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Material items extracted from the risk-factor, conflicts, and prior-performance sections of Red Oak Capital's PPMs. Each is quoted verbatim with its source page — surfaced, not editorialized.
As of the offering date, Red Oak Capital Fund II had not commenced active operations and owned no assets. The fund is a blind pool and investors cannot evaluate specific investments before committing capital.
“As of the date of this offering circular, we own no assets. We are not able to provide you with information to evaluate our future investments.”
All prior Red Oak Capital funds (ROCF II, III, IV, V, ROIOF, ROCIIF, ROCF VI) have reported consistent GAAP net losses every reported year (2019-2023). For example, ROCF III reported a net loss of $(7,342,071) for 2023 and ROCF V reported $(9,194,705) for 2023. Additionally, ROCF III held four commercial real estate properties acquired through foreclosure with $2.2 million in unrealized fair market value reserves as of June 2023. All funds have made interest payments on time despite operating losses.
“Table III Operating Results for the year ended December 31, 2023, of projects closed within last 5 years (unaudited) ... Net income- GAAP Basis ROCF II (2,414,510) ROCF III (7,342,071) ROCF IV (490,870) ROCF V (9,194,705) ROIOF (473,512) ROCIIF (490,729) ROCF VI (2,511,111)”
The Company has operated at a net loss every period since inception: net loss of $166,350 (year ended Dec 31, 2021), $595,981 (year ended Dec 31, 2022), and $199,778 (six months ended June 30, 2023). Total member's deficit as of June 30, 2023 was $962,109. The Company pays out more in bond interest and fees than it earns on its loan participations.
“Net loss for the period amounted to $199,778. ... Net loss for the period amounted to $595,981. ... Net loss for the period amounted to $166,350.”
Sponsor's related prior fund, Red Oak Capital Fund III, LLC, had foreclosed on properties and owned four commercial real estate properties acquired through foreclosure with an aggregate gross cost basis of $15.6 million (gross of $2.2 million in unrealized fair market value reserves) as of June 30, 2023, indicating prior loan losses across the sponsor's portfolio.
“As of June 30, 2023, ROCF III owned four commercial real estate properties acquired through foreclosure with an aggregate gross cost basis of $15.6 million, gross of $2.2 million in unrealized fair market value reserves.”
The fund has no employees and relies entirely on the Sponsor's management team. There are no employment agreements with key individuals and no key man life insurance. Loss of any key person could impair the fund's ability to meet obligations on the Bonds.
“We do not have employment agreements with any of these individuals nor do we currently have key man life insurance on any of these individuals. If any of them were to cease their affiliation with us, our Manager or our Sponsor, our Sponsor may be unable to find suitable replacements, and our operating results could suffer.”
The Company's success depends on key individuals at the Sponsor but there are no employment agreements or key man life insurance policies on any of these individuals, creating key-person risk.
“Our success depends to a significant degree upon the contributions of our Sponsor's management team. We do not have employment agreements with any of these individuals nor do we currently have key man life insurance on any of these individuals.”
The fund's success depends substantially on the Sponsor's management team, but there are no employment agreements or key-man life insurance in place. If key individuals depart, the Sponsor may be unable to find suitable replacements.
“Our success depends to a significant degree upon the contributions of our Sponsor's management team. We do not have employment agreements with any of these individuals nor do we currently have key man life insurance on any of these individuals. If any of them were to cease their affiliation with us, our Manager or our Sponsor, our Sponsor may be unable to find suitable replacements, and our operating results could suffer.”
The fund's success depends significantly on the Sponsor's management team. The fund has no employment agreements with any key individuals and no key-man life insurance. If key persons ceased their affiliation, the Sponsor may be unable to find suitable replacements.
“We do not have employment agreements with any of these individuals nor do we currently have key man life insurance on any of these individuals. If any of them were to cease their affiliation with us, our Manager or our Sponsor, our Sponsor may be unable to find suitable replacements, and our operating results could suffer.”
On March 9, 2023, the lead lender (Red Oak Capital Fund V, a related party) issued a notice of default, acceleration, and demand to pay to 11 Waterview Blvd. LLC for failure to make interest payments. The Company's $1,000,000 minority participation was placed on nonaccrual status and foreclosure proceedings were commenced. As of June 30, 2023, the note remained on nonaccrual.
