Ginsburg v. Icc Holdings Llc et al

Motion to Dismiss for Failure to State a Claim

N.D. Tex.October 17, 2016

AUS-6306826-1 530201/1 IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF TEXAS DALLAS DIVISION SCOTT GINSBURG, Plaintiff, v. ICC HOLDINGS, LLC, and TIM MCGRAW, Defendants. § § § § § § § § § § CIVIL ACTION NO. 3:16-cv-02311-D DEFENDANTS, ICC HOLDINGS, LLC AND TIM MCGRAW’S MOTION TO DISMISS PURSUANT TO F.R.C.P. 12(B)(6) AND 9(B) AND BRIEF IN SUPPORT NOW COME ICC Holdings, LLC (“ICC”) and Tim McGraw (“McGraw”) (collectively “Defendants”), and respectfully request that the Court dismiss this case pursuant to Rules 12(b)(6) and 9(b) of the Federal Rules of Civil Procedure because Plaintiff’s Second Amended Complaint and Jury Demand [Dkt. 8] (the “Complaint”) fails to state a claim upon which relief can may be granted. Case 3:16-cv-02311-D Document 13 Filed 10/17/16 Page 1 of 30 PageID 119 AUS-6306826-1 530201/1 Respectfully submitted, By: /s/ Richard A. Illmer Richard A. Illmer State Bar No. 10388350 Rick.Illmer@huschblackwell.com HUSCH BLACKWELL LLP 2001 Ross Avenue, Suite 2000 Dallas, Texas 75201 (214) 999-6100 (214) 999-6170 facsimile ATTORNEYS DEFENDANTS, ICC HOLDINGS, LLC AND TIM MCGRAW Case 3:16-cv-02311-D Document 13 Filed 10/17/16 Page 2 of 30 PageID 120 i AUS-6306826-1 530201/1 Table of Contents Page I. INTRODUCTION............................................................................................................. 1 II. FACTUAL BACKGROUND ........................................................................................... 4 III. ARGUMENT AND AUTHORITIES. ............................................................................. 7 A. Rules 12(b)(6) and 9(b) Motion to Dismiss Standard ........................................ 7 B. The Notes are void and unenforceable because their illegal purpose contravenes public policy. .................................................................................... 8 C. Ginsburg could not have justifiably relied on any alleged misrepresentations, and all risks were disclosed. ............................................. 13 D. Plaintiff’s breach of contract claim fails as a matter of law. .......................... 15 E. Plaintiff has failed to state a plausible federal securities act claim. ............... 16 F. Plaintiff has failed to state a plausible Texas Securities Act claim................. 19 G. Plaintiff has failed to state a plausible claim for common law fraud. ............ 19 H. Plaintiff likewise fails to state a plausible statutory fraud claim. ................... 20 I. Plaintiff has failed to state a plausible Illinois Securities Act claim. .............. 21 J. Plaintiff has failed to state a plausible RICO claim. ........................................ 21 IV. CONCLUSION & PRAYER. ........................................................................................ 22 Case 3:16-cv-02311-D Document 13 Filed 10/17/16 Page 3 of 30 PageID 121 ii AUS-6306826-1 530201/1 Table of Authorities Federal Court Cases Abrams v. Baker Hughes Inc., 292 F.3d 424, 430 (5th Cir.2002) .............................................................................................. 8 Anderson v. U.S. Dept. of Housing and Urban Development, 554 F.3d 525 (5th Cir. 2008) ..................................................................................................... 7 Ashcroft v. Iqbal, 129 S. Ct. 1937 (2009) ............................................................................................................... 7 Bell Atl. Corp. v. Twombly, 550 U.S. 555 (2007) ................................................................................................................... 7 Brown v. Protective Life Ins. Co., 353 F.3d 405 (5th Cir. 2003) ................................................................................................... 22 Collins v. Morgan Stanley Dean Witter, 224 F.3d 496 (5th Cir. 2000) ..................................................................................................... 4 Coppell v. Hall, 74 U.S. 542 (1868) ..................................................................................................................... 3 Dorsey v. Portfolio Equities, Inc., 540 F.3d 333 (5th Cir. 2008) ..................................................................................................... 8 Gonzales v. Raich, 545 U.S. 1 (2005) ................................................................................................................... 8, 9 Greenberg v. Crossroads Sys., Inc., 364 F.3d 657 (5th Cir. 2004) ................................................................................................... 18 Hammer v. Today’s Health Care II, CV2011-051310, (Ariz. Sup. Ct. Apr. 12, 2012) ..................................................................... 11 Herrmann Holdings Ltd. v. Lucent Techs. Inc., 302 F.3d 552 (5th Cir. 2002) ................................................................................................... 19 In re Arenas, 535 B.R. 845 (B.A.P. 10th Cir. 2015) ................................................................................. 2, 10 In re Capstead Mortg. Corp. Sec. Litig., 258 F. Supp. 2d 533 (N.D. Tex. 2003) .............................................................................. 16, 18 In re Johnson, 532 B.R. 53 (Bankr. W.D. Mich. 2015) ................................................................................... 10 Case 3:16-cv-02311-D Document 13 Filed 10/17/16 Page 4 of 30 PageID 122 iii AUS-6306826-1 530201/1 In re Rent-Rite Super Kegs W. Ltd., 484 B.R. 799 (Bankr. D. Colo. 2012) ...................................................................................... 10 Kane Enters. v. MacGregor (USA), Inc., 322 F.3d 371 (5th Cir. 2003) ..................................................................................................... 7 Krim v. BancTexas Group, Inc., 989 F.2d 1435, 1446 (5th Cir.1993) ........................................................................................ 18 Local 210 Unity Pension & Welfare Funds v. McDermott Intern. Inc., 4:13-CV-2393, 2015 WL 1143081 (S.D. Tex. Mar. 13, 2015) ............................................... 18 Lone Star Fund v. (U.S.), L.P. v. Barclays Bank PLC, 594 F.3d 383 (5th Cir. 2010) ...................................................................................................... 4 Lormand v. US Unwired, Inc., 565 F.3d 228 (5th Cir. 2009) ................................................................................................... 17 McCormick v. Stadler, 105 F.3d 1059 (5th Cir. 1997) ................................................................................................... 7 Montana Shooting Sports Ass’n v. Holder, 727 F.3d 975 (9th Cir. 2013) ................................................................................................... 10 Nathenson v. Zonagen, Inc., 267 F.3d 400 (5th Cir. 2001) ................................................................................................... 17 Neitzke v. Williams, 490 U.S. 319 (1989) ................................................................................................................... 7 Orthodontic Centers of Texas, Inc. v. Wetzel, 410 Fed. Appx. 795, 798 (5th Cir.2011) .................................................................................. 12 Packard v. OCA, Inc., 624 F.3d 726 (5th Cir. 2010) ................................................................................................... 12 Rosenzweig v. Azurix Corp., 332 F.3d 854 (5th Cir. 2003) ................................................................................................... 17 Shushany v. Allwaste, Inc., 992 F.2d 517, 524 (5th Cir.1993) ............................................................................................ 19 Stanissis v. DynCorp Int’l LLC, 3:14-CV-2736-D, 2015 WL 9478184 (N.D. Tex. Dec. 29, 2015) ........................................... 21 Tracy v. USAA Casualty Insurance Co., No. 11-00487LEK-KSC, 2012 WL 928186 (D. Haw. Mar. 16, 2012) ................................... 11 Case 3:16-cv-02311-D Document 13 Filed 10/17/16 Page 5 of 30 PageID 123 iv AUS-6306826-1 530201/1 U.S. ex rel. Thompson v. Columbia/HCA Healthcare Corp., 125 F.3d 899 (5th Cir. 1997) ..................................................................................................... 8 U.S. Quest Ltd. v. Kimmons, 228 F.3d 399 (5th Cir. 2000) ................................................................................................... 20 United States ex rel. Willard v. Humana Health Plan of Tex., Inc., 336 F.3d 375 (5th Cir. 2003) ..................................................................................................... 4 Williams v. WMX Tech., Inc., 112 F.3d 175 (5th Cir. 1997) ..................................................................................................... 8 Zastrow v. Houston Auto Imps. Greenway Ltd., 789 F.3d 553 (5th Cir. 2015) ................................................................................................... 22 State Court Cases Burks v. State, 795 S.W.2d 913 (Tex. App.—Amarillo 1990, pet. ref’d) ........................................................ 12 Country Village Homes, Inc. v. Patterson, 236 S.W.3d 413 (Tex. App.—Houston [1st Dist.] 2007, pet. granted ..................................... 19 Garcia v. Thomas, Case No. 34-2013-00138040-CU-BC-GDS (Cal. Dep’t Super. Ct.—Sacramento Sept. 6, 2013) ..................................................................................................................................... 12 Haeberle v. Lowden, 2012 WL 7149098 (Colo. Dist. Ct. Aug. 8, 2012) ............................................................ 11, 12 In re First Merit Bank, N.A., 52 S.W.3d 749 (Tex. 2001) ...................................................................................................... 19 Interceramic, Inc. v. South Orient R.R. Co., Ltd., 999 S.W.2d 920 (Tex. App.—Texarkana 1999, pet. denied) .................................................. 16 Winchek v. American Express Travel Related Servs., 232 S.W.3d 197 (Tex. App.—Houston [1st Dist.] 2007, no pet.) ........................................... 15 Federal Statutory Authorities 15 U.S.C. § 78(u) .......................................................................................................................... 18 15 U.S.C. § 78j(b) ......................................................................................................................... 16 15 U.S.C. § 78u-4(b) ..................................................................................................................... 17 18 U.S.C. § 1961(1) ...................................................................................................................... 22 Case 3:16-cv-02311-D Document 13 Filed 10/17/16 Page 6 of 30 PageID 124 v AUS-6306826-1 530201/1 18 U.S.C. § 1962(c) .............................................................................................................. 2, 9, 21 21 U.S.C. § 811 ............................................................................................................................... 8 21 U.S.C. § 812 ............................................................................................................................... 8 21 U.S.C. § 812(b)(1)(A)-(C) ...................................................................................................... 2, 8 21 U.S.C. § 812(c)(17) .................................................................................................................... 8 21 U.S.C. § 841 ............................................................................................................................... 2 21 U.S.C. § 844(a) ........................................................................................................................... 8 21 U.S.C. § 848 ............................................................................................................................... 9 Statutory Authorities Tex. Bus. & Com. Code § 27.01 ......................................................................................... 2, 20, 21 Federal Rules and Regulations 17 C.F.R. § 240.10b-5 ................................................................................................................... 16 Fed. R. Civ. P. 12(b)(6)................................................................................................... 1, 7, 16, 22 Fed. R. Civ. P. 9(b) ............................................................................................... 1, 7, 8, 17, 19, 22 Treatises Allan Farnsworth, Contracts § 5.1 (3rd ed. 1998) ......................................................................... 3 Additional Authorities James M. Cole, U.S. Deputy Att’y Gen., to U.S. Att’ys June 29, 2011 .......................................................................................................................... 2, 9 Marijuana Trafficker Sentenced to 48 Months in Federal Prison, U.S. Department of Justice (Sept. 21, 2016) ............................................................................. 3 Case 3:16-cv-02311-D Document 13 Filed 10/17/16 Page 7 of 30 PageID 125 Defendants’ Motion to Dismiss and Brief in Support Page 1 AUS-6306826-1 530201/1 IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF TEXAS DALLAS DIVISION SCOTT GINSBURG, Plaintiff, v. ICC HOLDINGS, LLC, and TIM MCGRAW, Defendants. § § § § § § § § § § CIVIL ACTION NO. 3:16-cv-02311-D DEFENDANTS’ BRIEF IN SUPPORT OF THEIR MOTION TO DISMISS PURSUANT TO F.R.C.P. 12(B)(6) AND 9(B) TO THE HONORABLE UNITED STATES DISTRICT JUDGE: Defendants request that the Court dismiss Plaintiff’s claims pursuant to Rules 12(b)(6) and 9(b) of the Federal Rules of Civil Procedure because Plaintiff’s Complaint fails to state a claim upon which relief can may be granted. Defendants respectfully show the Court: I. INTRODUCTION 1. This case is about Plaintiff Scott Ginsburg’s (“Ginsburg” or “Plaintiff”) multimillion-dollar investment in ICC Holdings, LLC’s (“ICC”), a start-up in the business of the cultivation, possession, sale and distribution of marijuana and marijuana related products. Ginsburg, individually, through two convertible promissory notes, knowingly invested $10,600,000.00 to fund the cultivation, possession, and sale of marijuana. 2. Under a reserve agreement, Ginsburg held back $1,260,000.00 of the $10,600,000.00 to service the first year’s interest payments for both notes. Notwithstanding the Case 3:16-cv-02311-D Document 13 Filed 10/17/16 Page 8 of 30 PageID 126 Defendants’ Motion to Dismiss and Brief in Support Page 2 AUS-6306826-1 530201/1 same, Ginsburg now contends that ICC defaulted on the notes by failing to make interest payments within the first year. 3. Additionally, Ginsburg asserts claims based upon allegations that Defendants (i) misrepresented forecasted earnings and financial projections and (ii) failed to disclose risks arising from the status of Illinois marijuana legislation.1 4. In sum, Ginsburg is brazenly requesting this federal court to resolve contractual disputes concerning his illegal investments in the cultivation, possession, and sale of marijuana, despite the Federal Controlled Substance Act of 1970 (“CSA”), which lists marijuana as a banned substance, has determined that marijuana has “no currently accepted medical use,” and forbids individuals from making a profit from the sale of marijuana.2 Indeed, James M. Cole, Deputy Attorney General, in a memorandum to U.S. attorneys, recently reemphasized that “[p]ersons who are in the business of cultivating, selling, or distributing marijuana . . . are in violation of the [CSA], regardless of state law.”3 5. As one federal court explained when refusing to provide relief to a marijuana dispensary, those in the cannabis industry “are unfortunately caught between pursuing a business that the people of [their state] have declared to be legal and beneficial, but which the laws of the United States—laws that every U.S. judge swears to uphold—proscribe and subject to criminal sanction.” 4 1 Ginsburg’s causes of action include (i) common law fraud, (ii) statutory fraud under Tex. Bus. & Com. Code § 27.01, (iii) Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5, (iv) Section 20 of the Securities Exchange Act of 1934, (v) Tex. Rev. Civ. Stat. Art. 581-33(A)(2), (vi) Tex. Rev. Civ. Stat. Art. 581- 33(F), (vii) unspecified provisions of the Illinois Securities Law of 1953, and (viii) violations of the Racketeer Influence Corruption Organizations Act (“RICO”), 18 U.S.C. § 1962(c). 2 21 U.S.C. §§ 812(b)(1)(A)-(C), 841, 844–848 (2012) . 3 Memorandum from James M. Cole, U.S. Deputy Att’y Gen., to U.S. Att’ys (June 29, 2011), https://www.justice.gov/sites/default/files/oip/legacy/2014/07/23/dag-guidance-2011-formedical-marijuana-use.pdf 4 In re Arenas, 535 B.R. 845, 854 (B.A.P. 10th Cir. 2015). Case 3:16-cv-02311-D Document 13 Filed 10/17/16 Page 9 of 30 PageID 127 Defendants’ Motion to Dismiss and Brief in Support Page 3 AUS-6306826-1 530201/1 6. Stated differently, while the Illinois Compassionate Use of Medical Cannabis Pilot Program Act may protect registered cultivation centers and registered dispensing organizations from prosecution of Illinois state and local drug laws, Ginsburg enjoys no such protection and/or immunity from the enforcement of federal and the State of Texas drug laws and public policies. Within the last month, this Court sentenced a marijuana trafficker to four years in federal prison for trafficking less marijuana than Ginsburg admittedly expected to result from his investment.5 7. Because the promissory notes fund the cultivation, possession, and sale of marijuana, they contravene public policy; thus, they are void and unenforceable.6 Indeed, as a discussed infra, courts refuse to aid either party to an illegal transaction. Moreover, even state courts in jurisdictions that permit medical marijuana (Arizona, California, and Colorado) have determined that loan agreements, investment agreements, and purchase contracts related to the cannabis industry are void and unenforceable because they violate federal law and, therefore, contravene public policy. 8. Finally, even if this Court determines that the notes are enforceable, the Court should nevertheless dismiss Ginsburg’s claims because the Complaint fails to state plausible claims related to Defendants’ alleged breach of the promissory notes, alleged misrepresentations, and/or failure to disclose risks. As a result, Plaintiff’s Complaint should be dismissed. 5 Marijuana Trafficker Sentenced to 48 Months in Federal Prison, U.S. DEPARTMENT OF JUSTICE (Sept. 21, 2016), https://www.justice.gov/usao-ndtx/pr/marijuana-trafficker-sentenced-48-months-federal-prison 6 ALLAN FARNSWORTH, CONTRACTS § 5.1 (3rd ed. 1998) (citing Coppell v. Hall, 74 U.S. 542, 558 (1868) (“The defence [sic] is allowed, not for the sake of the defendant, but of the law itself.”)). Case 3:16-cv-02311-D Document 13 Filed 10/17/16 Page 10 of 30 PageID 128 Defendants’ Motion to Dismiss and Brief in Support Page 4 AUS-6306826-1 530201/1 II. FACTUAL BACKGROUND7 9. ICC is a start-up, Illinois limited liability company seeking to enter the medical marijuana business in Illinois.8 Defendant Tim McGraw (“McGraw”) was its chief executive officer.9 10. On or about January 6, 2016, McGraw e-mailed Ginsburg the financial projections for ICC, including a Confidential Private Placement Memorandum previously issued in March 2015 (“PPM”).10 11. Ginsburg alleges he reviewed the PPM and relied on the same.11 12. The PPM advices potential investors that ICC disclaims all liabilities related to alleged representations and warranties expressed or implied.12 Regarding the associated risk related to investing in ICC, the PPM states any investment is highly speculative and involves high risk, such that investors must know that they may sustain a loss of their entire investment.13 The PPM further advises that forward-looking statements and projections are based upon assumptions of future events that are inherently uncertain and subjective.14 Finally, the PPM 7 In resolving a Rule 12(b)(6) motion, the Court is limited to the pleadings, any attachments thereto, matters of public record, and matters of which judicial notice may be taken. Lone Star Fund v. (U.S.), L.P. v. Barclays Bank PLC, 594 F.3d 383, 387 (5th Cir. 2010); Collins v. Morgan Stanley Dean Witter, 224 F.3d 496, 498 (5th Cir. 2000); see also United States ex rel. Willard v. Humana Health Plan of Tex., Inc., 336 F.3d 375, 379 (5th Cir. 2003) (“[T]he court may consider . . . matters of which judicial notice may be taken.”). Documents attached to a motion to dismiss are “‘part of the pleadings if they are referred to in the plaintiff’s complaint and are central to [the plaintiff’s] claim.’” Collins, 224 F.3d at 498–99 (quotation omitted). Accordingly, the Court may consider all records attached hereto by Defendants in connection with their motion to dismiss for failure to state a claim. 8 See Confidential Private Placement Memorandum (the “PPM”). Attached hereto as Exhibit A is the complete PPM. 9 See Complaint Ex. B, Ex.C; see also PPM. 10 Complaint ¶11. 11 See id. ¶12(a)–(c). 12 PPM 2. 13 Id. 14 Id. at 3-4. Case 3:16-cv-02311-D Document 13 Filed 10/17/16 Page 11 of 30 PageID 129 Defendants’ Motion to Dismiss and Brief in Support Page 5 AUS-6306826-1 530201/1 warns that the cultivation, sale, and use of marijuana are illegal under federal law, and that state laws are in flux.15 13. On or about January 19, 2016, ICC issued a convertible promissory note to Ginsburg in return for $7,000,000.00 (“January Note”).16 On or about that same day, Ginsburg wired the complete $7,000,000.00 to fund the cultivation, possession, and sale of marijuana.17 14. The January Note required ICC to make certain representations and warranties for the loan.18 However, none of the required representations or warranties concerned information in the PPM or alleged communications from McGraw and/or ICC.19 15. On or about February 17, 2016, McGraw warned Ginsburg that ICC’s patient and facility ramp-up was slower than projected because of decisions made by Illinois’ governor.20 16. On or about March 3, 2016, McGraw advised Ginsburg that, without additional funding, ICC could not afford to pay the subcontractors that were building one of its marijuana cultivation centers, and the subcontractors were threatening to walk off the job.21 17. On or about March 4, 2016, ICC issued another convertible promissory note in return for $3,600,000.00 (“March Note,” the January Note and March Note are together referred to as the “Notes”).22 On March 4, 2016, Ginsburg wired $2,340,000.00 to ICC to fund the cultivation, possession, and sale of marijuana, but withheld $1,260,000.00 (the “Reserve Funds”). 18. Ginsburg acknowledges that the parties negotiated the funding disbursement and 15 Id. at 5. 16 Complaint ¶12(c), Ex. B. 17 Id. at ¶12(j). 18 Id. Ex. B 4–5. 19 Id. 20 Id. at ¶12(e). 21 Id. at ¶12(h). 22 Id. at ¶12(i), Ex. C. Case 3:16-cv-02311-D Document 13 Filed 10/17/16 Page 12 of 30 PageID 130 Defendants’ Motion to Dismiss and Brief in Support Page 6 AUS-6306826-1 530201/1 interest reserve agreement (“Reserve Agreement”).23 It is further undisputed that the parties acted in complete conformance with the Reserve Agreement, as Ginsburg withheld the Reserve Funds that equaled twelve months of interest payments on the combined loan amounts of $10,600,000.00.24 19. Although Ginsburg asserts that he never agreed to or executed the Reserve Agreement, he admits in his Complaint that he withheld the Reserve Funds.25 Notably, Ginsburg also never executed the Notes, despite each reserving a spot for his signature. 20. The March Note also required ICC to make certain representations and warranties for the loan.26 However, just like the January Note, none of the required representations or warranties concerned information in the PPM or alleged communications from McGraw and/or ICC. 21. On July 6, 2016, in contravention to the Reserve Agreement, Ginsburg’s counsel issued a demand for accrued interest under the Notes (despite the fact that such payments were not due, pursuant to the terms of the Reserve Agreement.27 Nevertheless, Ginsburg brought the instant lawsuit. Ginsburg asserts a breach of contract claim for the alleged default under the Notes, along with various claims asserting that ICC fraudulently misled Ginsburg by allegedly providing “wildly optimistic forecasts.” 