Item 1. Business
Overview
Crossroads Capital, Inc. (“we,”
“our” and “us”) was incorporated on May 9, 2008 under the laws of the State of Maryland and is an internally
managed, non-diversified, closed-end management investment company that has elected to be regulated as a business development company
(“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). Effective December 2, 2015,
we changed our name from BDCA Venture, Inc. to Crossroads Capital, Inc. Effective January 1, 2010, we elected to be treated for
U.S. Federal income tax purposes as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue
Code of 1986, as amended (the “Code”). We commenced our portfolio company investment activities in January 2010. The
shares of our common stock have been listed on the Nasdaq Capital Market since December 12, 2011.
Our current investment objective
(our “Investment Objective”) is to preserve capital and maximize stockholder value by pursuing the sale of our portfolio
investments, limiting expenses and deploying surplus cash as appropriate, including into yielding investments to offset, in part,
operating expenses and, as of March 25, 2016, to monetize our portfolio holdings at the earliest practicable date. On May 3, 2016,
our Board of Directors approved a Plan of Liquidation (the “Plan”) pursuant to which we plan to convert into a liquidating
trust with the sole purpose of liquidating our assets and distributing the proceeds to our stockholders. The Plan is subject to
the approval of our stockholders, which our Board of Directors intends to seek at a special meeting called for the purpose of approving
the Plan and certain related matters, including the withdrawal of our election to be regulated as a BDC under the 1940 Act and
the delisting of our stock from Nasdaq Capital Market, as detailed in the preliminary proxy statement filed with the SEC on May
5, 2016, which was subsequently amended on June 27, 2016. For more information on our Investment Objective, see “Investment
Objective” below.
We are internally managed,
although we do receive certain administrative services from 1100 Capital Consulting, LLC (our “Administrator”), including
the provision of personnel to act as certain of our executive officers, including the Chief Executive Officer and Chief Financial
Officer. For more information on our agreement with our Administrator, see “Administrative Services” below.
Governance
Our Board of Directors monitors
and performs an oversight role with respect to our business affairs, including investment practices and performance, compliance
with regulatory requirements and the services, expenses and performance of our service providers. Among other things, our Board
of Directors approves the appointment of our Administrator and officers, reviews and monitors the services and activities performed
by our Administrator and officers, approves the engagement, and reviews the performance of, our independent registered public accounting
firm, and provides overall risk management oversight. Pursuant to the requirements under the 1940 Act and to satisfy the Nasdaq
listing standards, our Board of Directors is composed of a majority of non-interested, directors, as defined in the 1940 Act.
Our Board of Directors has
established an Audit Committee, a Nominating Committee and a Compensation Committee to assist the Board of Directors in fulfilling
its responsibilities. Each of these committees is composed solely of non-interested, or independent, directors. The Audit Committee’s
responsibilities include overseeing our accounting and financial reporting processes, our systems of internal control over financial
reporting, and audits of our financial statements. The Nominating Committee’s responsibilities include identifying qualified
individuals to serve on our Board of Directors, and to select, or recommend that the Board of Directors select such individuals.
The Compensation Committee’s responsibilities include evaluating our executive officer performance and overseeing our compensation
policies, including making recommendations to our Board of Directors with respect to any incentive compensation and equity-based
plans, if any, that are subject to the Board of Directors’ approval.
Investment Objective
On October 5, 2015, our
Board of Directors determined that we will no longer make investments in new portfolio companies and will focus on the orderly
monetization of our current holdings. On January 20, 2016, our Board of Directors changed our Investment Objective to preserve
capital and maximize stockholder value by pursuing the sale of our portfolio investments, limiting expenses and deploying surplus
cash as appropriate, including into yielding investments to offset, in part, operating expenses. Subsequent to this change in our
investment objective and in recognition that the monetization of our current holdings under our prior policies and investment objective
could take three to five years or more and the amounts realized may be less than current fair values, on March 25, 2016, our Board
of Directors resolved to monetize our portfolio holdings at the earliest practicable date. On August 24, 2016, we announced the
engagement of Setter Capital, Inc., a Toronto-based secondary market advisory firm, to assist us in identifying prospective buyers
for our portfolio investments.
On May 3, 2016, our Board
of Directors approved the Plan, subject to the approval of our stockholders at a special meeting of our stockholders. Our Board
of Directors has not yet set a date for the special meeting and continues to evaluate additional strategic alternatives.
Our Board of Directors cannot
estimate the expected proceeds that the liquidating trust could realize from the monetization of our portfolio investments pursuant
to the Plan and it is possible that the final liquidation value or the proceeds received from the sale of our portfolio investments
may be less than the value or proceeds an investor might receive from pursuing a strategy of holding such investments through any
potential initial public offering or other sale or liquidity event. The monetization of our portfolio investments and the adoption
of the Plan, pursuant to which we are focused on the liquidation and sale of our portfolio investments, makes our investment portfolio
susceptible to the risk that near-term sales could realize less than current fair values as we actively seek to sell our investments,
either individually or in groups, and it is possible that we will experience substantial differences in the exit prices ultimately
achieved by the liquidating trust on or the proceeds received from the sale of our portfolio holdings as compared to the respective
current fair values. The prices we ultimately realize may be further impacted by volatility in the financial markets to date, in
particular the market for Initial Public Offerings of previously privately-funded venture capital investments that at least in
part require a functioning IPO market to provide liquidity events for venture capital-backed enterprises. Our current fair values
were determined consistent with our disclosed valuation policies and procedures, and the methodologies included therein, and which
were based on the concept of an orderly transaction in accordance with Financial Accounting Standards Board (“FASB”),
Accounting Standards Codification Topic 820, “Fair Value Measurement and Disclosures” (“ASC 820”).
Our Board of Directors believes
the implementation of our Investment Objective and the Plan, each focusing on the monetization of our portfolio holdings at the
earliest practicable date and our conversion into a liquidating trust, even with the possibility of achieving significantly lower
prices from sales, will maximize stockholder value by substantially limiting estimated future operating expenses and removing the
risk of future volatility in the market values of our portfolio holdings.
While our Board of Directors
plans to distribute cash proceeds to stockholders from the sale or other monetization of our portfolio investments, no assurance
can be given regarding the timing of or amounts realized from any such transactions. Further, while our Board of Directors will
adhere to its previously announced determination not to invest in new venture capital-backed companies, we may consider making
opportunistic follow-on investments in our existing portfolio companies.
Former Investment Objectives
From September 22, 2014 to
January 20, 2016, our investment strategy was to maximize total return by generating current income from debt investments and,
to a lesser extent, capital appreciation from equity and equity-related investments.
Prior to our debt-focused
investment strategy, our investment strategy focused on making equity investments in emerging growth companies that were committed
to and capable of becoming public, or pre-IPO investments. We sought to provide investors with the ability to participate in a
publicly traded fund that allowed our stockholders to share in the potential value accretion that we believed typically occurred
once a company transformed from private to public status, or what we referred to as the private-to-public valuation arbitrage.
Our former investment strategies
primarily focused on companies in the technology, healthcare, life sciences and energy industries, which our former management
believed had the most favorable prospects for above-average growth and presented the most favorable investment opportunities. Within
these industries, investments were intended to be made in privately held companies across various stages of development, including
early, later and growth stage companies, more established companies and lower middle market companies. Lower middle market companies
were defined as companies with annual revenues ranging from $10 million to $100 million.
Former Investment Criteria
and Selection
Several criteria were considered
important in achieving our former investment strategies with respect to prospective portfolio companies. These criteria, while
not all-inclusive, provided general guidelines for our investment decisions.
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Companies in growth industries. We generally focused our investments in companies that we believed
were poised at the time of investment to grow at above-average rates relative to other sectors of the economy (“Growth Companies”).
While we intended to make investments in privately held companies across various stages of development, we generally required prospective
portfolio companies to be beyond the seed stage of development and to have already received or anticipated receiving commitments
for their first round of institutional venture capital or private equity financing before we considered making an investment.
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Financial sponsor commitment. We generally invested in companies in which one or more venture capital
or private equity firms, which we referred to as “financial sponsors,” have previously invested and remained committed
to future capital funding. We believed that financial sponsors could serve as a committed partner and would assist their portfolio
companies and their management teams in creating value.
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Operating plan and cash resources. We generally required that prospective portfolio companies,
in addition to having sufficient access to capital to support leverage, demonstrated operating plans capable of generating cash
flows or the ability to potentially raise the additional capital necessary to cover their operating expenses and service their
debt.
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Exit strategy. Prior to making an investment in a prospective portfolio company, we analyzed the
potential for a liquidity event that would enable us to realize appreciation in the value of our equity interest. Liquidity events
may include, but are not limited to, an IPO of common stock, a private sale of our equity interest to a third party, a strategic
merger or acquisition of the company, and a purchase of our equity interest by the company or one of its equity holders.
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The foundation of our former
investment philosophy was investment analysis, research and diversification. We followed a rigorous selection process based on:
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An analysis of issuer creditworthiness and growth potential, including a quantitative and qualitative
assessment of the issuer’s business and future prospects, as well as an evaluation of a potential portfolio company provided
by our contacts in venture capital, private equity, and industry participants;
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An evaluation of the management team, including prior experience, cohesiveness, and years of collaboration
together, as well as the level of commitment demonstrated (both financially and otherwise) by the founders;
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An assessment of existing financial sponsors and their commitment to future capital funding, management
assistance and liquidity events;
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An analysis of business strategy, technology and intellectual property and long-term industry trends
based on a review of relevant industry publications and conversations with knowledgeable industry participants; and
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An in-depth review and assessment of capital structure, financial results and financial projections.
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As of December 31, 2016, our
portfolio consisted of equity and equity-related investments in 10 private companies that were made by prior management under a
former investment strategy. We may make follow-on investments in our existing portfolio companies to the extent we believe such
investments are in the best interest of our stockholders. In evaluating follow-on investment opportunities, we typically assess,
among other factors, the possible adverse consequences to our existing investment if we elect not to make a follow-on investment.
We have not taken a control
position in any of our existing portfolio companies through ownership, board seats, observation rights or other control features.
Accordingly, we are not in a position to control the management, operation or strategic decision-making of our existing portfolio
companies. Nevertheless, as part of a portfolio company investment, we have in most cases obtained information rights that give
us access to the portfolio company’s quarterly and annual financial statements, as well as the portfolio company’s
annual budget. We also attempt to have dialogue with our private portfolio company management teams to review the portfolio company’s
business prospects, financial results, and exit strategy plans. We monitor the financial trends of each portfolio company to assess
the performance of individual portfolio companies as well as to evaluate overall portfolio quality and risk.
Subject to oversight by our
Board of Directors, our Administrator will continue to oversee our existing portfolio consistent with past practices.
Portfolio Monitoring
Our Administrator will monitor
and periodically evaluate all of our portfolio companies to determine if each company is meeting its business plan, if information
is available to us, and to assess the continuing prospects for each company.
We employ several methods
of evaluating and monitoring the performance and value of our investments, which may include, but are not limited to, the following:
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Assessment of successful execution of the portfolio company’s business plan, achievement
of development milestones and compliance with applicable debt covenants;
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Regular contact with portfolio company management and, if appropriate, the financial sponsor, to
discuss financial position, requirements and accomplishments;
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Evaluation of a portfolio company’s success in achieving periodic benchmarks established
by our Administrator and/or portfolio company management;
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Offering significant managerial assistance to our portfolio companies from our officers, managers
and personnel, including assistance in director and officer recruitment, referral of outside professionals such as management consultants
or bankers, providing financial, management and capital markets expertise through our investment adviser’s experience in
the business of the portfolio company; and
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Review of monthly and/or quarterly financial statements and financial projections of the portfolio company.
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Competition
Our primary competition includes
other investment funds, BDCs, investment banks and other financial services companies such as commercial banks and finance companies.
Many of our competitors are not subject to the regulatory restrictions that the 1940 Act imposes on us as a BDC.
Employees
Currently, we do not have
any employees. The management of our investment portfolio is the responsibility of our Board of Directors and the third-parties
engaged to assist in specific related activities, including the Administrator.
Administrative Services
On November 13, 2015, our
Board of Directors approved the engagement of our Administrator to provide administrative consulting services to us, including
the provision of personnel to act as certain of our executive officers, including the Chief Executive Officer and Chief Financial
Officer, pursuant to an Administrator Consulting Agreement.
Our Administrator furnishes
us with equipment and clerical services, including responsibility for the financial records which we are required to maintain,
and preparing reports to our stockholders and reports filed with the SEC. In addition, our Administrator assists us in monitoring
our portfolio accounting and bookkeeping, managing portfolio collections and reporting, performing internal audit services, determining
and publishing our net asset value, overseeing the preparation and filing of our tax returns and the printing and dissemination
of reports to our stockholders. In addition, our Administrator provides support for our risk management efforts and generally overseeing
the payment of our expenses and the performance of administrative and professional services rendered to us by others.
Effective December 2, 2015,
our Board of Directors appointed Ben H. Harris to serve as our Chief Executive Officer and President and David M. Hadani to serve
as our Chief Financial Officer, Treasurer and Secretary. Stephanie L. Darling, Esq. currently serves as our Chief Compliance Officer.
On November 10, 2015, our
Board of Directors approved the engagement of US Bancorp Fund Services, LLC (“US Bancorp”) to provide administration
and accounting services to us pursuant to an Administration Servicing Agreement and a Fund Accounting Servicing Agreement, respectively.
On May 3, 2016, the Board announced the termination of its agreement with US Bancorp, effective as of March 29, 2016.
We have entered into agreements
with MidFirst Bank to be the custodian of our portfolio securities and Frontier Bank to be the custodian of the majority of our
cash and cash-equivalent assets.