“On March 9, 2023, Red Oak Capital Fund V, LLC (the 'Lead Lender'), a related party, issued a notice of default, acceleration, and a demand to pay to a mortgage note borrower, 11 Waterview Blvd. LLC, for failure to make interest payments. Since the note was not paid off in accordance with the acceleration notice, the Company has begun the process of foreclosure. The Company holds a $1,000,000 minority Participation Interest in the Loan. The loan was placed on nonaccrual status as of March 9, 2023.”
Red Oak Capital Fund IV, LLC was formed October 31, 2019 and has not commenced active operations as of the offering date. It owns no assets and has no operating history on which investors can evaluate performance.
“We are a recently formed entity with no operating history and may not be able to successfully operate our business or achieve our investment objectives. ... As of the date of this offering circular, we own no assets.”
As of the offering date, Red Oak Capital Fund III had not commenced active operations and owned no assets. The fund was formed only three months before the offering circular date, providing no track record for this specific entity.
“As of the date of this offering circular, Red Oak Capital Fund III, LLC has not yet commenced active operations. ... As of the date of this offering circular, we own no assets.”
Every minority participation interest the Company has acquired has been purchased from related-party funds managed by the same Sponsor (Red Oak Capital Fund II, III, V and Red Oak Income Opportunity Fund). The Company depends entirely on investments originated by these Sponsored Funds and cannot acquire assets from third parties, creating a structural conflict of interest in negotiating participation terms.
“We depend entirely on the investments originated by the Sponsored Funds, and we could potentially generate greater returns by acquiring investments from third parties. We intend to only acquire participation interests in loans originated by the Sponsored Funds.”
The Operating Agreement eliminates fiduciary duties of the Manager and Members to the fullest extent permitted by Delaware law, except for violations of implied contractual covenants of good faith and fair dealing. Members have waived all rights and claims against the Manager and affiliates arising from competing business activities.
“To the fullest extent permitted under the Delaware Limited Liability Company Act and applicable case law, any and fiduciary duties that the Manager and the Members may have to the Company or the other Members have been eliminated; provided, however, that such elimination of fiduciary duties does not extend to acts or omissions that constitute a violation of the implied contractual covenants of good faith and fair dealing.”
The Sponsor concurrently manages Red Oak Capital Fund II through VI, Red Oak Capital Income Opportunity Fund, and other vehicles with substantially identical investment strategies. The Sponsor may direct attractive opportunities to other funds, and the allocation policy may not resolve conflicts in this fund's favor. The allocation policy may be amended by the Sponsor at any time without the Company's consent.
“Our Manager and our Sponsor, its executive officers and its affiliates face conflicts of interest relating to the making of investments, and such conflicts may not be resolved in our favor, which could limit our investment opportunities, impair our ability to make distributions and reduce the value of your investment.”
Kevin Kennedy, an officer and board member of the Sponsor, is registered as an associated person of Crescent Securities Group, Inc. (managing broker-dealer). He may receive all or part of selling commissions and wholesaling fees on Bonds sold directly by him or through certain selling group members, creating a conflict between his duty to the fund and his personal compensation from bond sales.
“Kevin Kennedy, an officer and member of the board of managers of our Sponsor, is registered as an associated person of our managing broker-dealer. As a result, he may be paid all or a part of any selling commission or wholesaling fee resulting from Bonds sold directly by him or through certain selling group members.”
Kevin Kennedy, an officer and member of the board of managers of the Sponsor, is registered as an associated person of the managing broker-dealer (Crescent Securities Group) and may receive selling commissions and wholesaling fees from Bond sales he directs or through certain selling group members, creating a conflict of interest between his role at the Sponsor and his compensation from the broker-dealer.
“Kevin Kennedy, an officer and member of the board of managers of our Sponsor, is registered as an associated person of our managing broker-dealer. As a result, he may be paid all or a part of any selling commission or wholesaling fee resulting from Bonds sold directly by him or through certain selling group members.”
Kevin Kennedy, an officer and member of the board of managers of the Sponsor, is registered as an associated person of the managing broker-dealer, Crescent Securities Group, Inc. As a result, he may personally receive selling commissions and wholesaling fees from Bond sales.
“Kevin Kennedy, an officer and member of the board of managers of our Sponsor, is registered as an associated person of our managing broker-dealer. As a result, he may be paid all or a part of any selling commission or wholesaling fee resulting from Bonds sold directly by him or through certain selling group members.”
Kevin Kennedy (officer and board member of Sponsor) and Raymond Davis (officer of Manager) are registered associated persons of Crescent Securities Group, Inc. (the managing broker-dealer). As a result, they may personally receive all or part of selling commissions generated from Bond sales, creating a direct financial conflict of interest between their roles as fund principals and as commission recipients.