22. As set forth below, because the purpose of the Notes is to fund the cultivation, possession, and sale of marijuana, in violation of federal law—the Notes are void and unenforceable as they contravene public policy. Further, even if the Notes were enforceable, the Court should still dismiss Ginsburg’s claims because Defendants have not breached the Notes, 23 Id. and note 1. The Funding Disbursement and Interest Reserve Agreement is attached hereto as Exhibit B. 24 Id. and note 1. 25 Id. and note 1. 26 Id. Ex. B, at 4–5. 27 Id. at ¶16. Case 3:16-cv-02311-D Document 13 Filed 10/17/16 Page 13 of 30 PageID 131 Defendants’ Motion to Dismiss and Brief in Support Page 7 AUS-6306826-1 530201/1 made any misrepresentations, or failed to disclose risks. As a result, Plaintiff’s Complaint fails to state a plausible claim for relief against Defendants. III. ARGUMENT AND AUTHORITIES. A. Rules 12(b)(6) and 9(b) Motion to Dismiss Standard 23. Pursuant to Rules 12(b)(6) and 9(b) of the Federal Rules of Civil Procedure, this action should be dismissed because Plaintiff has failed to state a claim against Defendants upon which relief may be granted. 24. “To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’” Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 555, 570 (2007)). “A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id. When reviewing the complaint, courts “are not bound to accept as true a legal conclusion couched as a factual allegation.” Iqbal, 129 S. Ct. at 1949–50. Instead, “a plaintiff must plead specific facts, not mere conclusional allegations, to avoid dismissal for failure to state a claim.” See Kane Enters. v. MacGregor (USA), Inc., 322 F.3d 371, 374 (5th Cir. 2003). Conclusory allegations and unwarranted deductions of fact are not accepted as true. Id. “A complaint must do more than name laws that may have been violated by the defendant; it must also allege facts regarding what conduct violated those laws. In other words, a complaint must put the defendant on notice as to what conduct is being called for defense in a court of law.” Anderson v. U.S. Dept. of Housing and Urban Development, 554 F.3d 525, 528-29 (5th Cir. 2008). Finally, complaints “based on an outlandish legal theory or on a close but ultimately unavailing one” should be dismissed. See Neitzke v. Williams, 490 U.S. 319, 327 (1989); McCormick v. Stadler, 105 F.3d 1059, 1061 (5th Cir. 1997). Case 3:16-cv-02311-D Document 13 Filed 10/17/16 Page 14 of 30 PageID 132 Defendants’ Motion to Dismiss and Brief in Support Page 8 AUS-6306826-1 530201/1 25. When pleading a claim of fraud in federal court, a plaintiff must comply with the heightened pleading standard of Fed. R. Civ. P. 9(b), which requires a plaintiff to “state with particularity the circumstances constituting fraud[.]” Id. This requires, “[a]t a minimum, . . . that a plaintiff set forth the ‘who, what, when, where, and how’ of the alleged fraud.” U.S. ex rel. Thompson v. Columbia/HCA Healthcare Corp., 125 F.3d 899, 903 (5th Cir. 1997) (quoting Williams v. WMX Tech., Inc., 112 F.3d 175, 179 (5th Cir. 1997)). “Both federal securities claims and state-law fraud claims are subject to the pleading requirements of Rule 9(b).” Dorsey v. Portfolio Equities, Inc., 540 F.3d 333, 338–39 (5th Cir. 2008) (citing Abrams v. Baker Hughes Inc., 292 F.3d 424, 430 (5th Cir.2002)); Williams v. WMX Technologies, Inc., 112 F.3d 175, 177 (5th Cir.1997). B. The Notes are void and unenforceable because their illegal purpose contravenes public policy. 1. It is illegal to finance the cultivation, possession, or distribution of marijuana. 26. The Federal Controlled Substances Act (“CSA”) classifies marijuana as a Schedule I controlled substance and prohibits its use under any circumstance. 21 U.S.C. § 812(c)(17); 21 U.S.C. § 844(a). Congress set forth three criteria that Schedule I controlled substances must meet: (a) the drug or other substance has a high potential for abuse; (b) the drug or other substance has no currently accepted medical use in treatment in the United States; and (c) there is a lack of accepted safety for use of the drug or other substance under medical supervision. 21 U.S.C. § 812(b)(1)(A)-(C). 27. The CSA makes it unlawful to “manufacture, distribute, dispense, or possess any controlled substance.” Gonzales v. Raich, 545 U.S. 1, 13 (2005) (citing 21 U.S.C. §§ 811 and 812). The CSA also makes it illegal to profit from the manufacturing or sale of marijuana. 21 U.S.C. §§ 841, 844–848 (2012). Loaning money to support a business cultivating, selling, or Case 3:16-cv-02311-D Document 13 Filed 10/17/16 Page 15 of 30 PageID 133 Defendants’ Motion to Dismiss and Brief in Support Page 9 AUS-6306826-1 530201/1 distributing marijuana exposes individuals to other federal laws that criminalize aspects of the marijuana businesses. See e.g., Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1962 (2012); and Continuing Criminal Enterprise Statute, 21 U.S.C. § 848 (2012). 28. Because some states have passed legislation providing protection from prosecution of state and local drug laws in limited situations, the Deputy Attorney General, in a memorandum to U.S. attorneys, recently reemphasized that “[p]ersons who are in the business of cultivating, selling, or distributing marijuana . . . are in violation of the [CSA], regardless of state law.”28 29. To Ginsburg’s credit, he has not attempted to mislead the Court. He has admitted to this Federal Court that he has invested $10,600,000.00 to support a business cultivating, selling, and distributing marijuana. 29 However, Ginsburg cannot deny that by investing in ICC to finance cultivating, possessing, and selling marijuana, he has knowingly violated countless Texas and federal drug laws. 2. The Illinois Compassionate Use of Medical Cannabis Pilot Program Act does not legalize cultivating, possessing, or selling marijuana under federal law. 30. In recognition that it cannot change federal law, the Illinois Compassionate Use of Medical Cannabis Pilot Program Act (the “Act”) restricts itself to amending only state and local law. In repeatedly qualifying its dictates with reference to state or local law, the drafters of the Act recognized it would be declared null and void if it purported to make medical marijuana use “lawful” for all purposes. U.S. Const. art. VI, cl. 2 (Supremacy Clause); see also Gonzales v. 28 Memorandum from James M. Cole, U.S. Deputy Att’y Gen., to U.S. Att’ys (June 29, 2011), https://www.justice.gov/sites/default/files/oip/legacy/2014/07/23/dag-guidance-2011-formedical-marijuana-use.pdf 29 Complaint ¶1; see PPM in general (Ginsburg invested $10,600,000.00 to “provide critical funding to support Defendants’ medical marijuana business.”). Case 3:16-cv-02311-D Document 13 Filed 10/17/16 Page 16 of 30 PageID 134 Defendants’ Motion to Dismiss and Brief in Support Page 10 AUS-6306826-1 530201/1 Raich, 545 U.S. 1, 22 (2005) (ruling that Congress may regulate marijuana under the Commerce Clause because marijuana sales substantially affect interstate commerce). 31. Should the Act be interpreted as creating exceptions to federal law or making federal law invalid within Texas or Illinois, the Act is preemptively void. See, e.g., Montana Shooting Sports Ass’n v. Holder, 727 F.3d 975, 982-83 (9th Cir. 2013) cert. denied, 134 S. Ct. 955, 187 L. Ed. 2d 786 (U.S. 2014) and cert. denied, 134 S. Ct. 1335, 188 L. Ed. 2d 308 (U.S. 2014) (declaring Montana laws seeking exceptions to federal gun law preempted). 32. While Ginsburg’s conduct may be in conformance with Illinois state laws, he has undoubtedly violated the laws of this Court’s jurisdiction and the laws of the State of Texas. 3. The Notes are illegal contracts that are void and unenforceable. 33. Federal courts in adjudicating disputes within the cannabis industry have generally taken a black and white approach to the illegality of the cannabis industry. For example, in In re Rent-Rite Super Kegs W. Ltd., despite Colorado’s immunity from prosecution under state and local laws for both medical and recreational marijuana purposes, a bankruptcy court denied relief to a debtor who leased his warehouse space to a party that sold marijuana under state laws. 484 B.R. 799 (Bankr. D. Colo. 2012). The court stated that, until Congress passes a law deeming the sale of marijuana legal under federal law, “a federal court cannot be asked to enforce the protections of the Bankruptcy Code in aid of a debtor whose activities constitute a continuing federal crime.” Id. at 803–05.30 30 The court further stated: “Debtor points out that federal authorities have never notified it that it is in violation of the law and that it has never been charged or convicted of any federal or state crime. But the fact that a violator is never charged, tried or convicted does not change the fact that the crime has been committed.” Id. at 805.; see also In re Arenas, 535 B.R. 845, 854 (B.A.P. 10th Cir. 2015) (stating that dispensary owners “are unfortunately caught between pursuing a business that the people of [their state] have declared to be legal and beneficial, but which the laws of the United States—laws that every U.S. judge swears to uphold—proscribe and subject to criminal sanction”); In re Johnson, 532 B.R. 53, 59 (Bankr. W.D. Mich. 2015) (“In the court’s view, the Debtor cannot conduct an enterprise that admittedly violates federal criminal law while enjoying the federal benefits the Bankruptcy Code affords him.”). Case 3:16-cv-02311-D Document 13 Filed 10/17/16 Page 17 of 30 PageID 135 Defendants’ Motion to Dismiss and Brief in Support Page 11 AUS-6306826-1 530201/1 34. Similarly, a federal district court in Hawaii entered a take nothing judgment against a homeowners insurance policy holder suing for $45,600.00 in unpaid claims for stolen marijuana plants. Tracy v. USAA Casualty Insurance Co., No. 11-00487LEK-KSC, 2012 WL 928186, at *1, *13 (D. Haw. Mar. 16, 2012). The court determined that federal law precluded the court from forcing USAA to honor the claim because “[p]laintiff’s possession and cultivation of marijuana, even for State-authorized medical use, clearly violate[d] federal law.” Id. 35. In line with federal courts, state courts have routinely acknowledged that, because contracts in the cannabis industry violate federal laws, they are unenforceable and void as a matter of public policy. For example, an Arizona state court refused to enforce two notes in which two individuals each loaned $250,000.00 to a Colorado marijuana business. Judgment of Dismissal, Hammer v. Today’s Health Care II, CV2011-051310 (Ariz. Sup. Ct. Apr. 12, 2012).31 The agreement explicitly provided that the loans would finance a “medical marijuana sales and grow center.” When the dispensary defaulted on the loan, the two lenders filed a lawsuit seeking to enforce the loan agreement. See id. The court denied the plaintiffs any relief by finding that “the explicitly stated purpose of these loan agreements was to finance the sale and distribution of marijuana. This was in clear violation of the laws of the United States. As such, this contract is void and unenforceable.” Id. 36. Similarly, in Colorado, a marijuana cultivator sued after delivering $40,000.00 in marijuana plants to a marijuana dispensary and receiving no payment, despite the dispensary promising to pay for the delivery in cash or shares in a potential business partnership. Haeberle v. Lowden, 2012 WL 7149098, at *1 (Colo. Dist. Ct. Aug. 8, 2012).32 The court, sua sponte, ordered briefings from both parties regarding the illegality and unclean hands doctrine. Id. at *2. 31 Attached hereto as Exhibit C. 32 Attached hereto as Exhibit D. Case 3:16-cv-02311-D Document 13 Filed 10/17/16 Page 18 of 30 PageID 136 Defendants’ Motion to Dismiss and Brief in Support Page 12 AUS-6306826-1 530201/1 In its opinion, despite finding that a proper contract existed and that the defendant breached that contract, the court held that because federal law preempts state law, the contract was void and unenforceable as it violated the public policy of the United States. Id. at *5. 37. Finally, after an individual invested $100,000.00 in a medical marijuana dispensary in compliance with California state law, the dispensary refused to honor the terms of the contractual agreement requiring the dispensary to provide the investor an ownership interest in the dispensary and repay 50% of the investment. Tentative Ruling, Garcia v. Thomas, Case No. 34-2013-00138040-CU-BC-GDS (Cal. Dep’t Super. Ct.—Sacramento Sept. 6, 2013).33 The court determined that because the subject of the contract related to the operation of a marijuana dispensary, in violation of federal law, the contract was illegal and unenforceable. Id. 38. As the Fifth Circuit has determined, “[n]either a court of law nor a court of equity will aid either party to an illegal transaction to recover or reinvest himself with any title or interest which he, in consideration of such unlawful contract, has vested in the other, but will leave them in the same condition as to vested interests as they, by their own acts, have placed themselves.” Packard v. OCA, Inc., 624 F.3d 726, 729–30 (5th Cir. 2010) (internal quotations omitted). The purpose of this rule is not to protect or punish either party, but “flows from the failure of the illegal contract to confer upon the parties rights to be examined and determined by the court … and from a refusal to aid a plaintiff who stands in pari delicto with the defendant. Id. (quoting Burks v. State, 795 S.W.2d 913, 914 (Tex. App.—Amarillo 1990, pet. ref’d)). Parties to a contract are presumed to know the law. Orthodontic Centers of Texas, Inc. v. Wetzel, 410 Fed. Appx. 795, 798 (5th Cir.2011) (per curiam). 33 Attached hereto as Exhibit D. Case 3:16-cv-02311-D Document 13 Filed 10/17/16 Page 19 of 30 PageID 137 Defendants’ Motion to Dismiss and Brief in Support Page 13 AUS-6306826-1 530201/1 39. Here, Ginsburg is not entitled to any relief because the stated purpose of the Notes is to finance the cultivation, possession and dispensing of marijuana. Because the purpose is in clear violation of the laws of the United States, the Notes are void and unenforceable. C. Ginsburg could not have justifiably relied on any alleged misrepresentations, and all risks were disclosed. 40. Ginsburg claims based upon his reliance of forecasted earnings and financial projections, or failure to disclose risks arising from the status of Illinois marijuana legislation fail as a matter of law. The PPM advices potential investors that ICC disclaims all liabilities related to alleged representations and warranties expressed or implied.34 Regarding the associated risk related to investing in ICC, the PPM states any investment is highly speculative and any investment involves high risk, such that investors must know that they may sustain a loss of their entire investment.35 The PPM further advises that its forward-looking statements and projections are based upon assumptions of future events that are inherently uncertain and subjective.36 34 PPM 2. (“[ICC] DISCLAIMS ANY AND ALL LIABILITIES FOR REPRESENTATIONS OR WARRANTIES EXPRESSED OR IMPLIED, CONTAINED IN, OR OMISSIONS FROM, THIS MEMORANDUM, OR ANY OTHER WRITTEN OR ORAL COMMUNICATION TRANSMITTED OR MADE AVAILABLE TO THE RECIPIENT. THIS MEMORANDUM DOES NOT PURPORT TO BE ALL-INCLUSIVE OR TO CONTAIN ALL OF THE INFORMATION THAT A PROSPECTIVE INVESTOR MAY DESIRE IN EVALUATING AN INVESTMENT IN [ICC]. STATEMENTS MADE IN THIS MEMORANDUM ARE MADE AS OF THE DATE HEREOF UNLESS OTHERWISE STATED AND ARE SUBJECT TO CHANGE, COMPLETION OR AMENDMENT WITHOUT NOTICE. NEITHER THE DELIVERY OF THIS MEMORANDUM, AT ANY TIME, NOR THE SALE OF THE SECURITIES HEREUNDER, SHALL UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.”). 35 Id. (“HIGHLY SPECULATIVE AND ANY INVESTMENT INVOLVES A HIGH DEGREE OF RISK. INVESTORS SHOULD BE PREPARED TO BEAR THE ECONOMIC RISK OF THEIR INVESTMENT FOR AN INDEFINITE PERIOD OF TIME AND BE AWARE THAT THEY MAY SUSTAIN A LOSS OF THEIR ENTIRE INVESTMENT.”) 36 Id. at 3-4 (“THIS MEMORANDUM INCLUDES PROJECTIONS, ESTIMATES OF FUTURE PERFORMANCE OF [ICC] OR VARIOUS ELEMENTS OF THE [ICC’S] BUSINESS, AND “FORWARD- LOOKING STATEMENTS”. SUCH PROJECTIONS, ESTIMATES AND “FORWARD-LOOKING STATEMENTS” ARE BASED ON ASSUMPTIONS AS TO FUTURE EVENTS THAT ARE INHERENTLY UNCERTAIN AND SUBJECTIVE. [ICC] MAKES NO REPRESENTATION OR WARRANTY AS TO THE ATTAINABILITY OF SUCH ASSUMPTIONS OR AS TO WHETHER FUTURE RESULTS SHALL OCCUR AS PROJECTED. Case 3:16-cv-02311-D Document 13 Filed 10/17/16 Page 20 of 30 PageID 138 Defendants’ Motion to Dismiss and Brief in Support Page 14 AUS-6306826-1 530201/1 Finally, the PPM warns that the cultivation, sale and use of marijuana are illegal under federal law, and that state laws are in flux.37 IT MUST BE RECOGNIZED THAT THE PROJECTIONS AND “FORWARD-LOOKING STATEMENTS” ARE NECESSARILY SUBJECT TO A HIGH DEGREE OF RISK AND UNCERTAINTY, THAT ACTUAL RESULTS CAN BE EXPECTED TO VARY FROM THE RESULTS PROJECTED, AND THAT SUCH VARIANCES MAY BE MATERIAL AND ADVERSE. THE RISKS AND UNCERTAINTIES, INDIVIDUALLY OR MUTUALLY, MAY IMPACT THE MATTERS HEREIN DESCRIBED, INCLUDING BUT NOT LIMITED TO, FINANCIAL PROJECTIONS, PRODUCT DEMAND AND MARKET ACCEPTANCE, THE EFFECT OF ECONOMIC CONDITIONS, THE IMPACT OF COMPETITIVE PRODUCTS AND PRICING, GOVERNMENT REGULATIONS, TECHNOLOGICAL DIFFICULTIES AND/OR OTHER FACTORS OUTSIDE THE CONTROL OF [ICC]. INVESTORS SHOULD EXPECT THAT ANTICIPATED EVENTS AND CIRCUMSTANCES MAY NOT OCCUR, THAT UNANTICIPATED EVENTS AND CIRCUMSTANCES MAY OCCUR, AND THAT ACTUAL RESULTS MAY LIKELY VARY FROM THE “FORWARD-LOOKING CIRCUMSTANCES”. INVESTORS SHOULD BE AWARE THAT A NUMBER OF FACTORS COULD CAUSE THE “FORWARD- LOOKING STATEMENTS” OR PROJECTIONS CONTAINED IN THIS MEMORANDUM OR OTHERWISE MADE BY OR ON BEHALF OF [ICC] TO BE INCORRECT OR TO DIFFER MATERIALLY FROM ACTUAL RESULTS. SUCH FACTORS MAY INCLUDE, WITHOUT LIMITATION: (i) THE ABILITY OF [ICC] TO PROVIDE SERVICES AND TO COMPLETE THE DEVELOPMENT OF ITS PRODUCTS IN A TIMELY MANNER; (ii) THE DEMAND FOR AND TIMING OF DEMAND FOR SUCH SERVICES AND PRODUCTS; (iii) COMPETITION FROM OTHER PRODUCTS AND COMPANIES; (iv) THE [ICC’S] SALES AND MARKETING CAPABILITIES; (v) [ICC’S]ABILITY TO SELL ITS SERVICES AND PRODUCTS PROFITABLY; (vi) AVAILABILITY OF ADEQUATE DEBT AND EQUITY FINANCING; AND (vii) GENERAL BUSINESS AND ECONOMIC CONDITIONS. THESE IMPORTANT FACTORS AND CERTAIN OTHER FACTORS THAT MIGHT AFFECT [ICC’S] FINANCIAL AND BUSINESS RESULTS ARE DISCUSSED IN THIS MEMORANDUM UNDER THE SECTION TITLED “RISK FACTORS.” THERE ARE NO ASSURANCES THAT [ICC] SHALL BE ABLE TO ANTICIPATE, RESPOND TO OR ADAPT TO CHANGES IN ANY FACTORS AFFECTING [ICC’S] BUSINESS AND FINANCIAL RESULTS.”). 37 Id. at 5. (“THE STATE OF ILLINOIS RECENTLY PASSED THE “COMPASSIONATE USE OF MEDICAL CANNABIS PILOT PROGRAM ACT” (“PILOT PROGRAM”). THE BILL ENACTED A PILOT PROGRAM THAT WENT INTO EFFECT JANUARY 1, 2014 AND WILL EXPIRE DECEMBER 31, 2017. IT HAS TEMPORARILY AUTHORIZED THE CULTIVATION, PRODUCTION, DISTRIBUTION AND USE OF MARIJUANA FOR CERTAIN MEDICINAL PURPOSES. FEDERAL, STATE AND LOCAL LAWS GOVERNING MEDICAL MARIJUANA HOWEVER REMAIN IN FLUX. THE RULES AND REGULATIONS GOVERNING THE PILOT PROGRAM HAVE NOT BEEN FINALIZED AND ARE SUBJECT TO CHANGE. ANY CHANGES MAY IMPACT THE PRODUCTION, SALE AND USE OF MARIJUANA FOR MEDICAL PURPOSES. THERE IS NO GUARANTEE THAT THE PILOT PROGRAM WILL BECOME PERMANENT OR REMAIN IN ITS CURRENT STATE. THE STATE MAY DETERMINE TO MODIFY OR TERMINATE THE PROGRAM. IN ADDITION, FUTURE PROPOSALS, LAWS AND REGULATIONS BY STATE AND LOCAL GOVERNMENTS COULD HAVE A MATERIAL ADVERSE EFFECT ON [ICC’S] OPERATIONS OR IMPOSE OTHER REQUIREMENTS THAT COULD MATERIALLY AND ADVERSELY AFFECT [ICC’S] AND YOUR INVESTMENT. FINALLY, FEDERAL LAW PROHIBITS THE CULTIVATION, SALE AND USE OF MARIJUANA. THERE IS NO GUARANTEE THAT THE U.S. GOVERNMENT OR FEDERAL LAW MIGHT PASS A LAW, RULE OR REGULATION THAT MATERIALLY AND ADVERSELY IMPACT THE PILOT PROGRAM OR [ICC].”) Case 3:16-cv-02311-D Document 13 Filed 10/17/16 Page 21 of 30 PageID 139 Defendants’ Motion to Dismiss and Brief in Support Page 15 AUS-6306826-1 530201/1 41. Therefore, Ginsburg could not have justifiably relied on any alleged misrepresentation, as ICC disclaimed all liabilities related to alleged representations and warranties expressed or implied. Similarly, the PMM disclosed and identified all alleged undisclosed risks. As such, Ginsburg claims based upon his reliance of forecasted earnings and financial projections, or failure to disclose risks arising from the status of Illinois marijuana legislation fail as a matter of law D. Plaintiff’s breach of contract claim fails as a matter of law. 42. To prevail on a breach of contract claim, a plaintiff must show: (1) the existence of a valid contract, (2) performance or tendered performance by the plaintiff, (3) breach of contract by the defendant, and (4) damages sustained because of the breach. Winchek v. American Express Travel Related Servs., 232 S.W.3d 197, 202 (Tex. App.—Houston [1st Dist.] 2007, no pet.). 43. Here, the Notes and the Reserve Agreement are the operative contracts between the parties. Per the Reserve Agreement, Ginsburg withheld $1,260,000.00 to service twelve (12) months of interest payments under both Notes. Accordingly, based on the facts pleaded by Ginsburg, ICC did not breach its agreement with Ginsburg, and Ginsburg’s contract claim fails as a matter of law. 44. As set forth above, Ginsburg alleges that he never agreed or executed the Reserve Agreement. Nevertheless, he admits that he withheld the Reserve Funds from ICC. Such admission negates Ginsburg’s breach of contract claim because he has suffered no damages. Specifically, the Reserve Funds held by Ginsburg are far in excess of the payments allegedly due under the Notes. Alternatively, Ginsburg’s withholding of the Reserve Funds would constitute a prior material default under the parties’ agreement that Ginsburg would lend ICC the total amount of $3,000,000.00. Therefore, Ginsburg’s prior breach bars his recovery for breach of Case 3:16-cv-02311-D Document 13 Filed 10/17/16 Page 22 of 30 PageID 140 Defendants’ Motion to Dismiss and Brief in Support Page 16 AUS-6306826-1 530201/1 contract. See Interceramic, Inc. v. South Orient R.R. Co., Ltd., 999 S.W.2d 920, 924 (Tex. App.—Texarkana 1999, pet. denied) (“A party who fails to perform his obligation may not thereafter enforce the remaining terms of the contract against the other party.”). 45. In light of the above, Ginsburg has failed to state a plausible breach of contract claim. Accordingly, Defendants respectfully request the Court dismiss this claim pursuant to Rule 12(b)(6). E. Plaintiff has failed to state a plausible federal securities act claim. 46. Ginsburg asserts federal securities act claims under § 10(b) and § 20 of the Securities Exchange Act of 1934. As an initial matter, a “controlling person’s” liability under § 20 is derivative of liability of the “controlled person” under § 10(b). Thus, if a plaintiff fails to plead a violation of § 10(b), the court must also dismiss the plaintiff’s § 20(a) claim. In re Capstead Mortg. Corp. Sec. Litig., 258 F. Supp. 2d 533, 566 (N.D. Tex. 2003). 47. Section 10(b) of the Securities Exchange Act of 1934 empowers the SEC to promulgate rules relating to the sale or purchase of securities. 15 U.S.C. § 78j(b). Under this grant of authority, the SEC issued Rule 10b-5, which makes it unlawful: (a) To employ any device, scheme, or artifice to defraud, (b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or (c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security. 17 C.F.R. § 240.10b-5. 48. The elements of a claim under § 10(b) are: (1) a misrepresentation or omission; (2) of a material fact; (3) in connection with the purchase or sale of a security; (4) scienter by the defendant; (5) justifiable reliance by the plaintiff; (6) damages; and (7) proximate cause. Case 3:16-cv-02311-D Document 13 Filed 10/17/16 Page 23 of 30 PageID 141 Defendants’ Motion to Dismiss and Brief in Support Page 17 AUS-6306826-1 530201/1 Rosenzweig v. Azurix Corp., 332 F.3d 854, 865 (5th Cir. 2003). To establish the requisite scienter, a plaintiff must show the defendant intended to deceive, defraud, or manipulate, or that the defendant acted with severe recklessness. Lormand v. US Unwired, Inc., 565 F.3d 228, 251 (5th Cir. 2009). “Severe recklessness” only applies to “highly unreasonable omissions or misrepresentations” involving an “extreme departure from the standards of ordinary care.” Nathenson v. Zonagen, Inc., 267 F.3d 400, 408 (5th Cir. 2001). 