SEC Company Response from Sachem Capital Corp. (SACH, SCCC, SCCD, SCCE, SCCF, SCCG, SACH-PA) (CIK 0001682220) (SACH) — Oct 28, 2016
Sachem Capital Corp. (SACH, SCCC, SCCD, SCCE, SCCF, SCCG, SACH-PA) (CIK 0001682220)
Date: Oct. 28, 2016 · CIK: 0001682220 · Accession: 0001144204-16-130344
AI Filing Summary & Sentiment
Reasoning
Letter
United States Securities and Exchange Commission Mail Stop 3233 Re: Sachem Capital Corp. (the “Registrant”) Draft Registration Statement on Form S-11 Submitted August 12, 2016 CIK No. 0001682220 (the “Registration Statement”)
Dear Ms. Gowetski:
We have reviewed the Staff’s comments to the above-referenced Registration Statement as set forth in your letter, dated September 8, 2016. On behalf of the Registrant we are providing the following responses to those comments below. For your convenience, we have copied your comments, which appear in bold. In addition, please note that the Registration Statement being filed concurrently herewith is no longer in draft form. Thus, references to the “Registration Statement” in our responses to the Staff’s comments are to the Registration Statement filed currently herewith and all page references are to the prospectus included in such Registration Statement.
General
1. Please supplementally provide us with copies of all written communications, as defined in Rule 405 under the Securities Act, that you, or anyone authorized to do so on your behalf, present [sic] to potential investors in reliance on Section 5(d) of the Securities Act, whether or not they retain copies of the communications.
To date, there have been no written communications (as defined in Rule 405 under the Securities Act), directly or indirectly, from the Registrant to potential investors in reliance on Section 5(d) of the Securities Act and none are being currently contemplated. The Registrant will provide the Staff with a copy, if any such materials are presented to potential investors.
2. Please provide us with copies of any graphics, maps, photographs, and related captions or other artwork including logos that you intend to use in the prospectus. Such graphics and pictorial representations should not be included in any preliminary prospectus distributed to prospective investors prior to our review.
Based on discussions with the Staff, the Registrant’s logo is included on the cover page of the prospectus included in the Registration Statement.
3. We note your analysis on pages 8, 26 and 58 regarding why you believe your operations will permit you to maintain an exemption from registration under the Investment Company Act of 1940. Please provide us with a detailed analysis of the exemption that you and your subsidiaries intend to rely on and how your investment strategy will support that exemption. Please note that we will refer your response to the Division of Investment Management for further review.
The Registrant’s business is making loans secured by first mortgage liens on real estate. These assets constituted over 89% of the Registrant’s total assets as of June 30, 2016. Accordingly, the Registrant falls squarely within the exception provided by Section 3(c)(5)(C) of the Investment Company Act of 1940. The Registrant’s business plan and strategy is to continue to originate loans secured by first mortgage liens on real estate. In terms of the net proceeds from the offering contemplated by the Registration Statement, although the exact terms of the offering are still unknown, the Registrant does not believe that the net proceeds will exceed one-third of its total assets immediately after the offering. Even if that is not the case, the Registrant intends to initially use the net proceeds to temporarily pay down the outstanding balance on the Bankwell credit line, to invest any excess in short-term U.S. government securities or hold the cash. U.S. government securities and cash are excluded for purposes of determining whether the Registrant qualifies as an “investment company” and paying down debt should not make a difference. Therefore, it should still qualify for the Section 3(c)(5)(C) exception.
Summary, page 1
Our Competitive Strengths, page 2
4. We note your disclosure that a “significant portion” of your business comes from repeat customers with whom you have long-standing relationships. Please revise to quantify the portion of your business that comes from repeat customers as well as the portion of your business that comes from affiliates.
Per your comment, the disclosure on pages 2 and 53 has been revised by deleting the word “significant” and to reflect the percentage of the Registrant’s loan portfolio at June 30, 2016 represented by repeat customers and affiliates.
Leverage Policies/Financing Strategy, page 3
5. We note your disclosure that you do not have a formal policy limiting the amount of debt you may incur and that your governing documents contain no limitation on the amount of leverage you may use. Please revise the summary risk factors to include this information and disclose your target leverage ratio.
