Item
1. Business
SuRo
Capital
SuRo
Capital Corp. (“we”, “us”, “our”, “Company” or “SuRo Capital”), formerly
known as Sutter Rock Capital Corp. and as GSV Capital Corp. and formed in September 2010 as a Maryland corporation, is an internally-managed,
non-diversified closed-end management investment company. The Company has elected to be regulated as a business development company (“BDC”)
under the Investment Company Act of 1940, as amended (the “1940 Act”), and has elected to be treated, and intends to qualify
annually, as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the
“Code”).
Our date of inception was January 6, 2011, which is the date we commenced
development stage activities. We commenced operations as a BDC upon completion of our initial public offering (“IPO”) in May
2011 and began our investment operations during the second quarter of 2011. See “Management’s Dicussion and Analysis of Financial
Condition and Results of Operations” in Part II, Item 7 of this Form 10-K.
On and effective June 22, 2020, we changed our name to “SuRo Capital
Corp.” from “Sutter Rock Capital Corp.” On and effective March 12, 2019, our board of directors (“Board of Directors”)
approved internalizing our operating structure (“Internalization”) and we began operating as an internally-managed non-diversified
closed-end management investment company that has elected to be regulated as a BDC under the 1940 Act. Our Board of Directors approved
the Internalization in order to better align the interests of the Company’s stockholders with its management. As an internally managed
BDC, the Company is managed by its employees, rather than the employees of an external investment adviser, thereby allowing for greater
transparency to stockholders through robust disclosure regarding the Company’s compensation structure.
Our
investment objective is to maximize our portfolio’s total return, principally by seeking capital gains on our equity and equity-related
investments, and to a lesser extent, income from debt investments. We invest principally in the equity securities of what we believe
to be rapidly growing venture-capital-backed emerging companies. We acquire our investments through direct investments in prospective
portfolio companies, secondary marketplaces for private companies, and negotiations with selling stockholders. In addition, we may invest
in private credit and in the founders equity, founders warrants, forward purchase agreements, and private investment in public equity
(“PIPE”) transactions of special purpose acquisition companies (“SPACs”). We may also invest on an opportunistic
basis in select publicly traded equity securities or certain non-U.S. companies that otherwise meet our investment criteria, subject
to applicable requirements of the 1940 Act. To the extent we make investments in private equity funds and hedge funds that are excluded
from the definition of “investment company” under the 1940 Act by Section 3(c)(1) or 3(c)(7) of the 1940 Act, we will limit
such investments to no more than 15% of our net assets.
Our
investment philosophy is based on a disciplined approach of identifying promising investments in high-growth, venture-backed companies
across several key industry themes which may include, among others, social mobile, cloud computing and big data, internet commerce, financial
technology, mobility, and enterprise software. Our investment decisions are based on a disciplined analysis of available information
regarding each potential portfolio company’s business operations, focusing on the portfolio company’s growth potential, the
quality of recurring revenues, and path to profitability, as well as an understanding of key market fundamentals. Venture capital funds
or other institutional investors have invested in the vast majority of companies that we evaluate.
We
seek to deploy capital primarily in the form of non-controlling equity and equity-related investments, including common stock, warrants,
preferred stock and similar forms of senior equity, which may or may not be convertible into a portfolio company’s common equity,
and convertible debt securities with a significant equity component. Typically, our preferred stock investments are non-income producing,
have different voting rights than our common stock investments and are generally convertible into common stock at our discretion. As
our investment strategy is primarily focused on equity positions, our investments generally do not produce current income and therefore
we may be dependent on future capital raising to meet our operating needs if no other source of liquidity is available.
We
seek to create a low-turnover portfolio that includes investments in companies representing a broad range of investment themes.
Our
common stock is traded on the Nasdaq Global Select Market under the symbol “SSSS”. The net asset value per share of our common
stock on December 31, 2022 was $7.39. On March 15, 2023, the last reported sale price of a share of our common stock on the Nasdaq Global
Select Market was $3.01.
Operating
and Regulatory Structure
We
formed in 2010 as a Maryland corporation and operate as an internally managed, non-diversified closed-end management investment company.
Our investment activities are supervised by our Board of Directors and managed by our executive officers and investments professionals,
all of which are our employees.
As
a BDC, we are subject to certain regulatory requirements. See “—Regulation as a Business Development Company.” Also,
while we are permitted to finance investments using debt, our ability to use debt is limited in certain significant aspects.