49. Claims under § 10(b) are subject to the heightened pleading requirements of both Federal Rule of Civil Procedure 9(b) and the Private Securities Litigation Reform Act (“PSLRA”). Fed. R. Civ. P. 9(b); 15 U.S.C. § 78u-4(b). To avoid dismissal under Rule 9(b) for lack of particularity in securities cases, the Fifth Circuit has held a plaintiff must: (1) specify each statement alleged to have been misleading, i.e., contended to be fraudulent; (2) identify the speaker; (3) state where and when the statement was made; (4) plead with particularity the contents of the false representations; (5) plead with particularity what the person making the misrepresentation obtained thereby; and (6) explain the reason or reasons why the statement is misleading, i.e., why the statement is fraudulent. Rosenzweig, 332 F.3d at 866. 50. The PSLRA also dictates a more rigorous pleading standard for private securities fraud actions in two ways. First, in any such action alleging the defendant made an untrue statement of material fact or a misleading omission: [T]he complaint shall specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding Case 3:16-cv-02311-D Document 13 Filed 10/17/16 Page 24 of 30 PageID 142 Defendants’ Motion to Dismiss and Brief in Support Page 18 AUS-6306826-1 530201/1 the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed. 15 U.S.C. § 78(u)–4(b). 51. Second, for claims under which the plaintiff must prove a particular state of mind to recover: [T]he complaint shall, with respect to each act or omission alleged to violate this chapter, state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind. Id. (emphasis added). 52. Here, Ginsburg’s federal securities act claims fail because Ginsburg has identified no actionable misrepresentation. Specifically, each of the “misrepresentations” on which Ginsburg bases his claims are merely “estimates” or “predictive” statements relating to ICC’s future performance. Projections of future performance not worded as guarantees are not actionable under the federal securities laws.” Krim v. BancTexas Group, Inc., 989 F.2d 1435, 1446 (5th Cir.1993). Moreover, predictive statements are not “facts” which are “false” when made merely because the prediction turned out to be wrong. In re Capstead Mortg. Corp. Sec. Litig., 258 F. Supp. 2d 533, 563 (N.D. Tex. 2003). Rather, the pleadings must allege particular facts that indicate that “the speaker did not in fact hold that belief and the statement made asserted something false or misleading about the subject matter.” See Local 210 Unity Pension & Welfare Funds v. McDermott Intern. Inc., 4:13-CV-2393, 2015 WL 1143081, at *11 (S.D. Tex. Mar. 13, 2015) (citing Greenberg v. Crossroads Sys., Inc., 364 F.3d 657, 670 (5th Cir.2004)). 53. Ginsburg alleges no facts which demonstrate that (1) the projections or predictive statements were false when made; (2) Defendants did not believe the statements to be true when made; (3) the projections or predictive statements lacked any reasonable basis; or (4) Defendants knew of undisclosed facts that would seriously undermine the accuracy of the statements. See In Case 3:16-cv-02311-D Document 13 Filed 10/17/16 Page 25 of 30 PageID 143 Defendants’ Motion to Dismiss and Brief in Support Page 19 AUS-6306826-1 530201/1 re Capstead Mortg. Corp. Sec. Litig., 258 F. Supp. 2d at 563. Simply put, despite the requirements of Rule 9(b) and the PSLRA, Ginsburg’s Complaint makes no particularized showing that Defendants did not believe what they were saying when they said it. 54. For these reasons, Ginsburg has failed to plead a plausible federal securities claim under both § 10(b) and § 20; accordingly, such claims should be dismissed. F. Plaintiff has failed to state a plausible Texas Securities Act claim. 55. In construing claims under the Texas Securities Act (“TSA”), the Fifth Circuit has held that predictive statements “are actionable only if they were false when made.” Herrmann Holdings Ltd. v. Lucent Techs. Inc., 302 F.3d 552, 563 (5th Cir. 2002) (citing Shushany v. Allwaste, Inc., 992 F.2d 517, 524 (5th Cir.1993)). As set forth above, Ginsburg has wholly failed to plead any facts that show that Defendants made any prediction or representation known to be false when it was made. Thus, Ginsburg’s TSA claim should be dismissed for failure to state a claim. G. Plaintiff has failed to state a plausible claim for common law fraud. 56. Under Texas law, to state a claim for common law fraud, a plaintiff must show: (1) that the defendant made a material representation; (2) the representation was false; (3) when the representation was made, the speaker knew it to be false, or made it recklessly, without knowledge of the truth, and as a positive assertion; (4) the representation was made with the intent that the plaintiff rely upon it; (5) the plaintiff acted in reliance upon the representation; and (6) the plaintiff suffered an injury as a result. In re First Merit Bank, N.A., 52 S.W.3d 749, 758 (Tex. 2001). A representation about future events is an opinion or prediction, which is not actionable. See Country Village Homes, Inc. v. Patterson, 236 S.W.3d 413, 435 (Tex. App.— Houston [1st Dist.] 2007, pet. granted, judgm’t vacated w.r.m.). Case 3:16-cv-02311-D Document 13 Filed 10/17/16 Page 26 of 30 PageID 144 Defendants’ Motion to Dismiss and Brief in Support Page 20 AUS-6306826-1 530201/1 57. Again, Ginsburg has wholly failed to plead any facts that show that Defendants made any prediction or representation known to be false when it was made. Moreover, Ginsburg’s pleading negates an element of his fraud claim, reasonable reliance. Specifically, the PPM on which Ginsburg’s claims are based expressly states that the projections were “forward- looking” and admonished potential investors to perform their own investigation and due diligence. The forecasted financials ICC sent to Ginsburg were projections for growth in 2017 and 2018.38 Ginsburg’s common law fraud claim should be dismissed as it fails to state a plausible claim. H. Plaintiff likewise fails to state a plausible statutory fraud claim. 58. The elements of statutory fraud under § 27.01 of the Texas Business and Commerce Code are: (1) false representation of a past or existing material fact, when the false representation is (A) made to a person for the purpose of inducing that person to enter into a contract; and (B) relied on by that person in entering into that contract; or (2) false promise to do an act, when the false promise is (A) material; (B) made with the intention of not fulfilling it; (C) made to a person for the purpose of inducing that person to enter into a contract; and (D) relied on by that person in entering into that contract. 59. A fraud claim under § 27.01 generally embodies the same elements of common law fraud. U.S. Quest Ltd. v. Kimmons, 228 F.3d 399, 406 (5th Cir. 2000). Additionally, § 27.01 only applies where there is an actual conveyance of stock, and not to situations where there is merely a breach of contract to convey stock. Id. 38 See Complaint ¶12(f). Case 3:16-cv-02311-D Document 13 Filed 10/17/16 Page 27 of 30 PageID 145 Defendants’ Motion to Dismiss and Brief in Support Page 21 AUS-6306826-1 530201/1 60. Here, as set forth above, Ginsburg has failed to plead any facts establishing actionable fraud. Specifically, Ginsburg bases his claims upon representations of future estimates or projections, not past or existing facts. The Complaint does not factually allege that Defendants knew that any representation was false when the representation was made. Moreover, the Notes did not convey any stock; rather, Ginsburg retained the option to convert any outstanding principle owed under the Notes to Class B units. Therefore, § 27.01 does not apply as a matter of law. For these reasons, the Court should dismiss Ginsburg’s statutory fraud claim. I. Plaintiff has failed to state a plausible Illinois Securities Act claim. 61. Ginsburg also asserts that “Defendants have violated the Illinois Securities Law of 1953.” However, Ginsburg identifies no specific provision of the Illinois Securities Law which he contends Defendant has violated or describe how Defendants’ alleged actions violated such unspecified provision. Accordingly, dismissal is proper for failure to state a plausible claim for relief. J. Plaintiff has failed to state a plausible RICO claim. 62. Ginsburg has asserted a RICO claim under § 1962(c), which makes it unlawful “for any person employed by or associated with any enterprise engaged in, or the activities of which affect, interstate or foreign commerce, to conduct or participate, directly or indirectly, in the conduct of such enterprise's affairs through a pattern of racketeering activity [.]” 18 U.S.C. § 1962(c). “Reduced to their simplest terms, the essential elements of a RICO claim are: (1) a person who engages in (2) a pattern of racketeering activity (3) connected to the acquisition, establishment, conduct, or control of an enterprise.” Stanissis v. DynCorp Int'l LLC, 3:14-CV- 2736-D, 2015 WL 9478184, at *3 (N.D. Tex. Dec. 29, 2015) (citations omitted). “A pattern of racketeering activity requires two or more predicate acts and a demonstration that the Case 3:16-cv-02311-D Document 13 Filed 10/17/16 Page 28 of 30 PageID 146 Defendants’ Motion to Dismiss and Brief in Support Page 22 AUS-6306826-1 530201/1 racketeering predicates are related and amount to or pose a threat of continued criminal activity.” Brown v. Protective Life Ins. Co., 353 F.3d 405, 407 (5th Cir. 2003). Section 1961(1) provides the exclusive list of conduct that constitutes RICO predicate acts. 18 U.S.C. § 1961(1); Zastrow v. Houston Auto Imps. Greenway Ltd., 789 F.3d 553, 559 (5th Cir. 2015). 63. Here, Ginsburg’s Complaint wholly fails to provide facts supporting the required elements. As set forth above, Ginsburg pleads no facts which support a securities fraud claim or any otherwise actionable misconduct by Defendants. Accordingly, the Court should dismiss Ginsburg’s RICO claims under Rule 12(b)(6). IV. CONCLUSION & PRAYER 64. As demonstrated above the Notes are unenforceable and void as the underlying purpose for the Notes is in violation of federal law. Additionally, Plaintiff’s various fraud claims fail because Plaintiff has wholly failed to plead any facts establishing (i) an actionable misrepresentation of fact, (ii) requisite scienter by Defendants, or (iii) justifiable reliance. Accordingly, Plaintiff’s claims should be dismissed with prejudice. WHEREFORE, PREMISES CONSIDERED, Defendants, ICC Holdings, LLC and Tim McGraw, respectfully request that the Court dismiss Plaintiff’s claims with prejudice under Rules 12(b)(6) and 9(b). Defendants further request such other further relief to which Defendants may show themselves to be justly entitled. Case 3:16-cv-02311-D Document 13 Filed 10/17/16 Page 29 of 30 PageID 147 Defendants’ Motion to Dismiss and Brief in Support Page 23 AUS-6306826-1 530201/1 RESPECTFULLY SUBMITTED, By:/s/ Richard A. Illmer Richard A. Illmer State Bar No. 10388350 Rick.illmer@huschblackwell.com Chalon N. Clark-Thomas State Bar No. 24050045 chalon.clark@huschblackwell.com HUSCH BLACKWELL L.L.P. 2001 Ross Avenue, Suite 2000 Dallas, Texas 75201 (214) 999-6100 (214) 999-6170 facsimile ATTORNEYS FOR SPECIALLY APPEARING DEFENDANTS, ICC HOLDINGS, LLC AND TIM MCGRAW CERTIFICATE OF SERVICE I hereby certify that a true copy of the foregoing was delivered to all counsel of record via the Northern District of Texas Electronic Case Filing System (ECF). TO: Talmadge Boston WINSTEAD PC 2728 N. Harwood Street 500 Winstead Building Dallas, Texas 75201 Tel: (214) 745-5400 Fax: (214) 745-5390 on this the 17th day of October, 2016. /s/ Richard A. Illmer Richard A. Illmer Case 3:16-cv-02311-D Document 13 Filed 10/17/16 Page 30 of 30 PageID 148 1 Memorandum No.: ___________ For the Exclusive Use of : ______________ Date: March 2015 CONFIDENTIAL PRIVATE PLACEMENT MEMORANDUM ICC HOLDINGS, LLC Maximum of $37,262,504 Capital Investment or Up to 4,383,824 Class B Units in ICC Holdings, LLC Minimum Investment of $250,000 INITIAL DISCLOSURE STATEMENT INTRODUCTION THIS PRIVATE PLACEMENT MEMORANDUM (“MEMORANDUM”) IS INTENDED TO BE USED BY ICC HOLDINGS, LLC, AN ILLINOIS LIMITED LIABILITY COMPANY (THE “COMPANY” OR “ICC”), IN CONNECTION WITH A PRIVATE OFFERING OF THE SALE AND PURCHASE OF A MAXIMUM OF 4,383,824 CLASS B UNITS OF THE COMPANY, AT A PRICE OF $8.50 PER UNIT, TO A NUMBER OF PROSPECTIVE INVESTORS WHO MEET CERTAIN SUITABILITY STANDARDS AND REQUIREMENTS. THE COMPANY RESERVES THE RIGHT TO MODIFY THE NUMBER OF UNITS OFFERED AND THE OFFERING PRICE PER UNIT FOR INVESTORS WHO MAKE AN INVESTMENT IN THE COMPANY ABOVE A CERTAIN SIZE AND/OR PRIOR TO LOAN CLOSING DESCRIBED HEREIN, EACH AS DETERMINED BY THE COMPANY. FURTHER, TO THE EXTENT A CLASS B INVESTOR PURCHASES CLASS B UNITS PRIOR TO THE LOAN CLOSING AT A PRICE PER UNIT BELOW THE PRICE SET FORTH ABOVE, EACH CLASS B INVESTOR WILL RETROACTIVELY RECEIVE SUCH PRICE PER UNIT AND BE ISSUED ADDITIONAL UNITS THEREFOR. THIS MEMORANDUM IS CONFIDENTIAL IN NATURE AND IS INTENDED ONLY FOR THE PERSON OR ENTITY TO WHICH OR WHOM IT IS GIVEN OR TRANSMITTED. THIS MEMORANDUM MAY NOT BE DISTRIBUTED OR REPRODUCED WITHOUT THE COMPANY’S PRIOR WRITTEN CONSENT. BY ACCEPTING DELIVERY OF THIS MEMORANDUM, OR ANY OTHER MATERIAL IN CONNECTION WITH THIS OFFERING, THE OFFEREE AGREES NOT TO DISCLOSE SUCH CONTENTS TO ANY THIRD PARTY OR OTHERWISE USE THE CONTENTS FOR ANY PURPOSE OTHER THAN EVALUATION BY SUCH OFFEREE OF AN INVESTMENT IN THE UNITS. INVESTORS SHALL RETURN THIS MEMORANDUM AND ALL SUCH OTHER MATERIAL TO THE COMPANY IF THE OFFEREE DOES NOT SUBSCRIBE TO PURCHASE ANY UNITS, OR IF THE OFFEREE’S SUBSCRIPTION IS NOT ACCEPTED, OR IF THIS OFFERING IS TERMINATED OR WITHDRAWN. Case 3:16-cv-02311-D Document 13-1 Filed 10/17/16 Page 1 of 46 PageID 149 2 EXCLUSIVE NATURE OF PRIVATE PLACEMENT MEMORANDUM EXCEPT FOR SUCH INFORMATION CONTAINED IN THIS MEMORANDUM OR THAT IS PROVIDED BY THE COMPANY IN RESPONSE TO REQUESTS FROM PROSPECTIVE INVESTORS OR THEIR ADVISORS, NO PERSON OR ENTITY HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS CONCERNING THE COMPANY OR THE SECURITIES REFERENCED HEREIN, AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION(S) SHOULD NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THE COMPANY DISCLAIMS ANY AND ALL LIABILITIES FOR REPRESENTATIONS OR WARRANTIES EXPRESSED OR IMPLIED, CONTAINED IN, OR OMISSIONS FROM, THIS MEMORANDUM, OR ANY OTHER WRITTEN OR ORAL COMMUNICATION TRANSMITTED OR MADE AVAILABLE TO THE RECIPIENT. THIS MEMORANDUM DOES NOT PURPORT TO BE ALL-INCLUSIVE OR TO CONTAIN ALL OF THE INFORMATION THAT A PROSPECTIVE INVESTOR MAY DESIRE IN EVALUATING AN INVESTMENT IN THE COMPANY. STATEMENTS MADE IN THIS MEMORANDUM ARE MADE AS OF THE DATE HEREOF UNLESS OTHERWISE STATED AND ARE SUBJECT TO CHANGE, COMPLETION OR AMENDMENT WITHOUT NOTICE. NEITHER THE DELIVERY OF THIS MEMORANDUM, AT ANY TIME, NOR THE SALE OF THE SECURITIES HEREUNDER, SHALL UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. CERTAIN PROVISIONS OF VARIOUS AGREEMENTS ARE SUMMARIZED IN THIS MEMORANDUM, BUT PROSPECTIVE INVESTORS SHOULD NOT ASSUME THAT THE SUMMARIES ARE COMPLETE. THIS MEMORANDUM DOES NOT CONSTITUTE AN OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY ANY UNIT OR SECURITY OTHER THAN THOSE OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY FROM ANY PERSON IN ANY STATE OR OTHER JURISDICTION IN WHICH SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL, OR IN WHICH THE PERSON OR ENTITY MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO A PERSON OR ENTITY TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION. THE COMPANY RESERVES THE RIGHT AT ITS SOLE DISCRETION AND FOR ANY REASON WHATSOEVER TO MODIFY, AMEND AND/OR WITHDRAW ALL OR A PORTION OF THE OFFERING, AND/OR ACCEPT OR REJECT IN WHOLE OR IN PART ANY PROSPECTIVE INVESTMENT IN THE UNITS, TO OFFER CLASS B UNITS AT PRICE PER UNIT LESS THAN THE PRICE SET FORTH ABOVE SHOULD THE INVESTOR PURCHASE A SUBSTANTIAL NUMBER OF UNITS, OR TO ALLOT TO ANY PROSPECTIVE INVESTOR LESS THAN THE AMOUNT OF UNITS SUCH INVESTOR DESIRES TO PURCHASE. THE COMPANY SHALL HAVE NO LIABILITY WHATSOEVER TO ANY OFFEREE AND/OR INVESTOR IN THE EVENT THAT ANY OF THE FOREGOING SHALL OCCUR. SPECULATIVE; HIGH RISK; DUE DILIGENCE THE SECURITIES REFERENCED HEREIN ARE HIGHLY SPECULATIVE AND ANY INVESTMENT INVOLVES A HIGH DEGREE OF RISK. INVESTORS SHOULD BE PREPARED TO BEAR THE ECONOMIC RISK OF THEIR INVESTMENT FOR AN INDEFINITE PERIOD OF TIME AND BE AWARE THAT THEY MAY SUSTAIN A LOSS OF THEIR ENTIRE INVESTMENT. EACH INVESTOR WILL BE REQUIRED TO REPRESENT THAT THEY ACKNOWLEDGE AND UNDERSTAND THE TERMS, RISKS, AND MERITS OF THE OFFERING DESCRIBED HEREIN AND ALL ATTACHMENTS TO THIS MEMORANDUM. Case 3:16-cv-02311-D Document 13-1 Filed 10/17/16 Page 2 of 46 PageID 150 3 THIS MEMORANDUM HAS BEEN PREPARED FOR INFORMATIONAL PURPOSES ONLY IN ORDER TO ASSIST PROSPECTIVE INVESTORS IN EVALUATING AN INVESTMENT IN THE COMPANY. PROSPECTIVE INVESTORS ARE EXPECTED TO CONDUCT THEIR OWN INVESTIGATIONS WITH REGARD TO THE COMPANY AND ITS PROSPECTS. IN MAKING AN INVESTMENT DECISION, INVESTORS MUST CONDUCT AND RELY ON THEIR OWN EXAMINATIONS OF THE COMPANY AND THE TERMS OF THE OFFERING, INCLUDING THE MERITS AND RISKS INVOLVED IN MAKING AN INVESTMENT DECISION WITH RESPECT TO THIS MEMORANDUM. SECURITY LAWS; REGISTRATION THE OFFER AND SALE OF CLASS B UNITS HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS IN RELIANCE UPON EXEMPTIONS FROM REGISTRATION PROVIDED BY SECTION 4(2) OF THE SECURITIES ACT OF 1933, AS AMENDED, AND REGULATION D PROMULGATED THEREUNDER, AND SIMILAR EXEMPTIONS FROM REGISTRATION PROVIDED BY CERTAIN STATE SECURITIES LAWS. THE SECURITIES HAVE NOT BEEN REGISTERED WITH OR APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR BY ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY SUCH STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PRIVATE PLACEMENT MEMORANDUM. THIS MEMORANDUM DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OTHER THAN THE UNREGISTERED SECURITIES TO WHICH IT RELATES NOR AN OFFER TO, OR THE SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS MEMORANDUM NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF ICC SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. RESTRICTIONS; TRANSFERABILITY THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE. THE SECURITIES MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, APPLICABLE STATE SECURITIES LAWS PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM, AND/OR THE COMPANY’S OPERATING AGREEMENT. SAFE HARBOR STATEMENT; FORWARD-LOOKING STATEMENTS THIS MEMORANDUM INCLUDES PROJECTIONS, ESTIMATES OF FUTURE PERFORMANCE OF THE COMPANY OR VARIOUS ELEMENTS OF THE COMPANY’S BUSINESS, AND “FORWARD-LOOKING STATEMENTS”. SUCH PROJECTIONS, ESTIMATES AND “FORWARD-LOOKING STATEMENTS” ARE BASED ON ASSUMPTIONS AS TO FUTURE EVENTS THAT ARE INHERENTLY UNCERTAIN AND SUBJECTIVE. THE COMPANY MAKES NO REPRESENTATION OR WARRANTY AS TO THE ATTAINABILITY OF SUCH ASSUMPTIONS OR AS TO WHETHER FUTURE RESULTS SHALL OCCUR AS PROJECTED. IT MUST BE RECOGNIZED THAT THE PROJECTIONS AND “FORWARD-LOOKING STATEMENTS” ARE NECESSARILY SUBJECT TO A HIGH DEGREE OF RISK AND UNCERTAINTY, THAT ACTUAL RESULTS CAN BE EXPECTED TO VARY FROM THE RESULTS PROJECTED, AND THAT SUCH VARIANCES MAY BE MATERIAL AND ADVERSE. THE RISKS AND UNCERTAINTIES, INDIVIDUALLY OR MUTUALLY, MAY IMPACT THE MATTERS HEREIN DESCRIBED, INCLUDING BUT NOT LIMITED TO, FINANCIAL PROJECTIONS, PRODUCT DEMAND AND MARKET ACCEPTANCE, THE EFFECT OF ECONOMIC CONDITIONS, THE IMPACT OF COMPETITIVE PRODUCTS AND PRICING, GOVERNMENT REGULATIONS, TECHNOLOGICAL DIFFICULTIES AND/OR OTHER FACTORS OUTSIDE THE CONTROL OF THE COMPANY. INVESTORS SHOULD EXPECT THAT ANTICIPATED EVENTS AND Case 3:16-cv-02311-D Document 13-1 Filed 10/17/16 Page 3 of 46 PageID 151 4 CIRCUMSTANCES MAY NOT OCCUR, THAT UNANTICIPATED EVENTS AND CIRCUMSTANCES MAY OCCUR, AND THAT ACTUAL RESULTS MAY LIKELY VARY FROM THE “FORWARD-LOOKING CIRCUMSTANCES”. INVESTORS SHOULD BE AWARE THAT A NUMBER OF FACTORS COULD CAUSE THE “FORWARD- LOOKING STATEMENTS” OR PROJECTIONS CONTAINED IN THIS MEMORANDUM OR OTHERWISE MADE BY OR ON BEHALF OF THE COMPANY TO BE INCORRECT OR TO DIFFER MATERIALLY FROM ACTUAL RESULTS. SUCH FACTORS MAY INCLUDE, WITHOUT LIMITATION: (i) THE ABILITY OF THE COMPANY TO PROVIDE SERVICES AND TO COMPLETE THE DEVELOPMENT OF ITS PRODUCTS IN A TIMELY MANNER; (ii) THE DEMAND FOR AND TIMING OF DEMAND FOR SUCH SERVICES AND PRODUCTS; (iii) COMPETITION FROM OTHER PRODUCTS AND COMPANIES; (iv) THE COMPANY’S SALES AND MARKETING CAPABILITIES; (v) THE COMPANY’S ABILITY TO SELL ITS SERVICES AND PRODUCTS PROFITABLY; (vi) AVAILABILITY OF ADEQUATE DEBT AND EQUITY FINANCING; AND (vii) GENERAL BUSINESS AND ECONOMIC CONDITIONS. THESE IMPORTANT FACTORS AND CERTAIN OTHER FACTORS THAT MIGHT AFFECT THE COMPANY’S FINANCIAL AND BUSINESS RESULTS ARE DISCUSSED IN THIS MEMORANDUM UNDER THE SECTION TITLED “RISK FACTORS.” THERE ARE NO ASSURANCES THAT THE COMPANY SHALL BE ABLE TO ANTICIPATE, RESPOND TO OR ADAPT TO CHANGES IN ANY FACTORS AFFECTING THE COMPANY’S BUSINESS AND FINANCIAL RESULTS. INVESTOR SUITABILITY; DISCLOSURES; BACKGROUND CHECKS THE SECURITIES HEREIN ARE BEING OFFERED EXCLUSIVELY TO THOSE CERTAIN INVESTORS WHO MAY QUALIFY AS BOTH SOPHISTICATED AND “ACCREDITED INVESTORS” AND POSSESS THE QUALIFICATIONS NECESSARY TO PERMIT THE SECURITIES TO BE OFFERED AND SOLD IN RELIANCE UPON CERTAIN EXEMPTIONS AND/OR AS DEFINED IN REGULATION D UNDER THE SECURITIES ACT OF 1933. INVESTORS ARE ADVISED THAT THEY MAY NEED TO MEET CERTAIN MINIMUM ANNUAL INCOME OR NET WORTH THRESHOLDS PROVIDED IN THE INVESTOR SUITABILITY QUESTIONNAIRE AS WELL AS OTHER ADDITIONAL SUITABILITY REQUIREMENTS AS MAY BE DETERMINED BY THE COMPANY. INVESTORS ARE FURTHER ADVISED THAT THEY MAY IN CONNECTION WITH SUCH SUITABILITY REQUIREMENTS, BE REQUIRED TO SUBMIT FINANCIAL STATEMENTS, W-2 FORMS, 1099 FORMS, SCHEDULE K-1 OF 1065 FORMS, 1040 FORMS, TAX RETURNS, A SUITABILITY QUESTIONNAIRE, AND/OR OTHER DOCUMENTATION. THE SECURITIES OFFERED HEREIN MAY BE OFFERED THROUGH ONE OR MORE BROKER-DEALERS AND PLACEMENT AGENTS ON A NON-EXCLUSIVE “BEST EFFORTS” BASIS, INCLUDING RAINMAKER SECURITIES, LLC – A REGISTERED BROKER DEALER, MEMBER FINRA/SIPC, 500 N. MICHIGAN AVE, SUITE 600; CHICAGO, IL 60611. ALL COMPANY SPECIFIC INFORMATION PROVIDED HEREIN, INCLUDING COMPARISONS OF THE COMPANY’S PRODUCTS OR SERVICES TO COMPETITIVE PRODUCTS OR SERVICES, UNLESS OTHERWISE CITED, WERE PROVIDED BY COMPANY STAFF, AND HAVE NOT BEEN INDEPENDENTLY VERIFIED BY ANY BROKER DEALER, INCLUDING RAINMAKER SECURITIES, LLC, AND NO BROKER DEALER MAKES ANY REPRESENTATION OR WARRANTY, EXPRESSED OR IMPLIED, AS TO THE ACCURACY OF COMPLETENESS OF SUCH INFORMATION. FURTHER, ANY COMPARISONS WITH COMPETITORS ARE INTENDED EXCLUSIVELY TO DELINEATE THE COMPANY’S COMPETITIVE DIFFERENTIATION IN THE MARKETPLACE AND IN NO WAY SHOULD BE CONSIDERED A COMPARISON OF POTENTIAL INVESTMENTS. NOTICE TO NON-UNITED STATES RESIDENTS Case 3:16-cv-02311-D Document 13-1 Filed 10/17/16 Page 4 of 46 PageID 152 5 IT IS THE RESPONSIBILITY OF ANY ENTITY WISHING TO PURCHASE THE UNITS HEREIN TO SATISFY THEMSELVES AS TO FULL OBSERVANCE OF THE LAWS OF ANY RELEVANT TERRITORY OUTSIDE THE UNITED STATES IN CONNECTION WITH ANY SUCH PURCHASE, INCLUDING OBTAINING ANY REQUIRED GOVERNMENTAL OR OTHER CONSENTS OR OBSERVING ANY OTHER APPLICABLE FORMALITIES. MEDICAL MARIJUANA LAWS AND REGULATIONS THE STATE OF ILLINOIS RECENTLY PASSED THE “COMPASSIONATE USE OF MEDICAL CANNABIS PILOT PROGRAM ACT” (“PILOT PROGRAM”). THE BILL ENACTED A PILOT PROGRAM THAT WENT INTO EFFECT JANUARY 1, 2014 AND WILL EXPIRE DECEMBER 31, 2017. IT HAS TEMPORARILY AUTHORIZED THE CULTIVATION, PRODUCTION, DISTRIBUTION AND USE OF MARIJUANA FOR CERTAIN MEDICINAL PURPOSES. FEDERAL, STATE AND LOCAL LAWS GOVERNING MEDICAL MARIJUANA HOWEVER REMAIN IN FLUX. THE RULES AND REGULATIONS GOVERNING THE PILOT PROGRAM HAVE NOT BEEN FINALIZED AND ARE SUBJECT TO CHANGE. ANY CHANGES MAY IMPACT THE PRODUCTION, SALE AND USE OF MARIJUANA FOR MEDICAL PURPOSES. THERE IS NO GUARANTEE THAT THE PILOT PROGRAM WILL BECOME PERMANENT OR REMAIN IN ITS CURRENT STATE. THE STATE MAY DETERMINE TO MODIFY OR TERMINATE THE PROGRAM. IN ADDITION, FUTURE PROPOSALS, LAWS AND REGULATIONS BY STATE AND LOCAL GOVERNMENTS COULD HAVE A MATERIAL ADVERSE EFFECT ON THE COMPANY’S OPERATIONS OR IMPOSE OTHER REQUIREMENTS THAT COULD MATERIALLY AND ADVERSELY AFFECT THE COMPANY AND YOUR INVESTMENT. FINALLY, FEDERAL LAW PROHIBITS THE CULTIVATION, SALE AND USE OF MARIJUANA. THERE IS NO GUARANTEE THAT THE U.S. GOVERNMENT OR FEDERAL LAW MIGHT PASS A LAW, RULE OR REGULATION THAT MATERIALLY AND ADVERSELY IMPACT THE PILOT PROGRAM OR THE COMPANY. LEGAL ADVICE INVESTORS SHOULD NOT CONSTRUE THE CONTENTS OF THIS MEMORANDUM AS LEGAL, BUSINESS, OR TAX ADVICE. EACH INVESTOR SHOULD CONSULT THEIR OWN COUNSEL, ACCOUNTANT, OR FINANCIAL ADVISOR AS TO LEGAL, BUSINESS, OR TAX RELATED MATTERS CONCERNING THE PURCHASE OF ANY UNITS HEREIN. INQUIRIES PRIOR TO PURCHASING UNITS, EACH PROSPECTIVE PURCHASER HAS THE RIGHT TO ASK QUESTIONS REGARDING THE TERMS OF THE OFFERING AND OBTAIN ADDITIONAL INFORMATION, TO THE EXTENT THAT ICC POSSESSES SUCH INFORMATION OR CAN ACQUIRE IT WITHOUT UNREASONABLE EFFORT OR EXPENSE, WHICH IS NECESSARY TO VERIFY THE ACCURACY OF THE INFORMATION SET FORTH HEREIN. INQUIRIES MAY BE DIRECTED TO: ICC HOLDINGS, LLC: C/O ACE MANAGEMENT LLC 8348 LEMONT RD, DARIEN, IL 60561 ATTENTION: OLEG MOVCHAN OMOVCHAN@ACEREVOLUTION.COM Case 3:16-cv-02311-D Document 13-1 Filed 10/17/16 Page 5 of 46 PageID 153 6 Table of Contents OFFERING SUMMARY ................................................................................................................................. 