Per your comment, we have revised the summary risk factors (page 5) and added additional disclosure on pages 5, 24, 42-43, 54 and 100.
6. We note your disclosure here and on page 43 that since inception through March 31, 2016, your predecessor, Sachem Capital Partners, LLC, raised $26.5 million of equity capital from investors, including JJV, LLC, whose principals are Jeffrey Villano and John Villano, your Co-Chief Executive Officers, taking into account initial and additional capital contributions. Please revise your disclosure to break out the amount of equity capital raised from JJV, LLC. Please also disclose the initial and additional capital contributions to which you refer.
Per your comment, the disclosure on pages 3 and 43 has been revised to specify the amount of equity capital contributed by JJV and the initial and additional capital contributions.
Summary Risk Factors, page 4
7. Please revise your geographic concentration summary risk factor to quantify your concentration of loans with underlying properties in Connecticut.
Per your comment, the disclosure on page 5 has been revised to quantify the concentration of loans secured by properties located in Connecticut.
Our Organizational Structure, page 6
8. We note your disclosure that you will enter into an Exchange Agreement with the members of SCP pursuant to which you will acquire all of the outstanding membership interests of SCP in exchange for 6,283,237 common shares. Please revise your disclosure to explain how you valued the membership interests being contributed.
Additional disclosure has been added in response to your comment. In addition, the description of the exchange transaction has been revised. Rather than each member of SCP contributing their SCP membership interest to Sachem Capital in exchange for Sachem Capital common shares, SCP will transfer all its assets and liabilities to Sachem Capital in exchange for 6,283,237 Sachem Capital common shares. SCP will then distribute those shares to its members, pro rata in accordance with their capital account balances, in full liquidation of their SCP membership interests. See pages 1, 6, 45-46, and 63.
9. We note your disclosure that any SCP member who does not sign the Exchange Agreement will have his, her or its membership interest redeemed for cash. Please tell us how many members will receive cash in lieu of common shares and how that will impact the number of common shares to be issued. In addition, please revise to clarify, if true, in your Summary section, and throughout the prospectus, that the cash payable to any SCP member who does not sign the Exchange Agreement is to be paid using a portion of the net proceeds of this offering.
As a result of the changes to the structure of the exchange, described in our response to Comment 8, each SCP member will receive his, her or its pro rata share of the 6,283,237 Sachem Capital common shares. Accordingly, redemptions have been eliminated as a Use of Proceeds.
10. Please revise to quantify the amount each of SCP’s controlling stockholders and control persons will receive as a result of the transactions contemplated by the Exchange Agreement and the redemptions, if any.
Per your comment, additional disclosure has been added on pages 1, 6, 45 and 63.
Risk Factors, page 31
11. We note your disclosure that you have elected to avail yourselves of the extended transition period for adopting new or revised accounting standards available to emerging growth companies. In accordance with the JOBS Act, please include a statement that this election is irrevocable within your amended filing.
Per your comment, additional disclosure has been included. See pages 9, 32-33 and 46.
12. We further note your disclosure that as a result of this election your financial statements may not be comparable to companies that comply with public company effective dates. A similar statement should be included in your critical accounting policy disclosures. Please revise your disclosure in your amended filing.
Per your comment, additional disclosure has been included. See page 46.
Selected Historical and Pro Forma Financial Information, page 38
13. We note from Use of Proceeds section on page 34 that you expect to use portion of the proceeds to redeem membership interests. In that regard, please clarify your disclosure in the introductory paragraph whether you give effect to the redemption in the pro forma, as adjusted column of your pro forma financial information. If not, please explain why not. Please also provide similar disclosures in the Capitalization section on page 37 and elsewhere, as applicable, in the filing.
Please see our responses to Comments Nos. 8 and 9.
Management’s Discussion and Analysis, page 41
14. Although we note your disclosure on page 42, please revise to more specifically discuss the spread between the yield on the loan portfolio and the cost of financing and the reasons for any material trends in the spread or advise.
Per your comment, the disclosure referenced in your comment has been revised. See page 42.
Our Competitive Strengths, page 50
15. We note your disclosure under this heading regarding the “history of successful operations” of your management and predecessor. Please revise to disclose some of the key adverse business developments experienced in an effort towards providing investors with a balanced and complete overview of your prior performance or advise.