With
certain limited exceptions, we may issue “senior securities,” including borrowing money from banks or other financial
institutions only in amounts such that the ratio of our total assets (less total liabilities other than indebtedness represented by
senior securities) to our total indebtedness represented by senior securities plus preferred stock, if any, is at least 200% (or
150% if certain conditions are met) after such incurrence or issuance. This means that generally, we can borrow up to $1 for every
$1 of investor equity (or, if certain conditions are met, we can borrow up to $2 for every $1 of investor equity). In March 2018,
the Small Business Credit Availability Act (the “SBCAA”) modified the 1940 Act by allowing a BDC to increase the maximum
amount of leverage it may incur by decreasing the asset coverage percentage from 200% to 150%, if certain requirements under the
1940 Act are met. Under the 1940 Act, we are allowed to increase our leverage capacity if stockholders representing at least a
majority of the votes cast, when a quorum is present, approve a proposal to do so. If we receive stockholder approval, we would be
allowed to increase our leverage capacity on the first day after such approval. Alternatively, the 1940 Act allows the majority of
our independent directors to approve an increase in our leverage capacity, and such approval would become effective after the
one-year anniversary of such approval. In either case, we would be required to make certain disclosures on our website and in SEC
filings regarding, among other things, the receipt of approval to increase our leverage, our leverage capacity and usage, and risks
related to leverage. The Company currently does not intend to seek stockholder approval or Board of Directors approval to increase its leverage
capacity as set forth above. See “Risk Factors” in Part I, Item 1A for more information.
We
have elected to be treated as a RIC under Subchapter M of the Code and expect to continue to operate in a manner so as to qualify for
the tax treatment applicable to RICs. See “—Material U.S. Federal Income Tax Considerations” and “Note 2—Significant
Accounting Policies—U.S. Federal and State Income Taxes” and “Note 9—Income Taxes” to our consolidated
financial statements for the year ended December 31, 2022 for more information.
Human
Capital Resources
As
of December 31, 2022, we had ten employees, each of whom was directly employed by us. These employees include our executive officers,
investment and finance professionals, and administrative staff. All of our employees are located in the United States at our principal
executive office and headquarters located at 640 Fifth Avenue, 12th Floor, New York, NY 10019 and our additional office located at One
Sansome Street, Suite 730, San Francisco, CA 94104. Our telephone number is (212) 931-6331.
As
an internally managed BDC, the success of our business and investment strategy, including achieving our investment objective, depends
in material part on our employees. We depend upon the members of our management team and our investment professionals for the identification,
final selection, structuring, closing and monitoring of our investments. These employees have critical industry experience and relationships
on which we rely to implement our business plan. We expect that the members of our management team and our investment professionals will
maintain key informal relationships, which we will use to help identify and gain access to investment opportunities. If we do not attract,
develop and retain highly skilled employees, we may not be able to operate our business as we expect and our operating results could
be adversely affected. See “Item 1A. Risk Factors.”
We
strive to attract, develop and retain our employees by offering unique employment opportunities, advancement and promotion opportunities,
training programs and opportunities, and competitive compensation and benefit structures, as well as a safe, harassment-free work environment.
Investment
Opportunity
We
believe that society is experiencing a convergence of numerous disruptive trends, producing new high-growth markets.
At
the same time, we believe that the IPO markets have experienced substantial structural changes which have made it significantly more
challenging for private companies to go public. Volatile equity markets, a lack of investment research coverage for private and smaller
companies and investor demand for a longer history of revenue and earnings growth have resulted in companies staying private significantly
longer than in the past. In addition, increased public company compliance obligations such as those imposed by the Sarbanes-Oxley Act
of 2002 (the “Sarbanes-Oxley Act”) and the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank
Act”) have made it more costly and less attractive to become a public company. As a result, there are significantly fewer IPOs
today than there were during the 1990s, with prospective public companies taking longer to come to market.
Investment
Strategy
We
seek to maintain our portfolio of potentially high-growth emerging private companies via a repeatable and disciplined investment approach,
as well as to provide investors with access to such companies through our publicly traded common stock.