8 SUBSCRIPTION PROCEDURE ...................................................................................................................... 9 EXECUTIVE SUMMARY ............................................................................................................................ 11 Market Opportunity .................................................................................................................................... 11 The Company ............................................................................................................................................ 14 Overview ............................................................................................................................................... 14 Mission Statement .................................................................................................................................. 14 Cultivation of Medical Cannabis .............................................................................................................. 15 Joint Ventures ........................................................................................................................................ 17 Managed Services................................................................................................................................... 17 Application Process in Illinois: Selection Criteria and ICC Holding Submission .......................................... 18 Company Structure and Capitalization...................................................................................................... 20 Management Team ................................................................................................................................. 21 THE OFFERING ........................................................................................................................................... 25 Securities Offered ................................................................................................................................... 25 Minimum Investment .............................................................................................................................. 25 Price Per Unit and Value ......................................................................................................................... 25 Capital Contributions .............................................................................................................................. 25 Offering Period ...................................................................................................................................... 25 Multiple “Closings” and Right of Rejection .............................................................................................. 25 Management of Company ....................................................................................................................... 26 Distributions and Preferences .................................................................................................................. 26 Additional Issuances and Preemptive Rights ............................................................................................. 26 Anti-Dilution Protection .......................................................................................................................... 26 Restrictions on and Duties to Transfer of Units ......................................................................................... 27 Covenants .............................................................................................................................................. 27 Reporting ............................................................................................................................................... 27 Indemnification ...................................................................................................................................... 27 Investor Representations ......................................................................................................................... 27 Financial Projections .............................................................................................................................. 28 Use of Proceeds ...................................................................................................................................... 28 INVESTOR SUITABILITY STANDARDS .................................................................................................... 29 Overview ............................................................................................................................................... 29 General .................................................................................................................................................. 29 Accredited Investors ............................................................................................................................... 29 Case 3:16-cv-02311-D Document 13-1 Filed 10/17/16 Page 6 of 46 PageID 154 7 Other Requirements ................................................................................................................................ 31 RISK FACTORS ........................................................................................................................................... 32 Risks Related to the Company: ................................................................................................................ 32 Risks Related to Taxes: ........................................................................................................................... 34 Risks Related to the Offering: .................................................................................................................. 36 INCOME TAX CONSIDERATIONS ............................................................................................................. 38 Overview ............................................................................................................................................... 38 Tax Status of the Company as a Partnership .............................................................................................. 38 Flow-Through Taxation .......................................................................................................................... 39 Allocations ............................................................................................................................................ 39 Tax Basis; Distributions .......................................................................................................................... 39 The Company’s Income, Expense, Gain and Loss. .................................................................................... 40 Limitations on Loss Deductions. .............................................................................................................. 40 Tax Basis Limitation. .............................................................................................................................. 40 At-Risk Limitation. ................................................................................................................................. 41 Passive Activity Losses. .......................................................................................................................... 41 Deductibility of Fees. .............................................................................................................................. 41 Sales of Units. ........................................................................................................................................ 42 Alternative Minimum Tax. ...................................................................................................................... 42 Company Tax Returns and Information. ................................................................................................... 42 Potential Changes in Tax Rates. ............................................................................................................... 43 Medicare Tax. ........................................................................................................................................ 43 State Taxes. ........................................................................................................................................... 43 Foreign Investors. ................................................................................................................................... 44 PATRIOT ACT RIDER ................................................................................................................................. 44 ERISA CONSIDERATIONS .......................................................................................................................... 45 General .................................................................................................................................................. 45 Plan Assets ............................................................................................................................................ 45 QUESTIONS OR COMMENTS ..................................................................................................................... 46 EXHIBIT A - INVESTOR QUESTIONNAIRE AND PURCHASE AGREEMENT EHXIBIT B - AMENDED AND RESTATED OPERATING AGREEMENT Case 3:16-cv-02311-D Document 13-1 Filed 10/17/16 Page 7 of 46 PageID 155 8 OFFERING SUMMARY ICC seeks up to $37,262,504 to finance construction and development of two technologically advanced facilities for growing cannabis plants and producing medicines derived from cannabis.(up to $18,631,252 per facility). The pre-money valuation of ICC prior to the issuance of Class B Units is $66,597,500. Each of these two state of the art facilities provides 75,520 sq. ft. of usable space initially. Both facilities can be scaled up to a maximum 300,000 sq. ft. to meet the growing demand for cannabinoid medicines and the prospect of additional markets opening due to changes in state and federal law, including the allowance of personal use of cannabis and loosening of interstate restrictions. ICC offers up to 34% of the Company, or up to 4,383,824 Class B Units at a price of $8.50 per unit Funds received from prospective investors will be held in escrow and ICC will not release funds from escrow unless and until ICC raises the “Minimum Offering Amount” based on the following table: (1) The Minimum Offering Amount is based on the amount of funds necessary to initiate construction of 2 cultivation facilities. Maximum Offering Amount subject to change. (2) The Percentage of Gross Proceeds has been rounded to the nearest one-hundredth percent. (3) This includes Broker/Dealer Fees and legal fees related to this Offering, but do not include fees related to the operation of the business. Notwithstanding the foregoing, the Company reserves the right to adjust the number of Class B Units sold, the percentage of the Company sold, or price per Unit as described herein, as management may reasonably determine necessary in order to construct a cultivation facility for greater or lesser amounts. Further, the Company reserves the right to modify the offering price per Unit for investors who make an investment in the Company above a certain size and/or prior to the Loan Closing described herein, each as determined by the Company. Lastly, to the extent a Class B Investor purchase Class B Units prior to the Loan Closing at a price per unit below the discounted price per unit described herein, each Class B investor will retroactively receive such price per unit and be issued additional units therefor. Case 3:16-cv-02311-D Document 13-1 Filed 10/17/16 Page 8 of 46 PageID 156 9 SUBSCRIPTION PROCEDURE Prospective investors must: (1) Meet disclosure and eligibility criteria, including:  Submit most recent complete federal and state tax return information (all forms)  Undergo a full Illinois State Police criminal background check (Illinois law prohibits participation by individuals convicted of controlled substance felonies and violent crimes in any jurisdiction.) (2) Review, complete and sign all relevant parts of Investor Questionnaire and Purchase Agreement (Exhibit A), including the signature page on Section III for the Amended and Restated Operating Agreement (the form of which is attached as Exhibit B). (3) Wire funds into the Company’s escrow account at Farmers Bank. Initial closing is conditioned upon the Company raising the Minimum Offering Amount. As previously noted, the Company is under no obligation to accept your investment and reserves the right to reject your investment at its sole and absolute discretion. If the Investor Questionnaire and Purchase Agreement is not completed and executed to the Company’s satisfaction, and completion of other due diligence, ICC may not accept your investment. Note that if the prospective investor is subscribing on behalf of an entity (i.e., other than an individual), the investor shall supply ICC with a properly executed instrument authorizing the purchase by the agent on behalf of the entity as per the Investor Questionnaire and Purchase Agreement. Foreign investors may be required to provide additional documentation. In the event a subscription is rejected, all funds delivered to ICC with such subscription will be returned to the subscriber as soon as practicable following rejection, without interest. Case 3:16-cv-02311-D Document 13-1 Filed 10/17/16 Page 9 of 46 PageID 157 10 INTRODUCTION Illinois created a legal market for cannabinoid medicines on August 1, 2013 with enactment of the Compassionate Use of Medical Cannabis Pilot Program Act. Effective January 1, 2014, the law created two types of licensed business: cultivation centers and dispensaries. Cultivation centers perform all functions of growing cannabis plants and producing medicines derived from cannabis. Dispensaries perform the retail function of selling cultivation center’s medical cannabis products to end consumers (patients). Illinois law wisely caps the maximum number of cultivation center and dispensary licenses, thereby avoiding critical flaws that plague Colorado’s legal market. Illinois law permits only 21 licensed cultivation centers and 60 dispensaries, whereas in Colorado an overabundance of producers supplies an only moderately populated state (see the table below). Producers in Illinois are far more fortunate because State law enables only a very small number of producers to supply the fifth most populated US state. ACE Revolution commands 2 of 21 cultivation center licenses in Illinois ICC Holdings, LLC (the “Company” or “ICC”) and its Manager, ACE Management, LLC, owned and managed by Tim McGraw, on February 2, 2015 was declared winner of two cultivation center licenses. The company overcame fierce competition that attracted some of Illinois’ best and brightest entrepreneurs. Out of 158 total application submissions, ACE Revolution’s two facilities are identified by Illinois Department of Agriculture as the very best in their territories. The limited number of licenses that will be issued for medicinal cannabis production and sale in Illinois, combined with the potentially large patient population, makes them among the most valuable permits ever issued, arguably as or even more valuable than the coveted casino licenses. Case 3:16-cv-02311-D Document 13-1 Filed 10/17/16 Page 10 of 46 PageID 158 11 EXECUTIVE SUMMARY Market Opportunity Legalization of medical cannabis is an undeniable trend sweeping the 50 states and soon the international market. Fueled by access to information suggesting cannabis is far more helpful than harmful to humans, American sentiment is rapidly revolving. Legalization of cannabis appeals not only to Americans’ sense of personal freedoms, it fuels their hunger for economic growth. Legal cannabis industries contribute substantially to local economies through construction, job creation, tax revenue, and general local spending. Twenty-three states including Illinois and the District of Columbia have passed laws legalizing the medical use of cannabis (Figure 1). Additionally, Colorado and Washington legalized cannabis for recreational use. As cannabis gains support for full legalization/recreational use, it is another indication that the industry is set to rapidly expand, providing both investors and operators with unprecedented opportunities. Figure 1. State laws regarding the legal status of cannabis in the United States (Source: Wikipedia) Cannabis remains a Schedule I substance under federal law as of 2014. It is important to note that public perception and opinions regarding cannabis are reflected in national legislation trends. As Figure 2 illustrates, many states have moved to decriminalize possessing small amounts of cannabis, or pass laws legalizing cannabis for medical or recreational use. State with legalized cannabis State with both medical and decriminalization laws State with legal medical cannabis State with decriminalized cannabis possession laws State with total cannabis prohibition Case 3:16-cv-02311-D Document 13-1 Filed 10/17/16 Page 11 of 46 PageID 159 12 Figure 2. Current Cannabis Legislation by State (Source:mpp.org) According to Arc View Market Research:  Legal US cannabis market value now assessed at $1.53 billion,  Legal US market projected to grow 68% from current levels to $2.57 billion by 2014.  US market five-year potential $10.2 billion, more than 700% increase above current US market value. According to IBIS World Industry Analyst David Yang, “Revenue is expected to grow 23.1% in 2014 alone, largely due to a favorable regulatory environment, a steadily aging population and an increase in per capita disposable income.” Overall, the Medical Cannabis Growing industry is expected to experience annualized revenue growth of 16.2% to $2.1 billion in the five years to 2014. Adults aged 50 and older are a major industry market because they tend to require more healthcare services and treatment than the rest of the population. The number of adults in this age group has been steadily expanding and is expected to total 107 million in 2014. Consequently, medical cannabis demand from this demographic has risen during the past five years. Case 3:16-cv-02311-D Document 13-1 Filed 10/17/16 Page 12 of 46 PageID 160 13 Low ratio of operating cultivation licenses (21) to population (about 13 million) makes investment in a State-licensed operator in IL an immensely attractive opportunity. Currently, there are 2.4 million medical cannabis patients in the US. The U.S. average is 7.7 patients per 1000 residents in states where medical cannabis is legal. States with robust dispensary coverage and more mature markets have much higher patient numbers. Colorado: 21.4 per 1000, Maine: 12.38 per thousand, and Washington 14.63 per 1000. According to the Colorado’s Department of Revenue, in July 2014, customers purchased more than $29.7 million in recreational cannabis — up from $24.7 million in June. Medical cannabis patients spent more than $28.9 million on cannabis in July — comparable to June’s $28.6 million in sales. This implies, that with no growth, in Colorado, the state with 5.3 million people, the industry is going to generate about $720 million in annual revenue in the State of Colorado. Conservatively using the national average as estimate for Illinois patient population, we can come to a reasonable estimate of the projected revenue for medical cannabis sales in Illinois. (Note: Illinois has over 850,000 veterans who will not need a prescription for a purchase.) Total Illinois Population (2013 census): 12,882,135 Medical Cannabis Patients: 7.7 per 1,0001 99,192 Monthly Purchase Limit per Patient 5 ounces Annual Purchase Limit per Patient 60 ounces Wholesale Price Per Ounce $187.5 Total IL Wholesale Revenue $1,115,910,000 1 Assuming national average of 7.7 medical cannabis patients per 1000 and 12.8 mm total IL population. Case 3:16-cv-02311-D Document 13-1 Filed 10/17/16 Page 13 of 46 PageID 161 14 The Company Overview ICC Holdings, LLC, an Illinois limited liability company (the “Company” or “ICC”), has been awarded two cultivation center licenses from Illinois Department of Agriculture, giving the company the right to construct two state of the art facilities for growing cannabis plants and producing medicines derived from cannabis. The Company was formed for the purpose of building a leading platform that owns, advises and invests in legal cannabis cultivation and retail license holders and ancillary businesses internationally. ICC has obtained a strong position as one of the dominant operators in the legal US cannabis markets and continues to grow stronger. The Company has substantial in-house ability and talent with multi-discipline expertise. The Company has also partnered with carefully selected external service providers to create a fully integrated platform for cultivating purest grade cannabis plants and cannabinoid medicines and related products and services. ICC adds value to existing and nascent legal cannabis cultivation and retail operators and other industry participants through:  Managed services and advisory  Capital partnerships and strategic solutions  Distribution chain efficiency improvement  Designing and installation of technologically advanced products and services. The Company actively seeks to promote “ACE Revolution” and “Revolution Cannabis” brands across all its offerings. Mission Statement Our mission is to lead the cannabis industry in cultivation, research and development, distribution, capital markets, patient advocacy and education. In so doing ICC will advance the science of cannabis and improve the quality of life for patients while fighting the stigma currently associated with cannabis use. Case 3:16-cv-02311-D Document 13-1 Filed 10/17/16 Page 14 of 46 PageID 162 15 Cultivation of Medical Cannabis The Company’s key short term business objective is construction and operation in Illinois of two twin 75,000 square feet state of the art facilities to engineer the world’s most scientifically advanced cannabis plants and derived medicines. ICC has secured the fiercely sought licenses by submitting the strongest and most reliable business plan among all applicants in their territory as decided by Illinois’ Department of Agriculture. The company achieved this monumental success by spending 20 months focused on best standards and practices and compliance with Illinois’ sophisticated legal and regulatory framework. ICC succeeds by exercising utmost care and scrutiny in selecting partners and providers, developing relationships, building support from legislative leaders and local communities, assembling the best team, building intellectual property and designing and implementing production processes. In particular,  ICC carefully selected advantageously located real estate properties that comply with Illinois law’s strict requirements for cultivation facilities.  Construction and operation of our twin state of the art facilities has overwhelming support from the mayors, police chiefs and governing bodies in our communities—the cities of Barry and Delavan, Illinois.  ICC compiled the most thorough and complete Standard Operating Procedures by collaborating with carefully selected out of state partners and advisers.  ICC employs an industry-leading and certified cultivation team with over 10 years of legal commercial growing experience, in addition to operations advisors with multiple commercial growth facilities and seven dispensaries in Denver, CO.  