Former Investment Advisory and Administrative
Services Agreement
BDCA Venture Adviser, LLC
previously served as our investment adviser and also provided us with administrative services pursuant to an Investment Advisory
and Administrative Services Agreement (the “Investment Advisory Agreement”). On October 5, 2015, our Board of Directors
approved the termination of the Investment Advisory Agreement between us and BDCA Venture Adviser effective as of December 6, 2015
(the “Termination Date”). The Investment Advisory Agreement, which was entered into on July 1, 2014, was approved by
our stockholders at the 2014 Annual Meeting of Stockholders held on June 16, 2014. All payments due under the Investment Advisory
Agreement as of the Termination Date were mutually agreed upon between us and BDCA Venture Adviser and subsequently paid by us.
Under the Investment Advisory
Agreement, we paid BDCA Venture Adviser a fee for its investment advisory services consisting of two components: (i) a base management
fee, and (ii) an incentive fee. We also reimbursed BDCA Venture Adviser for our allocable portion of overhead and other administrative
expenses incurred by it in performing its administrative obligations under the Investment Advisory Agreement
,
including our allocable portion of the compensation of our former Chief Financial Officer and Chief Compliance Officer, and their
respective staff
. See Note 4 – Related Party Agreements and Transactions – to the financial statements of this
annual report on Form 10-K for a further discussion of the fees under our former Investment Advisory Agreement and other agreements
with BDCA Venture Adviser.
Under the former Investment
Advisory Agreement, absent the willful misfeasance, bad faith or gross negligence of BDCA Venture Adviser or BDCA Venture Adviser’s
reckless disregard of its duties and obligations, we agreed to indemnify BDCA Venture Adviser (including its officers, managers,
agents, employees and members) for any damages, liabilities, costs and expenses (including reasonable attorneys’ fees and
amounts reasonably paid in settlement) arising out of BDCA Venture Adviser’s performance of its duties and obligations under
the Investment Advisory Agreement or otherwise as our investment adviser, except to the extent specified in the 1940 Act. Pursuant
to the former Investment Advisory Agreement, the indemnification provision shall remain in full force and effect, and BDCA Venture
Adviser shall remain entitled to the benefits thereof, notwithstanding termination of the Investment Advisory Agreement.
Material U.S. Federal Income Tax Considerations
From incorporation through
December 31, 2009, we were treated as a corporation under the Internal Revenue Code of 1986, as amended (the “Code”).
Effective January 1, 2010, we elected to be treated for tax purposes as a regulated investment company, or RIC, under the Code.
We have made no provision for income taxes as of December 31, 2016, 2015 and 2014. Our continued qualification as a RIC requires
that we comply with certain requirements contained in Subchapter M of the Code that may affect our ability to pursue additional
business opportunities or strategies that, if we were to determine we should pursue, could diminish the desirability of qualifying,
or impede our ability to qualify, as a RIC. For example, a RIC must meet certain requirements, including source of income and asset
diversification requirements (as described below) and distributing annually at least 90% of its investment company taxable income
(the “Annual Distribution Requirement”).
As a RIC, we generally will
not have to pay corporate-level federal income taxes on any investment company taxable income (which is generally our net ordinary
income plus the excess, if any, of realized net short-term capital gains over realized net long-term capital losses) or any realized
net capital gains (which is generally net realized long-term capital gains in excess of net realized short-term capital losses)
that we distribute to our stockholders. We will be subject to United States federal income tax at the regular corporate rates on
any investment company taxable income or capital gain not distributed (or deemed distributed) to our stockholders.
In order to qualify and continue
to qualify as a RIC for federal income tax purposes and obtain the tax benefits accorded to a RIC, in addition to satisfying the
Annual Distribution Requirement, we must, among other things:
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Have in effect at all times during each taxable year an election to be regulated as a business
development company under the 1940 Act;
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Derive in each taxable year at least 90% of our gross income from (i) dividends, interest, payments
with respect to certain securities loans, gains from the sale of stock or other securities, or other income derived with respect
to our business of investing in such stock or securities and (ii) net income derived from an interest in a “qualified publicly
traded limited partnership” (the “90% Income Test”); and
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Diversify our holdings so that at the end of each quarter of the taxable year:
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at least 50% of the value of our assets consists of cash, cash equivalents, U.S. government securities,
securities of other RICs, and other securities if such other securities of any one issuer do not represent more than 5% of the
value of our assets or more than 10% of the outstanding voting securities of such issuer; and
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no more than 25% of the value of our assets is invested in (i) securities (other than U.S. government
securities or securities of other RICs) of one issuer, (ii) securities of two or more issuers that are controlled, as determined
under applicable tax rules, by us and that are engaged in the same or similar or related trades or businesses, or (iii) securities
of one or more “qualified publicly traded partnerships” (the “Diversification Tests”).
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Provided that we satisfy the
Diversification Tests as of the close of any quarter, we will not fail the Diversification Tests as of the close of a subsequent
quarter as a consequence of a discrepancy between the value of our assets and the requirements of the Diversification Tests that
is attributable solely to fluctuations in the value of our assets. Rather, we will fail the Diversification Tests as of the end
of a subsequent quarter only if such a discrepancy existed immediately after our acquisition of any asset and was wholly or partly
the result of that acquisition. In addition, if we fail the Diversification Tests as of the end of any quarter, we will not lose
our status as a RIC if we eliminate the discrepancy within thirty days of the end of such quarter and, if we eliminate the discrepancy
within that thirty-day period, we will be treated as having satisfied the Diversification Tests as of the end of such quarter.
We satisfied the above RIC
requirements during each of the taxable years since our election to be treated as a RIC for tax purposes. Since we did not generate
investment company taxable income in any of these taxable years, we were not required to make any distributions to satisfy the
Annual Distribution Requirement. We did not generate any realized net capital gains in 2016 or 2015 and, as a result, we were not
required to make any distributions to satisfy the Excise Tax Avoidance Requirement, as described below. Because we distributed
all of our net realized capital gains for the year ended December 31, 2014, no corporate-level federal income or excise taxes were
due on such net realized capital gains. As such, we have not made any provision for federal income or excise taxes as of December
31, 2016, 2015 and 2014.
Assuming we continue to qualify
as a RIC, our corporate-level federal income tax should be substantially reduced or eliminated to the extent that we distribute
any investment company taxable income or realized net capital gains to our stockholders. However, we will pay corporate-level federal
income tax on any amount of realized net capital gain that we elect to retain. In the event we retain some or all of our realized
net capital gains, we may designate the retained amount as a deemed distribution to stockholders. In such case, among other consequences,
we will pay corporate-level tax on the retained amount, each U.S. stockholder will be required to include its share of the deemed
distribution in income as if it had been actually distributed to the U.S. stockholder, and the U.S. stockholder will be entitled
to claim a credit or refund equal to its allocable share of the corporate-level tax we pay on the retained realized net capital
gain. The amount of the deemed distribution (net of such tax credit or refund) will be added to each U.S. stockholder’s cost
basis for its common stock. In order to utilize the deemed distribution approach, we must provide written notice to our stockholders
prior to the expiration of 60 days after the close of the relevant taxable year. We cannot treat any of our investment company
taxable income as a “deemed distribution.”
As a RIC, we are also subject
to a 4% nondeductible federal excise tax on certain undistributed income unless we distribute in a timely manner an amount at least
equal to the sum of (i) 98% of our ordinary income for each calendar year, (ii) 98.2% of our capital gains in excess of capital
losses for the one-year period ending December 31 in that calendar year, and (iii) any ordinary income and realized net capital
gains for preceding years that were not distributed during such years (the “Excise Tax Avoidance Requirement”). We
will not be subject to this excise tax on amounts on which we are required to pay corporate income tax (such as retained realized
net capital gains which we designate as “undistributed capital gain” or a deemed distribution). We currently intend
to make sufficient distributions (including deemed distributions of retained realized net capital gains) each taxable year to avoid
the payment of this excise tax. We elected to calculate excise taxes related to any net capital gains on a calendar year basis
beginning with our 2012 tax returns.
The following simplified examples
illustrate the tax treatment under Subchapter M of the Code for us and our non-corporate U.S. stockholders with regard to three
possible distribution alternatives, assuming we realize, in 2016, a net capital gain of $1.00 per share, consisting entirely of
sales of non-real property assets held for more than 12 months. These illustrations exclude any additional 3.8% tax on their “net
investment income” for certain U.S. individuals.
Under Alternative A:
100% of net capital gain declared as a cash dividend and distributed to stockholders:
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No federal income taxation at the Company level.
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Taxable stockholders receive a $1.00 per share dividend and pay federal income tax at a rate not
in excess of 20% or $0.20 per share, retaining $0.80 per share.
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Non-taxable stockholders that file a federal tax return receive a $1.00 per share dividend and
pay no federal income tax, retaining $1.00 per share.
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Under Alternative
B:
100% of net capital gain retained by the Company and designated as “undistributed capital gain” or deemed dividend:
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The Company pays a corporate-level federal income tax of 35% on the undistributed gain or $0.35
per share and retains 65% of the gain or $0.65 per share.
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Taxable stockholders increase their cost basis in their stock by $0.65 per share. They are liable
for federal income tax at a rate not in excess of 20% on 100% of the undistributed gain of $1.00 per share or $0.20 per share in
tax. Offsetting this tax, stockholders receive a tax credit equal to the $0.35 per share tax paid by us, which offsets the $0.20
per share tax liability, resulting in an excess tax credit of $0.15 per share for each such stockholder.
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Non-taxable stockholders that file a federal income tax return receive a tax refund equal to $0.35
per share.
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Under Alternative
C:
100% of net capital gain retained by the Company, with no designated undistributed capital gain or deemed dividend:
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The Company pays a corporate-level federal income tax of 35% on the retained gain or $0.35 per share.
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There is no tax consequence at the stockholder level.
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We are authorized to borrow
funds and to sell assets in order to satisfy the Annual Distribution Requirement and the Excise Tax Avoidance Requirement (collectively,
the “Distribution Requirements”). Further, under the 1940 Act, we are not permitted to make distributions to our stockholders
while our debt obligations and other senior securities are outstanding unless certain “asset coverage” tests are met.
Moreover, our ability to dispose of assets to meet the Distribution Requirements may be limited by: (i) the illiquid nature of
our portfolio, or (ii) other requirements relating to our status as a RIC, including the Diversification Tests. If we dispose of
assets in order to meet the Distribution Requirements, we may make such dispositions at times that, from an investment standpoint,
are not advantageous.
A RIC is limited in its ability
to deduct expenses in excess of its investment company taxable income. If our expenses in a given year exceed investment company
taxable income (which is likely to occur since our operating expenses are expected to exceed the amount of interest or dividend
income we receive on our current portfolio company investments), we would experience a net operating loss for that year. However,
a RIC is not permitted to carry forward net operating losses to subsequent years. We may for tax purposes have aggregate taxable
income for several years that we are required to distribute and that is taxable to our stockholders even if such income is greater
than the aggregate net income we actually earned during those years. Such required distributions may be made from our cash assets
or by liquidation of investments, if necessary. We may realize gains or losses from such liquidations. In the event we realize
net capital gains from such transactions, our stockholders may receive a larger capital gain distribution than they would have
received in the absence of such transactions.
If we are unable to continue
to qualify for treatment as a RIC, we would be subject to tax on all of our taxable income at regular corporate rates. We would
not be able to deduct distributions to stockholders, nor would distributions be required to be made. Such distributions would be
taxable to our stockholders. Subject to certain limitations under the Code, corporate distributees would be eligible for the dividends
received deduction. Distributions in excess of our current and accumulated earnings and profits would be treated first as a return
of capital to the extent of the stockholder’s tax basis, and any remaining distributions would be treated as a capital gain.
If we fail to qualify as a
RIC in any taxable year, we would be required to satisfy the RIC qualification requirements in order to requalify as a RIC and
dispose of any earnings and profits from any year in which we failed to qualify as a RIC. Subject to a limited exception applicable
to RICs that qualified as such under Subchapter M of the Code for at least one year prior to disqualification and that requalify
as a RIC no later than the second year following the nonqualifying year, we could be subject to tax on any unrealized net built-in
gains in the assets held by us during the period in which we failed to qualify as a RIC that were recognized within the subsequent
10 years, unless we made a special election to pay corporate-level tax on such built-in gain at the time of our requalification
as a RIC. If we fail to satisfy the 90% Income Test or the Diversification Test described above, however, we may be able to avoid
losing our status as a RIC by timely providing notice of such failure to the IRS, curing such failure and possibly paying an additional
tax.
If we convert to a liquidating trust pursuant to the Plan, which remains subject to stockholder approval,
there could be additional federal income tax consequences to our stockholders as a result of such conversion and going forward
as a beneficiary of the liquidating trust. These potential tax consequences are discussed in detail in the
preliminary
proxy statement filed with the SEC on May 5, 2016, which was subsequently amended on June 27, 2016, and will be relevant only to
the extent stockholders vote to approve the Plan and we proceed with converting into the liquidating trust.
Regulation as a BDC
We have elected to be regulated
as a BDC under the 1940 Act. The 1940 Act requires that a majority of our directors be persons other than “interested persons,”
as that term is defined in the 1940 Act. In addition, the 1940 Act provides that we may not change the nature of our business so
as to cease to be, or to withdraw our election as, a BDC without the approval of a “majority of our outstanding voting securities,”
within the meaning of the 1940 Act.
