What are the tax consequences of investing in a syndicate?

For each syndicate deal, investors become members of a special-purpose fund formed to make the investment. That fund will purchase preferred shares, convertible debt or other instruments issued by the company. Certain taxable events may result in income or losses flowing through the special-purpose fund to its investors. Investors with taxable income or loss will receive K-1s.

If the fund holds an equity interest in a portfolio company that is a US Corporation, there is generally a taxable event on exits or when the company shuts down. In rare instances, there may also be a taxable event if the fund receives a dividend or distribution.

If the fund purchases convertible debt, prior to conversion into equity there may be taxable income for your portion of the interest on the debt or in connection with the cancellation of debt such as in a bankruptcy. Non-US investors should consult local tax advisors to understand the local tax impacts of their investment. Be sure to consult your tax advisor to understand the impacts of your investment in the context of your personal tax situation.

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