Tim McGraw’s professional experience demonstrates continued success as an entrepreneur, specifically, in the real estate development sector, which contains similar stringent requirements to his newest venture in ICC.  ICC’s distinguished advisory board is comprised of senior officials from various branches of government, national associations, and professionals from the security and financials industries.  ICC community outreach programs include working with US military veteran organizations to hire as many returning soldiers as possible - allowing flexible work schedules so they may continue their education.  ICC has worked hand in hand with local government in Barry and Delavan to develop patient education and drug abuse prevention programs fully funded by ICC.  Tim McGraw is a sustaining member of the National Cannabis Industry Association, a sponsor of NORML (National Organization for the Reform of Cannabis Laws), sits on the board of Patients for Safer Access IL chapter, advisor to the Medical Cannabis Institute, and the founder of the Illinois Cannabis Cultivators Association (being formed). Case 3:16-cv-02311-D Document 13-1 Filed 10/17/16 Page 15 of 46 PageID 163 16 The strength of ICC’s framework and strategy execution have been verified: State of the art cultivation center facilities ACE Barry and ACE Delevan are declared the strongest and most reliable business plans among all license application in respective districts as determined by Illinois Department of Agriculture. ICC strongly believes that capital availability and ability to cultivate superior quality cannabis plants are merely small components of the overall successful operation of its two licenses. . ICC’s business model for successful operation of ACE Barry and ACE Delavan includes: 1. Develop the largest, most secure and technologically advanced cultivation operations in the country. The vast majority of cultivation facilities nationwide were not built as sophisticated and scalable facilities. More often than not, they are not well maintained, poorly laid out, inefficiently constructed, cheap, and have almost no environmental controls. Another common issue is the actual grow rooms are too large in size and susceptible to the spread of disease. ICC facilities will be purpose built, have very stringently regulated environmental controls, top of line security, lab like cleanliness, anti- microbial coatings, computer regulated PH and CO2 levels, and organic bio controls. 2. The most successful cultivators nationally have these traits in common: i. Ability to quickly scale up as soon as market demands it ACE Barry and ACE Delavan are approximately 75,000 sq. ft. and will produce more than 7,400 pounds of the most scientifically advanced cannabis plants per year. ICC’s properties are 10 acres or more and will allow us to expand operations by more than 300% to meet increased demand. ii. Broad variety of genetic strain engineering, pure methods, and high cultivation yields ACE Barry and ACE Delavan will source approximately 70 different genetic strains of cannabis plants of Indica and Sativas variety plus Hybrids with high proportions of CBD and low proportions of THC. 20% of ACE Barry and ACE Delavan are devoted to research and development of high CBD strains, whole plant extracts and the development of the first cannabis genetics database. ICC has the means to decode the chemical profile genetic strains and substantially advance scientific research into the effects of various cannabinoid combinations on debilitating medical conditions. . iii. Compartmentalized flower rooms and Co2 extraction capability. The use of proven high yield methodologies with both in house and 3rd party lab testing guarantees that ICC’s quality, purity, safety, and variety will be unmatched in Illinois. ICC is planning several community outreach programs including working with veteran organizations to hire as many returning veterans as possible and allowing flexible work schedules so they may continue their education. We will also be working hand in hand with local government to develop patient education and drug abuse prevention programs fully funded by ICC. Not only is this good for the community, it will also add ancillary value to our permit application. Case 3:16-cv-02311-D Document 13-1 Filed 10/17/16 Page 16 of 46 PageID 164 17 Joint Ventures As stated before, ICC’s long-term objective is to create a leading fully integrated national platform that participates in all segments of legal cannabis industry. At present, the industry is replete with various barriers and inefficiencies, including, but not limited to non-uniform nature of laws and regulations across states, generally low availability of high quality management teams and standard operating procedures, under-developed capital markets, lack of robust banking and financing services, absence of high quality scientific research and related data. This setting creates an enormous opportunity to develop and acquire intellectual property and assets that address these inefficiencies and help the firm participate in and lead the industry evolution going forward. ICC has established ACE Joint Ventures business unit that is focused on capturing aforementioned opportunities. The key objective of ACE Joint Ventures is to serve as a strategic investment arm of ICC by deploying internal and external capital via both stand-alone investment vehicles and directly. This approach will allow to efficiently expand ICC’s cultivation and retail capabilities nationally and internationally, promote the “ACE Revolution” brand as well as facilitate creation additional sources of revenue by deploying managed services, building distribution capabilities, providing strategic and capital solutions and capturing various partnership opportunities with various industry participants. The Company has developed a deep and rich pipeline of transactions and partnership opportunities that can be immediately accretive to the Company’s bottom line. Managed Services The internal expertise spanning all segments of the cannabis industry “food chain” allows ICC to create an additional stand-alone profit center by offering managed services to cultivation and dispensary operators across all US states that legalized cannabis as well as internationally. The Company’s hands-on proactive approach, tested in real and diverse cultivation environments, allows ICC’s managed services team to make immediate positive impact on profitability by improving yields, reducing operational risks and enhancing overall business strategy. The Company’s hybrid and modern cultivation methodology emphasizes scalability, risk management, and standardization, thereby allowing the cultivators to achieve optimal growth potential for each strain, increase yields while decreasing the risk of crop impairment and overall cost of goods sold. Case 3:16-cv-02311-D Document 13-1 Filed 10/17/16 Page 17 of 46 PageID 165 18 Application Process in Illinois: Selection Criteria and ICC Holding Submission Overview The legislation that has been enacted in Illinois contains some of the strictest standards and highest barriers for entry of those seeking a cultivation or dispensary license. The following regulatory agencies are involved in the “Compassionate Use of Medical Cannabis Pilot Program Act” (the “Pilot Program”) in Illinois: 1. The Illinois Department of Agriculture (IDOA) will register and regulate the cultivation of cannabis. All applications for cultivation licenses will be reviewed and scored by a team selected by IDOA. 2. The Illinois Department of Public Health will govern the use of cannabis and regulations concerning doctors and patients. 3. The Illinois Department of Financial and Professional Regulation (IDFPR) will regulate the distribution of cannabis, including rules and regulations concerning dispensary centers. All applications for dispensary licenses will be reviewed and scored by a team selected by IDFPR. 4. The Illinois Department of Revenue will regulate and oversee the sales and taxation of cannabis. IDOA has proposed an application process under which applicants for dispensary and cultivation permits would be scored on a wide array of criteria, such as: business plans, security plans, expertise in the medical and agricultural fields, building plans, plans for hiring minorities, plans for helping to combat substance abuse in Illinois, plans for using alternative energy sources and plans showing how the entity could "give back to the local community" if awarded a permit. The IDOA administrative rules were approved by the Illinois General Assembly’s Joint Committee on Administrative Rules (“JCAR”) on July 15, 2014. The list below provides a high level summary of key requirements for cultivation permits:  Cultivation facility must be 2,500 ft. from residential zoning, schools or daycare centers  Site cannot be encumbered by a mortgage  Must have local zoning approval prior to application  Must be able to show support from the community  Only large scale facilities will be considered  Facilities under 24 hour surveillance by Illinois State Police  All Cannabis tracked from seed to sale  Must prove ability to expand to meet demand on site  $2,000,000 Surety Performance Bond required per facility by the state  Approximately $5.5 million in development costs per facility (50% built out)  Cultivation plans, employee training manuals, security plans, inventory control plans, product labeling plan, research plan and further requirements as graded by the Dept. of Agriculture, Illinois State Police and Dept. of Public Health  The single-stage application process includes a $25,000 non-refundable application fee, proof of $500,000 in liquid assets and documentation satisfying selection and optional bonus criteria. Case 3:16-cv-02311-D Document 13-1 Filed 10/17/16 Page 18 of 46 PageID 166 19 Schedule 1: Suitability of the Proposed Facility (150 points) Given the extensive experience in real estate development and management, this section of the application represented one of the cornerstones of the application process and long-term strategy. While many competitors postponed identification and development of facility sites toward post-application stage, ICC spent many months cultivating and developing relationships with target municipalities and related authorities to secure the most attractively positioned lots of land that satisfy all regulatory and compliance requirements. The firm has invested significant capital and resources to ensure zoning compliance and develop state-of-the-art engineering plans and specifications. ICC has managed to obtain exclusive agreements with each municipality thereby cementing its competitive positioning in target districts as well as gathering substantial support from both communities and public service organizations such as fire and police departments. Schedule 2: Staffing and Operations Plan (100 points) ICC developed a comprehensive staffing and operations plan that incorporated best operational and management practices and covered all functional areas of the business, including cultivation, facilities management, security capabilities, human resources, technology, finance and accounting, and others. Schedule 3: Security Plan (200 Points) ICC considers security and compliance to be the single most important area in terms of its impact on overall quality and risk profile of its operating capability. The firm’s internal security team is led by one of the most experienced and respected US Marshals in the State of Illinois. As part of the integrated security plan, ICC has developed full scale engineering plans and specification of cultivation facility security, including the security surveillance system and standard operating procedures at the facility. Additionally, the plan emphasizes product and financial security, shipping and transportation security as well as compliance with relevant financial laws and regulations. Schedule 4: Cultivation Plan (300 Points) Supported by the leading cannabis industry consultant and relying on internal industry experience, ICC has created the most comprehensive cultivation plan in the industry. It covers a variety of advanced and unique cultivation methods, detailed cultivation process specifications, such as cultivation process flow, production area design, application of pesticides, inventory management, storage plan, shipping and receiving process, water flow diagram and waste disposal. The firm’s Chief Cultivation Officer has spent the last 4.5 years advising the most complex, advanced and sizable cultivation operators in US and has laid the foundations of our cultivation process that are based on disciplined process combined with state-of-the-art methodologies, equipment and technology solutions. Case 3:16-cv-02311-D Document 13-1 Filed 10/17/16 Page 19 of 46 PageID 167 20 Schedule 5: Product Safety and Labeling (150 Points) ICC developed and proposed a comprehensive product safety and labeling plan that involves certified and safe product packaging, labeling, product testing, and product recall plans. Schedule 6: Business Plan and Financial Disclosure (100 Points) ICC complied with the most stringent standards and requirements for financial disclosure the cannabis industry has ever seen, with the specific focus on balancing the state requirements for financial transparency with the privacy of investors. The proposed business plan has been developed to showcase ICC’s ability to design and implement an industry-leading cultivation operation Schedule 7: Bonus Section (20 points each) With the help of one of the most prominent law firm in the country, ICC developed the most advanced set of labor and employment practices to ensure both compliance and adequate operational staffing. The firm emphasized hiring veterans, creating local community jobs, and providing safe and productive environment for its employees. In close cooperation with local communities, the firm created a comprehensive community benefits plan, that went beyond jobs creating and added substance abuse prevention plan, environmental plan as well as research and education plan/program. Needless to say, we scored high in every category to obtain the two licenses. Company Structure and Capitalization The Company is currently majority controlled by its two Founding Members, ACE Management, LLC, which is owned and managed by Tim McGraw, and Kameosa Capital, which is owned and controlled by Oleg Movchan. The Founding Members hold collectively own 67.65% of the outstanding Units and the Class A Investors collectively hold 32.35% of the outstanding Units. ACE Management, LLC acts as the Company’s Manager. The Company has also formed two subsidiaries, one for each cultivation center. Each subsidiary will act as the operating companies for ICC. Case 3:16-cv-02311-D Document 13-1 Filed 10/17/16 Page 20 of 46 PageID 168 21 Management Team Tim McGraw – Founder & CEO Tim McGraw is the Founder and Chief Executive Officer of ICC Holdings, LLC (ACE Revolution) and is responsible for defining the overall strategy of the firm and all of its subsidiaries and brands. He serves as a Vice Chairman of Americans for Safe Access (Illinois Chapter) and the co-founder and Director of The Illinois Cannabis Association. Mr. McGraw is a lifelong cannabis advocate, investor, and entrepreneur. While real estate is a common thread of Mr. McGraw’s career, his portfolio has a myriad of investments spanning the spectrum from private equity to payment processing. Tim began his career in as a loan officer and later moved into the wholesale mortgage-backed securities, closing over $1.4 billion in transactions at Fremont Investment & Loan. He founded The McGraw Companies, a real estate development, property preservation, general contracting, property management, and disaster recovery company and served as its President and CEO from 1999 to 2012. Mr. McGraw’s broad experience in all segments of the real estate value chain, including his work with some of the largest institutions in the country including HUD, Fannie Mae, Bank of America, Chase, and GMAC give him the necessary experience to oversee the design and construction of ACE’s facilities and manage the strict regulatory environment in which ACE operates. Since 2012, Tim has focused all of his time and energy to make ACE Revolution a national leader in the cannabis industry. He and his extraordinarily talented team have designed and engineered the most advanced cultivation facilities in the United States and developed a significant portfolio of supporting intellectual property. Tim is widely regarded as an expert on intersection of capital markets and cannabis industry, and a passionate and vocal leader within the industry. His unique skill sets as well as his vision for ACE combined with the most talented team in the industry will ensure that ACE remains a national leader for many years. Dustin Shroyer - Chief Cultivation Officer & COO, ACE Managed Services For the last 17 years Dustin Shroyer’s passion for health has driven his studies into the benefits of natural healing methods and organic gardening. During the last eight years he has merged these interests with medical cannabis cultivation. In addition to his cultivation expertise, Dustin brings extensive knowledge of retail experience in both management and corporate loss prevention In 2007 Dustin started Digital Sun Harvesters, LLC, a wholesale production cooperative, in order to meet a pressing demand from dispensaries and patients for high grade, legally produced medical cannabis. DSH banded together 8 small batch cultivation sites with an individual manager at each. The cultivation cycle was staggered to produce 1 harvest per-week in order to provide top up and coming brands in Denver with a consistent supply of the best medical strain varieties the DSH team could acquire. Mr. Shroyer went on to open Root Organic Medical Marijuana Center in 2010. Root organic focused on producing clean organic cannabis and superior patient education. In 2012 Dustin merged the brand with a larger organization in order to increase market share for organic medical cannabis. Post-merger, Dustin shifted his role to product development and production facility design in order to utilize the cleanest extraction processes, also known as supercritical Co2. Dustin conceptualized and created Hummingbird Co2 Nectar Brand in order to create the purest and healthiest delivery methods for cannabis consumption. For the last three years Mr. Shroyer’s focus has been working with leading cannabis consulting firms to share his knowledge on a national level and help create successful cannabis brands. Dustin’s experience has resulted in an impeccable track record of winning merit-based cannabis cultivation and dispensary applications in multiple states through turning his knowledge of cultivation and management into manuals and operating procedures. The results have proven valuable for multiple cannabis businesses that have won highly competitive licenses in the most restrictive and regulated states; including, MA, CT, CO, WA, NV, IL & MN. Since 2012, Dustin has designed operating plans for over 500,000 square feet of cultivation space. Dustin’s combined experience of operating successful retail, cultivation operations, and developing standardized procedures make him an integral part of the ACE team. Case 3:16-cv-02311-D Document 13-1 Filed 10/17/16 Page 21 of 46 PageID 169 22 Mr. Shroyer earned his B.A. in Anthropology with a minor in business from Texas State University and currently holds multiple yoga teaching certificates. In addition to the cannabis industry, Dustin owned and operated an award winning yoga studio in Denver, Co. Oleg Movchan, CFA - Chief Executive Officer, ACE Joint Ventures Oleg Movchan brings 18 years of experience in asset management and investment banking industries across both public and private capital markets, having served as a Chief Risk Officer and Head of Risk Management for global multi-billion dollar multi-strategy and global macro hedge funds, a fund of hedge funds and a global asset management firm. He is also a CEO of Kameosa Capital, LLC, an asset management advisory firm which provides integrated advisory on business and product strategy, innovative portfolio construction and implementation solutions, enterprise-wide risk management, operations and technology solutions. Oleg’s experience in evaluating potential investment opportunities, deal structuring and negotiations, managing risk of large complex portfolios, and creating appropriate investment and operating structures adds value throughout the entire ACE Revolution organization by allowing the firm to create shareholder value by effectively deploying internal and external capital. Mr. Movchan’s focus is to establish ACE Revolution and ACE Joint Ventures as a leading provider of capital and strategic solutions to the cannabis industry both domestically and internationally. Mr. Movchan holds a MS degree in Financial Mathematics and a MBA in Analytic Finance, both from the University of Chicago, as well as a MS degree in Applied Mathematics and Physics from Kharkov State University, Ukraine. He also holds CFA designation. Joseph Spokas - Chief Financial Officer Joseph Spokas is Chief Financial Officer of ICC Holdings, LLC. Mr. Spokas has 35 years of experience as a CPA, and has spent more than a quarter century in the heavily regulated securities industry as a financial planner and investment adviser. In 1977 Joseph Spokas graduated with an accounting and business degree from Benedictine University in Lisle, Illinois. He earned his CPA certification in 1978 while working at Genworth Financial as an Investment Adviser Representative, and in 1987 he became a Registered Representative. He continued to work at Genworth until 2011 while at the same time working as a CPA and financial adviser for several other entities, including his own accounting firm. Since 2002 he has been an Investment Advisor Representative at Forum Financial Management LLP, and since 2011 he has sold securities as a Registered Representative at Pinnacle Wealth Management while continuing his CPA practice as Managing Member of Joseph A. Spokas & Associates CPA. He has served as CFO at Cooper Flexible Packaging, Fenton Press Inc., and at multiple companies while working with ICIS Financial. In addition to his CPA, he is a Certified Financial Planner since 1998, a Personal Financial Specialist since 2000, and since 1987 he holds a Series 7 license from the North American Securities Administrators Association, and a Series 63 license from the Financial Industry Regulatory Authority. Teresa Slepawic - Chief Administrative Officer Teresa Slepawic has been with the company for six months, and before that spent the past four years in the heavily regulated Video Gaming industry. As part of the application and licensing process of the Illinois Gaming Board, Ms. Slepawic educated and advised over 90 video gaming locations. She also worked with municipalities to understand the regulatory compliance of video gaming, and how it effects the community. Ms. Slepawic has particular expertise in the understanding, communication, and implementation of new regulations and compliance in a state regulated program. She is adept in handling multiple complex processes and programs, and tailoring her educational activities to specific locations. Case 3:16-cv-02311-D Document 13-1 Filed 10/17/16 Page 22 of 46 PageID 170 23 In her 6 months with ICC, Ms. Slepawic has participated fully in the community outreach process in each community where ACE considered locating a cultivation center. She met with officials and citizens, presented the plans for the cultivation center, solicited feedback, and conducted polls. Her performance smoothed the way for multi-level approvals in three different locations. James Smith - Chief Security Officer James Smith is a retired U.S. Marshal whose law enforcement career followed a path from a Corrections Officer at Chicago’s Cook County Jail to security details for Supreme Court justices. Now, Mr. Smith brings those 25 years of risk assessment and protection experience to bear on the similar security needs of ICC. During his career Mr. Smith coordinated and supervised over two-hundred protection missions, ranging from protection for every living U.S. Supreme Court Justice to providing protective operations for several members of the Department of Justice and Federal Judiciary. In 2003, the Office of the United States Marshal promoted James Smith to the role of Senior Inspector for the 7th Circuit Court of Appeals. In this