Per your comment, additional disclosure has been included. See page 53. Other than as disclosed on page 53, management does not believe that SCP has experienced any adverse business developments.
Our Loan Portfolio, page
16. We note that your loans are secured by properties located in Connecticut, Massachusetts, Rhode Island or New York. Please revise to quantify the number of loans secured by properties in each state.
Per your comment, additional disclosure has been included. See page 57.
17. We note your disclosure on page 53 that a borrower may prepay a loan at any time beginning three months after the funding date, without premium or penalty. Please revise to provide the prepayment rate on your loans or advise.
Per your comment, additional disclosure has been included. See page 56.
18. Please revise to disclose the number of loans for which there was an event of default and the number of loans in default or advise. In addition, please revise to clarify the number of your loans that have exercised extension options.
The registrant is unable to quantify the number of loans for which there was an event of default. As disclosed, any failure by a borrower to comply with a covenant or agreement in the loan documents is technically a default but, as a practical matter, SCP has rarely declared the borrower in default. As further disclosed in Amendment No. 1, SCP has foreclosed on a mortgaged property only once. In addition, it has acquired eight other properties from five borrowers who were in default. See pages 16, 53 and 56. In terms of borrowers that have exercised extension options, the Registrant does not track that information. Rather it treats an extension as a new loan.
19. We note your disclosure that as of March 31, 2016, the two largest borrowers accounted for 5.3% and 4.8% of SCP’s loan portfolio. We further note your disclosure on page 49 that you will adopt a policy that will limit the maximum amount of any loan you fund to a single borrower or group of affiliated borrowers to 10% of the aggregate amount of your loan portfolio. To the extent a group of affiliated borrowers account for 5% or more of SCP’s loan portfolio, please disclose the specific percentage of SCP’s loan portfolio for which they account.
There are no other borrowers or group of affiliated borrowers that account for more than 5% of SCP’s loan portfolio. The disclosure has been revised accordingly.
20. We note your disclosure that the Bankwell Credit Line contains various covenants and restrictions including limiting the amount that you can borrow relative to the value of the underlying collateral, maintaining various financial ratios and limitations on the terms of loans that you make to your customers. Although we note the disclosure regarding the eligibility requirements for an advance on page 55, please revise to provide more detailed disclosure of any material financial covenants, including quantifying any ratios, or advise. In addition, please clarify whether the Exchange Agreement and related transaction will impact this credit line.
In response to your comment, the disclosure appearing on pages 22, 44, 58 and 59 has been expanded to include material financial covenants. The company believes that all material covenants have been disclosed in the prospectus. The company has commenced discussions with Bankwell regarding terminating the existing agreement between Bankwell and SCP and replacing it with a similar agreement that between Bankwell and Sachem Capital, albeit with certain modifications to reflect the Exchange Agreement and Sachem’s desire to operate and qualify as a REIT. Once the new loan agreement is finalized, the disclosure will be updated accordingly. The new agreement will be executed simultaneously with or immediately prior to the effectiveness of the Registration Statement.
Management, page 61
21. Please disclose the principal business of any corporation or other organization by which your executive officers were employed during the past five years. In addition, we note your disclosure that “during a business career of more than 25 years, Mr. Villano has founded and served as the chief executive officer of a number of businesses” and that Mr. Goldberg “held senior executive positions, including chief financial officer and chief operating officer, at a number of public companies. Please expand this disclosure to identify the businesses to which you refer, and include dates of employment and a description of the business’s industry, or remove. Please refer to Item 401 of Regulation S-K.
The sentence in Mr. Villano’s bio referenced in your comment has been deleted. Mr. Goldberg’s bio has been revised per your comment. See pages 64 and 65.
Executive Compensation, page 64
Summary Compensation, page 64
22. We note your disclosure that SCP has paid management and other fees to JJV. Please revise to disclose the “other fees” that have been paid to JJV.
Pursuant to the SCP operating agreement the term “management fees” includes all the fees listed on page 67. The disclosure throughout the prospectus included in the Registration Statement has been revised accordingly.