Our
investment objective is to maximize our portfolio’s total return, principally by seeking capital gains on our equity and equity-related
investments, and to a lesser extent, income from debt investments. We have adopted the following business strategies to achieve our investment
objective:
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● |
Identify
high quality growth companies. Based on our extensive experience in analyzing technology trends and markets, we have identified
several technology sub-sectors, including social mobile, big data and cloud, marketplaces, and education technology, as opportunities
where we believe companies are capable of producing substantial growth. We rely on our collective industry knowledge as well as an
understanding of where leading venture capitalists and other institutional investors are investing. |
We
leverage a combination of our relationships throughout Silicon Valley and our independent research to identify leaders in our targeted
sub-sectors that we believe are differentiated and best positioned for sustained growth. Our team continues to expand our sourcing network
in order to evaluate a wide range of investment opportunities in companies that demonstrate strong operating fundamentals. We are targeting
businesses that have been shown to provide scaled valuation growth before a potential IPO or strategic exit.
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● |
Acquire
positions in targeted investments. We seek to selectively add to our portfolio by sourcing investments at an acceptable price
through our disciplined investing strategy. To this end, we utilize multiple methods to acquire equity stakes in private companies
that are not available to many individual investors. |
Direct
equity investments. We seek direct investments in private companies. There is a large market among emerging private companies for
equity capital investments. Many of these companies, particularly within the technology sector, lack the necessary cash flows to sustain
substantial amounts of debt, and therefore have viewed equity capital as a more attractive long-term financing tool. We seek to be a
source of such equity capital as a means of investing in these companies and look for opportunities to invest alongside other venture
capital and private equity investors with whom we have established relationships.
Private
secondary marketplaces and direct share purchases. We also utilize private secondary marketplaces as a means to acquire equity and
equity-related interests in privately held companies that meet our investment criteria and that we believe are attractive candidates
for investment. We believe that such markets offer new channels for access to equity investments in private companies and provide a potential
source of liquidity should we decide to exit an investment. In addition, we also purchase shares directly from stockholders, including
current or former employees. As certain companies grow and experience significant increased value while remaining private, employees
and other stockholders may seek liquidity by selling shares directly to a third party or to a third party via a secondary marketplace.
Sales of shares in private companies are typically restricted by contractual transfer restrictions and may be further restricted by provisions
in company charter documents, investor rights of first refusal and co-sale and company employment and trading policies, which may impose
strict limits on transfer. We believe that the reputation of our investment professionals within the industry and established history
of investing affords us a favorable position when seeking approval for a purchase of shares subject to such limitations.
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● |
Create
access to a varied investment portfolio. We seek to hold a varied portfolio of non-controlling equity investments, which
we believe will minimize the impact on our portfolio of a negative downturn at any one specific company. We believe that our relatively
varied portfolio will provide a convenient means for accredited and non-accredited individual investors to obtain access to an asset
class that has generally been limited to venture capital, private equity and similar large institutional investors. |
Starting
in 2017, we began to focus our investment strategy to increase the size of our investments in individual portfolio companies. While this
will likely have the effect of reducing the number of companies in which we hold investments, we believe that the shift towards larger
positions will better allow our investment professionals to focus our investments in companies and industries that are more likely to
result in beneficial returns to our stockholders.
Competitive
Advantages
We
believe that we benefit from the following competitive advantages in executing our investment strategy:
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● |
Capable
team of investment professionals. Our executive officers, investment professionals, and Board of Directors have significant
experience researching and investing in the types of high-growth venture-capital-backed companies we are targeting for investment.
Through our proprietary company evaluation process, including our identification of technology trends and themes and company
research, we believe we have developed important insight into identifying and valuing emerging private companies. |
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● |
Disciplined
and repeatable investment process. We have established a disciplined and repeatable process to locate and acquire available
shares at attractive valuations by utilizing multiple sources. In contrast to industry “aggregators” that accumulate
stock at market prices, we conduct valuation analysis and make acquisitions only when we can invest at valuations that we believe
are attractive to our investors. |
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● |
Deep
relationships with significant credibility to source and complete transactions. Our executive officers and investment professionals
are strategically located in New York, New York and at our additional office in San Francisco, California, allowing us to fully engage
in the technology and innovation ecosystem. Our wide network of venture capital and technology professionals supports our sourcing
efforts and helps provide access to promising investment opportunities. Our executive officers and investment professionals have
also developed strong relationships in the financial, investing and technology-related sectors. |
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Source
of permanent investing capital. As a publicly traded corporation, we have access to a source of permanent equity capital
that we can use to invest in portfolio companies. This permanent equity capital is a significant differentiator from other potential
investors that may be required to return capital to stockholders on a defined schedule. We believe that our ability to invest on
a long-term time horizon makes us attractive to companies looking for strong, stable owners of their equity. |
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● |
Early
mover advantage. We believe we are one of the few publicly traded BDCs with a specific focus on investing in high-growth
venture-backed companies. The transactions that we have executed to date since our IPO have helped to establish our reputation with
the types of secondary sellers and emerging companies that we target for investment. We have leveraged a number of relationships
and channels to acquire the equity of private companies. As we continue to grow our portfolio with attractive investments, we believe
that our reputation as a committed partner will be further enhanced, allowing us to source and close investments that would otherwise
be unavailable. We believe that these factors collectively differentiate us from other potential investors in private company securities
and will serve our goal to complete equity transactions in compelling private companies at attractive valuations. |
Our
primary competitors include specialty finance companies including late-stage venture capital funds, private equity funds, other crossover
funds, public funds investing in private companies and public and private BDCs. Many of these entities have greater financial and managerial
resources than we will have. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which
could allow them to consider more investments and establish more relationships than we do. Furthermore, many of our competitors are not
subject to the regulatory restrictions the 1940 Act imposes on us as a BDC. For additional information concerning the competitive risks
we face, see “Risk Factors—Risks Related to Our Business and Structure” in Part I, Item 1A of this Form 10-K.