position, James applied his deep knowledge of security in carrying out protective details of various individuals, and in creating security assessments. Further accolades include receiving the Director’s Award for action taken while assigned to the U.S. Marshals Service Training Academy, as well as recognition for apprehending a suspect in an armed robbery. James played a vital role in developing a new policy addressing the manner in which prisoners were transferred. All of these activities directly relate to his responsibilities to protect the assets of ICC. Ed Warpinski – Director of Facilities Ed Warpinski has over ten years of commercial, industrial and residential construction management experience. Ed plays a key role facilitating construction projects and mitigating implementation risk by applying his deep understanding of cannabis cultivation facilities and diverse real estate and project management expertise. Since joining ACE, Mr. Warpinski has immersed himself in the design, engineering and cost analysis for the most advanced cultivation facilities in the country. This facilities were designed and engineered solely to safely and effectively cultivate medical cannabis. Due to the complex and sensitive conditions the cultivation requires, Ed worked collectively with cannabis-specific consultants to specify and engineer specialized grow-lighting, elaborate HVAC systems, intricate water purification equipment, technical extraction/infusion apparatus and expansive security components. Throughout this process, Ed implemented project control strategies, performed value-engineering evaluations, and proactively vetted various materials and methods. Ed holds a Bachelor’s Degree in Construction Management from Arizona State University. In addition, Ed is a LEED accredited professional who has managed the completion of two Scottsdale, Arizona “Green” Buildings, and also holds a real estate license in the state of Illinois. Andrew Warpinski – Director of Operations Andrew Warpinski has more than 15 years of experience in agribusiness. He began working his way from the ground up at one of the nation’s largest turf grass producers. In 2004, he accepted a position with their Mid-Atlantic farm. This transition allowed him to focus more so on the business than farming aspect of the operation. The DC Metro market required product certification, making record keeping essential, thus affording Andrew the experience in working in a highly regulated environment. Andrew co-developed a program that maintained the necessary information for crop establishment and nutrient management practices. In 2010, Andrew returned to the Illinois farm. As the Corporate Operations Manager, he improved customer service and order accuracy by implementing electronic ordering and dispatching. Expanding on his previous experience, Andrew began maintaining and improving an IT network of over 50 devices in 9 locations throughout Northern Illinois. By 2014, Andrew managed a diverse staff of more than 40 sales Case 3:16-cv-02311-D Document 13-1 Filed 10/17/16 Page 23 of 46 PageID 171 24 and production personnel and oversaw and accounted for the timely delivery of hundreds of thousands of square feet of turf daily. Andrew earned his Associates degree in 2010 and is certified by the Illinois Department of Agriculture for integrated pesticide management as a licensed commercial applicator. Eric Diekhoff – Director of Operations Eric Diekhoff brings a lifetime of agricultural experience and 10 years business operations experience. Raised on a family farm, Eric earned a double major in Agronomy and Agriculture Business from Illinois State University in 2001 and is certified in the ASA-CTI Core Cannabis Training Program.. After starting his own farming operation, Eric was brought on by a local agricultural supply distributor as sales manager. Eric became a certified crop advisor in 2009 and has attained expert status in the areas of soil and water management, nutrient management, integrated pest management, crop management, and is experienced in biotechnology and strain selection. Additionally, Eric has provided supplemental services to farms needing assistance during the peak seasons for winter planning, spring planting, and fall harvesting. Since joining ACE, Eric and the Chief Cultivation Officer have worked together to establish ideal soil compositions, generate optimal nutrient formulations, and to create a growth medium that enables the medical cannabis to achieve maximum genetic potential. Case 3:16-cv-02311-D Document 13-1 Filed 10/17/16 Page 24 of 46 PageID 172 25 THE OFFERING Securities Offered Up to 4,383,824 Class B Units of the Company, as may be increased at the Company’s sole discretion. Minimum Investment The minimum required investment is $250,000. The Company may accept subscriptions for less than $250,000 in its sole discretion. Minimum Offering Amount is $6,900,000. Price Per Unit and Value Each Class B Unit is priced at $8.50. Prior to the issuance of Class B Units, 7,835,000 Units have been issued to the founders and Class A members. The Company arbitrarily determined the purchase price per Unit based on the amount the Company needs per license to construct and develop a cultivation center and cover the Company’s costs and expenses; it has no direct relationship to earnings, value, fair market value, assets or other objective standards of worth. The Company reserves the right to modify the offering price per Unit for investors who make an investment in the Company above a certain size as determined by the Company, and the Company is currently offering Class B Units at $6.75 per Unit to those investors who subscribe for Class B Units prior to the Company closing on the construction loan it is currently negotiating with an Illinois state chartered bank (the “Loan Closing”). Further, to the extent a Class B Investor purchase Class B Units at a price per unit below a price per unit set forth above prior to the Loan Closing, each Class B investor will retroactively receive such price per unit and be issued additional Class B units therefor as if it was the price per Unit for which they subscribed. Capital Contributions Upon each investor’s subscription for a certain number of units, the said subscription would represent their capital contribution to the Company. Members may be requested to make additional capital contributions in accordance with the terms of the Amended and Restated Operating Agreement. Offering Period The “Offering Period” shall commence on the date of hereof and terminate twelve (12) months from the date hereof, unless extended by the Company for up to an additional 90 (ninety) calendar days. Multiple “Closings” and Right of Rejection The initial closing shall occur and funds from escrow shall be released upon the Company raising the Minimum Offering Amount. The Company may release funds thereafter on a rolling basis. The Company has the right to accept or reject any subscription from any prospective investor. Case 3:16-cv-02311-D Document 13-1 Filed 10/17/16 Page 25 of 46 PageID 173 26 Management of Company Except as provided in the Amended and Restated Operating Agreement, the Company is managed exclusively by the Manager and virtually all Company decisions are made by the Manager. The Manager, however, may be removed for Cause by the Board of Directors. The Board is comprised of not less than five (5) persons and not more than seven (7), two of whom have been appointed by the Founding Members, and three and five of whom will be appointed by the Class A and Class B Members, pro rata by capital contribution. The Board’s duties, rights and obligations are as set forth in the Amended and Restated Operating Agreement. Distributions and Preferences The Company may make distributions to its members and economic interest owners as determined by management, provided, however that, to the extent not prohibited, the Company shall make distributions to its members to cover estimated tax obligations incurred by the members and economic interest owners. For discretionary distributions from operations, the Company will distribute 80% of any non-capital transaction distributions to the Class A members and 20% to the Class B members, pro rata in accordance with their percentage interest (relative to the group), until such time as the Class A members have been returned their capital plus an 18% preferred return on any unreturned capital. Once the Class A members have received their capital plus preferred return back, then the Company will distribute 100% of any non-capital transaction distributions to the Class B members, until such time as the Class B members have been returned their capital plus an 8% preferred return on any unreturned capital. Thereafter, all distributions shall be made pro rata in accordance with their percentage interest, without regard to class. Additional Issuances and Preemptive Rights The Company has the right to issue additional new securities and classes of securities to other investors; provided, however that the Company’s existing members, Class A and Class B included, shall have the right to participate in that offering of new securities on the same terms and conditions to, at a minimum, maintain their percentage interest. Anti-Dilution Protection The Class A investors’ collective percentage interest in the Company following the issuance of Class B Units shall not dip below 25% of the total Units outstanding. To the extent it does, the Company will issue new Class A Units to the Class A Members, diluting the Founding Members and Class B Members. However, such anti-dilution protection has already taken into account in the number of Class B Units offered and does not extend past this equity round of funding. Further, Class B investors will receive a broad-based anti-dilution protection as provided for in the Amended and Restated Operating Agreement to the extent that in the next round of qualified equity financing, the enterprise value is less than the Case 3:16-cv-02311-D Document 13-1 Filed 10/17/16 Page 26 of 46 PageID 174 27 Company’s enterprise value in connection with this offering. See the Amended and Restated Operating Agreement for specific details. Restrictions on and Duties to Transfer of Units The transfer of Class B Units is generally restricted by the Amended and Restated Operating Agreement. Except in certain limited circumstances as enumerated therein, transfers of Units are subject to a right of first refusal by the Company. All transfers require Manager approval. Members holding a majority of the Units may, upon Manager approval, cause a Change of Control and “drag along” the other members, and the members also hold “tag along” rights. Further, to the extent a member’s ownership in the Company violates, or becomes a violation of any law, rule or regulation of the Company’s licenses, such member shall be required to sell their membership interest to avoid further violations, and if a member fails or refuses to transfer such interest in compliance, such member will be required to sell their Units back to the Company for $1,000.00, irrespective of actual value. Covenants Members shall keep Company information confidential, and shall not hold any ownership or economic interest, or participate in management of, a competitor of the Company, while they are a member of the Company. Reporting Investors will receive an annual report of the activities of the Company and audited financial statements as soon as practicable after the end of each Fiscal Year. Information necessary to enable investors to timely prepare and file tax returns will be supplies no later than 90 days after the end of each calendar year. Indemnification The Company shall indemnify all Members, Directors and Managers against any claims made against them save for those constituting fraud, gross negligence or willful misconduct. Investor Representations Class B Members reaffirm the representations and warranties made in their Investor Questionnaire and Purchase Agreement. PLEASE REVIEW THE AMENDED AND RESTATED OPERATING AGREEMENT ATTACHED HERETO AS EXHIBIT B CAREFULLY AND IN FULL FOR MORE DETAILED INFORMATION. Case 3:16-cv-02311-D Document 13-1 Filed 10/17/16 Page 27 of 46 PageID 175 28 FINANCIAL PROJECTIONS & USE of PROCEEDS Financial Projections THE PROJECTIONS ARE “FORWARD LOOKING STATEMENTS” AND WERE NOT PREPARED WITH A VIEW TO PUBLIC DISCLOSURE OR COMPLIANCE WITH PUBLISHED GUIDELINES OF THE COMMISSION OR ANY STATE SECURITIES COMMISSION. THE COMPANY ADVISES ALL PROSPECTIVE INVESTORS TO PURSUE THEIR OWN INDEPENDENT INVESTIGATION WITH RESPECT TO THE PROJECTED FINANCIAL INFORMATION INCLUDED. The key assumptions and profitability summary per facility are presented in the table below. Total lights 900 Yield (lbs per light) 1.5 lbs2 Harvests per year 5.5 Wholesale price per lb 3,0003 2016 2017 Gross Revenue $65,302,848 $68,739,840 Flower $46,170,000 $48,600,000 Extracts/Edibles $19,132,848 $20,139,840 Total Expenses $18,485,008 $15,674,473 EBITDA $46,817,840 $53,065,367 A more detailed pro-forma is available upon request. Use of Proceeds The following information provides estimates of how the Company expects to use the proceeds raised in this Offering. 1 Minimum and Maximum Offering Amounts - Maximum Offering Amount subject to change 2 Conservative assumption based on proven cultivation methodology. Target yield to exceed 2.0 lbs. 3 Conservative assumption, the price is likely to be as high as $4,500 Case 3:16-cv-02311-D Document 13-1 Filed 10/17/16 Page 28 of 46 PageID 176 29 INVESTOR SUITABILITY STANDARDS Overview Prospective purchasers of the Units offered by this Memorandum should give careful consideration to certain risk factors described under “RISK FACTORS” section and especially to the speculative nature of this investment and the limitations described under that caption with respect to the lack of a readily available market for the Units and the resulting long term nature of any investment in the Company. This Offering is available only to suitable Accredited Investors having adequate means to assume such risks and of otherwise providing for their current needs and contingencies. General The Units will not be sold to any person unless such prospective purchaser or his or her duly authorized representative shall have represented in writing to the Company in an Investor Questionnaire and Purchase Agreement that:  The prospective purchaser has adequate means of providing for his or her current needs and personal contingencies and has no need for liquidity in the investment of the Units;  The prospective purchaser’s overall commitment to investments which are not readily marketable is not disproportionate to his, her, or its net worth and the investment in the Units will not cause such overall commitment to become excessive; and  The prospective purchaser is an “Accredited Investor” (as defined on the next page) suitable for purchase in the Units. Each person acquiring Units will be required to represent that he, she, or it is purchasing the Units for his, her, or its own account for investment purposes and not with a view to resale or distribution. Accredited Investors The Company will conduct the Offering in such a manner that Units may be sold only to “Accredited Investors” as that term is defined in Rule 501(a) of Regulation D promulgated under the Securities Act of 1933 (the “Securities Act”). In summary, a prospective investor will qualify as an “Accredited Investor” if he, she, or it meets any one of the following criteria:  Any natural person whose individual net worth, or joint net worth with that person’s spouse, at the time of his purchase, exceeds $1,000,000. Except as provided in paragraph (2) of this section, for purposes of calculating net worth under this paragraph: Case 3:16-cv-02311-D Document 13-1 Filed 10/17/16 Page 29 of 46 PageID 177 30 (i) The person’s primary residence shall not be included as an asset; and (ii) Indebtedness that is secured by the person’s primary residence, up to the estimated fair market value of the primary residence at the time of the sale of securities, shall not be included as a liability (except that if the amount of such indebtedness outstanding at the time of the sale of securities exceeds the amount outstanding 60 days before such time, other than as a result of the acquisition of the primary residence, the amount of such excess shall be included as a liability); and (iii) Indebtedness that is secured by the person’s primary residence in excess of the estimated fair market value of the primary residence at the time of the sale of securities shall be included as a liability.  Any natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person’s spouse in excess of $300,000 in each of those years and who has a reasonable expectation of reaching the same income level in the current year;  Any bank as defined in Section 3(a)(2) of the Act, or any savings and loan association or other institution as defined in Section 3(a) (5)(A) of the Securities Act, whether acting in its individual or fiduciary capacity; any broker or dealer registered pursuant to Section 15 of the Securities and Exchange Act of 1934 (the “Exchange Act”); any insurance company as defined in Section 2(13) of the Exchange Act; any investment company registered under the Investment Company Act of 1940 or a business development company as defined in Section 2(a)(48) of that Act; any Small Business Investment Company (SBIC) licensed by the U.S. Small Business Administration under Section 301(c) or (d) of the Small Business Investment Act of 1958; any plan established and maintained by a state, its political subdivisions, or any agency or instrumentality of a state or its political subdivisions, for the benefit of its employees, if such plan has total assets in excess of $5,000,000; any employee benefit plan within the meaning of the Employee Retirement Income Security Act of 1974, if the investment decision is made by a plan fiduciary, as defined in Section 3(21) of such Act, which is either a bank, savings and loan association, insurance company, or registered investment advisor, or if the employee benefit plan has total assets in excess of $5,000,000 or, if a self-directed plan, with investment decisions made solely by persons who are Accredited Investors;  Any private business development company as defined in Section 202(a)(22) of the Investment Advisors Act of 1940;  Any organization described in Section 501(c)(3)(d) of the Internal Revenue Code, corporation, business trust, or partnership, not formed for the specific purpose of acquiring the securities offered, with total assets in excess of $5,000,000;  Any director or executive officer, or general partner of the issuer of the securities being sold, or any director, executive officer, or general partner of a general partner of that issuer; Case 3:16-cv-02311-D Document 13-1 Filed 10/17/16 Page 30 of 46 PageID 178 31  Any trust, with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the securities offered, whose purchase is directed by a sophisticated person as described in Section 501(b)(2)(ii) of Regulation D adopted under the Act; and  Any entity in which all the equity owners are Accredited Investors. Other Requirements No subscription for the Class B Units will be accepted from any investor unless he is acquiring the Class B Units for his own account (or accounts as to which he has sole investment discretion), for investment and without any view to sale, distribution or disposition thereof. Each prospective purchaser of Class B Units may be required to furnish such information as the Company may require to determine whether any person or entity purchasing Class B Units is an Accredited Investor. Case 3:16-cv-02311-D Document 13-1 Filed 10/17/16 Page 31 of 46 PageID 179 32 RISK FACTORS An investment in Class B Units involves a high degree of risk. An investment in Class B Units is suitable only for those subscribers who understand, and have financial resources sufficient to enable them to bear a number of risks, including but not necessarily limited to those described below. You should consider carefully the information set forth below in “Risk Factors” and the other matters set forth elsewhere in this Memorandum. The Company urges each prospective investor to consult its tax advisors with respect to the federal, state, local and other tax consequences of investing in the Class B Units. Risks Related to the Company: No Operating History The Company was recently formed and has no history of operations. The Company cannot provide assurance that it can manage start-up effectively and properly staff operations, and any failure by The Company to manage its start-up effectively, or obtain licenses on a timely basis, could delay the commencement of operations. Such a delay is likely to further delay the Company’s ability to generate revenue and make distributions to unit holders. The Company proposed operations are subject to all the risks inherent in the establishment of a new business enterprise of its type, including governmental approvals. The Company anticipates a period of significant growth, involving the construction, installation and start-up of operations and the hiring of employees. This period of growth and the start-up are likely to be a substantial challenge to the Company. If the Company fails to manage start-up effectively, you could lose all or a substantial part of your investment. As a new company with limited capital, an investment in the Company is particularly vulnerable to general business risks, such as adverse changes in general economic conditions, increasing labor costs, changes in governmental regulations, competitive businesses and products and technological changes. Dependence on Management Team and Other Key Personnel The Company is dependent on Mr. McGraw, Mr. Shroyer and the rest of the management team for design, construction, installation and operation of cultivation centers. Any loss of the Company’s relationship with management, particularly during the construction, installation and start-up period for the cultivation centers, may prevent the Company from commencing operations and result in the failure of the Company’s business. The time and expense of locating new cultivation experts and contractors would result in unforeseen expenses and delays. Unforeseen expenses and delays may reduce the Company’s ability to generate revenue and profitability and significantly damage the Company’s competitive position in the cannabis industry such that you could lose some or all of your investment. Further, the future performance of the Company will depend to a significant extent on the skill and expertise of the managers and other key personnel, particularly Tim McGraw. The loss of any of such key personnel or the inability to find and hire qualified personnel could have a material adverse effect on the performance of the Company. The Company has not entered into an employment contract with or purchased key man life insurance on the life of Mr. McGraw or any other key personnel. Case 3:16-cv-02311-D Document 13-1 Filed 10/17/16 Page 32 of 46 PageID 180 33 The Company is Relying Heavily on Management Decisions to Conduct Business All day-to-day decisions with respect to the management of the Company will be made exclusively by the Manager and its executive team. Holders of Class B Units will have no right or power to take part in the management of the Company. Accordingly, a potential investor should not purchase any of the Class B Units offered hereby unless he is willing to entrust all aspects of the management of the Company to the Manager, subject to the terms of the Amended and Restated Operating Agreement. (See Exhibit B). Risks Associated with Banking Regulations To the extent that the federal law prohibits the sale and use of cannabis, commercial banks charted at the federal level restricted from providing banking services to cannabis cultivation facility operators and other industry participants. While the Company has secured several banking relationships with commercial banks charted by the state of Illinois, there can be no assurances that the Company will be able to obtain adequate banking services to facilitate its operations. Changes in Medical Marijuana Laws Due to the Company’s planned operations in the medical marijuana industry, any changes to the current medical marijuana laws in Illinois, or delays in implementation of rules, regulations and licensing, could have a material and adverse effect on the Company. It is possible that a change in regulations or a termination of the pilot program, or failure to extend the pilot