Groundfloor Finance

The Company's unaudited June 2022 condensed financial statements were prepared on a going-concern basis noting recurring losses since inception and accumulated deficit of approximately $31.1M. Management acknowledged substantial doubt about ability to continue as a going concern without additional financing.

“There is substantial doubt that the Company will continue as a going concern for at least 12 months following the date these Condensed Consolidated Financial Statements are issued, without additional financing based on the Company's limited operating history and recurring operating losses.”

Sponsor is currently incurring net losses and expects to continue incurring net losses in the future, which could impair operations of the Groundfloor Platform by limiting access to working capital.

“Our Sponsor is currently incurring net losses and expects to continue incurring net losses in the future. Its failure to become profitable could impair the operations of the Groundfloor Platform by limiting its access to working capital to operate the Groundfloor Platform.”

The Sponsor is currently incurring net losses and expects to continue incurring net losses in the future, which could impair its ability to operate the Groundfloor Platform and provide services to the Company.

“Our Sponsor is currently incurring net losses and expects to continue incurring net losses in the future. Its failure to become profitable could impair the operations of the Groundfloor Platform by limiting its access to working capital to operate the Groundfloor Platform.”

Sponsor and Manager have limited experience in mortgage loan underwriting; the founders of Groundfloor Finance Inc. had no mortgage loan underwriting experience when operations began. If underwriting methodology proves flawed, returns on loans may not be as expected.

“Our Sponsor and our Manager have limited experience in mortgage loan underwriting and a limited number of our Sponsor's and Manager's management teams has experience in mortgage loan underwriting and the founders of our Sponsor had no such experience at the time it began operations.”

The Company has no prior operating history and has not made any investments as of the offering date. Total assets consist of approximately $5,000 in cash. Past performance of the Sponsor may not predict future results.

“We are a recently formed company and have no operating history. As of the date of this Offering Circular, we have not made any investments, and prior to our initial closing, our total assets will consist of approximately $5,000 in cash.”

The Company has no operating history and has made no investments as of the offering date. Total assets consist of approximately $5,000 in cash. Prior performance of the Sponsor does not predict future results.

“We are a recently formed company and have no operating history. As of the date of this Offering Circular, we have not made any investments, and prior to our initial closing, our total assets will consist of approximately $5,000 in cash.”

Going concern assumption: Financial statements prepared assuming the Company will continue as a going concern, with no adjustments for inability to continue as a going concern.

“The audited financial statements included in this Offering Circular have been prepared assuming that the Company will continue as a going concern. The audited financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result should the Company be unable to continue as a going concern.”

Investors are required to waive rights to jury trial and agree to binding arbitration in Georgia for all claims including federal securities law claims, and waive rights to class action lawsuits. The arbitration provision severely limits investor remedies.

“By purchasing shares in this offering, investors agree to be bound by the Arbitration Provision contained in our subscription agreement (the 'Arbitration Provision'). Such Arbitration Provision applies to claims under the U.S. federal securities laws and to all claims that are related to the Company, including with respect to this Offering, our holdings, our common shares, our ongoing operations and the management of our investments, among other matters and limit the ability of investors to bring class action lawsuits or similarly seek remedy on a class basis.”

In December 2016, the Company issued and sold three series of LROs after the applicable state registration form (Form U-1) had expired. The LROs were refunded in full with accrued interest and re-qualified. This represents a prior compliance failure in state securities registration.

“In December 2016, we issued and sold three series of LROs after the original Form U-1 for such offering had expired. The LROs were refunded in full, including all accrued interest, and submitted again to be offered under a subsequent post-qualification amendment to an offering statement on Form 1-A, covered by the Form U-1 dated December 21, 2016.”

The Company is not a viable stand-alone financing company. It is wholly reliant on Groundfloor Finance Inc. (parent and sole member) to advance overhead costs, sell loans to it, and fund interest and principal payments on the Promissory Notes. All capital raised is advanced to the parent on a dollar-for-dollar basis.

“Our parent and sole shareholder, Groundfloor Finance Inc., operates the Company on a cash-neutral basis. All capital raised through the Offering is used to purchase originated loans at face value and then sell such loans at face value. In connection with such purchases, the proceeds of the Offering and interest income we receive from holding existing loans are thereby advanced to our parent on a dollar-for-dollar basis to originate new loans, either directly by the parent or by an originating affiliate.”

Manager maintains only a contractual (not fiduciary) relationship with the Company and its shareholders. Liability of Manager is broadly limited and the Company has agreed to indemnify the Manager, its officers, directors, Sponsor and affiliates to the fullest extent permitted by law.

“Our Manager maintains a contractual, as opposed to a fiduciary relationship, with us and our shareholders. Accordingly, we and our shareholders only have recourse and are able to seek remedies against our Manager to the extent it breaches its obligations pursuant to our operating agreement. Furthermore, we have agreed to limit the liability of our Manager and to indemnify our Manager against certain liabilities.”