Investment
Process
Concentrated
Technology-Related Focus
Our
executive officers and investment professionals have identified five key investment themes from which we have seen significant numbers
of high-growth companies emerge: social and mobile, financial technology and services, big data and cloud, marketplaces, and education.
However, the opportunity set of high-growth venture-backed technology companies extends beyond these key investment themes into much
broader markets. These broad markets have the potential to produce disruptive technologies, reach a large addressable market, and provide
significant commercial opportunities. Within these areas, we have identified trends that could create significant positive effects on
growth such as globalization, consolidation, branding, convergence and network effects. Thus, while we remain focused on selecting market
leaders within the key investment themes identified, our executive officers and investment professionals actively seek out promising
investments across a diverse selection of new technology subsectors.
Investment
Targeting and Screening
We
identify prospective portfolio companies through an extensive network of relationships developed by our executive officers and investment
professionals, supplemented by the knowledge and relationships of our Board of Directors. Investment opportunities that fall within our
identified themes are validated against the observed behavior of leading venture capitalists and institutional investors, as well as
through our own internal and external research. We evaluate potential portfolio companies across a spectrum of criteria, including industry
positioning and leadership, stage of growth, path to profitability, the uniqueness and defensibility of the portfolio company’s
strategy, investor sponsorship, and the portfolio company’s potential access to capital to continue to fund its growth that collectively
characterize our proprietary investment process. We typically seek to invest our assets under management in the equity of well-established
and growth stage companies, and debt investments of emerging companies that fit within our targeted areas. Based on our initial screening,
we identify a select set of companies that we evaluate in greater depth.
Research
and Due Diligence Process
Once
we identify those companies that we believe warrant more in-depth analysis, we focus on their total addressable market, revenue growth
and sustainability, and earnings growth, as well as other metrics that may be strongly correlated with higher valuations. We also focus
on the company’s management team and any significant financial sponsor, their current business model, competitive positioning,
regulatory and legal issues, the quality of any intellectual property and other investment-specific due diligence. Each prospective portfolio
company that passes our initial due diligence review is given a qualitative ranking to allow us to evaluate it against others in our
pipeline, and we review and update these companies on a regular basis.
Our
due diligence process will vary depending on whether we are investing through a private secondary transaction on a marketplace or with
a selling stockholder or by direct equity investment. We access information on our potential investments through a variety of sources,
including information made available on secondary marketplaces, publications by private company research firms, industry publications,
commissioned analysis by third-party research firms, and, to a limited extent, directly from the company or financial sponsor. We utilize
a combination of each of these sources to help us set a target value for the companies we ultimately select for investment.
Portfolio
Construction and Sourcing
Upon
completion of our research and due diligence process, we select investments for inclusion in our portfolio based on their value proposition,
addressable market, fundamentals and valuation. We seek to create a relatively varied portfolio that we expect will include investments
in companies representing a broad range of investment themes. We generally choose to pursue specific investments based on the availability
of shares and valuation expectations. We utilize a combination of secondary marketplaces, direct purchases from stockholders and direct
equity investments in order to make investments in our portfolio companies. Once we have established an initial position in a portfolio
company, we may choose to increase our stake through subsequent purchases. Maintaining a balanced portfolio is a key to our success,
and as a result we constantly evaluate the composition of our investments and our pipeline to ensure we are exposed to a diverse set
of companies within our target segments.