program, could result in the Company no longer being able to operate. Further, should the Company’s business fail or become insolvent, the specific nature of the facilities and related improvements could make reselling the property more difficult and may result in higher costs or lower net proceeds from the asset sale. Failure to Obtain and Retain a License The Company has applied for and was awarded two cultivation licenses in the State of Illinois, subject to certain ongoing obligations. However, given the evolving nature of the business, there is no guarantee nor can the Company provide any assurance that the Company will retain the licenses and/or continually meet the qualifications and requirements to retain those licenses. Should the Company fail to obtain and retain a license, the business of the Company as intended may not continue. Environmental Issues Unique to the Company’s Operations The Company’s planned marijuana growing and cultivation operations may involve certain unforeseen environmental impacts that could cause the Company to expend capital in excess of current budgeted amounts. Such expenditures could hamper the Company’s cash flow and could hinder execution of operations. Crop Damage or Insufficient Yield The Company intends to cultivate and sell medicinal marijuana. The cultivation of marijuana plants, like any crop, is subject to certain environmental factors and risks that could impinge upon the quality of the resulting crop or the yield. While the Company intends to employ experienced managers for the grow operation, there can be no assurances provided that the Company’s grow operation will not face certain challenges in the cultivation and yield of the crop. Case 3:16-cv-02311-D Document 13-1 Filed 10/17/16 Page 33 of 46 PageID 181 34 Risks Associated With Expansion Any expansion of operations the Company may undertake will entail risks, such actions may involve specific operational activities which may negatively impact the profitability of the Company. Consequently, the Members must assume the risk that (i) such expansion may ultimately involve expenditures of funds beyond the resources available to the Company at that time, and (ii) management of such expanded operations may divert Management’s attention and resources away from its existing operations, all of which factors may have a material adverse effect on the Company’s present and prospective business activities. Insurance Coverage May Be Inadequate or Unavailable to Protect the Company from Losses Related to the Construction and Operation of the Cultivation Centers Manager intends to procure comprehensive insurance, including fire, liability and extended coverage for the cultivation facilities. However, there are certain types of losses (generally of a catastrophic nature), which may be either uninsurable or not economically insurable. Such excluded risks generally include terrorism, war, earthquakes and floods. Should such disaster occur and not be covered by insurance, the Company might suffer a loss of capital invested and any profits which might be anticipated from the cultivation centers. The Amended and Restated Operating Agreement Includes Certain Provisions Protecting the Manager and its Members from Liability to the Company Under the Amended and Restated Operating Agreement, ACE Management, LLC, Tim McGraw and the other members of the Manager are not liable to the Company nor to the investors for any acts performed in their capacities as managers by them in good faith or for any failure to act, except for acts of fraud, gross negligence and willful misconduct. Also, under certain circumstances the managers will be entitled to indemnification from the Company for any loss. (See Exhibit B attached hereto). Investors May be Subject to Contingent Liabilities Resulting From Distributions by the Company Generally, the investors do not have personal liability for the obligations of the Company. However, under the Illinois Limited Liability Company Act, the investors could be required to return distributions previously made by the Company if it is determined that such distributions were wrongfully made. Additionally, the investors may have to return all or a portion of distributions to the extent the Company has an obligation to withhold any amount from such distribution for tax purposes. Risks Related to Taxes: The following discussion summarizes certain of the federal income tax aspects of and risks associated with an investment in the Company. For a more extensive discussion of potential federal income tax issues, see the section entitled “Federal Income Tax Matters.” There is no Internal Revenue Service Rulings to Assure Tax Consequences. The Company will not seek Internal Revenue Service (the “IRS”) rulings as to any of the federal income tax consequences of investment in the Company. Thus, positions taken by the Company as to tax consequences could differ from positions ultimately taken by the IRS in auditing tax returns, in issuing rulings or otherwise. Therefore, there can be no assurance that the intended tax consequences of investment in the Company will be realized. Case 3:16-cv-02311-D Document 13-1 Filed 10/17/16 Page 34 of 46 PageID 182 35 There is a Possibility that Tax Attributable to Company Activity Will Exceed Amount of Distributions The Company will be required to file an informational return for each taxable year reporting its operations on the accrual method of tax accounting. Each member will be required to report on his, her or its personal federal income tax return such member’s distributive share of the income, gains, losses, deductions and credits of the Company for the taxable year of the Company ending within or with such member’s taxable year, whether or not any actual cash distribution has been or will be made to such member. The total amount of a member’s tax liability may well exceed the total amount of cash distributions, if any, which such member may receive from the Company during a taxable year. Company Deductions and Allocations May Be Challenged by the IRS The Company will claim all deductions that the Manager reasonably believes it is entitled to claim, although some positions that the Company may take may not necessarily be based upon settled interpretations of the Internal Revenue Code of 1986, as amended (the “Code”). There can be no assurance that the IRS will not challenge the appropriateness, amount, characterization or timing of deductions claimed by the Company. Additionally, despite the best efforts of the Company to comply with the rules relating to allocation of Company items, the IRS may assert that income and loss items of the Company are to be allocated among the members in a manner different from that asserted by the Manager, as reflected in the Operating Agreement. There are Limitations of Deductibility of Losses The amount of losses of the Company that a member may deduct is limited to his, her or its basis in the investment in the Company, the amount as to which such member is at risk with respect to the investment, and will be limited further under the passive loss rules. A member should not view an investment in the Units as a method by which to shelter taxable income. The Company’s Tax Returns are Subject to Audit An examination of the Company’s tax returns could result in adjustments to the tax consequences initially reported by the Company and could possibly result in audits of the members’ personal income tax returns. Any such audits could involve items not related to an investment in the Company as well as Company items. With respect to the Company, one of the Founding Members will be the “Tax Matters Partner” under the Operating Agreement. The Tax Matters Partner may, in that capacity, extend the statute of limitations with respect to Company items by agreement with the IRS on behalf of the Company without the consent of the members. Tax Legislation Changes Frequently There are frequent and sometimes retroactive changes in tax laws. Regulations, rulings and interpretations of existing statutes by court decision may also change the law with retroactive effect. It is possible that there will be adverse changes in the law or interpretations thereof during the term of the Company which would materially and adversely affect the economic consequences of the investment. Case 3:16-cv-02311-D Document 13-1 Filed 10/17/16 Page 35 of 46 PageID 183 36 Risks Related to the Offering: No One has Agreed to Purchase Any of the Units Offered Which May Result in the Failure of This Offering The Offering is not underwritten. The Units are offered on a “best efforts” basis by the Company through its officers and directors. The Company has set a Minimum Offering Amount as described herein. All proceeds from the sale of Units will be deposited in escrow until the Minimum Offering Amount has been raised. Upon the sale of the Minimum Offering Amount, all proceeds will be delivered directly to the Company’s corporate account and be available for use by the Company at its discretion. Units may also be sold by FINRA member brokers or dealers who enter into a Participating Dealer Agreement with the Company, who will receive commissions of up to 8% of the price of the Units sold. The Company reserves the right to pay expenses related to this Offering from the proceeds of the Offering. There can be no assurance that the Offering will be successful. Continued Investment May Be Required The Company intends to construct and invest in its cultivation centers, and raw materials, inventory, equipment, technology and other capital needs in order to make its cultivation centers successful. Changes in market environment, technology, demand, regulations and others or sales growth beyond currently established production capabilities may require further investment. However, there can be no assurances that the Company will generate sufficient funds from operations to finance any required investment or that other sources of funding shall be available. Additionally, there can be no guarantees that any future expansion will not negatively affect earnings. Even if the Company Raises Less than the Maximum Amount of Equity in this Offering, the Company May Not Be Able Obtain the Financing Necessary to Construct and Operate the Cultivation Centers The Company does not have commitments with any financial institutions for debt financing for construction and installation of the cultivation centers and costs of this Offering in the event that less than the Maximum Offering Amount of Class B Units is sold. If loans cannot be obtained, the Company will have the option of returning investors' money with nominal interest, less expenses for escrow fees, if any. Lenders May Require the Company to Abide by Restrictive Loan Covenants That May Hinder the Company’s Ability to Operate and to Make Distributions to Unit Holders In the event loans are obtained to complete all of the cultivation centers’ funding requirements, the Company anticipates that the loan agreements governing Company’s secured debt financing will contain a number of restrictive affirmative and negative covenants. A lender may also require the establishment of reserves for future loan servicing, repayment of debt obligations, capital improvements, replacements and contingencies. The establishment of reserves, cash flow sweeps and cash distribution constraints may delay any distribution of funds to Unit holders and affect the investor’s returns. Also, depending on performance and commodity prices, the Company may never be in a position to pay cash distributions. No Public Trading Market Exists for Company Units and Company Does Not Anticipate the Creation of Such a Market, Which Means That it will be Difficult for You to Liquidate Your Investment There is currently no established public trading market for Class B Units in the Company and an active trading market will not develop despite this Offering. To maintain partnership tax status, Units may not be traded on an established securities market or readily traded on a secondary market or the substantial Case 3:16-cv-02311-D Document 13-1 Filed 10/17/16 Page 36 of 46 PageID 184 37 equivalent thereof. The Company, therefore, will not apply for listing of the Units on any stock exchange. As a result, Units are not readily available for sale. Investors must be prepared to hold the Class B Units for an indefinite period of time. Limited Liquidity of the Class B Units Because of potential restrictions on transferability of Units, and the fact that no trading market exists or is expected to develop for the Units, holders of the Units are not likely to be able to liquidate their investments or pledge the Units as security on a loan in the event of an emergency. Thus, the Units should be considered only as a long-term investment. There can be no assurances that the Company will be able to affect a public registration of its Units, as its present level of business does not merit public ownership. The Offering Price Was Determined by Capital Needs and Does Not Reflect Intrinsic Value The price per Class B Unit offered hereby was primarily based on the projected capital needs of the Company. There is no relationship to any established criteria of value such as book value or earnings per unit. No outside party has been requested to value each Class B Unit, or the Company as a whole, or its prospects for success. The implied enterprise value is merely a reflection of blended price per Class B Unit multiplied by number of Units outstanding. The Company has Placed Significant Restrictions on Transferability of the Class B Units, Limiting an Investor's Ability to Withdraw from the Company The Class B Units are being offered pursuant to exemptions from the registration requirements of the Securities Act of 1933 (the “Act”) and must be held indefinitely unless they are subsequently registered under the Act or an exemption from such registration is available and state securities laws are complied with. The Company is under no obligation to register the Class B Units under the Act or any state securities laws. These Units May Be Subject to Dilution in Value Which Reduces the Value of Your Investment If, for any reason, the Company is required in the future to raise additional equity capital and if such equity capital is raised at a lesser implied enterprise value, investors in this Offering may suffer some dilution of their Class B Units, notwithstanding their broad based anti-dilution protection. There is no assurance that Class A and Class B Units will not be diluted in the future. Absence of Merit Review Investors are cautioned that these Securities have not been registered under the Securities Act and any state review by the securities administrators in some states in which interests may be offered and sold is limited to the form and compliance with certain disclosure requirements. No state authority has reviewed the accuracy or adequacy of the information contained herein nor has any regulatory authority made a merit review of the pricing of this Offering, the percentage of securities offered to Investors, or the compensation paid to Managers or other corporations under their control, and any dilutive factors there from. Therefore, investors must recognize that they do not have all the protections afforded by securities laws to register or qualify offerings in states with merit reviews, and must therefore judge for themselves the adequacies of the disclosures, the amounts of compensation, the pricing, dilution and fairness of the terms of this Offering, without the benefit of prior merit review by authorities. Case 3:16-cv-02311-D Document 13-1 Filed 10/17/16 Page 37 of 46 PageID 185 38 INCOME TAX CONSIDERATIONS Overview This section describes the principal federal income tax considerations in connection with an investment in the Company. Except where otherwise specifically indicated, the discussion assumes that the member acquiring and holding Class B Units in the Company is an individual who is a citizen or resident of the United States. Different and additional tax considerations may be relevant to certain other potential investors (including, for this purpose corporations, partnerships, tax exempt organizations, foreign persons, and “dealers”). It is impossible to describe all tax consequences of an investment in the Company as they may relate to the circumstances of all potential members of the Company. EACH POTENTIAL INVESTOR, THEREFORE, SHOULD SATISFY HIMSELF OR HERSELF AS TO THE TAX CONSEQUENCES OF THE POTENTIAL INVESTOR’S PARTICIPATION IN THE COMPANY BY OBTAINING ADVICE, AT THE POTENTIAL INVESTOR’S OWN EXPENSE, FROM THE POTENTIAL INVESTOR’S OWN TAX ADVISOR. The discussion that follows in this Section of the Memorandum is based upon the Operating Agreement, existing provisions of the Code, applicable Treasury Regulations thereunder (the “Regulations”), judicial decisions, current administrative rulings and such other documents and laws as were deemed relevant for purposes hereof. It is possible that legislative, judicial or administrative changes inconsistent with the statements contained in this section of the Memorandum may be forthcoming. Any such changes may or may not be retroactive with respect to transactions prior to the effective date of such changes. POTENTIAL INVESTORS SHOULD BE AWARE THAT THE INTERNAL REVENUE SERVICE (the “IRS”) MAY NOT AGREE WITH ALL TAX POSITIONS DESCRIBED HEREIN AND THAT, IF CHALLENGED BY THE IRS, SUCH POSITIONS MIGHT NOT BE SUSTAINED BY THE COURTS. NOTICE PURSUANT TO IRS CIRCULAR 230. TO ENSURE COMPLIANCE WITH THE INTERNAL REVENUE SERVICE CIRCULAR 230 DISCLOSURE REQUIREMENTS, POTENTIAL INVESTORS ARE INFORMED THAT ANY UNITED STATES FEDERAL TAX ADVICE CONTAINED HEREIN (A) IS WRITTEN IN CONNECTION WITH THE PROMOTION OR MARKETING OF THE INTERESTS IN THE COMPANY AND (B) IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED BY ANY TAXPAYER, FOR THE PURPOSE OF AVOIDING U.S. TAX PENALTIES. EACH TAXPAYER SHOULD SEEK ADVICE BASED ON THE TAXPAYER’S PARTICULAR SITUATION. Tax Status of the Company as a Partnership The Company has been validly organized as a limited liability company pursuant to the laws of the State of Illinois. Under applicable Regulations, an entity organized as a limited liability company under state law having at least two equity owners will be classified as a partnership for federal income tax purposes unless it affirmatively elects to be classified as an association taxable as a corporation. The Company does not intend to make such election, and accordingly will be classified as a partnership for federal income tax purposes. Despite being classified as a partnership, the Company will be taxed as a corporation for federal income tax purposes if it constitutes a “publicly traded partnership taxable as an association.” The Board of the Company does not intend to permit a transfer of Class B Units in circumstances where such transfer would cause the Company to be a publicly traded partnership. Therefore, the Company should not be characterized as a publicly traded partnership taxable as an association. Case 3:16-cv-02311-D Document 13-1 Filed 10/17/16 Page 38 of 46 PageID 186 39 Flow-Through Taxation Provided the Company is classified and taxable as a partnership, it will not be subject to federal income taxation. Each year the Company will file a partnership information tax return and will furnish the members with a report of their distributive share of the income, gain, loss, deduction and credit of the Company. These taxable items must be taken into account by the members when filing their own tax returns, and will accordingly affect the members’ own tax liabilities. The characterization of each item of profit or loss (e.g., as capital gain or ordinary income) will be determined at the Company level and generally must be treated consistently by the Company and its members. Allocations Code Section 704 provides that the distributive share of all income, gain, loss, deduction or credit of a member of an organization taxable as a partnership for federal income tax purposes will be determined by the governing agreement for the entity unless the allocations set forth therein do not have “substantial economic effect.” In the event that an allocation does not have substantial economic effect, all items of income, gain, loss, deduction and credit would be allocated in accordance with the members’ interests in the entity by taking into account all relevant facts and circumstances, which include the members’ interests in profits and losses, interests in cash flow, and rights to distributions of capital upon liquidation. In the event the allocations of the Company are determined not to have substantial economic effect, such allocations could differ from those set out in the Operating Agreement and could cause some of the members to have a larger amount of taxable income than would otherwise be the case. The Company believes the allocations provided in the Operating Agreement will satisfy the requirement of substantial economic effect. It cannot be guaranteed, however, that the IRS will not take, and ultimately maintain, a contrary position. Tax Basis; Distributions As described above, the Company is expected not to be subject to federal income taxation as an entity. The taxable items of the Company will be allocated among its members, who will take such taxable items into account. The allocation of Company taxable items to the members will affect the members’ tax liability with respect to the Company as well as the members’ tax basis in the members’ interests in the Company. Initially, a member’s tax basis in the member’s interest in the Company will be equal to the member’s original capital contribution to the Company, plus the member’s proportionate share of nonrecourse liabilities of the Company (limited for this purpose to the fair market value of the property subject to such liabilities). A member’s tax basis in the limited liability company interest in the Company will be increased by (a) the member’s additional capital contributions to the Company; (b) the member’s distributive share of any taxable income of the Company; and (c) the member’s allocable share of increases in nonrecourse liabilities of the Company. A member’s tax basis in the limited liability company interest will be decreased, but not below zero, by (a) Company distributions to the member (including for this purpose the member’s allocable share of decreases in nonrecourse liabilities of the Company); and (b) the member’s distributive share of Company taxable losses and deductions. Cash distributions from the Company will not be taxable to the members to the extent of the member’s adjusted tax basis in the member’s interest in the Company. Cash distributions in excess of the member’s adjusted tax basis in the member’s interest in the Company will be taxable to the member generally as capital gain. Special rules apply to the distribution of property (other than cash), which generally prevent the members’ recognition of gain or loss in respect of such distributions. The Company, however, does not anticipate distributing any property other than cash to the members. Members can generally claim a capital loss upon the liquidation of the Company, where the member receives solely cash in exchange for its interest Case 3:16-cv-02311-D Document 13-1 Filed 10/17/16 Page 39 of 46 PageID 187 40 in the Company and where the amount of such cash is less than the member’s tax basis in its interest in the Company. The Company’s Income, Expense, Gain and Loss. The Company’s general operations are expected to generate income characterized as “ordinary income” or “ordinary loss” for U.S. federal income tax purposes. The Company will deduct certain operating expenses (e.g., wages, costs of goods sold and certain fees (see below under the heading -Deductibility of Fees)). These expenses may be classified as either expenses incurred in the conduct of a trade or business, or investment expenses. If the expenses are classified as investment expenses they will be allowable as deductions for individual members only as miscellaneous itemized deductions subject to a floor equal to 2% of adjusted gross income. In either case, the IRS may challenge deductions based on a recharacterization of the expenses or a claim that the expenses are excessive. The Company expects that such operating expenses will be classified as expenses incurred in the conduct of a trade or business. The Company intends to depreciate the equipment used in connection with its general operations under the MACRS method using the applicable cost recovery period. To the extent that the