Underwriting, page 99
23. We note that you include a line item in your table on page 99 regarding the non- accountable expense allowance of 1%. Please revise to clarify whether the disclosure on page 100 regarding your agreement to pay the underwriters’ expenses relating to the
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CORRESP 1 filename1.htm Morse, Zelnick, Rose & Lander A LIMITED LIABILITY PARTNERSHIP 825 PARK AVENUE NEW YORK, NEW YORK 10022-4405 212-838-1177 FAX – 212-208-3809 WRITER’S DIRECT LINE (212) 838-8269 October 28, 2016 Filed via EDGAR United States Securities and Exchange Commission 100 F Street, NE Washington, D.C. 20549 Attn: Jennifer Gowetski, Senior Counsel Mail Stop 3233 Re: Sachem Capital Corp. (the “Registrant”) Draft Registration Statement on Form S-11 Submitted August 12, 2016 CIK No. 0001682220 (the “Registration Statement”) Dear Ms. Gowetski: We have reviewed the Staff’s comments to the above-referenced Registration Statement as set forth in your letter, dated September 8, 2016. On behalf of the Registrant we are providing the following responses to those comments below. For your convenience, we have copied your comments, which appear in bold. In addition, please note that the Registration Statement being filed concurrently herewith is no longer in draft form. Thus, references to the “Registration Statement” in our responses to the Staff’s comments are to the Registration Statement filed currently herewith and all page references are to the prospectus included in such Registration Statement. General 1. Please supplementally provide us with copies of all written communications, as defined in Rule 405 under the Securities Act, that you, or anyone authorized to do so on your behalf, present [sic] to potential investors in reliance on Section 5(d) of the Securities Act, whether or not they retain copies of the communications. To date, there have been no written communications (as defined in Rule 405 under the Securities Act), directly or indirectly, from the Registrant to potential investors in reliance on Section 5(d) of the Securities Act and none are being currently contemplated. The Registrant will provide the Staff with a copy, if any such materials are presented to potential investors. 2. Please provide us with copies of any graphics, maps, photographs, and related captions or other artwork including logos that you intend to use in the prospectus. Such graphics and pictorial representations should not be included in any preliminary prospectus distributed to prospective investors prior to our review. Based on discussions with the Staff, the Registrant’s logo is included on the cover page of the prospectus included in the Registration Statement. 3. We note your analysis on pages 8, 26 and 58 regarding why you believe your operations will permit you to maintain an exemption from registration under the Investment Company Act of 1940. Please provide us with a detailed analysis of the exemption that you and your subsidiaries intend to rely on and how your investment strategy will support that exemption. Please note that we will refer your response to the Division of Investment Management for further review. The Registrant’s business is making loans secured by first mortgage liens on real estate. These assets constituted over 89% of the Registrant’s total assets as of June 30, 2016. Accordingly, the Registrant falls squarely within the exception provided by Section 3(c)(5)(C) of the Investment Company Act of 1940. The Registrant’s business plan and strategy is to continue to originate loans secured by first mortgage liens on real estate. In terms of the net proceeds from the offering contemplated by the Registration Statement, although the exact terms of the offering are still unknown, the Registrant does not believe that the net proceeds will exceed one-third of its total assets immediately after the offering. Even if that is not the case, the Registrant intends to initially use the net proceeds to temporarily pay down the outstanding balance on the Bankwell credit line, to invest any excess in short-term U.S. government securities or hold the cash. U.S. government securities and cash are excluded for purposes of determining whether the Registrant qualifies as an “investment company” and paying down debt should not make a difference. Therefore, it should still qualify for the Section 3(c)(5)(C) exception. Summary, page 1 Our Competitive Strengths, page 2 4. We note your disclosure that a “significant portion” of your business comes from repeat customers with whom you have long-standing relationships. Please revise to quantify the portion of your business that comes from repeat customers as well as the portion of your business that comes from affiliates. Per your comment, the disclosure on pages 2 and 53 has been revised by deleting the word “significant” and to reflect the percentage of the Registrant’s loan portfolio at June 30, 2016 represented by repeat customers and affiliates. Leverage Policies/Financing Strategy, page 3 5. We note your disclosure that you do not have a formal policy limiting the amount of debt you may incur and that your governing documents contain no limitation on the amount of leverage you may use. Please revise the summary risk factors to include this information and disclose your target leverage ratio. Per your comment, we have revised the summary risk factors (page 5) and added additional disclosure on pages 5, 24, 42-43, 54 and 100. 