Transaction
Execution
We
enter into purchase agreements for substantially all of our private company portfolio investments. Private company securities are typically
subject to contractual transfer limitations, which may, among other things, give the issuer, its assignees and/or its stockholders a
particular period of time, often 30 days or more, in which to exercise a veto right, or a right of first refusal over, the sale of such
securities. Accordingly, the purchase agreements we enter into for secondary transactions typically require the lapse or satisfaction
of these rights as a condition to closing. Under these circumstances, we may be required to deposit the purchase price into escrow upon
signing, with the funds released to the seller at closing or returned to us if the closing conditions are not met.
Risk
Management and Monitoring
We
monitor the financial trends of each portfolio company to assess our exposure to individual companies as well as to evaluate overall
portfolio quality. We establish valuation targets at the portfolio level and for gross and net exposures with respect to specific companies
and industries within our overall portfolio. In cases where we make a direct investment in a portfolio company, we may also obtain board
positions, board observation rights and/or information rights from that portfolio company in connection with our equity investment. We
regularly monitor our portfolio for compliance with the diversification requirements for purposes of maintaining our status as a BDC
and a RIC for tax purposes.
Managerial
Assistance
As
a BDC we are required to offer, and in some cases may provide and be paid for, significant managerial assistance to portfolio companies.
This assistance typically involves monitoring the operations of portfolio companies, participating in their board and management meetings,
consulting with and advising their officers and providing other organizational and financial guidance. We will provide such managerial
assistance on our behalf to portfolio companies that request assistance. We may receive fees for these services, subject to review by
our Board of Directors, including our independent directors.
Portfolio
Overview
The
following table shows the fair value of our portfolio of investments by asset class as of December 31, 2022 and 2021:
| |
December
31, 2022 | | |
December
31, 2021 | |
| |
Fair Value | | |
Percentage
of Portfolio | | |
Fair
Value | | |
Percentage
of Portfolio | |
Private
Portfolio Companies: | |
| | | |
| | | |
| | | |
| | |
Preferred
Stock | |
$ | 117,214,465 | | |
| 48.4 | % | |
$ | 163,801,798 | | |
| 63.0 | % |
Common
Stock | |
| 18,692,931 | | |
| 7.7 | % | |
| 42,860,156
| | |
| 16.5 | % |
Debt
Investments | |
| 4,488,200 | | |
| 1.9 | % | |
| 3,011,438
| | |
| 1.1 | % |
Options | |
| 3,469,497 | | |
| 1.4 | % | |
| 4,959,112
| | |
| 1.9 | % |
Private
Portfolio Companies | |
| 143,865,093 | | |
| 59.4 | % | |
| 214,632,504
| | |
| 82.5 | % |
Publicly
Traded Portfolio Companies: | |
| | | |
| | | |
| | | |
| | |
Common
Stock | |
| 13,323,485 | | |
| 5.5
| % | |
| 44,573,225
| | |
| 17.1 | % |
Options | |
| — | | |
| — | % | |
| 930,524 | | |
| 0.4 | % |
Publicly
Traded Portfolio Companies | |
| 13,323,485 | | |
| 5.5 | % | |
| 45,503,749 | | |
| 17.5 | % |
Total
Portfolio Investments | |
| 157,188,578 | | |
| 64.9 | % | |
| 260,136,253
| | |
| 100.0 | % |
Non-Portfolio
Investments | |
| | | |
| | | |
| | | |
| | |
U.S.
Treasury Bills | |
| 85,056,817 | | |
| 35.1 | % | |
| — | | |
| — | % |
Total
Investments | |
$ | 242,245,395 | | |
| 100.0 | % | |
$ | 260,136,253
| | |
| 100.0 | % |
Determination
of Net Asset Value
We
determine the net asset value of our investment portfolio after the conclusion of each fiscal quarter in connection with the preparation
of our annual and quarterly reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or
more frequently if required under the 1940 Act.
Securities
that are publicly traded are generally valued at the close price on the valuation date; however, if they remain subject to lock-up restrictions
they are discounted accordingly. Securities that are not publicly traded or for which there are no readily available market quotations,
including securities that trade on secondary markets for private securities, are valued at fair value as determined in good faith by
our Board of Directors and in accordance with Rule 2a-5 as promulgated under the 1940 Act. In connection with that determination, our
executive officers and investment professionals will prepare portfolio company valuations using, when available, the most recent portfolio
company financial statements and forecasts. We also engage an independent valuation firm to perform independent valuations of our investments
that are not publicly traded or for which there are no readily available market quotations. We may also engage an independent valuation
firm to perform independent valuations of any securities that trade on private secondary markets, but are not otherwise publicly traded,
where there is a lack of appreciable trading or a wide disparity in recently reported trades.