Qualifying assets
Under the 1940 Act, a BDC
may not acquire any asset other than assets of the type listed in Section 55(a) of the 1940 Act, which are referred to here as
“qualifying assets,” unless, at the time the acquisition is made, qualifying assets represent at least 70% of the company’s
total assets (the “70% test”). The principal categories of qualifying assets relevant to our business are any of the
following:
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Securities purchased in transactions not involving any public offering from the issuer of such
securities, which issuer (subject to certain limited exceptions) is an eligible portfolio company, or from any person who is, or
has been during the preceding 13 months, an affiliated person of an eligible portfolio company, or from any other person, subject
to such rules as may be prescribed by the SEC. An eligible portfolio company is defined in the 1940 Act as any issuer which:
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is organized under the laws of, and has its principal place of business in, the United States;
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is not an investment company (other than a small business investment company wholly owned by the
BDC) or a company that would be an investment company but for certain exclusions under the 1940 Act; and
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Satisfies any of the following:
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i.
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does not have any class of securities that is traded on a national securities exchange;
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ii.
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has a class of securities listed on a national securities exchange, but has an aggregate market
value of outstanding voting and non-voting common equity of less than $250 million;
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iii.
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is controlled by a BDC or group of companies including a BDC and the BDC has an affiliated person
who is a director of the eligible portfolio company; or
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iv.
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is a small and solvent company having gross assets of not more than $4.0 million and capital and
surplus of not less than $2.0 million.
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2.
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Securities of any eligible portfolio company that we control.
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3.
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Securities purchased in a private transaction from a U.S. issuer that is not an investment company
or from an affiliated person of the issuer, or in transactions incident thereto, if the issuer is in bankruptcy and subject to
reorganization or if the issuer, immediately prior to the purchase of its securities was unable to meet its obligations as they
came due without material assistance other than conventional lending or financing arrangements.
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4.
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Securities of an eligible portfolio company purchased from any person in a private transaction
if there is no ready market for such securities and we already own 60% of the outstanding equity of the eligible portfolio company.
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5.
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Securities received in exchange for or distributed on or with respect to securities described in
(1) through (4) above, or pursuant to the exercise of warrants or rights relating to such securities.
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6.
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Cash, cash equivalents, certificates of deposit, U.S. Government securities or high-quality debt
securities maturing in one year or less from the time of investment.
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If less than 70% of our total
assets are comprised of qualifying assets, we would generally not be permitted to acquire any additional non-qualifying assets,
until such time as 70% of our then current total assets were comprised of qualifying assets. We would not be required, however,
to dispose of any non-qualifying assets in such circumstances. As of December 31, 2016, approximately 99.7% of our portfolio company
investments constituted qualifying investments under Section 55(a) of the 1940 Act.
Managerial assistance to
portfolio companies
In general, in order to count
portfolio securities as qualifying assets for the purpose of the 70% test, we must either control the issuer of the securities
or must offer to make available to the issuer of the securities (other than small and solvent companies described above) significant
managerial assistance; except that, where we purchase such securities in conjunction with one or more other persons acting together,
one of the other persons in the group may make available such managerial assistance. Making available managerial assistance means,
among other things, any arrangement whereby the BDC, through its directors, officers or employees, offers to provide, and, if requested
to, provides significant guidance and counsel concerning the management, operations or business objectives and policies of a portfolio
company.
Senior securities
We are permitted, under specified
conditions, to issue multiple classes of debt and one class of stock senior to our common stock if our asset coverage, as defined
in the 1940 Act, is at least equal to 200% immediately after each such issuance. In addition, while any senior securities remain
outstanding, we must make provisions to prohibit any distribution to our stockholders or the repurchase of such securities or shares
unless we meet the applicable asset coverage ratios at the time of the distribution or repurchase. We may also borrow amounts up
to 5% of the value of our gross assets for temporary or emergency purposes without regard to asset coverage.
We may borrow funds to make
investments, to the extent we determine that additional capital would allow us to take advantage of additional investment opportunities
or if our Board of Directors determines that leveraging our portfolio would be in our best interest and the best interests of our
stockholders.
Proxy voting policies and
procedures
We vote proxies relating to
our portfolio securities in the best interest of our stockholders. We review on a case-by-case basis each proposal submitted to
a stockholder vote to determine its impact on the portfolio securities held by us. Although we generally vote against proposals
that may have a negative impact on our portfolio securities, we may vote for such a proposal if there exists compelling long-term
reasons to do so.
Our proxy voting decisions
are made by our Board of Directors. To ensure that our vote is not the product of a conflict of interest, we require that any member
of the Board of Directors disclose to our Chief Compliance Officer any potential conflict that he is aware of and obtain the consent
of the Chief Compliance Officer prior to entering into discussion with the Board of Directors with respect to how the proxy should
be voted.
Stockholders may obtain information
regarding how we voted proxies with respect to our portfolio securities by making a written request for proxy voting information
to: Chief Executive Officer, Crossroads Capital, Inc., 128 North 13
th
Street, Suite 1100, Lincoln, Nebraska 68508.
Temporary investments
Pending investment in other
types of “qualifying assets,” as described above, our investments may consist of cash, cash equivalents, certificates
of deposit, U.S. government securities or high-quality debt securities maturing in one year or less.
Code of Ethics
We have adopted a Code of
Ethics pursuant to Rule 17j-1 under the 1940 Act that establishes procedures for personal investments and restricts certain transactions
by our personnel. Our Code of Ethics generally does not permit investments by officers and directors in securities that may be
purchased or held by us. The Code of Ethics is available on the SEC’s website at
www.sec.gov
. You may also obtain
a copy of the Code of Ethics, after paying a duplicating fee, by electronic request at the following email address: publicinfo@sec.gov,
or by writing the SEC’s Public Reference Section, 100 F Street, N.E., Washington, DC 20549. You may also obtain a copy of
our Code of Ethics on our website at
www.xroadscap.com
.
Capital Raising
We do not intend to raise
additional equity capital in the foreseeable future.
Compliance Policies and
Procedures
We have adopted and implemented
written policies and procedures reasonably designed to detect and prevent violation of the federal securities laws and are required
to review these compliance policies and procedures annually for their adequacy and the effectiveness of their implementation and
designate a Chief Compliance Officer to be responsible for administering the policies and procedures.
Sarbanes-Oxley Act
The Sarbanes-Oxley Act imposes
a wide variety of regulatory requirements on publicly-held companies and their insiders. Many of these requirements affect us.
For example:
● Pursuant to Rule
13a-14 of the Securities Exchange Act of 1934, as amended (“Exchange Act”), our Chief Executive Officer and Chief Financial
Officer must certify the accuracy of the financial statements contained in our periodic reports;
● Pursuant to Item
307 of Regulation S-K, our periodic reports must disclose our conclusions about the effectiveness of our disclosure controls and
procedures;
● Pursuant to Rule
13a-15 of the Exchange Act, our management must prepare an annual report regarding its assessment of our internal controls over
financial reporting and, if, as and when, our public float exceeds $75 million, must obtain an audit of the effectiveness of internal
controls over financial reporting performed by our independent registered public accounting firm;
● Pursuant to Item
308 of Regulation S-K and Rule 13a-15 of the Exchange Act, our periodic reports must disclose whether there were significant changes
in our internal controls over financial reporting or in other factors that could significantly affect these controls subsequent
to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses;
and
● Pursuant to Section
404 of the Sarbanes-Oxley Act and Rule 13a-15 of the Exchange Act, we are required to include in our annual report on Form 10-K
a report from our management on internal controls over financial reporting, including a statement that our management is responsible
for establishing and maintaining adequate internal control over financial reporting as well as our management’s assessment
of the effectiveness of our internal control over financial reporting.
A reporting company that is
a non-accelerated filer (with a public float below $75 million as of June 30 of the previous year) is exempt from the requirement
to obtain an audit of the effectiveness of internal controls over financial reporting performed by their auditors. Accordingly,
until such time as we have a public float in excess of $75 million, our auditors will not need to report on our management’s
assessment of our internal control over financial reporting. However, we will be required to assess the effectiveness of our internal
controls over financial reporting each year. Based on our public float at June 30, 2016, we are a non-accelerated filer for the
year ended December 31, 2016 and, thus, we are not required to obtain an audit of the effectiveness of internal controls over financial
reporting for that year.
The Sarbanes-Oxley Act requires
us to review our current policies and procedures to determine whether we comply with the Sarbanes-Oxley Act and the regulations
promulgated thereunder. We will continue to monitor our compliance with all regulations that are adopted under the Sarbanes-Oxley
Act and will take actions necessary to ensure that we are in compliance therewith.
Privacy Policy
We are committed to protecting
your privacy. This privacy notice, which is required by federal law, explains the privacy policy of Crossroads Capital, Inc. This
notice supersedes any other privacy notice you may have received from Crossroads Capital, Inc., and its terms apply both to our
current stockholders and to former stockholders as well.
We will safeguard, according
to strict standards of security and confidentiality, all information we receive about you. With regard to this information, we
maintain procedural safeguards that comply with federal standards.
Our goal is to limit the collection
and use of information about you. In certain cases, when you purchase shares of our common stock, our transfer agent collects personal
information about you, such as your name, address, Social Security number or tax identification number. This information is used
only so that we can send you annual reports, proxy statements and other information required by law, and to send you information
we believe may be of interest to you.
We do not share such information
with any non-affiliated third party except as described below:
● It is our policy
that only authorized employees of our Administrator who need to know your personal information will have access to it.
● We may disclose
stockholder-related information to companies that provide services on our behalf, such as record keeping, processing your trades,
and mailing you information. These companies are required to protect your information and use it solely for the purpose for which
they received it.
● If required by
law, we may disclose stockholder-related information in accordance with a court order or at the request of government regulators.
Only that information required by law, subpoena, or court order will be disclosed.
Other
We may also be prohibited
under the 1940 Act from knowingly participating in certain transactions with our affiliates without the prior approval of our Board
of Directors who are not interested persons and, in some cases, prior approval of the SEC.
We expect to be periodically
examined by the SEC for compliance with the 1940 Act.
We are required to provide
and maintain a bond issued by a reputable fidelity insurance company to protect us against larceny and embezzlement. Furthermore,
as a BDC, we are prohibited from protecting any director or officer against any liability to us or our stockholders arising from
willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of such person’s
office.
Available Information
We are required to file with
or submit to the SEC annual, quarterly and current reports, proxy statements and other information meeting the informational requirements
of the Exchange Act. You may inspect and copy these reports, proxy statements and other information, as well as related exhibits
and schedules, at the Public Reference Room of the SEC. You may obtain information on the operation of the Public Reference Room
by calling the SEC at (202) 551-8090. The SEC maintains an Internet site that contains reports, proxy and information statements
and other information filed electronically by us with the SEC, which are available on the SEC’s website at
www.sec.gov
.
Copies of these reports, proxy and information statements and other information may be obtained, after paying a duplicating fee,
by electronic request at the following e-mail address: publicinfo@sec.gov, or by writing the SEC’s Public Reference Section,
100 F Street, N.E., Washington, DC 20549. This information is also available free of charge by contacting us at Crossroads Capital,
Inc., 128 North 13
th
Street, Suite 1100, Lincoln, Nebraska 68508, (402) 261-5345 or on our website at
www.xroadscap.com
.
We make available free of charge on our website access to these reports, proxy and information statements and other information
as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Information contained
on our website is not incorporated by reference into this annual report on Form 10-K and you should not consider information contained
on our website to be part of this annual report on Form 10-K.
Item 1A. Risk Factors
Our Investment Objective was
approved by our Board of Directors on January 20, 2016 and as of March 25, 2016, our Board has resolved to monetize our portfolio
holdings at the earliest practicable date in furtherance of our Investment Objective. Our Investment Objective and existing portfolio
involve a number of significant risks discussed below. Additional risks and uncertainties not presently known to us might also
impair our operations and performance. If any of the following events occur, our business, financial condition and results of operations
could be materially and adversely affected. In such case, our net asset value and the trading price of our common stock could decline,
and you may lose all or part of your investment in our common stock.
Risks Related to our Investment Objective
There can be no guarantee
that we will proceed with the Plan of Liquidation and, if we do, that stockholders will realize the current fair values of our
portfolio investments.
On March 25, 2016, our Board
of Directors resolved to monetize the Company’s portfolio holdings at the earliest practicable date and on May 3, 2016 approved
a Plan of Liquidation, or the Plan, pursuant to which the Company would convert into a liquidating trust with the sole purpose
of liquidating the Company’s assets and distributing the proceeds to the Company’s stockholders. The Plan is subject
to the approval of the stockholders, which the Board would seek at a special meeting called for the purpose of approving the Plan
and certain related matters as detailed in the preliminary proxy statement filed with the U.S. Securities and Exchange Commission,
or the SEC, on May 5, 2016, which was subsequently amended on June 27, 2016.
If we fail to implement the
Plan, we may remain subject to regulation under the Investment Company Act of 1940 as a business development company and therefore
continue to incur significant general and administrative expenses in order to comply with such regulation. Even if our stockholders
approve the Plan and it is implemented by us, we cannot estimate the expected proceeds that the liquidating trust could realize
from the monetization of our portfolio investments pursuant to the Plan or the expected proceeds, if any, from the sale of our
investments and it is possible that the final liquidation value or the proceeds received from the sale of our portfolio investments
may be less than the value or proceeds an investor might receive from pursuing a strategy of holding such investments through any
potential initial public offering or other sale or liquidity event. It is possible that we will experience substantial differences
in the exit prices ultimately achieved by the liquidating trust on our portfolio investments as compared to the respective current
fair values.
We continue to evaluate
and consider strategic alternatives to the Plan.
Although we have adopted the
Plan, our Board of Directors continues to evaluate and consider potential strategic alternatives to best implement our Investment
Objective to monetize our portfolio holdings at the earliest practicable date, which may include transactions such as a sale, a
merger with another party or another strategic transaction involving some or all of our assets. There can be no assurance that
the evaluation of strategic alternatives will result in the identification or consummation of any transaction. In addition, we
may incur substantial expenses associated with identifying and evaluating potential strategic alternatives. We also cannot assure
that any potential transaction, if identified, evaluated and consummated, will provide greater value to our stockholders than that
reflected in our current stock price. Any potential transaction would be dependent upon a number of factors that may be beyond
our control, including, among other factors, market conditions, industry trends, the interest of third parties in our business
and the availability of financing to potential buyers on reasonable terms.