6. We note your disclosure here and on page 43 that since inception through March 31, 2016, your predecessor, Sachem Capital Partners, LLC, raised $26.5 million of equity capital from investors, including JJV, LLC, whose principals are Jeffrey Villano and John Villano, your Co-Chief Executive Officers, taking into account initial and additional capital contributions. Please revise your disclosure to break out the amount of equity capital raised from JJV, LLC. Please also disclose the initial and additional capital contributions to which you refer. Per your comment, the disclosure on pages 3 and 43 has been revised to specify the amount of equity capital contributed by JJV and the initial and additional capital contributions. Summary Risk Factors, page 4 7. Please revise your geographic concentration summary risk factor to quantify your concentration of loans with underlying properties in Connecticut. Per your comment, the disclosure on page 5 has been revised to quantify the concentration of loans secured by properties located in Connecticut. Our Organizational Structure, page 6 8. We note your disclosure that you will enter into an Exchange Agreement with the members of SCP pursuant to which you will acquire all of the outstanding membership interests of SCP in exchange for 6,283,237 common shares. Please revise your disclosure to explain how you valued the membership interests being contributed. Additional disclosure has been added in response to your comment. In addition, the description of the exchange transaction has been revised. Rather than each member of SCP contributing their SCP membership interest to Sachem Capital in exchange for Sachem Capital common shares, SCP will transfer all its assets and liabilities to Sachem Capital in exchange for 6,283,237 Sachem Capital common shares. SCP will then distribute those shares to its members, pro rata in accordance with their capital account balances, in full liquidation of their SCP membership interests. See pages 1, 6, 45-46, and 63. 9. We note your disclosure that any SCP member who does not sign the Exchange Agreement will have his, her or its membership interest redeemed for cash. Please tell us how many members will receive cash in lieu of common shares and how that will impact the number of common shares to be issued. In addition, please revise to clarify, if true, in your Summary section, and throughout the prospectus, that the cash payable to any SCP member who does not sign the Exchange Agreement is to be paid using a portion of the net proceeds of this offering. As a result of the changes to the structure of the exchange, described in our response to Comment 8, each SCP member will receive his, her or its pro rata share of the 6,283,237 Sachem Capital common shares. Accordingly, redemptions have been eliminated as a Use of Proceeds. 10. Please revise to quantify the amount each of SCP’s controlling stockholders and control persons will receive as a result of the transactions contemplated by the Exchange Agreement and the redemptions, if any. Per your comment, additional disclosure has been added on pages 1, 6, 45 and 63. Risk Factors, page 31 11. We note your disclosure that you have elected to avail yourselves of the extended transition period for adopting new or revised accounting standards available to emerging growth companies. In accordance with the JOBS Act, please include a statement that this election is irrevocable within your amended filing. Per your comment, additional disclosure has been included. See pages 9, 32-33 and 46. 12. We further note your disclosure that as a result of this election your financial statements may not be comparable to companies that comply with public company effective dates. A similar statement should be included in your critical accounting policy disclosures. Please revise your disclosure in your amended filing. Per your comment, additional disclosure has been included. See page 46. Selected Historical and Pro Forma Financial Information, page 38 13. We note from Use of Proceeds section on page 34 that you expect to use portion of the proceeds to redeem membership interests. In that regard, please clarify your disclosure in the introductory paragraph whether you give effect to the redemption in the pro forma, as adjusted column of your pro forma financial information. If not, please explain why not. Please also provide similar disclosures in the Capitalization section on page 37 and elsewhere, as applicable, in the filing. Please see our responses to Comments Nos. 8 and 9. Management’s Discussion and Analysis, page 41 14. Although we note your disclosure on page 42, please revise to more specifically discuss the spread between the yield on the loan portfolio and the cost of financing and the reasons for any material trends in the spread or advise. Per your comment, the disclosure referenced in your comment has been revised. See page 42. Our Competitive Strengths, page 50 15. We note your disclosure under this heading regarding the “history of successful operations” of your management and predecessor. Please revise to disclose some of the key adverse business developments experienced in an effort towards providing investors with a balanced and complete overview of your prior performance or advise. Per your comment, additional disclosure has been included. See page 53. Other than as disclosed on page 53, management does not believe that SCP has experienced any adverse business developments. Our Loan Portfolio, page 53 16. We note that your loans are secured by properties located in Connecticut, Massachusetts, Rhode Island or New York. Please revise to quantify the number of loans secured by properties in each state. Per your comment, additional disclosure has been included. See page 57. 