Management fee, offering expense reimbursement, and all material agreements between the Company and Manager/Sponsor were not negotiated at arm's length. The Manager's compensation is tied to investor distributions, creating an incentive to retain assets rather than liquidate when that might benefit shareholders.

“The asset management fee paid to our Manager is based on the amount of distributions to investors in the Offering. Our Manager may benefit by us retaining ownership of our assets in order to avoid a reduction in our Aggregate Loan Amount at times when our shareholders may be better served by the sale or distribution of our assets.”

Groundfloor Finance has an economic incentive to originate loans in higher volume than appropriate, because it earns origination and servicing fees passed through from GRE 1. This creates a potential conflict between Groundfloor Finance's fee-earning interest and investors' interest in loan quality.

“Groundfloor Finance conducts due diligence and may have an incentive to advance or recommend loans in a higher volume than would otherwise be appropriate due to origination and servicing fees payable to GRE 1 and passed through to Groundfloor Finance.”

Groundfloor Finance entered into material affiliated transactions (Series Seed Financing, Bridge Financing, Series A Financing) involving its officers, directors, and principal shareholders without approval by a majority of disinterested Independent Directors, because it lacked sufficient disinterested Independent Directors at the time each transaction was consummated.

“Groundfloor Finance has lacked sufficient disinterested Independent Directors to approve the prior material affiliated transactions listed above at the time each was consummated and may choose to enter into transactions in the future for which it lacks sufficient disinterested Independent Directors.”

The management fee is based on the Aggregate Loan Amount calculated by the Sponsor's own internal accountants and asset management team -- not an independent party -- creating a conflict of interest since the Manager benefits from retaining assets rather than disposing of them.

“Our Manager will face a conflict of interest because the asset management fee it will receive for services performed for us is based on our Aggregate Loan Amount, which employees of our Sponsor, the parent company of our Manager, are ultimately responsible for determining.”

Sponsor operates multiple competing REIT offerings and LRO programs (Groundfloor Finance Inc., Groundfloor Real Estate 1 LLC, Groundfloor Loans 1 LLC, Groundfloor Loans 2 LLC) through the same platform using the same management team, creating investment allocation conflicts with no binding obligation to favor this fund.

“Our Sponsor has in the past, and expects to continue in the future, to establish and sponsor additional REIT offerings and other programs, and to continue to offer investment opportunities primarily through the Groundfloor Platform, including offerings that will acquire or invest in commercial real estate loans and other real estate-related assets.”

On January 11, 2017, the Company entered into a promissory note with ISB Development Corp., an affiliate of board member Sergei Kouzmine, for up to $2,000,000 at 8%-14% interest, secured by a first-priority lien on Company assets. The Company paid ISB a $10,000 origination fee and later paid a $5,000 amendment fee and $10,000 amendment fee for subsequent amendments. As of the filing date, $1,750,000 remained outstanding.

“On January 11, 2017, we entered into a promissory note and security agreement (as amended, the 'ISB Note') in favor of ISB Development Corp., an affiliate of Mr. Kouzmine ('ISB'), for a principal sum of $1,000,000. We paid to ISB an origination fee of $10,000 concurrently with the funding by ISB of the principal of the ISB Note.”

The Manager's asset management fee is based on investor distributions, creating incentive to retain assets rather than liquidate when shareholders may be better served by sale. All compensation arrangements were not negotiated at arm's length. Manager has contractual (not fiduciary) duty to the Company.

“The asset management fee paid to our Manager is based on the amount of distributions to investors in the Offering. Our Manager may benefit by us retaining ownership of our assets in order to avoid a reduction in our Aggregate Loan Amount at times when our shareholders may be better served by the sale or distribution of our assets.”

Shareholders can only remove the Manager for 'cause' by affirmative two-thirds vote. Unsatisfactory financial performance expressly does not constitute 'cause', limiting investor recourse for poor investment results.

“Our shareholders may only remove our Manager for 'cause' following the affirmative vote of shareholders holding two-thirds of the outstanding common shares. Unsatisfactory financial performance does not constitute 'cause' under the operating agreement.”

Affiliates and family members of board directors (MDO Ventures JS LLC affiliated with director Olander; Nancy Luberoff, wife of director Boehm; Richard Tuley Realty affiliated with director Tuley) participated in the Series Seed financing and Bridge Note financing. The Company lacked sufficient disinterested independent directors to approve these transactions at the time they were consummated.

“We lacked sufficient disinterested independent directors to approve the prior material affiliated transactions listed above at the time each was consummated and may choose to enter into transactions in the future for which it lacks sufficient disinterested Independent Directors.”

The Sponsor operates multiple similar investment programs (LRO programs, Groundfloor Loans 1 LLC, Groundfloor Real Estate 1 LLC) that compete with this fund for investment opportunities. Allocation is at management's business judgment with no binding policy.

“Our Sponsor has in the past, and expects to continue in the future, to establish and sponsor additional REIT offerings and other programs, and to continue to offer investment opportunities primarily through the Groundfloor Platform, including offerings that will acquire or invest in commercial real estate loans and other real estate-related assets.”