Last month we reported that Shunfeng International Clean Energy, the new owner of 2012's largest solar company, Suntech, had acquired a 63 percent stake in high-efficiency solar cell and module firm Suniva.

Shunfeng joined Suniva's venture investors NEA, Goldman Sachs, Warburg Pincus, and Prelude Ventures. A document obtained by GTM illustrates the high stakes and risks involved in VC investing. This case is complicated by the presence of Advanced Equities, a now-closed and then-disreputable investment house, which acted to aggregate the small investments (less than $1 million) of high-net-worth individuals to fill out VC rounds.

Here are excerpts from a letter sent by the manager of the LLC representing Advanced Equities to an investor in Suniva's B round.     

Dear Advanced Equities Suniva Investments I, LLC Members:

On August 12, 2015, Suniva announced it agreed to a merger with Shunfeng International Clean Energy Limited, a Hong Kong Stock Exchange company. In connection with the merger, the Company will also receive equity financing funded through the issuance of a Simple Agreement for Future Equity (“SAFE”). The Board of Directors (including the independent directors) of Suniva unanimously approved the merger after considering various strategic and financing alternatives and believe the merger transaction is in the best interest of the stockholders of Suniva.

As the Managing Member of the Investor we elected to vote for the Merger, but after reviewing the fundraising documentation chose not to have the Investor participate in the additional equity financing. As an alternative, the Company has agreed to accept direct investments from individual Members if they are prepared to act quickly and fund by the Closing.  If you are interested in directly investing in the SAFE, please reply back to sdif@spruceinvest.com by close of business tomorrow and we will put you in contact with the Company directly.

The Merger is structured as a stock-for-stock merger.  The merger consideration will consist solely of shares of Shunfeng Common Stock, and shares of the Surviving Company’s Class A Common Stock. While the initial ratio of Shunfeng shares to Surviving Company shares was 60/40, fluctuations in the price of publicly traded Shunfeng stock will affect the final ratio; nevertheless, all stockholders receiving merger consideration will receive the same ratio of Shunfeng shares to Surviving Company shares. All outstanding shares of preferred stock and common stock of the Company will be canceled in exchange for the right to receive the amount of Merger Consideration to which each stockholder is entitled.

These liquidation preferences provide for distribution of proceeds to be made in the following order (presented by class based upon the expected number of shares of each class at Closing):

  • $42 million to the Series F Preferred Stock
  • $21.3 million to the Series E (pari passu with the Series D)
  • $127.3 million to the Series D (pari passu with the Series E)
  • $74.5 million to the Series C Preferred Stock
  • $37.3 Million to the Series B Preferred Stock; and
  • $5.6 to the Series A Preferred Stock.

Given the deal valuation and the current price of Shunfeng stock, it is anticipated that only holders of Series F Preferred Shares will receive their full liquidation preference and that only Series E Preferred Shares and Series D Preferred Shares will receive a portion of their liquidation preference. No other classes would receive Merger Consideration, and those Company Stockholders that receive a portion of the Merger Consideration will not participate equally in the distribution of the Merger Consideration but only in accordance with the liquidation distribution provisions of the Company's Certificate of Incorporation.

In connection with the Merger, the Surviving Company is to receive equity contributions totaling $20 million. Shunfeng, through a subsidiary, is to contribute $12 million of the $20 million total equity contribution at Closing in exchange for shares of Surviving Company Common Stock. The Company is required to secure commitments for the remaining $8 million ("SAFE Contribution"). The Company is funding its requirement through the issue of SAFEs, executed by certain investors ("SAFE Investors"). So far, certain investors have funded approximately $5 million of the required $8 million.

As part of the SAFE investment, each investor in the SAFE will receive one share of the Company's Series F Preferred Stock at a purchase price of $5,416.03 per share.  The SAFE Contribution is to be applied to the Surviving Company immediately following Closing, and the Surviving Company is to issue to SAFE Investors shares of Class A Common Stock in the Surviving Company, to be divided among the SAFE investors on a pro rata basis.

Sincerely,

Spruce Direct Investment Fund I, LP

Although the recipient of this letter was alarmed to learn that early investment rounds were lost in this transaction, VC sources suggest that "it’s pretty typical that new rounds get senior preference over previous rounds."

Suniva lost $15 million in 2014, less than the $44 million it lost in 2013, according to this document.

GTM Research solar analyst Jade Jones notes that Suniva is the No. 2 U.S. c-Si manufacturer in terms of total capacity. Suniva claims that it "employs the highest percentage of American workers among all other major solar module manufacturers." The expansion is supposed to create 300 jobs.

U.S. module manufacturing capacity is now on track to surpass 3.5 gigawatts by 2018, up from 1.6 gigawatts today. Cell manufacturing capacity could increase to 2 gigawatts, up from 0.7 gigawatts, over the same period, according to GTM Research's PV Pulse.