“Kevin Kennedy, an officer and member of the board of managers of our Sponsor, and Raymond Davis, an officer and member of the board of Managers of our Manager, are registered as associated persons of our managing broker-dealer. As a result, they may be paid all or a part of any selling commission resulting from Bonds sold directly by them or through certain selling group members.”
Kevin Kennedy (officer and board member of the Sponsor) and Raymond Davis (officer of the Manager) are registered as associated persons of Crescent Securities Group, the managing broker-dealer, and may receive selling commissions on Bonds sold directly by them or through certain selling group members.
“Kevin Kennedy, an officer and member of the board of managers of our Sponsor and Raymond Davis, an officer of our Manager, are registered as associated persons of our managing broker-dealer. As a result, they may be paid all or a part of any selling commission resulting from Bonds sold directly by them or through certain selling group members.”
The Company may purchase existing performing first mortgage loans held by other Sponsor-managed entities at face value of outstanding principal. The Sponsor cannot guarantee that face value represents the lowest available price, meaning the Company may overpay for loan acquisitions from affiliated programs.
“We may from time to time acquire loans from existing or future entities or programs sponsored and managed by our Sponsor and its affiliates. Part of our business strategy will likely include the purchase of existing and performing first mortgage loans, which could include loans held by entities or programs sponsored and managed by our Sponsor. In such an instance, we would anticipate that we would purchase the loan for the face amount of the principal then outstanding on the loan. The Sponsor cannot guarantee that this is the lowest price for which the loan could be purchased. As a result, we may acquire these loans for a premium to fair market value.”
Fees payable to the Manager and Sponsor were not determined through arm's-length negotiation. The Sponsor also manages other programs with similar investment objectives, creating conflicts in allocating attractive investment opportunities. The investment allocation policy may be amended by the Sponsor at any time without the fund's consent.
“Although customary in the industry, the fees to be paid to our Manager and our Sponsor and its affiliates were not determined in an arm's-length negotiation. We cannot assure you that a third party unaffiliated with our Sponsor would not be willing to provide such services to us at a lower price.”
Fees paid to the Manager (O&O Fee and asset management fee) were not determined through arm's-length negotiation and are paid regardless of the Company's performance or bond returns. Kevin Kennedy and Raymond Davis are also registered associated persons of the managing broker-dealer and may receive wholesaling fees from bond sales.
“Although customary in the industry, the fees to be paid to our Manager were not determined in an arm's-length negotiation. We cannot assure you that a third party unaffiliated with our Manager would not be willing to provide such services to us at a lower price.”
Fees payable to the Manager and Sponsor were not determined through arm's-length negotiations. The Sponsor also manages other programs with similar investment objectives, creating conflicts in allocating investment opportunities among funds.
“Our Manager and our Sponsor and its affiliates perform services for us in connection with the selection and acquisition of our investments. They are paid fees for these services, which reduces the amount of cash available for investment and for payment of our obligations with respect to the Bonds. Although customary in the industry, the fees to be paid to our Manager and our Sponsor and its affiliates were not determined in an arm's-length negotiation.”
Compensation arrangements between the fund and the Manager/Sponsor were not established through arm's-length negotiation. The Sponsor can increase fees payable to itself or affiliates with the nominal consent of a majority of Bondholders, and a Bondholder is deemed to have consented if it does not object in writing within five calendar days of receiving a consent request.
“Our Sponsor may, or may cause our Manager to, increase the fees payable to it and/or its affiliates with the consent of a majority of the Bonds. For this purpose, a Bondholder will be deemed to have consented with respect to its Bonds if the Bondholder has not objected in writing within five (5) calendar days after the receipt of the consent request. As a result, our Sponsor may increase fees paid to it or its affiliates without the affirmative consent of the Bondholders.”
An affiliate of the Sponsor (ROCP) has the ability to purchase foreclosed properties from the Company at a price equal to the outstanding amounts due under the foreclosed loan. The Sponsor acknowledges it cannot guarantee this is the highest price achievable, meaning the Sponsor affiliate may acquire assets at a discount to fair market value at the Company's expense.
“An affiliate of our Sponsor will have the ability to acquire property from our company following a foreclosure of any of our loans. In the case of a purchase by an affiliate of our Sponsor following a foreclosure, the affiliate would purchase the property at a price equal to the amounts due under the foreclosed loan. The Sponsor cannot guarantee this price is the highest price it could receive for the sale of the foreclosed property.”
