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Structure of the Venture-Capital Corporation Key Questions on the design of a venture capital corporation 1. Our prospective investors do not have much money to invest because they are largely young and establishing households, etc. How do we propose to make investments by such people possible? Space Environments Ecovillage (SEE) is expected to reduce the cost of living to the extent that residents will easily be able to invest ten percent of their after tax incomes in Millennial Ventures. Perhaps more will be possible. This will be an expectation of residents who do not have prior loans, such as college loans, which they are paying off with at least ten percent of their disposable income. 2. We are not dealing with sophisticated investors. Our prospective investors can barely distinguish between an investment and a donation. How do we propose to demonstrate to them that they are making an investment and not a donation? We need to be able to guarantee in the strongest terms possible that the purchase of shares will represent a prudent investment. The structure of the proposed corporation is unusual for this reason. As in most corporations, the shareholders elect the board and the board elects the officers. Unlike in most corporations where the officers or board make the key decisions, in the proposed corporation, for investment decisions, the ultimate decision is made directly by the shareholders. The officers have no role in an investment decision, while the directors may veto an investment proposal, but may not carry one out. 3. A minority of FMF members will reside in SEE. How can those who do not reside there invest? The stock can be sold to people who visit SEE as it will be registered in the state in which SEE is located. The stock could also be registered in the state in which a conclave is held if there is sufficient interest. FMF members who visit can purchase stock in the state of SEE. On return home, they can resell the stock to members of their chapter. Resale of stock does not require its registration. 4. What is it likely to cost to aggregate our money? One cost is imposed by the strong necessity to avoid being an "investment company." An investment company is one that has more than 40 percent of its capital in "investment securities." An investment security is any security except a governmental security or a security of a corporation which the venture capital company holds a majority of voting stock. An investment company cannot sell stock unless it has $100,000 of capital. We can only raise $100,000 of capital by selling stock. Therefore we cannot be an investment company. This means that if we form a company to aggregate our small individual contributions, that about 65 percent of the capital would need to be invested in governmental securities (bonds) or non-securities (as defined by the SEC) such as savings accounts or mortgages until we had enough to act with. To satisfy this requirement we will sacrifice some return to money invested during accumulation, although it should be correspondingly more secure. In addition, there are the costs for filing a registration. The direct cost varies by state, usually depending on the size (California - $2,500, Texas - $1,000, Colorado - $100). In addition, the company must be registered in the state in which the offering is made. This may cost $100. There are statements required from a registered CPA and a lawyer in the state of incorporation and a long form to fill out. These costs could come to $500. Thus the costs of making the offering would be a few percent at first. The percentage should decline as the amount invested rises. The amount invested would rise primarily as additional people moved into SEE, but also as current residents pay off prior loans, and if non-resident FMF members took part. 5. What are some impacts of SCOR (Small Company Offering Registration) requirements? One SCOR requirement is that the amount of the offering cannot exceed ten times the current value of the corporation. Thus the initial directors may need to make a substantial investment between them. Furthermore, federal law puts strong restrictions and regulations on any stock not sold at a public offering (such as the stock initially sold to directors) until it has been held for three years. So a director making an initial investment should be prepared to hold the stock for three years at least. All directors and officers must be squeaky clean: no investigations into securities violations for the last five years. And the one that might bother us the most: no blind offerings. This means a specific business activity must be described. Investment companies, oil, and mining companies are specifically excluded from SCOR offerings. Whether a venture capital corporation would pass muster as a specific business activity is up to each individual state board that approves these things. If not, we can describe the first business we expect to enter. It is allowable to accumulate money without pursuing the purpose for some time, but the time allowable is fuzzy. 6. What is there that makes this company likely to support FMF goals in the investments it chooses? First, the directors are specified as being FMF core members. Second, the investment is limited to FMF members. Third, investment requires the support of a majority of the people as well as a majority of the shares. The second condition might be relaxed after a while in favor of allowing a minority of investment by non-FMF members. Some may happen anyhow if FMF investors leave FMF or sell their stock outside FMF. The third condition allows members to stop an investment which does not seem to be in accord with the purposes of FMF. This is a strong control and may even create a deadlock. There is provision for automatic dissolution in ten years if no investment has been made as that should be ample evidence that this design was unworkable. Example of Articles and Bylaws for the Venture Capital Corporation This version of the Certificate and Bylaws is laced with comments, which begin with "[Note:]," which would not appear in the legal documents. Standard and straightforward items are abbreviated to their titles or title plus [a short entry in brackets] in order to shorten the presentation to key features of this unusual corporation. The certificate and bylaws are written as if for New Jersey law with which I have some familiarity. SEE will actually be incorporated in the state where it is located. Certificate of Incorporation of Millennial Ventures, Inc. 1. The name of the corporation is: Millennial Ventures, Inc. 2. [registered agent is {a resident of state of incorporation}] 3. The purposes for which this Corporation is organized are: To provide venture capital for companies which will further the goals of colonizing space while developing means to ameliorate environmental problems of the earth; and to engage in any activity for which corporations may be organized under the "New Jersey Business Corporations Act," N.J.S. 14A 1-1 et. seq. [Note: Or similar language suitable for another state. We should be empowered to do anything legal with this corporation, because we will likely be doing a variety of different things.] 