Our expenses will increase
as a percentage of our net assets and we may be unable to achieve the economies of scale we believe are necessary to provide our
stockholders with maximum distributions.
Because we intend to seek
to monetize our existing investments and make distributions from the proceeds thereof rather than make investments in new portfolio
companies, our net assets will decline and operating expenses will increase as a percentage of our net assets. We must bear certain
fixed expenses, such as certain administrative, governance, regulatory and compliance costs that do not generally vary based on
our size. As a public company, we incur legal, accounting and other expenses, including costs associated with the periodic reporting
requirements applicable to a company whose securities are registered under the Exchange Act, as well as additional corporate governance
requirements, including requirements under the Sarbanes-Oxley Act, and other rules implemented by the SEC, that do not generally
vary based on our total assets. Although the Plan is intended to reduce such expenses, and we expect it would do so, there is no
guarantee that the Plan will result in the intended reduction of expenses and we anticipate the liquidating trust would continue
to incur legal, accounting and other expenses in connection with the liquidation of its assets.
Because the equity investments
in our current portfolio do not generate current income, and because we intend to distribute 100% of our net realized capital gains
on at least an annual basis, our operating expenses have historically caused a steady decline in, and depletion of, our net assets.
This depletion of net assets will continue for the foreseeable future.
The disposition of our
portfolio investments will be offset by operating expenses and subject to contingent liabilities.
Any amounts we will be able
to distribute to our stockholders from the sale or other monetization of our portfolio investments, whether pursuant to the Plan,
a strategic alternative or other transaction in connection with our Investment Objective, will be reduced by our operating expenses
and may result in losses and no distributions for an extended period of time. In addition, any disposition of our portfolio investments
that involves private securities may require us to make representations about the business and financial affairs of the portfolio
company typical of those made in connection with the sale of a business. We may also be required to indemnify the purchasers of
such investment to the extent any such representations turn out to be inaccurate or with respect to potential liabilities. These
arrangements may result in contingent liabilities, that ultimately may result in funding obligations that we must satisfy through
return of distributions previously made.
The recent change to
our Investment Objective, including the monetization of our portfolio holdings, could significantly impact the value of our investments
and the amounts realized upon the sale of our investments.
As discussed above, on March
25, 2016, our Board of Directors resolved to monetize our portfolio holdings at the earliest practicable date. Previously, on January
20, 2016, our Board of Directors changed our Investment Objective to preserve capital and maximize stockholder value by pursuing
the sale of our portfolio investments, limiting expenses and deploying surplus cash as appropriate, including into yielding investments
to offset, in part, operating expenses, but resolved on March 25, 2016 to fulfill that Investment Objective by monetizing our portfolio
holdings at the earliest practicable date in recognition that the monetization of our current holdings under our prior policies
and investment objective could take three to five years or more and the amounts realized may be less than current fair values.
This resolution, together
with uncertainty in financial markets in 2016 and early 2017, makes our investment portfolio susceptible to the risk that near-term
sales could result in amounts realized being less than the fair values determined as of December 31, 2016, as we actively seek
to sell our investments, either individually or in groups, it is possible that we will experience substantial differences in the
exit prices ultimately achieved on our portfolio holdings as compared to the respective fair values as of December 31, 2016. Such
values were determined consistent with our disclosed policies and procedures, and the methodologies included therein, and which
were based on the concept of an orderly transaction in accordance with Financial Accounting Standards Board (“FASB”),
Accounting Standards Codification Topic 820, “Fair Value Measurement and Disclosures,” (“ASC 820”).
We may have difficulty
monetizing assets, which could have an adverse impact on our operating results as well as our ability to make distributions.
As we work to monetize our
portfolio company holdings pursuant to our Investment Objective, we may be unable to monetize assets in a challenging market environment
that may preclude buyers from purchasing our portfolio investments at the fair values established by our Board of Directors. We
are susceptible to the risk of significant loss if we are forced to discount the value of our investments in order to monetize
assets to provide liquidity to fund operations. In addition, we may be unable to monetize assets in the relatively near future
and we will not be able to sell a portfolio investment if it results in our failure to maintain BDC status. Some assets may take
years to monetize, which could result in increased costs to us during such period and adversely affect our financial condition,
business and results of operations, as well as our ability to make distributions. Moreover, there may be limited opportunities
for us or, if our stockholders approve the Plan, the liquidating trust to sell our interests in existing private portfolio companies
to third parties in privately negotiated transactions. There can be no assurance that the prices we or the liquidating trust realize
for our portfolio company holdings will be equal to or more than their current fair values. Accordingly, it is possible that an
orderly monetization of our current holdings, either directly by us or by the liquidating trust pursuant to the Plan, may take
three to five years or more and the amounts realized may be less than current fair values.
A lack of IPO or strategic
sale/merger opportunities may cause our existing portfolio companies to stay in our portfolio longer, leading to lower returns,
unrealized depreciation, or realized losses on our pre-IPO equity investments.
A typical “liquidity
event” for our pre-IPO equity investments may be an IPO or a strategic sale/merger. We currently hold investments in ten
private portfolio companies which were made under our former pre-IPO investment strategy. A lack of IPO or strategic sale/merger
opportunities for our pre-IPO equity investments could lead to companies remaining in our portfolio as private entities still requiring
funding. This situation could lead to unrealized depreciation and realized losses as some companies run short of cash and have
to accept lower valuations in private financings or are not able to access additional capital at all, cease business activities
or enter a bankruptcy proceeding. A lack of IPO or strategic sale/merger opportunities for our pre-IPO equity investments could
also cause some financial sponsors to change their strategies, leading some of them to reduce funding of their portfolio companies
and making it more difficult for such companies to access capital and to fulfill their potential, which can result in unrealized
depreciation and realized losses in such companies by other capital providers including us. In the event our existing portfolio
companies experience a delay in completing an IPO or strategic sale/merger or we are unable to generate capital gains on the disposition
of our pre-IPO equity investments either following our contractual lock-up period in the case of an IPO or upon a strategic sale/merger,
we may have no or limited capital gains from which to make distributions to our stockholders.
Because the pre-IPO portfolio
company equity securities that we acquired under our former investment strategy are typically illiquid until an IPO or sale/merger
of the company, we generally cannot predict the regularity and time periods between sales of these equity investments and the realizations
of capital gains, if any, from such sales. Since we do not expect to generate current income from our pre-IPO portfolio company
equity investments, our annual operating expenses will be financed primarily from our capital base during periods of time between
realizations of capital gains on our equity existing investments.
Risks Related to Existing Investments
There will be uncertainty
as to the value of our portfolio investments.
As of December 31, 2016, all
of our portfolio investments were in the form of securities that are not publicly traded. The fair value of securities and other
investments that are not publicly traded may not be readily determinable. We expect to value these securities on a quarterly basis
in accordance with our valuation policy, which is at all times consistent with GAAP. Our Board of Directors has utilized the services
of the Administrator and a third-party valuation firm to aid it in determining the fair value of these securities. Our Board of
Directors will discuss valuations and determine the fair value in good faith based on the input of our Administrator and the respective
third-party valuation firm, if any. The factors that may be considered in fair value pricing our investments include the nature
and realizable value of any collateral, the portfolio company’s ability to make payments and its earnings, the markets in
which the portfolio company does business, comparisons to publicly traded companies, discounted cash flow and other relevant factors.
Because such valuations, and particularly valuations of private securities and private companies, are inherently uncertain, may
fluctuate over short periods of time and may be based on estimates, our determinations of fair value may differ materially from
the values that would have been used if a ready market for these securities existed. Our net asset value could be adversely affected
if our determinations regarding the fair value of our investments were materially higher or lower than the amounts that we ultimately
realize upon the disposal of such securities.
Our portfolio companies
are subject to many risks, including volatility, intense competition, current operating losses, shortened product life cycles and
periodic downturns.
Our portfolio companies consist
primarily of investments in Growth Companies in industries that our former investment adviser believed were poised to grow at above-average
rates relative to other sectors, which may have relatively limited operating histories and may be particularly vulnerable to U.S.
and foreign economic downturns. Many of these companies have narrow product lines and small market shares, compared to larger established
publicly owned firms, which tend to render them more vulnerable to competitors’ actions and market conditions, as well as
general economic downturns. Most of these portfolio companies experience operating losses, which may be substantial, and there
can be no assurance when or if such companies will operate at a profit. Many of the companies targeted for investment had more
limited access to capital and higher funding costs, will have a weaker financial position and will need additional capital to expand
or complete their business plans. They may face intense competition, including from larger, more established companies with greater
financial, technical and marketing resources. These companies generally have less predictable operating results, may from time
to time be parties to litigation, may be engaged in rapidly changing businesses with products subject to a substantial risk of
obsolescence, and require substantial additional capital to support their operations, finance expansion or maintain their competitive
position. The revenues, income (or losses) and valuations of these companies can and often do fluctuate suddenly and dramatically.
For these reasons, our portfolio companies, if rated by one or more ratings agencies, would typically be rated below “investment
grade,” which refers to securities rated by ratings agencies below the four highest rating categories. In addition, the growth
industries that were targeted under the former investment strategy including, but not limited to, technology, healthcare, life
sciences and energy, are generally characterized by abrupt business cycles and intense competition, and the competitive environment
can change abruptly due to rapidly evolving technology. Therefore, these portfolio companies may face considerably more risk than
companies in other industry sectors. Accordingly, these factors could impair their cash flow or result in other events, such as
bankruptcy, which could limit their ability to repay their obligations to us and may materially adversely affect the return on,
or the recovery of, our investments in these businesses.
Because of rapid technological
change, the average selling prices of products and some services provided by our portfolio companies may decrease with corresponding
rapid speed over their productive lives. These decreases could adversely affect their operating results and cash flow, their ability
to meet obligations under their debt securities and the value of their equity securities. This could, in turn, materially adversely
affect our business, financial condition and results of operations.
Our investments in private
Growth Companies present certain challenges, including the lack of available information about these companies, a dependence on
the talents and efforts of only a few key personnel at a given portfolio company, a lack of a diversified product line, a dependence
on several key customers and a greater vulnerability to economic downturns.
Under our former investment
strategy, investments were made in private Growth Companies across various stages of development. Generally, at the time of these
investments, there was little publicly available information about these businesses since they are primarily privately owned. Therefore,
although our former investment adviser performed due diligence investigations on these portfolio companies, their operations and
their prospects, we may not have learned all of the material information we needed to know regarding these businesses prior to
making our investments. At the time of our investments, we typically only had access to the portfolio company’s actual financial
results as of and for the most recent quarter end or, in certain cases, the quarter end preceding the most recent quarter end.
In addition, we typically relied on financial statements from a prior year-end which have not been audited. There can be no assurance
that the information that we obtained with respect to any investment was reliable. If we were unable to uncover all material information
about these companies, we may not have made a fully informed investment decision, and we may lose money on our investments. Also,
privately held companies frequently have less diverse product lines, dependence on a few key customers and a smaller market presence
than larger competitors. Thus, they are generally more vulnerable to economic downturns and a dependence on a few key sources of
revenue and may experience substantial variations in operating results. These factors could affect our investment returns.
In addition, our success depends,
in large part, upon the abilities of the key management personnel of our portfolio companies, who are responsible for the day-to-day
operations of our portfolio companies. Competition for qualified personnel is intense at any stage of a company’s development,
particularly so in the growth industries in which we hold investments. The loss of one or more key managers can hinder or delay
a company’s implementation of its business plan and harm its financial condition. Our portfolio companies may not be able
to attract and retain qualified managers and personnel. Any inability to do so may negatively affect our investment returns.
Our failure to make
follow-on equity investments in our portfolio companies could impair the value of our equity portfolio and may result in significant
dilution of the value of our investment.
Often during a growth company’s
life cycle, an additional or “follow-on” equity investment is required to fully realize the value to be created by
the portfolio company. Following an initial equity investment in a portfolio company in accordance with our new Investment Objective
we may make such “follow-on” equity investments, in order to attempt to preserve or enhance the value of our initial
equity investment. We may elect not to make these follow-on investments or otherwise lack sufficient funds to make those investments.
We will have the discretion to make any follow-on investments, subject to the availability of capital resources. The failure to
make follow-on equity investments may, in some circumstances, jeopardize the continued viability of a portfolio company, result
in a diminished current value, impair the ability or likelihood for a full recovery of the value of our initial equity investment,
result in a default under any outstanding debt investment with the portfolio company, or result in a missed opportunity for us
to maintain or increase our equity participation in a successful operation. In addition, the seniority and protections provided
in our equity investments may be diminished if a portfolio company issues more senior securities in a subsequent equity financing
round. Even if we have sufficient capital to make a desired follow-on equity investment, we may elect not to make such follow-on
investment because we do not want to increase our concentration of risk in that portfolio company, we prefer other opportunities,
we are subject to BDC requirements that would prevent or limit such follow-on investment or the follow-on investment would affect
our qualification as a RIC, particularly the RIC diversification requirements.
The lack of liquidity
in our debt and equity investments may adversely affect our business, and as we seek to sell our investments, we may not be able
to do so at a favorable price, if at all. As a result, we may suffer losses.
Under our former investment
strategy, investments were made primarily in companies whose securities were not publicly traded, and whose securities may be currently
subject to legal and other restrictions on resale or are otherwise less liquid than publicly traded securities. The illiquidity
of our debt and equity investments may make it difficult for us to sell these investments when desired, if at all, and meet our
Investment Objective, and may result in substantial differences in the exit prices ultimately achieved on our portfolio holdings
as compared to the respective fair values as of December 31, 2016. We may also face other restrictions on our ability to liquidate
an investment in a publicly traded portfolio company to the extent that we possess material non-public information regarding the
portfolio company or during the underwriters’ customary 180-day lockup period following an IPO. Because our investments are
typically illiquid, we may be unable to dispose of them, in which case we could fail to qualify as a RIC or BDC, or we may not
be able to dispose of them at favorable prices, and as a result, we may suffer losses.
