CNote was co-founded in 2016 by two experienced financial services executives, Catherine Berman and Yuliya Tarasava. Ms. Berman is a former Managing Director at Charles Schwab and Ms. Tarasava previously worked at Summit Rock Advisors. Broadly speaking, CNote is an “impact investing” platform, with a range of offerings allowing individual investors (as well as institutions) to back community lenders supporting underserved borrowers and entrepreneurs.
Types of investments CNote offers
CNote’s funds loan money to Community Development Financial Institutions (CDFIs), which are financial institutions certified by the U.S. Treasury Department. CDFIs promote job creation and economic development within financially underserved communities by offering low-cost loans to small businesses and entrepreneurs, and have been around since 1994.
Historically, CDFIs as an asset class have been funded mainly through institutional investors, and as with many of the investment crowdfunding platforms we review, CNote is bringing these investments to individual investors.
CNote currently offers four different funds. Their “Flagship Fund” is the only offering open to non-accredited investors, and has by far the lowest minimum investment. Their other three funds are open only to accredited investors.
What do you get when investing with CNote?
The specifics vary by fund, but as an example, investors in the Flagship Fund receive “CNote Notes” bearing a fixed interest rate, paid quarterly. For the Flagship Fund, the notes are issued under SEC Regulation A+.
How does CNote make money?
There are no direct fees for investors. CNote makes money on the “spread” between the rate charged to the CDFI borrowers and the interest paid out to investors. For example, CNote might make a loan to a community development organization with a 3% interest rate, and pay the investors funding the loan 2.5% – the 0.5% difference is the revenue to CNote.
Potential returns and cashflow
The interest rates offered by CNote vary by product, though typically are in the low single-digits. Investment terms range from 90 days to 5 years, with interest typically paid quarterly. While most of the CNote offerings are for fixed terms (meaning that investors must keep their notes until the end of the term), the “Flagship Fund” offers an attractive early liquidity option, with investors able to withdraw up to the greater of $20,000 or 10% of their investment.
Notably, investors in the Flagship Fund can boost their interest rate by referring additional investors to CNote.
Breadth of offerings on CNote
There are currently four different fund options available from CNote, with varying investment terms, interest rates, and target borrowers (for example, the “Promise Account” supports community banks and credit unions, while the “Wisdom Fund” provides low-cost loans to women of color).
Prospective investors should note that CNote is still developing their network of CDFI partners, so there is minimal diversification at this time. As noted by CNote in their SEC filings:
We currently have partnered with two CDFI partners. In addition, we are in discussions with two additional potential CDFI partners about possible partnerships. Thus, our investors capital is concentrated in a limited number of partners. We will not be able to diversify the risks for holders of CNote Notes until we have a greater number of CDFI partners.
Regulatory framework and due diligence expectations
CNote’s Flagship Fund is offered using Tier II of SEC Reg A+, which means that the offering has been reviewed by the SEC, and as required by Reg A+ “the company will be required to provide investors with additional information, including annual audited financial statements, annual reports filed on SEC Form 1-K, semiannual reports filed on SEC Form 1-SA, special financial reports filed on SEC Form 1-K, and current reports on SEC Form 1-U.” You can find the full SEC filing for the Flagship Fund on the SEC’s website.