4. The company shall be organized as a cooperative with two classes of voting shares. Membership shares will be sold one per member, and shall carry one vote each. Investment shares will be sold to members only. The aggregate number of membership shares which the corporation shall have initial authority to issue is one thousand shares without par value. The aggregate number of investment shares which the corporation shall have initial authority to issue is fifty thousand shares without par value. [Note: Membership shares will be approximately $100 (U.S.). Shares will be approximately $10 so that investors can closely approximate what they want to invest. Fees on the corporation often depend on the amount of stock issued. This should last for long enough to find out what we need to do when this runs out. If annual fees depend strongly on this amount, then it can be made smaller.] 5. The Board of Directors shall consist of two Directors, one of whom is elected by holders of membership shares and the other of whom is elected by holders of investment shares. The first Board of Directors of the Corporation shall consist of two Directors; the name and address of each person who is to serve as such Director are:
[Note: These people will have volunteered to be initial directors. The first elections for directors will take place at the first annual meeting.] 6. The name and address of the incorporator is Capitol Information Service, Inc., 172 West State Street, Trenton, NJ 08608. [Note: This organization can get an incorporation completed in one day at little cost. There are probably services like them in other states.] 7. Amendment of this Certificate of Incorporation shall require the affirmative vote of three quarters of the membership shares and the affirmative vote of three quarters of the investment shares. Example of Bylaws for Millennial Ventures, Inc. Section I [Note: Since the certificate of incorporation is short and since some of features of this corporation are intended to be harder to change than others, I have set up two "sections" of the bylaws, each with its own rules for amendment. The first section is harder to amend.] Article I: Directors Number and Term of Office The Corporation shall have a board of exactly two directors, designated as the "Member's Director" and the "Investor's Director." [Note: It was originally proposed to have three directors, one elected by FMF members. It is the fundamental right of shareholders in a business corporation to elect the directors, however, so such a provision would not be legal.] The directors will be elected at the annual meeting of the Corporation. Both will be core members of the First Millennial Foundation, a nonprofit corporation formed under the laws of the state of Colorado. The Member's Director will be elected by majority vote of the membership shares. The Shareholder's Director will be elected by majority vote of investment shares. No single person may serve as both directors. The term of office of the directors shall [be one year]. [Note: This addresses the fundamental design problem for this corporation: That we want to be convinced that purchase of shares in this corporation (1) is an investment and not a donation, and (2) will support the goal of colonizing the galaxy as best we know how. The directors being FMF core members when elected will work towards the second of these goals. The shareholder's director is elected by those with the most money at risk, and is particularly suited to see that a return to that money is expected. The investor's director represents the interests of the smaller investors who may have a different evaluation of risk than larger investors.] Article II: Capital Investment Decisions A proposal to invest assets of the Corporation in another corporation may be made by either director. It must be approved in writing by each of the directors. It will then be put to a vote of the members. Approval to make the investment decision shall require the vote of the majority of member shares and the vote of the majority of investment shares. [Note: While each director has veto over capital decisions and can thus protect the interests he or she was elected to protect, no constituency can take over the corporation.] Article III: Dissolution This Corporation shall be dissolved and the assets paid to shareholders in proportion to their shares if (1) No capital investment decision in a new company is approved within ten (10) years of the date of incorporation, and (2) The First Millennial Foundation is dissolved without the incorporation of a successor which has a class of voting members. A voluntary dissolution decision may be made in the same manner as a capital investment decision. [Note: If no venture capital investments are made, there is no reason to have this corporation. Likewise, if the FMF is dissolved.] Article IV: Force and Effect of the Bylaws Both Sections I and II [are subject to law of the state of incorporation]. Article V: Amendment of Section I [three quarters affirmative vote both by membership and by investment] Section II Article I: Offices [legal addresses for the corporation in <state for SEE>] Article II: Shareholders 1. Eligibility to invest. Purchases of shares in Millennial Ventures will be limited to members of the First Millennial Foundation. [Note: This may be a temporary measure. The point is that we want dominance by FMF members. We can set percentage goals, or whatever, but at first, when we have little invested, it seems best to restrict it to FMF members. The longer-run question of whether to actively seek investment from non-FMF members needs discussion. This sets us up in a cautious position and requires an active decision to move to a more aggressive position.] [Note: It could be limited further to core members and residents of SEE.] The membership share price may be changed from time to time at the annual meetings to reflect inflation or other economic factors. The initial membership share price will be $100 (U.S.). 2. Expectation of investment. It is expected that residents of Space Environments Ecovillage will invest ten percent of their disposable (after tax) income in Millennial Ventures, provided that they have no preexisting loans. Core members of FMF are encouraged to invest in Millennial Ventures. 3. Annual Meeting. The annual meeting of shareholders shall be held at the same place and within one day of the annual meeting of the First Millennial Foundation. [Note: For the convenience of the majority of investors. It should be a matter of indifference to non-FMF investors.]