The Sponsor has sponsored similar privately offered programs and may in the future sponsor similar programs with overlapping investment objectives, creating conflicts in allocating investment opportunities. The Sponsor could direct attractive opportunities to other entities, potentially impairing the fund's ability to honor Bond obligations.
“Our Sponsor has sponsored similar privately offered programs and may in the future sponsor similar private and public programs that have investment objectives similar to ours. Therefore, our Sponsor, its executive officers and its affiliates could be subject to conflicts of interest between our company and other programs. Many investment opportunities would be suitable for us as well as other programs. Our Sponsor could direct attractive investment opportunities to other entities.”
The Sponsor, as sole member of the Manager, has complete and absolute control over the fund. Bondholders have no rights to remove the Manager, no rights under the operating agreement, and no ability to influence investment decisions or major policies, even if the fund underperforms.
“Bondholders will have no right to remove our Manager or otherwise change our management, even if we are underperforming and not attaining our investment objectives. Only the members of our company have the right to remove our Manager, and currently our Manager is our sole member.”
The Sponsor manages other programs (ROCF II, ROCF III) with similar objectives. The allocation policy gives priority to the fund with the most days of outstanding deployable capital, but there is no assurance the policy will adequately address all conflicts or favor this fund.
“Our Sponsor has sponsored similar privately offered programs and may in the future sponsor similar private and public programs that have investment objectives similar to ours. Therefore, our Sponsor, its executive officers and its affiliates could be subject to conflicts of interest between our company and other programs. Many investment opportunities would be suitable for us as well as other programs. Our Sponsor could direct attractive investment opportunities to other entities.”
The Sponsor simultaneously manages Red Oak Capital Fund, LLC, ROCF II, ROCF III, ROCF IV, and Fund V (all with substantially the same business model), creating potential conflicts of interest in allocating lending opportunities among funds. The allocation policy may be amended by the Sponsor at any time without consent.
“In addition to the Company, the Sponsor sponsors and manages, Red Oak Capital Fund, LLC, Red Oak Capital Fund II, LLC, Red Oak Capital Fund III, LLC, and Red Oak Capital Fund IV, LLC (collectively, the 'Existing Funds'), and is considering sponsoring several additional investment vehicles (collectively with the Existing Funds and the Company, the 'Funds'). Each of the Funds has the same or a similar business model as the other Funds.”
Kevin Kennedy, a board member of the Sponsor, and Raymond Davis, an officer of the Manager, are registered as associated persons of Crescent Securities Group, the managing broker-dealer. As a result, they may receive a portion of the wholesaling fees generated from bond sales.
“Kevin Kennedy, an officer and member of the board of managers of our Sponsor, and Raymond Davis, an officer of our Manager, are registered as associated persons of our managing broker-dealer. As a result, they may be paid all or a part of any fees resulting from Bonds sold directly by them or through certain selling group members.”
The Company's operations depend significantly on the Sponsor's management team. The Company has no employment agreements with key personnel and no key-man life insurance on any individuals. Loss of key personnel could impair investment strategy and ability to honor bond obligations.
“We do not have employment agreements with any of these individuals nor do we currently have key man life insurance on any of these individuals. If any of them were to cease their affiliation with us, our Manager or our Sponsor, our Sponsor may be unable to find suitable replacements, and our operating results could suffer.”
The Company's success depends significantly on the Sponsor's management team, yet the Sponsor has no employment agreements with any key individuals and carries no key man life insurance. Loss of any key person could impair the Company's ability to implement its investment strategy and honor Bond obligations.
“We do not have employment agreements with any of these individuals nor do we currently have key man life insurance on any of these individuals. If any of them were to cease their affiliation with us, our Manager or our Sponsor, our Sponsor may be unable to find suitable replacements, and our operating results could suffer.”
On June 23, 2023, Red Oak Income Opportunity Fund (a related party lead lender) issued a notice of default, acceleration, and demand to 112 Wilmington PL SE DE LLC for violating a negative covenant. The Company held a $3,000,000 participation. The loan was subsequently paid off by the lead lender in full in September 2023.
“On June 23, 2023, Red Oak Income Opportunity Fund, LLC (the 'Lead Lender'), a related party, issued a notice of default, acceleration, and a demand to pay to a mortgage note borrower, 112 Wilmington PL SE DE LLC for violating a negative covenant per the terms of the loan agreement. On September 14, 2023, the minority participation was paid off by the Lead Lender for the full principal and accrued interest outstanding at the time.”