For
those securities that are not publicly traded or for which there are no readily available market quotations, our Board of Directors,
with the assistance of its valuation committee (the “Valuation Committee”), will use the recommended valuations as prepared
by our executive officers and investment professionals and the independent valuation firm, respectively, as a component of the foundation
for its final fair value determination. Due to the uncertainty inherent in the valuation process, such estimates of fair value may differ
significantly from the values that would have resulted had others made the determination using the same or different procedures or had
a readily available market for the securities existed, and the differences could be material. Additionally, changes in the market environment
and other events that may occur over the life of the investments may cause the gains or losses ultimately realized on these investments
to be different than the gains or losses implied by the valuation currently assigned to such investments. For those investments that
are publicly traded, we generally record unrealized appreciation or depreciation based on changes in the market value of the securities
as of the valuation date. Publicly traded securities that remain subject to lock-up restrictions are discounted accordingly. For those
investments that are not publicly traded and for which there are no readily available market quotations, we record unrealized depreciation
on such investments when we believe that an investment has become impaired and record unrealized appreciation if we believe that the
underlying portfolio company has appreciated in value and our equity security has also appreciated in value. Changes in fair value are
recorded in the consolidated statement of operations as the net change in unrealized appreciation or depreciation.
We
generally determine the fair value of our investments by considering a number of factors. The following represent factors that, among
others, could impact our fair value determinations:
|
1. |
Public
trading of our portfolio securities, taking into consideration lock-up requirements and liquidity; |
|
|
|
|
2. |
Active
trading of our portfolio securities on a private secondary market, where we have determined that there is meaningful volume and the
transactions are considered arm’s length by sophisticated investors; |
|
|
|
|
3. |
Qualified
funding rounds in the companies in which we invested, where there is meaningful and reputable information available on size, valuation
and investors; and |
|
|
|
|
4. |
Additional
investments by us in current portfolio companies, where the price of the new investment differs materially from prior investments. |
There
is inherent subjectivity in determining the fair value of our investments. We expect that most of our portfolio investments, other than
those for which market quotations are readily available and that may be sold without restriction, will be valued at fair value as determined
in good faith by our Board of Directors, with the assistance of our Valuation Committee. Furthermore, when calculating net asset value,
we also consider our recognition of a deferred tax liability for unrealized gains on investments for those investments held in our taxable
subsidiaries. See “Note 1—Nature of Operations” to our consolidated financial statements for the year ended December
31, 2022 for a list of our taxable subsidiaries.
Regulation
as a Business Development Company
General
A
BDC is regulated by the 1940 Act. A BDC must be organized in the United States for the purpose of investing in, or lending to, primarily
private companies and making significant managerial assistance available to them. A BDC may use capital provided by public stockholders
and from other sources to make long-term, private investments in businesses. A BDC provides stockholders the ability to retain the liquidity
of a publicly traded stock while sharing in the possible benefits, if any, of investing in primarily privately owned companies.
We
may not change the nature of our business so as to cease to be, or withdraw our election as, a BDC unless authorized by vote of a majority
of the outstanding voting securities, as required by the 1940 Act. A majority of the outstanding voting securities of a company is defined
under the 1940 Act as the lesser of: (a) 67% or more of such company’s voting securities present at a meeting if more than 50%
of the outstanding voting securities of such company are present or represented by proxy, or (b) more than 50% of the outstanding voting
securities of such company. We do not anticipate any substantial change in the nature of our business.
As
with other companies regulated by the 1940 Act, a BDC must adhere to certain substantive regulatory requirements. A majority of our directors
must be persons who are not “interested persons” as defined in the 1940 Act. Additionally, we are required to provide and
maintain a bond issued by a reputable fidelity insurance company to protect the BDC. 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.
As
a BDC, we are generally required to meet an asset coverage ratio, defined under the 1940 Act as the ratio of our gross assets (less all
liabilities and indebtedness not represented by senior securities) to our outstanding senior securities, of at least 200% after each
issuance of senior securities. We may also be prohibited under the 1940 Act from knowingly participating in certain transactions with
our affiliates without the prior approval of our directors who are not interested persons and, in some cases, prior approval by the SEC.
