Lawmakers say angel fund skirted law with real estate investments

BISMARCK -- Three agencies are investigating whether a North Dakota angel fund ran afoul of state law when it sought investors for real estate projects, a potential violation that lawmakers say underscores the need for major reforms to the angel ...

The front cover of an eight-page Angel Fund prospectus.
The front cover of an eight-page Angel Fund prospectus.

BISMARCK - Three agencies are investigating whether a North Dakota angel fund ran afoul of state law when it sought investors for real estate projects, a potential violation that lawmakers say underscores the need for major reforms to the angel fund program that rewards investors with lucrative tax credits.

The Minot-based Legendary Angel Fund is the biggest of the state's 22 angel funds, with 89 investors who invested nearly $4.8 million and reaped more than $2.1 million in tax credits between January 2014 when the fund was certified and Dec. 22, 2015, the end of the last reporting period.

One of the contacts listed on Legendary's website, Todd Berning, is a developer behind the proposed $12 million Sheyenne Plaza project in downtown West Fargo and the planned $14.5 million Homewood Suites hotel next to the Cambria Hotel and Suites in West Fargo.

The Legislature tweaked state law in 2013 to prohibit angel funds from investing in real estate projects because lawmakers said that wasn't the original intent. Any angel fund that was certified by the state Department of Commerce before Jan. 1, 2013, and had invested in real estate or a real estate holding company wasn't eligible for recertification.

Documents that lawmakers copied from Legendary's website advertised investment opportunities in the Homewood Suites, a strip mall in Grand Forks and an affordable housing development in New Rockford.


"It's a clear violation," Rep. Mike Nathe, R-Bismarck, said during a meeting Tuesday, Sept. 13, of the Legislature's interim Political Subdivision Taxation Committee, which has been evaluating tax incentives.

Attorney Kyle Pender of Montgomery Goff & Bullis in Fargo, which represents the fund, said via email Thursday that Legendary representatives were traveling and unavailable for comment.

"Without consent from our client, all I can tell you is that Legendary Investments, LLC has been in contact with representatives from the ND Commerce Department and is confident that its investments have all been made in accordance with the angel fund statute," he wrote.

'Had our suspicions'

Lawmakers created the angel fund investment tax credit in 2007 as a way to encourage investment in venture capital needed to support high-risk startup businesses.

Those who invest in a certified angel fund can claim a dollar-for-dollar state income tax credit equal to 45 percent of the investment, up to a maximum credit of $45,000 a year with a lifetime cap of $500,000.

The state Department of Commerce certified Legendary Investments LLC as an angel fund in May 2014 for the three-year period starting Jan. 1, 2014.


Nathe said he received a tip from a concerned citizen in June that the Legendary fund was soliciting investments for real estate projects, and prospectus sheets printed from the fund's website appeared to confirm it.

"We all had our suspicions," he said during Tuesday's committee meeting at the Capitol. "So we have some hard proof here that this is going on."

Agencies investigating

However, it's not that clear-cut because under state law, an angel fund doesn't have to report which companies it invests in or the amounts of those investments. Only the company's name and principal place of business must be reported.

Legendary Investments LLC has reported three investments to date: iconHD LLC, Proof Artisan Distillers LLC and Packet Digital, all North Dakota companies.

Paul Lucy, director of economic development and finance at the Commerce Department, said they're trying to determine whether the Legendary Angel Fund invested in real estate. The initial response from fund representatives wasn't sufficient, Lucy said, "so we're in the process of attempting to gather some additional information."

Tax Commissioner Ryan Rauschenberger said while it appears "on the surface" that the angel fund was investing in real estate, the structure of the fund and how money flowed to real estate projects - for example, as a loan or bridge financing versus an equity investment - will determine the legality.

"We are doing due diligence," he said.


If state officials find the law was violated, Legendary would lose its angel fund certification. But beyond that, the angel fund law has no penalty provisions, and Rauschenberger said it would be the investors - not the fund managers - who would be on the hook if the state determines the tax credits weren't allowed and must be paid back.

"There's really nothing we can do to that angel fund. That's a pass-through entity," he said.

Securities Commissioner Karen Tyler was attending an out-of-state conference Wednesday and Thursday and could not be reached for comment. Nathe said the Securities Department is looking into the matter.

'Blatant lie' or semantics?

Lawmakers were particularly critical of the Homewood Suites prospectus dated Nov. 20, which stated that Legendary Investments LLC "has created an equity investment series with its Angel Fund" to invest in the West Fargo property.

"This series is a direct equity investment, as the hotel property qualifies as primary sector as defined by the state of ND being that it is attached to the new Cambria convention center," it stated.

However, Lucy said the Commerce Department hasn't certified either the hotel or convention center as a primary sector business, "nor did we give anyone any indication that it was going to be."

Sen. Dwight Cook, R-Mandan, said that's why the Securities Department needs to look into it.

"They're luring money from an investor with a blatant lie, are they not?" he said.

"It might be semantics," Lucy said, noting the prospectus didn't actually state they were certified as primary sector.

Revisions recommended

Nathe noted that committee members took some heat during the primary election season for being critical of angel funds, with some suggesting political motivations because many Republican legislators had endorsed Attorney General Wayne Stenehjem and his opponent for the GOP nomination, Fargo businessman Doug Burgum, had been involved with angel funds.

Nathe said he didn't want to paint all angel funds with the same brush.

"But like any other industry, the 10 percent makes it bad for the other 90 percent," he said.

In July, the committee forwarded a draft bill that would eliminate the angel fund tax credit and expand the state's seed capital investment tax credit, which has more stringent reporting requirements and wouldn't allow tax credits to be claimed on investments in out-of-state companies.

"These are funds that are taking away from the general fund, so it's a burden on everyone as taxpayers of the state of North Dakota, so we have to make sure that they're going the right way," said the committee's chairman, Rep. Jason Dockter, R-Bismarck.

A separate bill draft that would keep the angel fund program but add stricter certification and reporting requirements is still under consideration.

Rep. Alisa Mitskog, D-Wahpeton, said Legendary is "definitely a bad player that needs to go away," but she noted the Southern Valley Angel Fund LLC "has done great work" growing ComDel Innovation in her district.

"We can't judge all angel funds by the one bad egg here," she said.

Badlands connection investigated

The documents presented to the committee this week were no longer available Thursday through Legendary's website at , which lists Berning, Pender and Blake Nybakken as contacts. Berning and Nybakken did not return messages seeking comment.

However, the documents were still online at, a similar-looking website with a page dedicated to the Legendary Angel Fund, complete with renderings of four "Recent Angel Fund Projects," including the two proposed West Fargo projects and Park South Apartments in Minot.

The Secretary of State's Office has no "Badlands Fund" in its business records but does have a "Badlands Angel Fund LLC," with Montgomery Goff & Bullis listed as its registered agent and address.

Justin Dever, co-deputy commissioner of the Commerce Department, said Badlands is not a certified angel fund and hasn't applied for certification. Rauschenberger said the state is looking into the relationship between Legendary and Badlands.


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