Our existing investments
may become concentrated in certain industries and in a limited number of companies, which subjects us to the risk of significant
loss if any of the industry sectors experience a downturn.
We currently hold investments
in 10 portfolio companies and do not expect to make investments in additional portfolio companies. As a consequence of this limited
number of investments, the aggregate returns we realize may be significantly adversely affected if a small number of investments
perform poorly or if we need to write down the value of any one investment. Beyond the asset diversification requirements to which
we will be subject as a RIC, we do not have fixed guidelines for diversification or limitations on the size of our investments
in any one portfolio company and our investments could be concentrated in relatively few issuers. In addition, our portfolio primarily
consists of Growth Companies, including those in technology, healthcare, life sciences, energy and other industries with above-average
rates of growth, at various stages of development. As a result, a downturn in industry sectors and particularly those in which
we are heavily concentrated could materially adversely affect our financial condition.
Our financial results
could be negatively affected if a significant portfolio investment fails to perform as expected.
Our total investment in companies
may be significant individually or in the aggregate. As a result, if a significant investment in one or more companies fails to
perform as expected, our financial results could be more negatively affected and the magnitude of the loss could be more significant
than if we had made smaller investments in more companies.
We cannot assure you that
any of our investments in our portfolio companies will be successful. There can be no assurance as to the levels of defaults or
recoveries that may be experienced on our debt investments. The secured and unsecured debt in which we invest may be issued by
companies with limited financial resources and limited access to alternative financing. Issuers of debt may be unable to meet their
obligations under their debt securities that we hold. Such developments may be accompanied by deterioration in the value of collateral,
if any, backing our investments. Moreover, as we monetize our investments, the remaining investments will represent a larger percentage
of our assets and a failure of one of such investments to perform will have a greater impact on our financial results. This could
lead to a decline in value of our debt investments, which could result in a decline in our net earnings and NAV. We may lose our
entire investment in any or all of our portfolio companies.
Most of our portfolio
companies will need additional capital, which may not be readily available.
Most of the portfolio companies
targeted under our former investment strategy may have limited financial resources and typically require substantial additional
financing to satisfy their continuing working capital and other capital requirements. We cannot predict the circumstances or market
conditions under which these portfolio companies will seek additional capital. Each round of institutional equity financing is
typically intended to provide a company with only enough capital to reach the next stage of development. It is possible that one
or more of our portfolio companies will not be able to raise additional financing or may be able to do so only at a price or on
terms that are unfavorable to the portfolio company, either of which would negatively impact our investment returns. Some of these
companies may be unable to obtain sufficient financing from any provider of capital under any terms, thereby requiring these companies
to cease or curtail business operations. Accordingly, investments in these types of companies generally entails a higher risk of
loss than investments in companies that do not have significant incremental capital raising requirements.
Portfolio companies
that do not have venture capital or private equity firms as financial sponsors may entail a higher risk of loss than do companies
with institutional equity investors, which could increase the risk of loss of your investment.
Portfolio companies that do
not have venture capital or private equity investors as financial sponsors
,
including certain of our portfolio investments,
may be unable to raise any additional capital to satisfy their obligations or to raise sufficient additional capital to reach the
next stage of development. Portfolio companies that do not have financial sponsors may be less financially sophisticated and may
not have access to independent members to serve on their boards, which means that they may be less successful than portfolio companies
sponsored by venture capital or private equity firms. Accordingly, investments in these types of companies may entail a higher
risk of loss than would financing companies that have a financial sponsor.
If our portfolio companies
are unable to commercialize their technologies, products, business concepts or services, the returns on our debt and equity investments
could be adversely affected.
The value of our debt and
equity investments in our portfolio companies may decline if our portfolio companies are not able to commercialize their technology,
products, business concepts or services. Additionally, although some of our portfolio companies may already have a commercially
successful product or product line at the time of our investment, technology-related products and services often have a more limited
market or life span than products in other industries. Thus, the ultimate success of these companies often depends on their ability
to innovate continually in increasingly competitive markets. If they are unable to do so, our investment returns could be adversely
affected, and their ability to service their debt obligations to us over the life of a loan could be impaired. Our portfolio companies
may be unable to acquire or develop successful new technologies and the intellectual property they currently hold may not remain
viable. Even if our portfolio companies are able to develop commercially viable products, the market for new products and services
is highly competitive and rapidly changing. Neither our portfolio companies nor we have any control over the pace of technology
development. Commercial success is difficult to predict, and the marketing efforts of our portfolio companies may not be successful.
If our portfolio companies
are unable to protect their intellectual property rights, our business and prospects could be harmed, and if portfolio companies
are required to devote significant resources to protecting their intellectual property rights, the value of our investment could
be reduced.
Our future success and competitive
position depends in part upon the ability of our portfolio companies to obtain, maintain and protect proprietary technology used
in their products and services. The intellectual property held by our portfolio companies often represents a substantial portion
of the collateral securing our debt investments or constitutes a significant portion of the portfolio companies’ value that
may be available in a downside scenario to repay our secured debt investments. Our portfolio companies rely, in part, on patent,
trade secret and trademark law to protect that technology, but competitors may misappropriate their intellectual property, and
disputes as to ownership of intellectual property may arise. Portfolio companies may, from time to time, be required to institute
litigation to enforce their patents, copyrights or other intellectual property rights, protect their trade secrets, determine the
validity and scope of the proprietary rights of others or defend against claims of infringement. Such litigation could result in
substantial costs and diversion of resources. Similarly, if a portfolio company is found to infringe or misappropriate a third
party’s patent or other proprietary rights, it could be required to pay damages to the third party, alter its products or
processes, obtain a license from the third party or cease activities utilizing the proprietary rights, including making or selling
products utilizing the proprietary rights. Any of the foregoing events could negatively affect both the portfolio company’s
ability to service our debt investment and the value of any related debt and equity securities that we own, as well as the value
of any collateral securing our investment.
Our investments in technology
companies are subject to many risks, including regulatory concerns, litigation risks and intense competition.
Investments in technology
companies are subject to substantial risks. For example, our portfolio companies face intense competition since their businesses
are rapidly evolving, intensely competitive and subject to changing technology, shifting user needs and frequent introductions
of new products and services. Potential competitors to our portfolio companies in the technology industry range from large and
established companies to emerging start-ups. Further, such companies are subject to laws that were adopted prior to the advent
of the Internet and related technologies and, as a result, may not contemplate or address the unique issues of the Internet and
related technologies. The laws that do reference the Internet are being interpreted by the courts, but their applicability and
scope remain uncertain. Claims have been threatened and filed under both U.S. and foreign laws for defamation, invasion of privacy
and other tort claims, unlawful activity, copyright and trademark infringement, or other theories based on the nature and content
of the materials searched and the ads posted by a company’s users, a company’s products and services, or content generated
by a company’s users. Further, the growth of technology companies into a variety of new fields implicate a variety of new
regulatory issues and may subject such companies to increased regulatory scrutiny, particularly in the U.S. and Europe. Any of
these factors could materially and adversely affect the operations of a portfolio company in the technology industry and, in turn,
impair our ability to timely collect principal and interest payments owed to us or adversely affect the value of these portfolio
companies.
Our investments in life
sciences companies are subject to numerous risks, including competition, extensive government regulation, product liability and
commercial difficulties.
Our investments in companies
in the life sciences industries, including biotechnology, pharmaceuticals and medical device companies are subject to numerous
risks. The successful and timely implementation of the business model of our biotechnology, pharmaceutical and medical device portfolio
companies depends on their ability to adapt to changing technologies and introduce new products. As competitors continue to introduce
competitive products, the development and acquisition of innovative products and technologies that improve efficacy, safety, patient’s
and clinician’s ease of use and cost-effectiveness are important to the success of such portfolio companies. Moreover, there
may be a limited number of suppliers to provide necessary components or a limited number of manufacturers for their products, creating
a risk of disruption to the manufacturing process if they are unable to find alternative suppliers when needed. The success of
new product offerings will depend on many factors, including the ability to properly anticipate and satisfy customer needs, obtain
regulatory approvals on a timely basis, develop and manufacture products in an economic and timely manner, obtain or maintain advantageous
positions with respect to intellectual property, and differentiate products from those of competitors. Failure by our portfolio
companies to introduce planned products or other new products or to introduce products on schedule could have a material adverse
effect on our business, financial condition and results of operations.
Further, the development of
products by biotechnology, pharmaceutical and medical device companies requires significant research and development, clinical
trials and regulatory approvals. The results of product development efforts may be affected by a number of factors, including the
ability to innovate, develop and manufacture new products, complete clinical trials, obtain regulatory approvals and reimbursement
in the U.S. and abroad, or gain and maintain market approval of products. In addition, regulatory review processes by U.S. and
foreign agencies may extend longer than anticipated as a result of decreased funding and tighter fiscal budgets. Further, patents
attained by others can preclude or delay the commercialization of a product. There can be no assurance that any products now in
development will achieve technological feasibility, obtain regulatory approval, or gain market acceptance. Failure can occur at
any point in the development process, including after significant funds have been invested. Products may fail to reach the market
or may have only limited commercial success because of efficacy or safety concerns, failure to achieve positive clinical outcomes,
inability to obtain necessary regulatory approvals, failure to achieve market adoption, limited scope of approved uses, excessive
costs to manufacture, the failure to establish or maintain intellectual property rights, or the infringement of intellectual property
rights of others. Moreover, even if products reach the market, they will continue to be subject to extensive regulation by the
Food and Drug Administration and other federal, state and foreign agencies, and failure to comply with applicable regulations can
result in significant penalties and claims that could materially and adversely affect their operations.
Changes in healthcare
laws and other regulations applicable to some of our portfolio companies’ businesses may constrain their ability to offer
their products and services.
Changes in healthcare or other
laws and regulations applicable to the businesses of some of our portfolio companies may occur that could increase their compliance
and other costs of doing business, require significant systems enhancements, or render their products or services less profitable
or obsolete, any of which could have a material adverse effect on their results of operations. In recent years in the United States
there have been and will likely continue to be a number of legislative and regulatory changes regarding the healthcare system.
For example, the Patient Protection and Affordable Care Act (the “ACA”), enacted in March 2010, introduced significant
changes to how healthcare is financed by both governmental and private insurers. Some of the provisions of the ACA have yet to
be fully implemented, while certain provisions have been subject to judicial and Congressional challenges. Furthermore, in January
2017, Congress voted to adopt a budget resolution for fiscal year 2017 that is widely viewed as the first step toward the passage
of legislation that would repeal certain aspects of the ACA. The President of the United States also signed an Executive Order
on January 20, 2017, directing federal agencies with authority and responsibilities under the ACA to waive, defer, grant exemptions
from, or delay the implementation of any provision of the ACA that would impose a fiscal burden on states or a cost, fee, tax,
penalty or regulatory burden on individuals, healthcare providers, health insurers or manufacturers of pharmaceuticals or medical
devices. Congress has also announced its intent to consider subsequent legislation to replace elements of the ACA. Thus, the full
impact of the ACA and of the uncertainty related the future legal and regulatory environment for healthcare in the United States
on the businesses of some of our portfolio companies remains unclear. We cannot predict what healthcare reform initiatives may
be adopted in the future and such reforms could have an adverse effect on the operations of certain of our portfolio companies
and, in turn, adversely impact the value of these portfolio companies.
Our investments in the
energy and energy-related technology industries are subject to many risks, including volatility, intense competition, unproven
technologies, periodic downturns, loss of government subsidies and incentives, and potential litigation.
Our investments in energy
and energy-related technology companies are subject to substantial operational risks, such as underestimated cost projections,
unanticipated operation and maintenance expenses, loss of government subsidies, and inability to deliver cost-effective alternative
energy solutions compared to traditional energy products. In addition, energy companies employ a variety of means of increasing
cash flow, including increasing utilization of existing facilities, expanding operations through new construction or acquisitions,
or securing additional long-term contracts. Thus, energy and energy-related companies in our portfolio may be subject to construction
risk, acquisition risk or other risks arising from their specific business strategies. Furthermore, production levels for solar,
wind and other renewable energies may be dependent upon adequate sunlight, wind, or biogas production, which can vary from market
to market and period to period, resulting in volatility in production levels and profitability. In addition, our energy companies
may have narrow product lines and small market shares, which tend to render them more vulnerable to competitors’ actions
and market conditions, as well as to general economic downturns. Moreover, there may be a limited number of suppliers to provide
necessary components or a limited number of manufacturers for their products, creating a risk of disruption to the manufacturing
process if they are unable to find alternative suppliers when needed. The revenues, income (or losses) and valuations of energy
and energy-related technology companies can and often do fluctuate suddenly and dramatically and the markets in which these companies
operate are generally characterized by abrupt business cycles and intense competition.