Company is able to place the equipment in service before January 1, 2013, the Company intends to claim a “bonus” depreciation deduction using the applicable percentage. Upon the sale or other taxable disposition of one or more of the Company’s assets, gains will generally be characterized as “Section 1231 gains” (other than depreciation “recapture” which is subject to special rules and gains from certain ordinary income assets such as accounts receivable and inventory which are always treated as ordinary), while losses will generally be characterized as “Section 1231 losses.” For this purpose, gain or loss will be the difference between: (a) the “amount realized” by the Company upon the sale or other taxable disposition of the asset (which includes the amount of cash and other property received by the Company and the amount of any debt from which the Company is relieved, if any); and (b) the adjusted tax basis of the Company in the asset. Section 1231 gains and Section 1231 losses are allocated to each member and, subject to a look back rule for net Section 1231 losses in prior years, any net Section 1231 gain in a given year is taxed as a capital gain and a net Section 1231 loss is treated as an ordinary loss (which, may result in recharacterization of net Section 1231 gain in later years as ordinary income). However, all of the Company’s gain, if any, on the sale of the Company’s assets, will be treated as ordinary income to the extent of MACRS cost recovery deductions previously claimed on the property by the Company. Limitations on Loss Deductions. A member’s ability to deduct taxable losses allocated to the member by the Company is subject to three primary limitations: the tax basis limitation, the at-risk limitation and the limitation on passive activity losses. All three rules must be applied before a loss deduction may be allowed. Tax Basis Limitation. Code Section 704(d) provides that a member’s distributive share of a loss (including a capital loss) allocated to the member by a limited liability company is allowed as a deduction only to the extent of the adjusted tax basis for the member’s limited liability company interest at the end of the taxable year of the limited liability company in which the loss is incurred. Losses disallowed under this rule may be carried forward indefinitely by the member until he or she has sufficient tax basis to permit the deduction. Case 3:16-cv-02311-D Document 13-1 Filed 10/17/16 Page 40 of 46 PageID 188 41 At-Risk Limitation. Under Code Section 465, individual taxpayers may deduct losses from an activity only to the extent they are “at-risk” with respect to the activity at the end of the taxable year. Losses disallowed by the at-risk limitation may be carried forward indefinitely and deducted to the extent the taxpayer has a sufficient at- risk amount at the end of a subsequent taxable year. For purposes of Code Section 465, a taxpayer is at- risk with respect to an activity to the extent of (1) the amount of money and the adjusted tax basis of other property contributed to the activity, and (2) the amounts borrowed with respect to the activity if the taxpayer is personally liable for repayment of the borrowed amount or pledges property, other than property used in the activity, as security for repayment of the borrowed amount (to the extent of the taxpayer’s interest in the fair market value of the pledged property). A taxpayer is not at-risk with respect to any amount that is protected against loss through “nonrecourse financing, guarantees, stop loss agreements, or other similar arrangements.” The amount at-risk with respect to an activity is decreased to the extent the member deducts losses from the activity and by the amount of any distributions from the activity, and is increased to the extent of allocations of taxable income generated by the activity. Passive Activity Losses. Under Code Section 469, losses from “passive activities” generally are disallowed to the extent they exceed income from such passive activities. Passive activities include any trade or business in which an owner does not materially participate. In addition, passive activities include owning interests in entities which themselves are engaged in passive activities. It is contemplated that the members will not meet the requirements for material participation in the Company, and, as a result, the Company is likely to be characterized as a passive activity with respect to the members. Suspended passive activity losses for a taxable year may be carried forward indefinitely but cannot be carried back. When a taxpayer disposes of the taxpayer’s entire interest in a passive activity in a fully-taxable transaction, any suspended loss from the activity is allowable in full. Complex rules govern the treatment of certain income and expense items for purposes of Code Section 469. For example, “portfolio income” (such as interest or dividend income) is generally not treated as passive income. To the extent the Company has portfolio income, a proportionate share of such income will be allocated to each member. As a result, a member may have tax due with respect to Company portfolio income, even though the Company generated passive activity losses (which are suspended pursuant to this rule) in excess of the portfolio income. It is expected that the amount of portfolio income generated by the Company will be minimal. Deductibility of Fees. Generally, payments for services are deductible only if the payments are ordinary and necessary expenses, are reasonable in amount, do not represent an expense required to be capitalized and are for services performed during the taxable year in which paid or accrued. In addition, fees paid by a limited liability company to a member are deductible only if, in addition to meeting the above general tests, such payments are compensation for services rendered by the member in “other than the member’s capacity as a member” or are “guaranteed payments” determined without regard to income of the limited liability company. These determinations are factual in nature and the IRS has stated that the deduction of fees paid to members will receive close scrutiny. There can be no assurance that the IRS will not contend successfully that the fees the Company intends to deduct (a) are excessive, (b) constitute an interest in the profits of the Company or (c) are required to be capitalized, either as part of the acquisition cost of the Company’s property (in which case they must be recovered in the same manner as other acquisition costs), as organization expenses (in which case they must be amortized over 180 months), or as syndication expenses (in which case they must be capitalized but cannot be amortized). Case 3:16-cv-02311-D Document 13-1 Filed 10/17/16 Page 41 of 46 PageID 189 42 Sales of Units. Upon a sale of a member’s Units, the member will be deemed to have received, in addition to any cash proceeds of the sale, the member’s allocable portion of the Company’s nonrecourse debt. As a result, it is possible that the tax due on the gain resulting from the sale will exceed the cash proceeds of the sale. In this event, the member will be required to pay the tax from other personal resources. If a member holds Units for more than one year, any gain on a sale of the Units will generally be long-term capital gain. Ordinary income treatment will apply, however, to the portion of such gain that represents depreciation recapture and unrealized receivables of the Company. The portion of gain (if any) that is long- term capital gain will be subject to a maximum federal income tax rate of 15%. The maximum federal income tax rate on long-term capital gain is scheduled to increase to 20% for tax years beginning after December 31, 2012. It is possible that the maximum federal income tax rate on long-term capital gain could be increased above the current 15% rate or the scheduled increase to 20% at any time. Under the Regulations, a member who transfers Units must notify the Company of this fact within 30 days after the transfer (or, if earlier, by January 15 of the calendar year following the calendar year in which the transaction occurred). The notice must provide the transferor’s name, address and taxpayer identification number and the name, address, and taxpayer identification number (if known) of the transferee and the date of the transfer. Failure to comply with this requirement could result in imposition of a penalty on the transferor member. Alternative Minimum Tax. The alternative minimum tax provides an alternative method of calculating income tax, employing rates that are lower than the regular tax rate, and a tax base (called “alternative minimum taxable income”, or “AMTI”) that is generally more inclusive than regular taxable income. A taxpayer subject to the alternative minimum tax (including individuals, certain trusts and certain corporations) has alternative minimum tax liability to the extent that the tax determined under this different set of rules exceeds the taxpayer’s regular tax liability. AMTI is determined by making numerous adjustments and additions to regular taxable income. Some adjustments may be expected as a result of participation in the Company. In particular, cost recovery deductions of the Company which are allocated to the members under the alternative minimum tax are likely to be smaller than those allowed under the regular tax during most, if not all, of the life of the Company. An investor who incurs alternative minimum tax liability as a result of investing in the Company may find the overall after-tax return on the investment reduced. The amount, if any, of alternative minimum tax liability a member may have will depend on the member’s individual circumstances. Each potential investor should review the potential investor’s particular situation and consult the potential investor’s own tax advisor. Company Tax Returns and Information. The tax year of the Company will end on December 31. Income of the Company will be reported on the accrual method of accounting. Audit determinations concerning the tax treatment of Company items will be made at the Company level, rather than in proceedings with individual members. The IRS generally is required to furnish notice to each member of the commencement of a limited liability company level audit, as well as notice of the “final partnership administrative adjustment” (“FPAA”). All members have a right to participate in the audit at their own expense. The time and place of meeting and other events involving the IRS will be determined by IRS representatives and the “Tax Matters Partner” (i.e., the Class A member). Settlement agreements, in the absence of fraud, will be binding upon the IRS and the members participating Case 3:16-cv-02311-D Document 13-1 Filed 10/17/16 Page 42 of 46 PageID 190 43 in the settlement. The Tax Matters Partner, within 90 days after the mailing of the notice of the FPAA, may file a petition for readjustment of items in certain courts. During this 90-day period, no other member may file a petition for judicial review. If the Tax Matters Partner does not file a petition, any member with at least a 1% interest in the Company (or a group of members having at least a 5% interest in the Company) may, within 60 days following the 90-day period, file a petition. Only the first action filed will go forward and all other actions will be dismissed, although each member with an interest will be treated as a party to the first-filed action and will be allowed to participate in the proceeding. The court acquiring jurisdiction of a proceeding will have jurisdiction to determine all members’ items for the taxable year under consideration and the proper allocation of such items among the members, which decision will be binding, subject to judicial review. If adjustments are proposed by the IRS that are either accepted by the Company or sustained by a court, members will be liable for additional income taxes, interest thereon and, potentially, penalties. Adjustments for federal income tax purposes will generally also result in liability for additional state income taxes, interest and, potentially, penalties. Potential Changes in Tax Rates. Under current law, the maximum individual income tax rate on ordinary income is 35%. The maximum marginal tax rate on ordinary income is scheduled to increase to 39.6% for tax years beginning after December 31, 2012. It is possible that the maximum marginal tax rates imposed on ordinary income could be increased above the current 35% rate or the scheduled increase to 39.6% at any time. Medicare Tax. A 3.8% Medicare tax on certain investment income earned by individuals, estates, and trusts will apply for taxable years beginning after December 31, 2012. For these purposes, investment income generally includes a member’s allocable share of income of the Company and gain realized by a member from a sale of Units. In the case of an individual, the tax generally will be imposed on the lesser of (i) the member’s net investment income from all investments (which includes the excess of (A) the sum of (1) gross income from interest, dividends, annuities, royalties, rents and other income and (2) gross income derived from a passive activity or trading in financial instruments or commodities and (B) certain deductions), or (ii) the amount by which the member’s modified adjusted gross income exceeds $250,000 (if the member is married and filing jointly or a surviving spouse), $125,000 (if the member is married and filing separately) or $200,000 (in any other case). In the case of an estate or trust, the tax will be imposed on the lesser of (i) undistributed net investment income, or (ii) the excess adjusted gross income over the dollar amount at which the highest income tax bracket applicable to an estate or trust begins. State Taxes. Except as otherwise provided herein, this Memorandum does not address state income tax and other tax issues that may apply to the Company or to the members. It is likely that each member will become subject to taxes in connection with an investment in the Company in the jurisdictions (e.g., the State of Maryland) in which the Company owns and operates the Plant. Many states have implemented or are in the process of implementing programs to require partnerships to withhold and pay state income taxes owed by non- resident partners relating to income-producing properties located in their states. For example, a partnership or limited liability company which owns property or does business within the State of Maryland is generally subject to an income tax in the amount of 6.75% of its non-resident individual partners’/members’ shares of distributable cash flow and 8.25% of its non-resident entity partners’/members’ shares of distributable cash flow (and while this tax is technically paid by the partnership or limited liability company, the tax is treated as imposed on the non-resident partners/members and paid on their behalf by the partnership or Case 3:16-cv-02311-D Document 13-1 Filed 10/17/16 Page 43 of 46 PageID 191 44 limited liability company). EACH POTENTIAL INVESTOR SHOULD CONSULT THE POTENTIAL INVESTOR’S OWN TAX ADVISOR, AT THE POTENTIAL INVESTOR’S OWN EXPENSE, CONCERNING THE POSSIBLE IMPACT OF STATE TAXES. Foreign Investors. Foreign investors may be subject to different federal income tax consequences than those described above. Accordingly, A FOREIGN INVESTOR SHOULD CONSULT WITH THE INVESTOR’S OWN TAX ADVISOR FOR SPECIFIC INFORMATION ON THE TAX CONSEQUENCES OF THE INVESTOR’S INVESTMENT IN THE COMPANY. PATRIOT ACT RIDER THE INVESTOR HEREBY REPRESENTS AND WARRANTS THAT THE INVESTOR IS NOT, NOR IS IT ACTING AS AN AGENT, REPRESENTATIVE, INTERMEDIARY OR NOMINEE FOR, A PERSON IDENTIFIED ON THE LIST OF BLOCKED PERSONS MAINTAINED BY THE OFFICE OF FOREIGN ASSETS CONTROL, U.S. DEPARTMENT OF TREASURY. IN ADDITION, THE INVESTOR HAS COMPLIED WITH ALL APPLICABLE U.S. LAWS, REGULATIONS, DIRECTIVES, AND EXECUTIVE ORDERS RELATING TO ANTI-MONEY LAUNDERING, INCLUDING BUT NOT LIMITED TO THE FOLLOWING LAWS: (1) THE UNITING AND STRENGTHENING AMERICA BY PROVIDING APPROPRIATE TOOLS REQUIRED TO INTERCEPT AND OBSTRUCT TERRORISM ACT OF 2001, PUBLIC LAW 107-56, AND (2) EXECUTIVE ORDER 13224 (BLOCKING PROPERTY AND PROHIBITING TRANSACTIONS WITH PERSONS WHO COMMIT, THREATEN TO COMMIT, OR SUPPORT TERRORISM) OF SEPTEMBER 11, 2001. Case 3:16-cv-02311-D Document 13-1 Filed 10/17/16 Page 44 of 46 PageID 192 45 ERISA CONSIDERATIONS General When deciding whether to invest a portion of the assets of a qualified profit-sharing, pension or other retirement trust in the Company, a fiduciary should consider whether: (i) the investment is in accordance with the documents governing the particular plan; (ii) the investment satisfies the diversification requirements of Section 404(a)(1)(c) of Employee Retirement Income Security Act of 1974, as amended (“ERISA”); and (iii) the investment is prudent and in the exclusive interest of participants and beneficiaries of the plan. Plan Assets Under ERISA, whether the assets of the Company are considered “plan assets” is also critical. ERISA generally requires that “plan assets” be held in trust and that the trustee or a duly authorized Manager have exclusive authority and discretion to manage and control the assets. ERISA also imposes certain duties on persons who are “fiduciaries” of employee benefit plans and prohibits certain transactions between such plans and parties in interest (including fiduciaries) with respect to the assets of such plans. Under ERISA and the Code, “fiduciaries” with respect to a plan include persons who: (i) have any power of control, management or disposition over the funds or other property of the plan; (ii) actually provide investment advice for a fee; or (iii) have discretion with regard to plan administration. If the underlying assets of the Company are considered to be “plan assets,” then the Manager(s) of the Company could be considered a fiduciary with respect to an investing employee benefit plan, and various transactions between Management or any affiliate and the Company, such as the payment of fees to Managers, might result in prohibited transactions. A regulation adopted by the Department of Labor generally defines plan assets as not to include the underlying assets of the issuer of the securities held by a plan. However, where a plan acquires an equity interest in an entity that is neither a publicly offered security nor a security issued by certain registered investment companies, the plan’s assets include both the equity interest and an undivided interest in each of the underlying assets of the entity unless: (i) the entity is an operating company or; (ii) equity participation in the entity by benefit plan investors (as defined in the regulations) is not significant (i.e., less than twenty-five percent (25%) of any class of equity interests in the entity is held by benefit plan investors). Benefit plan investors are not expected to acquire twenty-five percent (25%) or more of the Units offered by the Company. Management of the Company intends to preclude significant investment in the Company by such plans. Employee benefit plans (including IRAs), however, are urged to consult with their legal advisors before subscribing for the purchase of Units to ensure the investment is acceptable under ERISA regulations. Case 3:16-cv-02311-D Document 13-1 Filed 10/17/16 Page 45 of 46 PageID 193 46 QUESTIONS OR COMMENTS EACH PROSPECTIVE INVESTOR WILL BE GIVEN AN OPPORTUNITY TO ASK QUESTIONS OF, AND RECEIVE ANSWERS FROM, MANAGEMENT OF THE COMPANY CONCERNING THE TERMS AND CONDITIONS OF THIS OFFERING AND TO OBTAIN ANY ADDITIONAL INFORMATION, TO THE EXTENT THE COMPANY POSSESSES SUCH INFORMATION OR CAN ACQUIRE IT WITHOUT UNREASONABLE EFFORTS OR EXPENSE, NECESSARY TO VERIFY THE ACCURACY OF THE INFORMATION CONTAINED IN THIS MEMORANDUM. IF YOU HAVE ANY QUESTIONS WHATSOEVER REGARDING THIS OFFERING, OR DESIRE ANY ADDITIONAL INFORMATION OR DOCUMENTS TO VERIFY OR SUPPLEMENT THE INFORMATION CONTAINED IN THIS MEMORANDUM, PLEASE WRITE OR CALL THE COMPANY AT THE ADDRESS AND NUMBER LISTED BELOW. Tim McGraw TMcGraw@ACERevolution.com (708) 533-2424 Oleg Movchan omovchan@acerevolution.com (224) 522-2945 From Rainmaker Securities: Michael Gruber Mgruber@rainmakersecurities.com (312) 505-5659 Case 3:16-cv-02311-D Document 13-1 Filed 10/17/16 Page 46 of 46 PageID 194 Funding Disbursement and Interest Reserve Agreement Scott Ginsburg will hold back (one million two hundred thousand dollars) $1,260,000 from the funding of the $3,600,000 (three million six hundred thousand) note signed on March 3 2016. These funds will be used to service 12 months worth of interest payments on the combined loan amounts of $10,600,000. Regular quarterly payments will begin after 12 months and reserve is depleted. Tim McGraw CEO Revolution Enterprises Scott Ginsburg Case 3:16-cv-02311-D Document 13-2 Filed 10/17/16 Page 1 of 1 PageID 195 *** Gninted *** See eSlghatu Page Michael K. Jeanes{ Clerk of Court *** Electronica ly Filed*** Tina Hays 1 2 3 4 5 6 7 8 9 10 11 12 13 u :;: " ~ 14 " ~~ ~ Gl ~ ~~cl~ 15 Q ...l < 2: <'d ~ ~ ~ "'". ~ - > 16 ...l ~ ~ ' = ~~ "~ 0 0 ~<~~ 17 :i :i 8 "' 0"' ~ ~ 18 "' - 19 20 21 22 23 24 25 26 27 28 Gregory P. Gillis, #011214 Andrea H. Landeen, #020758 NUSSBAUM GILLIS & DINNER, P.C. 14850 N. Scottsdale Road, Suite 450 Scottsdale, Arizona 85254 ( 480) 609-0011 Email: illis dln 'dlaw.com Email: a andeen((i,ngdlaw.com Attorneys for Plaintiffe Michele Rene Hammer and Mark Wesley Haile Filing ID 1252567 4/17/201211:07:49AM IN THE SUPERIOR COURT OF ARIZONA IN AND FOR THE COUNTY OF MARICOPA MICHELE RENE HAMMER, individually, Case No: CV2011-051310 Plaintiff, v. (CONSOLIDATED WITH CV2011-051311) TODA Y'S HEAL TH CARE II, a Colorado JUDGMENT OF DISMISSAL corporation Defendant. (Assigned to the Honorable Michael R. MARK W. HAILE, an unmarried man, Plaintiff, v. TODA Y'S HEALTH CARE II, a Colorado corporation Defendant. Mc Vey) This matter having come on for oral argument on January 18, 2012, the Court having considered: 1. Plaintiffs' Motion for Summary Judgment; 2. Plaintiffs' Separate Statement of Facts in Support of their Motion for Summary Judgment; 3. Today's Health Care H's Response to Plaintiff's Motion for Summary Judgment; 860399115501-1 Case 3:16-cv-02311-D Document 13-3 Filed 10/17/16 Page 1 of 5 PageID 196 1 2 4. 5. Today's Health Care II Cross-Motion for Summary Judgment; Today's Health Care II Controverting Statement of Facts and Separate 3 Statement of Facts in Support of Response to Plaintiffs' Motion for Summary Judgment 4 and Today's Health Care H's Cross-Motion for Summary Judgment; 5 6. Plaintiffs' Reply to Defendant's Response to Motion for Summary 6 Judgment and Plaintiffs' Response to Defendant's Cross-Motion for Summary Judgment; 7 7. Plaintiffs' Controverting Statement of Facts in Response to Defendant's 8 Cross-Motion for Summary Judgment and Supplemental Statement of Facts; 9 10 8. 9. Plaintiffs' Notice of Errata to Supplemental Statement of Facts; and Today's Health Care H's Reply to Plaintiffs' Response to Today's Health 11 Care II's Cross-Motion for Summary Judgment. 12 The Court having considered the pleadings on file herein and having heard oral 13 argument of counsel for the parties finds the following: 14 15 16 17 18 Facts as Undisputed. 1. On or about August 12, 2010, each of the Plaintiffs entered into separate loan agreements with Defendant, Today's Health Care II, a Nevada corporation ("THC"). 2. Each Plaintiff loaned THC $250,000 for the stated purpose of financing a "retail medical marijuana sales and growth center". Each loan was memorialized by a 19 loan agreement and a promissory note (the "loan documents"). 20 21 22 3. These loan documents required THC to pay Plaintiffs interest at the rate of 12% per annum on the 12• day of each month. 4. The agreement provided that in the event of a default, THC had five (5) days 23 within which to cure its default. 24 5. If THC failed to cure its default within five (5) days, Plaintiffs were entitled to 25 repayment of the principal loan amount at a default interest rate of 21 %, plus any costs and 26 attorneys' fees associated with enforcement and collection. 27 28 6. 7. 860399/15501-l THC failed to timely pay interest on the loans by March 12, 2011. As of March 17, 2011, THC defaulted on its obligations under the loan obligation. 2 Case 3:16-cv-02311-D Document 13-3 Filed 10/17/16 Page 2 of 5 PageID 197 1 2 3 4 5 6 7 8 9 10 11 12 13 u :;: .: ~ 14 ~ tl ~ ON ~ ~ ~-~ 15 Qj~~ Od!(~2 ra ~ ~ ~ 16 ~ l: 14 ~ ,;; ~~ l;o;l 5~ ~~"':~ 15 ::; j ~ ~ ~~~~ 00 •• :l iZ :;! 16 ... ~ (;l lli G~~~ 17 ~