuse to accept a subscription, approve a transfer or process a redemption request and (in the case of a subscription for Units) any funds received will be returned without interest to the account from which the monies were originally debited. The Fund also reserves the right to refuse to make any redemption payment or other distribution to a Partner if the Fund or its designees suspect or are advised that the payment of any redemption money or other distribution to such Partner might result in a breach or violation of any applicable anti-money laundering, anti-terrorist financing or other laws or regulations by any person in any relevant jurisdiction, or such refusal is considered necessary or appropriate to ensure the compliance by the Fund with any such laws or regulations in any relevant jurisdiction.
TRADE ALLOCATIONS AND BROKERAGE COMMISSIONS
Bytelogics Inc is responsible for the execution of the Fund’s investment transactions and the allocation of the brokerage commissions. The Fund has no obligation to deal with any broker or group of brokers in the execution of transactions in portfolio securities. Such transactions may be subject to a commission or dealer mark-up which may not be the lowest commission or spread available.
Bytelogics Inc will determine the broker-dealers (collectively “Brokers”) to be used for the Fund’s securities, foreign exchange, and futures transactions. Bytelogics Inc will have complete discretion in deciding which Brokers the Fund will use and in negotiating their commission rates. Bytelogics Inc will not adhere to any rigid formulas in selecting Brokers but will weigh a combination of factors.
In selecting Brokers and negotiating commission rates, Bytelogics may take into account the Broker’s facilities, reliability, financial responsibility, costs of products or services and responsiveness to Bytelogics. Further, Bytelogics may consider the value of the products and services described below, either provided by the Broker or paid for by the Broker (either by cash payments or by commissions) and provided by others (collectively, “Products and Services”). A Broker will not be excluded from receiving brokerage business because it does not provide Products and Services. In selecting Brokers to execute transactions, Bytelogics will not be obligated to seek the lowest available “execution-only” commission cost. Thus, the Fund might be deemed to pay for Products and Services provided by the Broker that would be included in the commission rate. Accordingly, if Bytelogics determines in good faith that the amount of commissions charged by a Broker is reasonable in relation to the value of the brokerage services and other Products or Services provided by such Broker, the Fund may pay commissions to that Broker that are greater than the amount another Broker may charge.
The use of commissions to pay for Products and Services will be limited to items within the safe harbor of Section 28(e) of the U.S. Securities Exchange Act of 1934. Bytelogics has adopted a policy of refusing any “soft dollar” credits from Brokers for the payment of third-party non-brokerage and research services. The Products and Services the Investment Manager may consider in selecting a Broker are as follows:
Brokerage: Brokerage may include, among other things, clearing, order routing, and settlement services.
Research, research products, and research services: Research may include, among other things, proprietary research from Brokers, which may be written, oral or on-line. Research products may include, among other things, computer databases, to access research or which provide research directly. Research services may include, among other things: research concerning market, economic and financial data; statistical information; data on pricing and availability of securities; specialized financial publications; electronic market quotations; performance measurement services and commodities; analyses concerning specific securities, companies or sectors; and market, economic and financial studies and forecasts.
Bytelogics has no fixed internal brokerage allocation procedures designating specific percentages of brokerage commissions to particular firms. In exchange for the direction of commission dollars to certain Brokers, credits may be generated that may be used by Bytelogics to obtain the Products and Services provided or paid for by such Brokers. To the extent that such credits are generated or such Products and Services are obtained, the Fund and/or Bytelogics will be receiving a benefit by reason of the direction of commissions.
The Products and Services to be received from the Brokers also may be used by Bytelogics in servicing other fund accounts, as well as for the Fund. In addition, some Products and Services may not necessarily be used by the Fund even though its commission dollars provided for the Products and Services. The Fund, therefore, may not, in a particular instance, be the direct or indirect beneficiary of the Products or Services provided. Nonetheless, Bytelogics believes that under such circumstances the Products or Services would provide the Fund with benefits by, at least, supplementing the research otherwise available to the Fund.
When executing a transaction in security on behalf of the Fund, it can be aggregated and the aggregated transaction fulfilled with multiple trades. Trades aggregated with orders for other Bytelogics funds result in the need to allocate those trades. The ease with which Bytelogics can allocate trades to a fund can be limited by the sizes and prices of those trades relative to the sizes of the instructed transactions for the Bytelogics funds. A process of allocation can result in the Fund not receiving the whole benefit of the best-priced trade. Bytelogics manages this conflict by following an Order Allocation Policy, which is designed to ensure the fair treatment of all Bytelogics funds over time.
Securities held by the Fund also may be held by other investment vehicles or investment advisory clients for which Bytelogics acts as an adviser. Securities may be held by, or be an appropriate investment for, the Fund as well as other clients of Bytelogics. Because of different objectives or other factors, particular security may be bought for one or more such clients when one or more clients are selling the same security. If purchases or sales of securities for the Fund or other clients for which Bytelogics acts as an investment manager or adviser arise for consideration at or about the same time, transactions in such securities will be made, insofar as feasible, for the respective funds and clients in a manner deemed equitable to all. There may be circumstances when purchases or sales of Fund securities for one or more clients have an adverse effect on other clients.