The SBCAA modified the asset coverage percentage for BDCs, reducing the
required coverage percentage for senior securities from 200% to 150%, subject to certain conditions. Under the SBCAA, we are allowed to
increase our leverage capacity if stockholders representing at least a majority of the votes cast, when a quorum is present, approve a
proposal to do so. If we receive stockholder approval, we would be allowed to increase our leverage capacity on the first day after such
approval. Alternatively, the SBCAA allows the majority of our independent directors to approve an increase in our leverage capacity, and
such approval would become effective on the one-year anniversary of such approval. In either case, we would be required to make certain
disclosures on our website and in SEC filings regarding, among other things, the receipt of approval to increase our leverage, our leverage
capacity and usage, and risks related to leverage.
Pursuant
to the SBCAA, the SEC issued rules or amendments to rules allowing BDCs to use the same securities offering and proxy rules that are
available to operating companies, including, among other things, allowing BDCs to incorporate by reference in registration statements
filed with the SEC and allowing certain BDCs to file shelf registration statements that are automatically effective and take advantage
of other benefits available to Well-Known Seasoned Issuers.
We
do not intend to acquire securities issued by any investment company that exceed the limits imposed by the 1940 Act. Under these limits,
except for registered money market funds, we generally cannot acquire more than 3% of the voting stock of any investment company, invest
more than 5% of the value of our total assets in the securities of one investment company or invest more than 10% of the value of our
total assets in the securities of investment companies in the aggregate. The portion of our portfolio invested in securities issued by
investment companies ordinarily will subject our stockholders to additional indirect expenses. Our investment portfolio is also subject
to diversification requirements by virtue of our election to be treated as a RIC for U.S. federal income tax purposes and our intention
to continue to operate in a manner so as to qualify for the tax treatment applicable to RICs. See “Risk Factors—Risks Related
to Our Business and Structure” in Part I, Item 1A of this Form 10-K for more information.
In
addition, investment companies registered under the 1940 Act and private funds that are excluded from the definition of “investment
company” pursuant to either Section 3(c)(1) or 3(c)(7) of the 1940 Act may not acquire directly or through a controlled entity
more than 3% of our total outstanding voting stock (measured at the time of the acquisition), unless the funds comply with an exemption
under the 1940 Act. As a result, certain of our investors may hold a smaller position in our shares than if they were not subject to
these restrictions.
We
are generally not able to issue and sell our common stock at a price below net asset value per share. See “Risk Factors—Risks
Related to Our Business and Structure—Regulations governing our operation as a business development company affect our ability
to, and the way in which we, raise additional capital, which may expose us to risks, including the typical risks associated with leverage”
in Part I, Item 1A of this Form 10-K. We may, however, sell our common stock, or warrants, options or rights to acquire our common stock,
at a price below the then-current net asset value of our common stock if our Board of Directors determines that such sale is in our best
interests and the best interests of our stockholders, and our stockholders approve such sale. In addition, we may generally issue new
shares of our common stock at a price below net asset value in rights offerings to existing stockholders, in payment of dividends and
in certain other limited circumstances.
As
a BDC, we are also 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 by the SEC. The affiliates
with which we may be prohibited from transacting include our directors, officers and employees and any person controlling or under common
control with us, subject to certain exceptions. For example, under the 1940 Act, absent receipt of exemptive relief from the SEC, we
and certain of our affiliates are generally precluded from co-investing in negotiated private placements of securities.
We
are subject to periodic examination by the SEC for compliance with the 1940 Act.
As
a BDC, we are subject to certain risks and uncertainties. See “Risk Factors—Risks Related to Our Business and Structure”
in Part I, Item 1A of this Form 10-K.
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 as “qualifying assets”, unless, at the time the acquisition is made, qualifying assets represent at least 70% of the BDC’s
gross assets. The principal categories of qualifying assets relevant to our business are the following:
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1. |
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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a. |
is
organized under the laws of, and has its principal place of business in, the United States; |
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b. |
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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c. |
satisfies
any of the following: |
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i. |
does
not have any class of securities that is traded on a national securities exchange; |
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ii. |
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 $250.0 million; |
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iii. |
is
controlled by a BDC or a group of companies including a BDC and the BDC has an affiliated person who is a director of the eligible
portfolio company; |
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iv. |
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;
or |
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v. |
meets
such other criteria as may be established by the SEC. |
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2. |
Securities
of any eligible portfolio company which we control. |
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3. |
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. |
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. |
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 options, warrants or rights relating to such securities. |
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6. |
Cash,
cash equivalents, U.S. government securities or high-quality debt securities maturing in one year or less from the time of investment. |
In
addition, a BDC must have been organized and have its principal place of business in the United States and must be operated for the purpose
of making investments in the types of securities described in (1), (2) or (3) above.