Notice of the time and place of the meeting posted electronically on the World Wide Web, publicly accessible, and locatable by indexing on "millennial" and "ventures" and "annual" and "meeting" during the thirty days prior to the meeting will be deemed sufficient notice. [Note: This will cut our mailing costs.] 4. Action without meeting. [is possible in accord with NJ law] [Note: What about the state of incorporation?] 5. Quorum. [1/2 of both membership and investment shares represented in person or by proxy] [Proxy not assigned by default.] Article III: Directors 1. Regular Meetings. [right after the annual meeting, to elect officers] 2. Actions other than capital investment decisions. The affirmative vote of both directors may authorize expenses whose total amount annually does not exceed one quarter of one percent of the value of investments held, or of any action which does not require an expense, including the election of officers. All other decisions shall be made as capital investment decisions are made. [Note: Setting a limit of expenses of 1/4 of 1% means that this corporation is going to run on volunteer labor for a while. Everything possible will be done by email. The Board will have to arrange with FMF or with individuals willing to donate money to support office activity and the annual state fee [$25 in NJ] to continue a corporation.] 4. Action without meeting. [The board may act without meeting] 5. Quorum. [Both directors make a quorum] 6. Vacancies. If a director's position is vacant, no investment decision shall be made. A vacancy in the position of a director may be filled by the shareholders voting without meeting, and shall satisfy the requirements for the specific vacated position. 7. Removal of directors. Any director may be removed without cause by a vote of the constituency which elected that director, voting as it voted to elect the director, provided that a new director is also elected at the same time. 8. Presence at meetings. [Directors may be present electronically] 9. Indemnification of directors and officers. Article IV: Waivers of Notice. Article V: Officers. 1. Election. At its regular meeting following the annual meeting of shareholders, the Board shall elect a president, a treasurer, a secretary, and an auditor. One person may hold two or more offices, except that the auditor may hold no other position. 2. Duties and Authority of the President. [Coordination with FMF.] [Registration of shares for sale.] 3. Duties and Authority of the Treasurer. The treasurer shall have custody of the funds and securities of the corporation and shall be responsible for keeping regular books of account for the corporation. The treasurer will transfer shares of the corporation to investors in person near the time of annual meetings at the place of the annual meetings, upon payment of the sale price and upon signature of a contract that the sale of the shares shall be governed by laws of the state of incorporation. [Note: The contract is the key to our being able to sell shares with a registration in just one state. However, there will typically be three states involved: the state of sale, the state of incorporation, and the state of residence of the investor. This situation is called "conflict of laws" in the US. A contract stating which state's laws will hold is almost always definitive.] The treasurer will send to the auditor on a monthly basis the originals of any statements of investments by the Corporation and electronic copies of all letters received from outside the corporation and statements of transactions or account received from outside the corporation and of all correspondence initiated by the treasurer and current records of each investor's share holdings, address, and email address if there is one. The treasurer will keep electronic copies of all documents sent to the auditor. [Note: This provides backup on the records of the company. It also provides means for the auditor to check the treasurer. The treasurer and auditor should have mutually compatible mass storage devices with removable media. The treasurer will need to send the auditor the latest set of records, and the auditor can return an outdated cartridge.] 4. Duties and Authority of the secretary. [maintain the files of the contracts of sale, minutes of annual meetings, and minutes of directors meetings] 5. Duties and Authority of the Auditor. The auditor will be prepared to assume the duties of the treasurer if the treasurer becomes unable to continue those duties for any reason. If this happens, the board will elect a new auditor. The auditor may also call for removal of the treasurer from office by reason of malfeasance or incompetence. Such action must be taken by the board. [Note: The auditor is an unusual officer to name. It provides a high level of assurance to investors that their money is not being misused as well as providing a continuity in case the treasurer ceases being able to fulfill the duties of that office.] 6. Resignation or removal of officers. A. [officers can resign] B. [officers can be removed by the two directors if a replacement is elected] C. The board will fill any vacancy in an office. If the two directors do not agree and if the office being filled is the president, the treasurer shall cast the deciding vote. If the two directors do not agree and if the office being filled is other than the presidency, the president shall cast the deciding vote. [Note: With just two directors, how to break a disagreement needs to be specified if the office is empty.] Article VI: Fiscal Year [same as calendar year] Article VII: Amendment of Section II of the Bylaws [60% of votes both by membership and by investment]
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