Bytelogics reduces this risk by limiting the volume of the same security which may be traded in opposite directions on the same dealing day. When handling multiple orders for the same security on the same dealing day, Bytelogics may “cross” trades by matching opposing flows to seek to obtain the best execution. When crossing orders, it is possible that the execution may not result in the best execution for the Fund, for example, where a trade did not constitute a fair and reasonable price. Bytelogics reduces this risk by implementing a Crossing Policy.
The Fund and other Bytelogics funds may be restricted in its or their investment activities due to ownership threshold limits and reporting obligations in certain jurisdictions applying in aggregate to the funds managed by Bytelogics. Such restrictions may adversely impact clients through missed investment opportunities. Although it is not specifically designed to address those ownership limits and obligations, the Order Allocation Policy mitigates the associated conflict by seeking to allocate limited investment opportunities among Funds fairly and equitably over time.
The fund does not have an auditor and the General Partner prepares the books and records based on the broker statements.
The fiscal year of the Fund ends on December 31 of each year.
The Fund issues audited financial statements annually to Partners, drawn up to December 31 of each year. The Fund also issues unaudited reports to Partners monthly. To the extent applicable in any year, the General Partner will provide each Partner with a Schedule K-1 for tax purposes. If the General Partner is unable to deliver such Schedule K-1 by April 15, the General Partner will provide the relevant Partners with estimates of the taxable income or loss allocated to their investment in the Fund. Unless otherwise restricted by law, all reports, financial statements, and other information may be delivered to Partners electronically.
The fund also provides the NAV and partner capital account value through the iPhone app daily.
The Partnership Agreement designates the General Partner as the “Tax Matters Partner” of the Fund. As such, the General Partner would receive the IRS’s initial notice with respect to any Fund administrative adjustment initiated by the IRS.
Although each Partner is entitled to participate in the administrative proceedings at the Fund level, the General Partner will determine whether the Fund, as such, will challenge any adjustment proposed by the IRS.
CERTAIN DEFINITIONS USED IN THIS DOCUMENT
The following are definitions of certain terms used elsewhere in this Private Placement Memorandum:
“Benchmark” means the 50% risk-weighted SP500 and 50% 10-year treasuries leveraged for notional 5% margin.
Inputs to benchmark:
10 Year Treasury Index:
|As of Sept 26, 2019|
|Futures per 100k||0.67430883|
|Sp500 Future Margin||6,300|
|Margin from Long ETF||4,248|
|Margin from 4.5% extra||4500|
|Total SP500 Margin||8,748|
|Sp500 Index Weight||1.389|
|Treasury Future Margin||1,300|
|Treasury Bond Index Weight||6.729|
|Treasury Bill Index Weight||1|
The Fund aims to match the returns relative to the Benchmark.
“Business Day” means any day which is not a Saturday or Sunday or civic or statutory holiday in the City of New York or in
“Code” means the U.S. Internal Revenue Code of 1986, as amended.
“Dealing Day” means any Business Day on which existing and/or prospective investors submit valid dealing instructions, as well as the first Thursday of each calendar month (in the event of such Thursday not being a Business Day, then the preceding Business Day) and/or such other day as may be determined by the General Partner from time to time.
“Fund” means Face Fund.
“General Partner” means Bytelogics Inc, the general partner of the Fund.
“Investment Manager” means Bytelogics Inc, which provides the Fund with investment
“Unit” and “Units” means units of the Fund.
“Valuation Day” means each Dealing Day, the last Business Day of every month and/or such other day as may be determined by the General Partner from time to time.
SUBSCRIPTIONS AND REDEMPTIONS
Dealing in the Fund will occur on any Business Day on which existing and/or prospective investors submit valid dealing instructions, as well as the first Thursday of each calendar month (in the event of such Thursday not being a Business Day, then the preceding Business Day) and/or such other day as may be determined by the General Partner from time to time (a “Dealing Day”).
Subscription documents must be received by the Fund by 4:00 pm EST one Business Day prior to the requested Dealing Day and an acceptable form of payment must be received by the Fund by 12:00 pm EST on the requested Dealing Day.
Persons interested in becoming a Partner in the Fund will be furnished and will be required to complete and return to the General Partner, an Account Opening Form, and certain other documents.
Subject to certain conditions and limitations described herein, including the $250,000 minimum transaction requirement described herein, each Partner has the right to redeem any portion of its capital account and each Partner has the right to withdraw as a Partner, on each Dealing Day. Redemption documents must be received by the Fund by 4:00 pm EST one Business Day prior to the requested Dealing Day.
As an alternative to redeeming shares, a Partner may transfer ownership to an acceptable investor by submitting a Transfer form. Transferees who are new investors will be required to complete and return to the General Partner, an Account Opening Form, and certain other documents.
The General Partner reserves the right in its sole discretion to amend or waive any subscription or redemption-related requirements.
Transaction documents and other information relating to the Fund can be obtained by contacting Bytelogics in its U.S. office as follows:
304 e 6th street
New York NY 10003
Telephone: (646) 515-6388