Demand for energy technology
and renewable energy is also influenced by the available supply and prices for other energy products, such as coal, oil and natural
gases. A change in prices in these energy products, such as a substantial or extended decline in oil and natural gas prices, could
reduce demand for alternative energy. Furthermore, some of our portfolio companies are heavily dependent upon the demand for oil
and natural gas, and a prolonged or continued decline in oil and natural gas prices could have a material adverse effect on the
business, financial condition and results of operations of these portfolio companies and may impair their ability to meet capital
expenditure obligations and financial commitments. Our investments in energy companies also face potential litigation, including
significant warranty and product liability claims, as well as class action and government claims arising from business failures
of companies supported government subsidies. Such litigation could adversely affect the business and results of operations of our
energy portfolio companies. There is also particular uncertainty about whether agreements providing government incentives and subsidies
for reductions in greenhouse gas emissions, such as the Kyoto Protocol and the Paris Agreement, will continue and whether countries
around the world will enact or maintain legislation that provides such incentives and subsidies for reductions in greenhouse gas
emissions, without which such investments in energy technology dependent portfolio companies may not be economical or financing
for such projects may become unavailable. As a result, these portfolio company investments face considerable risk, including the
risk that favorable regulatory regimes or government subsidies and incentives expire or are adversely modified. Any of these factors
could materially and adversely affect the operations of a portfolio company in the energy and energy-related technology industries
and, in turn, impair our ability to timely collect principal and interest payments owed to us and adversely affect the value of
these portfolio companies.
Our investments in obligations
of non-U.S. obligors, involve certain risks related to regional economic conditions and risks not normally associated with investments
in the obligations of sovereign and corporate obligors located in the United States.
Investments in the obligations
of non-U.S. obligors involve certain special risks related to regional economic conditions and sovereign risks which are not normally
associated with investments in the obligations of sovereign and corporate obligors located in the U.S. We are unable to provide
any information regarding the specific risks associated with purchasing a loan, a participation interest or an investment governed
by a law other than those of a U.S. jurisdiction. These risks may include and economic uncertainty, fluctuations of currency exchange
rates, lower levels of disclosure and regulation in foreign securities markets, confiscatory taxation, taxation of income earned
in foreign nations or other taxes or restrictions imposed with respect to investments in foreign nations, foreign exchange controls
(which may include suspension of the ability to transfer currency from a given country and repatriation of investments) and uncertainties
as to the status, interpretation and application of laws including, but not limited to those relating to insolvency. In addition,
there is often less publicly available information about non-U.S. obligors than about sovereign and corporate obligors in the U.S.
Sovereign and corporate obligors in countries other than the U.S. may not be subject to uniform accounting, auditing and financial
reporting standards, and auditing practices and requirements for both foreign public and private obligors may not be comparable
to those applicable to U.S. companies. It also may be difficult to obtain and enforce a judgment relating to investments issued
by a non-U.S. obligor in a court outside the U.S.
We generally do not
control our portfolio companies.
We generally do not control
our portfolio companies, even though we may have board representation or board observation rights in some cases. As a result, we
are subject to the risk that a portfolio company in which we invest may make business decisions with which we disagree and the
management of such company may take risks or otherwise act in ways that do not serve our interests. Due to the lack of liquidity
for our investments in privately held companies, we may not be able to dispose of our interests in our portfolio companies as readily
as we would like or at an appropriate valuation. As a result, a portfolio company may make decisions that could decrease the value
of our portfolio holdings.
Defaults by our portfolio
companies will harm our operating results.
A portfolio company’s
failure to satisfy financial or operating covenants imposed by us or other lenders could lead to defaults and, potentially, termination
of its loans and foreclosure on its secured assets, which could trigger cross-defaults under other agreements and jeopardize a
portfolio company’s ability to meet its obligations under the debt or equity securities that we hold. We may incur expenses
to the extent necessary to seek recovery upon default or to negotiate new terms, which may include the waiver of certain financial
covenants, with a defaulting portfolio company.
We hold the debt and
equity securities of companies that may enter into bankruptcy proceedings.
One or more of our portfolio
companies may experience bankruptcy or similar financial distress. The bankruptcy process has a number of significant inherent
risks. Many events in a bankruptcy proceeding are the product of contested matters and adversary proceedings and are beyond the
control of the creditors. A bankruptcy filing by a borrower may adversely and permanently affect the borrower. If the proceeding
is converted to a liquidation, the value of the borrower may not equal the liquidation value that was believed to exist at the
time of the investment. The duration of a bankruptcy proceeding is also difficult to predict, and a creditor’s return on
investment can be adversely affected by delays until the plan of reorganization or liquidation ultimately becomes effective. The
administrative costs of a bankruptcy proceeding are frequently high and would be paid out of the debtor’s estate prior to
any return to creditors. Because the standards for classification of claims under bankruptcy law are vague, our influence with
respect to the class of securities or other obligations we own may be lost by increases in the number and amount of claims in the
same class or by different classification and treatment. In the early stages of the bankruptcy process, it is often difficult to
estimate the extent of, or even to identify, any contingent claims that might be made. In addition, certain claims that have priority
by law (for example, claims for taxes) may be substantial.
Any unrealized depreciation
we experience on our debt and equity investments may be an indication of future realized losses, which could reduce amounts available
for distribution.
As a BDC, we are required
to carry our debt and equity investments at fair value, which shall be the market value of our investments or, if no market value
is ascertainable, at the fair value as determined in good faith pursuant to procedures approved by our board of directors in accordance
with our valuation policy. We are not permitted to maintain a reserve for loan losses. Decreases in the fair values of our debt
and equity investments are recorded as unrealized depreciation. Any unrealized depreciation in our debt or equity portfolio could
be an indication of a portfolio company’s inability to meet its repayment obligations to us and the potential future decline
in the value of our investments. This could result in realized losses in the future and ultimately reduces our gains available
for distribution in future periods.
While substantially all of
our debt and equity investments are not publicly traded, applicable accounting standards require us to assume as part of our valuation
process that our investments are sold in a principal market to market participants (even if we plan on holding an investment through
its maturity). As a result, volatility in the capital markets can also adversely affect our investment valuations.
As part of the valuation process,
we may take into account the following types of factors, if relevant, in determining the fair value of our debt and equity investments:
the enterprise value of a portfolio company (an estimate of the total fair value of the portfolio company’s debt and equity),
the nature and realizable value of any collateral, the portfolio company’s ability to make payments and its earnings and
discounted cash flow, the markets in which the portfolio company does business, a comparison of the portfolio company’s securities
to similar publicly traded securities, changes in the interest rate environment and the credit markets generally that may affect
the price at which similar investments may be made in the future and other relevant factors. When an external event such as a purchase
transaction, public offering or subsequent equity sale occurs, we use the pricing indicated by the external event to corroborate
our valuation. While substantially all of our debt and equity investments are not publicly traded, applicable accounting standards
require us to assume as part of our valuation process that our investments are sold in a principal market to market participants
(even if we plan on holding an investment through its maturity). As a result, volatility in the capital markets can also adversely
affect our investment valuations.
We may participate on
creditors’ committees to negotiate the management of financially troubled companies.
We may (through an agent)
participate on committees formed by creditors to negotiate the management of financially troubled companies that may or may not
be in bankruptcy or we may seek to negotiate directly with the debtors with respect to restructuring issues. If we do join a creditors’
committee, the participants of the committee would be interested in obtaining an outcome that is in their respective individual
best interests and there can be no assurance of obtaining results most favorable to our interests. By participating on such committees,
we may be deemed to have duties to other creditors represented by the committees, which might expose us to liability to such other
creditors who disagree with our actions.
We may also be provided with
material non-public information that may restrict our ability to trade in such company’s securities. While we intend to comply
with all applicable securities laws and to make judgments concerning restrictions on trading in good faith, we may trade in a company’s
securities while engaged in such company’s restructuring activities. Such trading creates a risk of litigation and liability
that may cause us to incur significant legal fees and potential losses.
Our debt investments
involve a number of significant risks, including default risk, covenant compliance risk and subordination risk.
Our debt investments involve
a number of significant risks, including risks related to defaults, covenant compliance and subordination. Approximately 1% of
our total assets as of December 31, 2016 consist of debt investments in BrightSource Energy, both secured and unsecured. In the
event of a default on our secured debt, we will only have recourse to the assets collateralizing the loan. If the underlying collateral
value is less than the loan amount, we will suffer a loss. In addition, we currently hold debt investments that are unsecured,
which are subject to the risk that other lenders may be directly secured by the assets of the portfolio company. In the event of
a default, those collateralized lenders would have priority over us with respect to the proceeds of a sale of the underlying assets.
In cases described above, we may lack control over the underlying asset collateralizing our secured debt or the underlying assets
of the portfolio company prior to a default, and as a result the value of the collateral may be reduced by acts or omissions by
owners or managers of the assets. Moreover, because our debt investments are in a Growth Company, a substantial portion of the
assets securing the secured portion of our debt investment may be in intangible assets such as intellectual property, which could
lose value if the portfolio company’s rights to the intellectual property are challenged or if the company’s license
to the intellectual property is revoked or expires. Rapid changes in technology may also render previously valuable intellectual
property less valuable. If the value of collateral underlying our secured debt declines or interest rates increase during the term
of our debt, a portfolio company may not be able to obtain the necessary funds to repay our debt investment at maturity through
refinancing. Decreasing collateral value or increasing interest rates may hinder a portfolio company’s ability to refinance
our debt securities because the underlying collateral cannot satisfy the debt service coverage requirements necessary to obtain
new financing. If a borrower is unable to repay our debt investment at maturity, we could suffer a loss which may adversely impact
our financial performance.
Our debt investments in our
portfolio companies may include business and financial covenants placing affirmative and negative obligations on the operation
of the company’s business and its financial condition. The purpose of these provisions is to require our portfolio companies
to act, or refrain from acting, in a manner that we believe will best protect the capital we have invested. However, the financial
condition and results of operations of our portfolio companies may cause us to determine that it would be in our stockholders’
and portfolio companies’ best interest to waive or defer enforcement of these provisions. As a result, we may offer a flexible
payment and covenant enforcement structure to our portfolio companies. Accordingly, determination to waive or defer enforcement
of some or all of these covenants may not provide us with the same level of protection as more restrictive conditions that traditional
lenders typically impose on borrowers. In certain situations, we may even elect to waive breaches of these covenants, including
our right to payment, or waive or defer enforcement of remedies, such as acceleration of obligations or foreclosure on collateral,
depending upon the financial condition and prospects of the particular portfolio company, including situations where we believe
that one or more financial sponsors intend to, express their intent to, or provide subject to milestones or contingencies, continued
support, assistance or financial commitment to the borrower. These actions may reduce the likelihood in the short term of our receiving
the full amount of future payments of interest or principal and be accompanied by a deterioration in the value of the underlying
collateral as many of these companies may have limited financial resources, may be unable to meet future obligations and may go
bankrupt. These events could harm our financial condition and operating results.
Some of our debt investments
are secured on a second priority basis by the same collateral securing outstanding and future senior debt of the portfolio companies.
The holders of obligations secured by the first priority liens on the collateral will generally control the liquidation of and
be entitled to receive proceeds from any realization of the collateral to repay their obligations in full before we receive anything.
In addition, our rights may also be limited pursuant to the terms of one or more intercreditor agreements that we enter into with
the holders of senior debt. Furthermore, payment on our unsecured debt investments will generally be subject to full payment of
the secured indebtedness of the portfolio company. There can be no assurance that the proceeds, if any, from the sale or sales
of all of the collateral would be sufficient to satisfy the debt obligations secured by our second priority liens after payment
in full of all obligations secured by the first priority liens on the collateral or to satisfy debt obligations of our unsecured
debt investments after payment in full of all obligations to holders of secured indebtedness. If such proceeds are not sufficient
to repay amounts outstanding under debt obligations secured by the second priority liens or unsecured debt obligations, then we
may never receive full payment of interest and principal to which we would otherwise be entitled pursuant to our debt investments.
Many of our portfolio
companies have complex capital structures.
Many of our portfolio companies
have complex capital structures based on multiple rounds of equity financing and, as a result, may have multiple classes of common
and preferred equity securities with differing rights, including with respect to voting, dividends, redemptions, liquidation, and
conversion rights. Although our former investment adviser sought to make equity investments in the portfolio company’s most
senior class of equity securities, the seniority and protections provided in these types of equity investments may be diminished
if the portfolio company issues more senior securities in a subsequent equity financing round. The value of our equity investments
may also be adversely affected by subsequent financing by a portfolio company. The former investment adviser typically required
information on the private company’s capital structure as part of its due diligence process. Although, to our knowledge,
we believe that our former investment adviser’s investment professionals had extensive experience evaluating and investing
in Growth Companies with such complex capital structures, there can be no assurance that we will be able to adequately evaluate
the relative risks and benefits of investing in a particular class of a portfolio company’s equity securities. Further, a
preferred equity investment we make may be superseded by another series of preferred stock with greater priority. Any failure on
our part to properly evaluate the relative rights and value of a class of equity securities in which we invest could cause us to
lose part or all of our equity investment, which in turn could have a material and adverse effect on our NAV and results of operations.
The warrants that we
hold, as well as the direct equity investments, are highly speculative, and may not appreciate in value and may result in unrealized
depreciation or realized losses which may adversely affect our returns.
Certain of the warrants we
hold to acquire equity securities in portfolio companies include a “cashless exercise” provision to allow us to exercise
these rights without requiring us to make any additional cash investment. Our goal is ultimately to dispose of these equity interests
and realize gains upon disposition of such interests. Over time, the gains that we realize on these equity interests may offset,
to some extent, losses that we experience on defaults under debt securities that we hold. However, the equity interests that we
receive may not appreciate in value and, in fact, may decline in value. It is possible that these equity interests may become worthless.
Accordingly, we may not be able to realize gains from our equity interests, and any gains that we do realize on the disposition
of any equity interests may not be sufficient to offset any other losses that we experience on our debt securities.
We have also made direct equity
investments, where we make an upfront cash investment in a company’s equity securities, either as part of our debt investment
or as a stand-alone investment. We attempt to dispose of these investments and realize gains upon our disposition of them. However,
these equity investments are highly speculative and may not appreciate in value or may decline in value. We also may be unable
to realize any value if a portfolio company does not have a liquidity event, such as a sale of the business or an IPO, or if the
portfolio company defaults under its outstanding indebtedness, which could materially decrease the value of, or prevent us from
being able to sell, our equity investments. If our direct equity investments decline in value, we may have unrealized depreciation
or realized losses which may adversely affect our returns.