17. We note your disclosure on page 53 that a borrower may prepay a loan at any time beginning three months after the funding date, without premium or penalty. Please revise to provide the prepayment rate on your loans or advise. Per your comment, additional disclosure has been included. See page 56. 18. Please revise to disclose the number of loans for which there was an event of default and the number of loans in default or advise. In addition, please revise to clarify the number of your loans that have exercised extension options. The registrant is unable to quantify the number of loans for which there was an event of default. As disclosed, any failure by a borrower to comply with a covenant or agreement in the loan documents is technically a default but, as a practical matter, SCP has rarely declared the borrower in default. As further disclosed in Amendment No. 1, SCP has foreclosed on a mortgaged property only once. In addition, it has acquired eight other properties from five borrowers who were in default. See pages 16, 53 and 56. In terms of borrowers that have exercised extension options, the Registrant does not track that information. Rather it treats an extension as a new loan. 19. We note your disclosure that as of March 31, 2016, the two largest borrowers accounted for 5.3% and 4.8% of SCP’s loan portfolio. We further note your disclosure on page 49 that you will adopt a policy that will limit the maximum amount of any loan you fund to a single borrower or group of affiliated borrowers to 10% of the aggregate amount of your loan portfolio. To the extent a group of affiliated borrowers account for 5% or more of SCP’s loan portfolio, please disclose the specific percentage of SCP’s loan portfolio for which they account. There are no other borrowers or group of affiliated borrowers that account for more than 5% of SCP’s loan portfolio. The disclosure has been revised accordingly. 20. We note your disclosure that the Bankwell Credit Line contains various covenants and restrictions including limiting the amount that you can borrow relative to the value of the underlying collateral, maintaining various financial ratios and limitations on the terms of loans that you make to your customers. Although we note the disclosure regarding the eligibility requirements for an advance on page 55, please revise to provide more detailed disclosure of any material financial covenants, including quantifying any ratios, or advise. In addition, please clarify whether the Exchange Agreement and related transaction will impact this credit line. In response to your comment, the disclosure appearing on pages 22, 44, 58 and 59 has been expanded to include material financial covenants. The company believes that all material covenants have been disclosed in the prospectus. The company has commenced discussions with Bankwell regarding terminating the existing agreement between Bankwell and SCP and replacing it with a similar agreement that between Bankwell and Sachem Capital, albeit with certain modifications to reflect the Exchange Agreement and Sachem’s desire to operate and qualify as a REIT. Once the new loan agreement is finalized, the disclosure will be updated accordingly. The new agreement will be executed simultaneously with or immediately prior to the effectiveness of the Registration Statement. Management, page 61 21. Please disclose the principal business of any corporation or other organization by which your executive officers were employed during the past five years. In addition, we note your disclosure that “during a business career of more than 25 years, Mr. Villano has founded and served as the chief executive officer of a number of businesses” and that Mr. Goldberg “held senior executive positions, including chief financial officer and chief operating officer, at a number of public companies. Please expand this disclosure to identify the businesses to which you refer, and include dates of employment and a description of the business’s industry, or remove. Please refer to Item 401 of Regulation S-K. The sentence in Mr. Villano’s bio referenced in your comment has been deleted. Mr. Goldberg’s bio has been revised per your comment. See pages 64 and 65. Executive Compensation, page 64 Summary Compensation, page 64 22. We note your disclosure that SCP has paid management and other fees to JJV. Please revise to disclose the “other fees” that have been paid to JJV. Pursuant to the SCP operating agreement the term “management fees” includes all the fees listed on page 67. The disclosure throughout the prospectus included in the Registration Statement has been revised accordingly. Underwriting, page 99 23. We note that you include a line item in your table on page 99 regarding the non- accountable expense allowance of 1%. Please revise to clarify whether the disclosure on page 100 regarding your agreement to pay the underwriters’ expenses relating to the