The Manager is not registered and does not intend to register as an investment adviser under the Investment Advisers Act of 1940. If required to register, it could impact operations and reduce investor returns.
“The Manager is not currently registered as an investment adviser under the Advisers Act and does not expect to register as an investment adviser because the Company does not believe that it meets the registration requirements under the Advisers Act.”
All compensation arrangements with the Manager and its affiliates were established by the Manager itself and are not the result of arm's-length negotiations, creating a potential conflict of interest.
“These compensation arrangements have been established by our Manager and its affiliates and are not the result of arm's-length negotiations.”
The Manager receives a 1.00% annual management fee and a 0.50% disposition fee regardless of the fund's performance or the returns delivered to Bondholders. These fees were not negotiated at arm's length and reduce the cash available to honor Bond obligations.
“Our Manager will receive certain fees regardless of the performance of our company or an investment in the Bonds. Our Manager will receive management fees, calculated quarterly and paid in advance of the applicable quarter, equal to 1.00% of (i) all capital contributions of the Members, net of any amounts invested at that time in loans or debt instruments, plus (ii) the outstanding principal amount of each loan or real estate debt instrument we then hold, including loans secured by real estate we then own as a result of borrower default... These fees will be paid regardless of our success and the performance of the Bonds.”
The Manager is not registered and does not intend to register as an investment adviser under the Investment Advisers Act of 1940. If required to register, compliance costs could reduce investor returns, and if the Manager is found to be acting as an unregistered adviser, it could face enforcement action.
“The Manager is not currently registered as an investment adviser under the Advisers Act and does not expect to register as an investment adviser because the Company does not believe that it meets the registration requirements under the Advisers Act.”
In June 2021, previous sponsor Red Oak Capital Group, LLC completed an assignment of interests. In March 2022, Joseph Elias (COO) and Jason Anderson (CFO) sold their equity stakes to White Oak Capital Holdings, LLC and resigned from all positions after termination of Transition Services Agreements, representing significant management turnover.
“On March 14, 2022, Joseph Elias and Jason Anderson sold all their equity interests in the Manager to White Oak Capital Holdings, LLC, a Michigan limited liability company ('White Oak'), and resigned from their positions as Managers and members of the board of managers of the Manager, effective March 14, 2022.”
The Sponsor anticipated an internal reorganization in H2 2020 in which a new affiliated entity (NewCo) would acquire the Manager, with Davis and Anderson each owning minority interests in NewCo, potentially changing the ownership and control structure of the entity managing the Company.
“Our Sponsor anticipates engaging in an internal reorganization in second half of 2020 in which a new affiliated entity, or NewCo, will acquire our Manager from our Sponsor. This new entity is anticipated to be initially majority-owned by our Sponsor, with Messrs. Davis and Anderson each owning a minority interest in NewCo.”
The Sponsor's prior public program, Red Oak Capital Fund II (ROCF II), sold all $50 million of bonds but has no global liquidity event expected. The fund has an indefinite life with auto-renewing bonds, meaning bondholders rely on periodic maturity dates as the only liquidity events.
“ROCF II has an indefinite life with no global liquidity event expected. Each successive maturity date should viewed as a periodic liquidity event and the first such event has not yet been reached.”
ROCF II sold all $50M of bonds; final closing August 2019. As of June 30, 2019, ROCF II held approximately $19.32M of mortgage loans receivable (7 loans, 10-12% interest rate). All interest payments to date made timely. Net proceeds after all fees and costs were approximately $32.2M, with approximately $3.6M in debt issuance costs incurred.
“As of June 30, 2019, ROCF II issued approximately $2.3 million and $34.4 million of ROCF II Series A and ROCF II Series B, respectively. ROCF II had incurred approximately $3.6 million of debt issuance costs from the offering, of which $46,800 and $2,323,688 were incurred as commissions for ROCF II Series A and ROCF II Series B issuances, respectively.”
Prior funds ROCF II and ROCF III sold all $50 million of bonds and have indefinite lives with no global liquidity event expected. Each successive maturity date is the only periodic liquidity event. ROCF IV commenced operations in Feb 2020 with approximately $5.83 million of bonds remaining to be sold as of the filing date.
“ROCF II has an indefinite life with no global liquidity event expected. Each successive maturity date should viewed as a periodic liquidity event and the first such event has not yet been reached.”
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