Certain of our direct
equity investments do not have structural protections, and we cannot assure you that we will realize gains from structural protections
in those investments which have those protections.
Certain of our portfolio investments
contain structural protections with respect to our direct equity investments that may provide an opportunity to earn a potential
enhanced return upon an IPO, sale, merger or liquidation. Such structural protections may include preferred rights relative to
other security holders, conversion rights which would result in us receiving shares of common stock at a discount to the IPO price
upon conversion at the time of the IPO, warrants that would result in us receiving additional shares for a nominal exercise price
at the time of an IPO or liquidation preferences at amounts greater than our investment cost or with participation rights entitling
us to participate with common stockholders after all liquidation preference are paid. Our ability to realize the potential value
associated with these structural protections will depend on a number of factors including the completion of the IPO, any adjustment
to the terms of the structural protection that may be negotiated during the IPO process and the possible subsequent issuance of
more senior securities that may impact the relative value of our investment. Further, even if an IPO is completed, we would not
realize the potential value associated with these structural protections unless the market price of the portfolio company’s
common shares equaled or exceeded the IPO price at the time such shares were sold following the customary 180-day lockup period.
Further, our ability to realize the potential value associated with any structural protections at the time of a sale, merger or
liquidation of a portfolio company will depend on a number of factors including the realization of sale, merger or liquidation
proceeds (after payment of liabilities) sufficient to pay our senior preference amount, any adjustment to our preference amount
that may be negotiated prior to any sale, merger or liquidation and the possible subsequent issuance of more senior securities
that may make our preference rights subordinate to the preference rights of senior security holders. As a result, there can be
no assurance that we will be able to realize the potential value of these structural protections even if we are able to obtain
them.
Risks Relating to Our Business and Structure
Any failure on our part
to maintain our status as a BDC would reduce our operating flexibility.
The 1940 Act imposes numerous
constraints on the operations of business development companies. For example, business development companies are required to invest
at least 70% of their total assets primarily in securities of eligible portfolio companies, cash, cash equivalents, U.S. government
securities and other high quality debt investments that mature in one year or less. Furthermore, any failure to comply with the
requirements imposed on business development companies by the 1940 Act could cause the SEC to bring an enforcement action against
us and/or expose us to claims of private litigants. Upon approval of a majority of our stockholders, we may elect to withdraw our
status as a BDC. If we decide to withdraw our election, or if we otherwise fail to qualify, or maintain our qualification, as a
BDC, we might be regulated as a closed-end investment company under the 1940 Act, which would subject us to substantially more
regulatory restrictions under the 1940 Act and correspondingly decrease our operating flexibility and increase our costs of doing
business.
We may experience fluctuations
in our periodic results, and the net asset value of our common stock may decline.
We could experience fluctuations
in our periodic results due to a number of factors, some of which are beyond our control, including our ability to monetize our
investments at favorable prices, the level of our expenses (including the interest rates payable on any borrowings we may incur),
variations in and the timing of the recognition of realized gains or losses and unrealized appreciation and depreciation on our
investments, the degree to which we encounter competition in our markets and general economic conditions. Our periodic results
will also be affected by the ability of our private portfolio companies in which we have made equity investments to complete their
IPOs or complete a strategic sale/merger. As a result of these factors, results for any period should not be relied upon as being
indicative of performance in future periods.
The previously paid
incentive fee to our former investment adviser may have induced our former investment adviser to make speculative investments or
incur leverage.
The incentive fee payable
by us to our former investment adviser, calculated as a percentage of the return on invested capital, may have created an incentive
for our former investment adviser to make investments on our behalf that are risky or more speculative than would be the case in
the absence of such compensation arrangement, which could result in higher investment losses, particularly during cyclical economic
downturns.
In addition, our former investment
adviser had control over the timing of the acquisition and sale of our equity investments, and therefore control over when we realized
gains and losses on these equity investments. As a result, our former investment adviser may have faced a conflict of interest
in determining when it was appropriate to sell a specific equity investment, to the extent that doing so may serve to maximize
its incentive fee at a point where selling such investment may not necessarily be in the best interests of our stockholders. Our
Board of Directors monitored such conflicts of interest in connection with its review of the performance of our former investment
adviser under our former Investment Advisory Agreement, as well as during its quarterly review of our financial performance and
results of operations.
Our Administrator can
resign on 90 days’ notice and we may be unable to find a suitable replacement within that time, resulting in a disruption
in our operations that could adversely affect our financial condition, business and results of operations.
Our Administrator has the
right, under our Administrative Consulting Agreement, to resign at any time upon not less than 90 days’ written notice, whether
we have found a replacement or not. If our Administrator resigns, we may not be able to find a new Administrator or hire internal
management with similar expertise and ability to provide the same or equivalent services on acceptable terms within 90 days, or
at all. If we are unable to do so promptly, our operations are likely to experience a disruption, our financial condition, business
and results of operations as well as our ability to make distributions are likely to be adversely affected and the market price
of our shares may decline. In addition, the coordination of our internal management and investment activities is likely to suffer
if we are unable to identify and reach an agreement with a single institution or group of executives having the expertise possessed
by our Administrator. Even if we were able to retain comparable management, the integration of such management and their lack of
familiarity with our Investment Objective might result in additional costs and time delays that could adversely affect our financial
condition, business and results of operations.
Operating under
the constraints imposed on us as a BDC and a regulated investment company may hinder the achievement of our Investment Objective.
The 1940 Act imposes
numerous constraints on the operations of BDCs. For example, BDCs are required to invest at least 70% of their total assets primarily
in securities of U.S.-based private companies or public companies with market capitalizations of less than $250 million, cash,
cash equivalents, U.S. government securities and other high quality debt instruments that mature in one year or less. In addition,
qualification for taxation as a regulated investment company, or RIC, requires satisfaction of source-of-income, diversification
and distribution requirements. These constraints, among others, may hinder our Administrator and Board of Directors’ ability
to monetize investments and achieve our Investment Objective.
Our ability to enter
into transactions with our affiliates is restricted, which may limit our ability to liquidate our portfolio investments.
We are prohibited under the
1940 Act from knowingly participating in certain transactions with certain of our affiliates without the prior approval of our
independent directors and, in some cases, of the SEC. Any person that owns, directly or indirectly, 5% or more of our outstanding
voting securities will be our affiliate for purposes of the 1940 Act and we are generally prohibited from buying or selling any
security to such affiliate, absent the prior approval of our independent directors. These restrictions, by restricting possible
purchasers of our portfolio investments, may limit our ability to monetize our portfolio investments and achieve our Investment
Objective.
We will be subject to
corporate-level income tax if we are unable to qualify as a regulated investment company, or RIC.
Effective January 1, 2010,
we elected to be treated for tax purposes as a regulated investment company, or RIC, under the Code. No assurance can be given
that we will be able to continue to qualify for and maintain RIC status in future years. In order to qualify for the special treatment
accorded to a RIC, we must meet certain income source, asset diversification and annual distribution requirements. In order to
satisfy the income source requirement, we must derive in each taxable year at least 90% of our gross income from dividends, interest,
payments with respect to certain securities loans, gains from the sale of stock or other securities or foreign currencies, income
from “qualified publicly traded partnerships” or other income derived with respect to our business of investing in
such stock or securities. To qualify as a RIC, we must also meet certain asset diversification requirements at the end of each
quarter of our taxable year. Failure to meet these tests may result in our having to sell certain investments quickly in order
to prevent the loss of RIC status. Because most of our investments will be in private companies, any such sales could be made at
disadvantageous prices and may result in substantial losses. In order to satisfy the annual distribution requirement for a RIC,
we must distribute at least 90% of our investment company taxable income (which is generally our net ordinary income plus the excess,
if any, of realized net short-term capital gains over realized net long-term capital losses), if any, to our stockholders on at
least an annual basis. In the event we borrow funds or issue senior securities, we may be subject to certain asset coverage ratio
requirements under the 1940 Act and financial covenants under loan and credit agreements that could, under certain circumstances,
restrict us from making distributions necessary to satisfy the annual distribution requirement. If we are unable to obtain cash
from other sources, we may fail to qualify for special tax treatment as a RIC and, thus, may be subject to corporate-level income
tax on all our income. If we fail to qualify as a RIC for any reason and remain or become subject to corporate income tax, the
resulting corporate-level federal taxes could substantially reduce our net assets, the amount of income available for distribution,
and the amount of our distributions. Such a failure would have a material adverse effect on us and our stockholders.
We may have
difficulty paying our required distributions if we recognize income before or without receiving cash representing such income,
such as payment-in-kind (PIK) interest on certain debt investments.
We derive current interest
income on our debt investments. With respect to the debt obligations we have acquired with PIK provisions, under applicable tax
rules, we must include in income each year a portion of the PIK interest earned in that year. Because PIK interest will be included
in our investment company taxable income in the year it is earned, we may be required to make a distribution to our stockholders
in order to satisfy the Annual Distribution Requirement, even though we may not have received any corresponding cash amount. As
a result, we may have difficulty meeting the annual distribution requirement necessary to maintain our qualification for RIC tax
treatment under the Code. We may have to sell some of our investments at times and/or at prices we would not consider advantageous,
raise additional debt or equity capital or forgo new investment opportunities for this purpose. If we are not able to obtain cash
from other sources, we may fail to continue to qualify for RIC tax treatment and thus become subject to corporate-level income
tax.
To the extent original
issue discount (OID) or PIK interest constitute a portion of our income, we will be exposed to typical risks associated with such
income being required to be included in taxable and accounting income prior to receipt of cash representing such income.
Our investments include OID
instruments or contractual PIK interest arrangements, which represents contractual interest added to a loan balance and due at
the end of such loan’s term. To the extent OID or PIK interest constitute a portion of our income, we are exposed to typical
risks associated with such income being required to be included in taxable and accounting income prior to receipt of cash, including
the following:
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The higher interest rates of OID and PIK instruments reflect the payment deferral and increased credit risk associated
with these instruments, and OID and PIK instruments generally represent a significantly higher credit risk than coupon loans.
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Even if the accounting
conditions for income accrual are met, the borrower could still default when our actual collection is supposed to occur at the
maturity of the obligation.
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OID and PIK instruments
may have unreliable valuations because their continuing accruals require continuing judgments about the collectability of the deferred
payments and the value of any associated collateral. OID and PIK income may also create uncertainty about the source of our cash
distributions.
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For accounting
purposes, any cash distributions to stockholders representing OID and PIK income are not treated as coming from paid-in capital,
even though the cash to pay them comes from the offering proceeds. As a result, despite the fact that a distribution representing
OID and PIK income could be paid out of amounts invested by our stockholders, the 1940 Act does not require that stockholders be
given notice of this fact by reporting it as a return of capital.
Global economic, political
and market conditions may adversely affect our business, results of operations and financial condition, including our revenue growth
and profitability.
The current worldwide financial
market situation, as well as various social and political tensions in the United States and around the world, may contribute to
increased market volatility, may have long-term effects on the U.S. and worldwide financial markets, and may cause economic uncertainties
or deterioration in the United States and worldwide. The U.S. and global capital markets experienced extreme volatility and disruption
during the economic downturn that began in mid-2007, and the U.S. economy was in a recession for several consecutive calendar quarters
during the same period. In 2010, a financial crisis emerged in Europe, triggered by high budget deficits and rising direct and
contingent sovereign debt, which created concerns about the ability of certain nations to continue to service their sovereign debt
obligations. Risks resulting from such debt crisis, including any austerity measures taken in exchange for bailout of certain nations,
and any future debt crisis in Europe or any similar crisis elsewhere could have a detrimental impact on the global economic recovery,
sovereign and non-sovereign debt in certain countries and the financial condition of financial institutions generally. In June
2016, the United Kingdom held a referendum in which voters approved an exit from the European Union, which led to disruption and
instability in the global markets, and the implications of the United Kingdom’s pending withdrawal from the European Union
are unclear at present. There is continued concern about national-level support for the Euro and the accompanying coordination
of fiscal and wage policy among European Economic and Monetary Union member countries. In addition, the fiscal and monetary policies
of foreign nations, such as Russia and China, may have a severe impact on the worldwide and U.S. financial markets.
As a result of the 2016 U.S.
election, the Republican Party currently controls both the executive and legislative branches of government, which increases the
likelihood that legislation may be adopted that could significantly affect the regulation of U.S. financial markets. Areas subject
to potential change, amendment or repeal include the Dodd-Frank Act and the authority of the Federal Reserve and the Financial
Stability Oversight Council. The United States may also potentially withdraw from or renegotiate various trade agreements and take
other actions that would change current trade policies of the United States. We cannot predict which, if any, of these actions
will be taken or, if taken, their effect on the financial stability of the United States. Such actions could have a significant
adverse effect on our business, financial condition and results of operations. We cannot predict the effects of these or similar
events in the future on the U.S. economy and securities markets or on our existing portfolio investments or our ability to monetize
those portfolio investments in accordance with our Investment Objective.
We incur significant
costs as a result of being a public company.
As a public company, we incur
legal, accounting and other expenses, including costs associated with the periodic reporting requirements applicable to a company
whose securities are registered under the Exchange Act, as well as additional corporate governance requirements and other rules
implemented by the SEC.
Our compliance with
Section 404 of the Sarbanes-Oxley Act involves significant expenditures, and non-compliance with Section 404 of the Sarbanes-Oxley
Act would adversely affect us and the market price of our common stock.
We are required to report
on our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act and related rules and regulations
of the SEC. As a result, we incur expenses that may negatively impact our financial performance and our ability to make distributions.
This process also results in a diversion of management’s time and attention. We cannot ensure that our evaluation, testing
and remediation process is effective or that our internal control over financial reporting will be effective. In the event that
we are unable to maintain compliance with Section 404 of the Sarbanes-Oxley Act and related rules, we and the market price of our
securities would be adversely affected.
