A group of local entrepreneurs has filed plans with the Securities and Exchange Commission to raise as much as $306 million to buy real estate assets in a complex stock offering known as a "blind pool."
The proposed new company, a real estate investment trust dubbed Free and Clear Equity Inc., wants to buy commercial real estate and mortgages. The goal is to pay cash for stabilized properties and avoid taking on long-term debt.
Potential investors in the proposed firm would have to consider a daunting set of risks: FACE has not yet purchased or contracted to purchase any properties; has no operating history; and its only potential source of funds is from the sale of shares, the company said in a registration statement filed with the SEC Dec. 23.
FACE said it would need to raise at least $5 million to launch the company. Even if the firm can't raise that much, it would still hold onto about 10 percent of investors' money "to defray expenses and attempt to find other financing."
The stock sale is not a traditional initial public offering, and the company warns in its filing that "there will be no immediate trading market and there is no assurance a trading market will ever develop" for the shares. The offering will take place "as soon as practicable."
The CEO is Chance W. Bunger, 59, a residential real estate broker with Circle City Realty. Bunger and Thomas G. Ferkinhoff co-own two Dairy Queen franchises. Ferkinhoff, 48, an accountant and owner of Randolph County Insurance Agency, will serve as the new company's chief financial officer. The third partner is Jeffrey J. Jinks, an attorney and real estate consultant.
The partners say they capitalized the company with about $395,000—the cost of registering the shares and offering them for sale—and received shares in return. An investment fund called Monogenesis Corp. is set to receive 1.4 million shares and almost 3 million warrants in exchange for a payment of just $17,000, less than a penny for each share and a fraction of a penny for each warrant.
FACE plans to target existing buildings in stable or growing markets that are less than 10 years old and are leased to well-known tenants with at least seven years remaining on their lease.
"As we do not currently own any assets and plan to be an all-cash buyer, we are not restricted by legacy operating or legacy leverage issues that some of our competitors are presently facing," the company said in its registration statement.
Blind pool investments first surfaced in England 280 years ago, according to the North American Securities Administrators Association. They first appeared in the United States during the stock market boom of the 1920s and tend to proliferate during prosperous times for equity markets.
They are a cousin of so-called blank check offerings, and are considered a particularly risky investment that small-dollar and novice investors should avoid.
"During prosperous times, potential investors tend to become less cautious in considering investment alternatives, a course of action that can have disastrous results," the securities group warns on its website. "One type of investment instrument that lures unwary investors is the 'blind pool' offering. In these cases, it is only the investor who is truly blind to the use of his or her money. Strangely enough, investors readily agree to commit funds for totally unspecified purposes and with no assurance or commitments."
FACE plans to collect its startup cash by selling warrants that convert to common stock, then using the proceeds to buy properties and mortgages that align with the strategy outlined in the offering, spokesman Greg McAndrews wrote in an e-mail.
The company said it is registering 122.4 million shares with a conversion value of $2.50 apiece.