We face cyber-security
risks.
Our business operations rely
upon secure information technology systems for data processing, storage and reporting. Despite careful security and controls design,
implementation and updating, our information technology systems could become subject to cyber-attacks. Network, system, application
and data breaches could result in operational disruptions or information misappropriation, which could have a material adverse
effect on our business, results of operations and financial condition.
The failure in cyber
security systems, as well as the occurrence of events unanticipated in our disaster recovery systems and management continuity
planning could impair our ability to conduct business effectively.
The occurrence of a disaster
such as a cyber-attack, a natural catastrophe, an industrial accident, a terrorist attack or war, events unanticipated in our disaster
recovery systems, or a support failure from external providers, could have an adverse effect on our ability to conduct business
and on our results of operations and financial condition, particularly if those events affect our computer-based data processing,
transmission, storage, and retrieval systems or destroy data. If a significant number of our investment professionals were unavailable
in the event of a disaster, our ability to effectively conduct our business could be severely compromised.
We depend heavily upon computer
systems to perform necessary business functions. Despite our implementation of a variety of security measures, our computer systems
could be subject to cyber-attacks and unauthorized access, such as physical and electronic break-ins or unauthorized tampering.
Like other companies, we may experience threats to our data and systems, including malware and computer virus attacks, unauthorized
access, system failures and disruptions. If one or more of these events occurs, it could potentially jeopardize the confidential,
proprietary and other information processed and stored in, and transmitted through, our computer systems and networks, or otherwise
cause interruptions or malfunctions in our operations, which could result in damage to our reputation, financial losses, litigation,
increased costs, regulatory penalties and/or customer dissatisfaction or loss.
We are dependent on
information systems and systems failures could significantly disrupt our business, which may, in turn, negatively affect the market
price of our common stock and our ability to make distributions.
Our business is dependent
on our and third parties’ communications and information systems. Any failure or interruption of those systems, including
as a result of the termination of an agreement with any third-party service providers, could cause delays or other problems in
our activities. Our financial, accounting, data processing, backup or other operating systems and facilities may fail to operate
properly or become disabled or damaged as a result of a number of factors including events that are wholly or partially beyond
our control and adversely affect our business. There could be:
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sudden electrical or telecommunication outages;
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natural disasters such as earthquakes, tornadoes and
hurricanes;
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events arising from local or larger scale political
or social matters, including terrorist acts; and
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These events, in turn, could
have a material adverse effect on our operating results and negatively affect the market price of our common stock and our ability
to make distributions to our stockholders.
Our business and operation
could be negatively affected if we become subject to any securities litigation or shareholder activism, which could cause us to
incur significant expense, hinder execution of our Investment Objective and impact our stock price.
In the past, following periods
of volatility in the market price of a company’s securities, securities class action litigation has often been brought against
that company. Shareholder activism, which could take many forms or arise in a variety of situations, has been increasing in the
BDC space recently. While we are currently not subject to any securities litigation or shareholder activism, due to the potential
volatility of our stock price and for a variety of other reasons, including potentially significant corporate transactions such
as the Plan or any potential strategic alternatives to the Plan, we may in the future become the target of securities litigation
or shareholder activism. Securities litigation and shareholder activism, including potential proxy contests, could result in substantial
costs and divert management’s and our Board of Directors’ attention and resources from our business. Also, we may be
required to incur significant legal fees and other expenses related to any securities litigation and activist shareholder matters,
which may impair our ability to execute our Investment Objective and monetize our portfolio investments.
Our Board of
Directors may change certain of our investment objective, operating policies and strategies without prior notice or stockholder
approval, the effects of which may be adverse.
Our Board of Directors has
the authority to modify or waive our Investment Objective, certain of our current operating policies, investment criteria and strategies
without prior notice and without stockholder approval (except as required by the 1940 Act). We cannot predict the effect any changes
to our Investment Objective, current operating policies, investment criteria and strategies would have on our business, net asset
value, operating results and value of our stock. However, the effects might be adverse, which could negatively impact our ability
to pay you distributions and cause you to lose all or part of your investment.
We have internalized
and engaged third parties to provide administrative functions to us, and, therefore, expect to incur significant costs, even in
the event the value of your investment declines.
On October 5, 2015, our Board
of Directors approved the termination of the Investment Advisory Agreement to take effect on the Termination Date. Our Board of
Directors has engaged the Administrator to provide administrative consulting services to us, including the provision of personnel
to act as certain of our executive officers, including our Chief Executive Officer and Chief Financial Officer. Following the Termination
Date, although we no longer bear the costs of the various fees and expenses we had paid to our former investment adviser under
the Investment Advisory Agreement, by engaging third parties to provide administrative functions, we will incur additional costs.
The Administrator fee is $669,500
per annum. The Administrator fee is payable regardless of whether the value of our gross assets or your investment declines. As
a result, we will owe our Administrator a fee regardless of whether we incurred significant realized capital losses and unrealized
capital depreciation (losses) during the period for which the Administrator fee is paid.
Risks Related to Our Common Stock
The market price
of our shares of common stock may be adversely affected if we are unable to implement our Investment Objective.
Many of our operating
expenses as a public company are fixed and independent of the size of our net assets. Also, declining net assets and/or an increasing
operating expense ratio may diminish the marketability of our common stock, which in turn may lead to diminished (or no) institutional
ownership of our stock and the corresponding risk of a stock price that trades at a sustained discount to net asset value, which
discount may be large.
Our investments also
involve a high degree of risk and, as a result, we may incur losses in the value of our investment portfolio. Portfolio company
investments are highly speculative and, therefore, an investor in our common stock may lose his entire investment. Unrealized depreciation
of the debt and equity securities of our portfolio companies will always be a by-product and risk of our business, and there can
be no assurance that we will be successful in executing our Investment Objective. The market price of our shares of common stock
may be adversely affected if we are unable to successfully implement our investment strategy, and an investment in our common stock
would not be suitable for investors with lower risk tolerance.
Investing in shares
of our common stock is highly speculative and an investor could lose all or some of the amount invested.
Our current and former investment
objective and strategies result in a high degree of risk in our investments and may result in losses in the value of our investment
portfolio. Our investments in portfolio companies are highly speculative and, therefore, an investor in our common stock may lose
his entire investment. Write-downs of our debt and equity investments in privately held companies will always be a by-product and
risk of our business, and there can be no assurance that we will be able to achieve an acceptable return on our portfolio company
investments. An investment in our common stock would not be suitable for investors with lower risk tolerance.
Our common stock
price may be volatile and may decrease substantially.
Since shares of our
common stock were listed on the Nasdaq Capital Market beginning December 12, 2011, the trading price of our common stock has fluctuated
substantially. We expect that the trading price of our common stock will continue to fluctuate substantially. The price of our
common stock in the market on any particular day depends on many factors, some of which are beyond our control and may not be directly
related to our operating performance. These factors include, but are not limited to, the following:
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price and volume fluctuations in the overall stock market from time to time;
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investor demand for our shares;
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significant volatility in the market price and trading volume of securities of regulated investment
companies, business development companies or other financial services companies;
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changes in regulatory policies or tax guidelines with respect to regulated investment companies
or business development companies;
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failure to qualify as a RIC for a particular taxable year, or the loss of RIC status;
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actual or anticipated changes in our earnings, fluctuations in our operating results and net asset
value, or changes in the expectations of securities analysts;
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general economic conditions and trends;
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fluctuations in the valuation of our portfolio investments;
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public perception of the value of our portfolio companies;
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operating performance of companies comparable to us;
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market sentiment in the technology sector in which we invest; or
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departures of any of the officers, directors, or other investment professionals.
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If we are unable to
increase the institutional ownership of our stock and the number of analysts covering our stock, the trading volume of our stock
is likely to remain low which could, in turn, increase the volatility of our stock price.
In the past, following
periods of volatility in the market price of a company’s securities, securities class action litigation has often been brought
against that company. Due to the potential volatility of our stock price, we may therefore be the target of securities litigation
in the future. Securities litigation could result in substantial costs and divert management’s attention and resources from
our business.
Our shares might
trade at a sustained discount from net asset value, and since the listing of our common stock on Nasdaq on December 12, 2011, our
shares have typically traded at a discount to our net asset value per share.
Shares of closed-end
funds, including business development companies like us, may, during some periods, trade at prices higher than their net asset
value per share and, during other periods, as frequently occurs with closed-end investment companies, trade at prices lower than
their net asset value per share. The perceived value of our investment portfolio may be affected by a number of factors including
perceived prospects for individual companies we invest in, market conditions for common stock investments generally, for initial
public offerings and other exit events for venture capital-backed companies, and the mix of companies in our investment portfolio
over time. Because accurate financial and other data on our portfolio companies may be limited and not publicly disseminated, the
public perception of their value may be unduly influenced by trading levels on secondary marketplaces, speculation about their
prospects, market conditions, uninformed investor sentiment or other factors. Negative or unforeseen developments affecting the
perceived value of companies in our investment portfolio could result in a decline in the trading price of our common stock relative
to our net asset value per share. Since the listing of our common stock on Nasdaq on December 12, 2011, our shares have typically
traded at a discount to our net asset value per share, and there is no assurance that shares of our common stock will ever trade
at or above our net asset value.
The possibility that
our shares will continue to trade at a discount from net asset value is a risk separate and distinct from the risk that our net
asset value per share will decrease. The risk of purchasing shares of a BDC that might trade at a sustained discount is more pronounced
for investors who wish to sell their shares in a relatively short period of time because, for those investors, realization of a
gain or loss on their investments is likely to be more dependent upon changes in discount levels than upon increases or decreases
in net asset value per share.
There is a risk
that you may not receive dividends or that our dividends may be reduced over time, particularly since we do not intend to make
new portfolio investments, our current portfolio company investments consist primarily of securities that do not produce current
income, and our board has approved the liquidating trust Plan.
Due to the uncertainty of
our current portfolio companies achieving a liquidity event and our ability to sell our positions at a gain following a liquidity
event, we can give no assurance that we will be able make distributions from the sale of our portfolio investments. Furthermore,
we can give no assurance that we will achieve investment results that will allow such distributions to be paid from net investment
income or net realized capital gains from year-to-year. There is no assurance that our current portfolio companies will complete
an IPO, sale/merger or other liquidity event or that we will be able to realize any net capital gains from the sale of our publicly
traded portfolio company investments. Our ability to make distributions may also be adversely affected by, among other things,
the impact of one or more risk factors described herein. Accordingly, no assurances can be made that we will make distributions
to our stockholders in the future.
In addition, any unrealized
depreciation in our investment portfolio could be an indication that we will be unable to recover the cost of our investment when
we sell it in the future. This could result in realized capital losses in the future and ultimately in reductions of any net capital
gains distributions in future periods.
If we convert to a liquidating
trust pursuant to the Plan, subject to final approval of the trustees of the liquidating trust, we anticipate that the liquidating
trust will make a special cash distribution to holders of beneficial interests in the liquidating trust shortly after the conversion.
There can be no assurances at this time as to the amount of the special cash distribution or that our stockholders will approve
the Plan and we will convert to the liquidating trust. Moreover, although the liquidating trust will be required to make distributions
at least annually, we cannot make guarantees as to the amount of such distributions or the ability of the liquidating trust to
dispose of its illiquid assets.
A portion of our distributions
may constitute a return of capital and affect our stockholders’ tax basis in our shares.
We plan to make distributions
from any assets legally available for distribution and will be required to determine the extent to which such distributions are
paid out of current or accumulated earnings, realized capital gains or are returns of capital. To the extent there is a return
of capital, investors will be required to reduce their cost basis in our stock for federal tax purposes, which will result in higher
tax liability when the shares are sold, even if they have not increased in value or have lost value.
The market price of
our shares of common stock may be adversely affected by the sale of shares by our management or large stockholders.
Sales of our shares of common
stock by our officers or by large stockholders could adversely and unpredictably affect the price of those securities. Additionally,
the price of our shares of common stock could be affected even by the potential for sales by these persons. We cannot predict the
effect that any future sales of our common stock, or the potential for those sales, will have on our share price. Furthermore,
due to relatively low trading volume of our stock, should one or more large stockholders seek to sell a significant portion of
its stock in a short period of time, the price of our stock may decline.
Provisions of the Maryland
General Corporation Law and of our charter and bylaws could deter takeover attempts and have an adverse impact on the price of
our common stock.
Our charter and bylaws,
as well as certain statutory and regulatory requirements, contain certain provisions that may have the effect of discouraging a
third party from making an acquisition proposal for us. Our bylaws contain a provision exempting any and all acquisitions by any
person of our shares of stock from the Control Share Act under the Maryland General Corporation Law. If our Board of Directors
does not otherwise approve a business combination, the Control Share Act (if we amend our bylaws to be subject to that Act) may
discourage others from trying to acquire control of us and increase the difficulty of consummating any offer. Although our bylaws
include such a provision, such a provision may also be amended or eliminated by our Board of Directors at any time in the future,
provided that we notify the Division of Investment Management at the SEC prior to amending or eliminating this provision. However,
the SEC has recently taken the position that the Control Share Act is inconsistent with the 1940 Act and may not be invoked by
a BDC. It is the view of the staff of the SEC that opting into the Control Share Act would be acting in a manner inconsistent with
section 18(i) of the 1940 Act. Additionally, under our charter, our Board of Directors may, without stockholder action, authorize
the issuance of shares of stock in one or more classes or series, including preferred stock; and our Board of Directors may, without
stockholder action, amend our charter to increase the number of shares of stock of any class or series that we have authority to
issue. These antitakeover provisions may inhibit a change of control in circumstances that could give the holders of our common
stock the opportunity to realize a premium over the market price for our common stock.