If
at any time less than 70% of our gross assets are comprised of qualifying assets, including as a result of an increase in the value of
any non-qualifying assets or decrease in the value of any qualifying assets, we would generally not be permitted to acquire any additional
non-qualifying assets, other than office furniture and equipment, interests in real estate and leasehold improvements and facilities
maintained to conduct the business operations of the BDC, deferred organization and operating expenses, and other noninvestment assets
necessary and appropriate to its operations as a BDC, until such time as 70% of our then-current gross assets were comprised of qualifying
assets. We would not be required, however, to dispose of any non-qualifying assets in such circumstances.
Managerial
Assistance to Portfolio Companies
A
BDC generally must offer to make available to the issuer of the securities it holds significant managerial assistance, except in circumstances
where either (i) the BDC controls such issuer of securities or (ii) the BDC purchases such securities in conjunction with one or more
other persons acting together and one of the other persons in the group makes available such managerial assistance. Making available
significant managerial assistance means, among other things, any arrangement whereby the BDC, through its directors, officers or employees,
offers to provide, and, if accepted, does so provide, significant guidance and counsel concerning the management, operations or business
objectives and policies of a portfolio company.
Temporary
Investments
Pending
investment in other types of “qualifying assets,” as described above, our investments may consist of cash, cash equivalents,
U.S. government securities or high-quality debt securities maturing in one year or less from the time of investment, which we refer to,
collectively, as temporary investments, so that 70% of our assets are qualifying assets. Typically, we will invest in U.S. Treasury bills
or in repurchase agreements, provided that such agreements are fully collateralized by cash or securities issued by the U.S. government
or its agencies. A repurchase agreement involves the purchase by an investor, such as us, of a specified security and the simultaneous
agreement by the seller to repurchase it at an agreed-upon future date and at a price which is greater than the purchase price by an
amount that reflects an agreed-upon interest rate. There is no percentage restriction on the proportion of our assets that may be invested
in such repurchase agreements. However, if more than 25% of our gross assets constitute repurchase agreements from a single counterparty,
we would not meet the diversification tests in order to qualify as a RIC for U.S. federal income tax purposes. Thus, we do not intend
to enter into repurchase agreements with a single counterparty in excess of this limit. We will monitor the creditworthiness of the counterparties
with which we enter into repurchase agreement transactions.
Warrants
and Options
Under
the 1940 Act, a BDC is subject to restrictions on the amount of warrants, options, restricted stock or rights to purchase shares of capital
stock that it may have outstanding at any time. Under the 1940 Act, we may generally only offer warrants provided that (i) the warrants
expire by their terms within ten years, (ii) the exercise or conversion price is not less than the current market value at the date of
issuance, (iii) our stockholders authorize the proposal to issue such warrants, and our Board of Directors approves such issuance on
the basis that the issuance is in the best interests of us and our stockholders and (iv) if the warrants are accompanied by other securities,
the warrants are not separately transferable unless no class of such warrants and the securities accompanying them has been publicly
distributed. The 1940 Act also provides that the amount of our voting securities that would result from the exercise of all outstanding
warrants, as well as options and rights, at the time of issuance may not exceed 25% of our outstanding voting securities. In particular,
the amount of capital stock that would result from the conversion or exercise of all outstanding warrants, options or rights to purchase
capital stock cannot exceed 25% of the BDC’s total outstanding shares of capital stock. This amount is reduced to 20% of the BDC’s
total outstanding shares of capital stock if the amount of warrants, options or rights issued pursuant to an executive compensation plan
would exceed 15% of the BDC’s total outstanding shares of capital stock.
Senior
Securities
We
are permitted, under specified conditions, to issue multiple classes of indebtedness 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% (or 150% if certain requirements are met) 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. For a discussion of the risks associated with leverage, see “Risk Factors — Risks Related
to Our Business and Structure — Borrowings, such as our 6.00% Notes due 2026 (the “6.00% Notes due 2026”), can magnify
the potential for gain or loss on amounts invested and may increase the risk of investing in us.” in Part I, Item 1A of this Form
10-K.
Code
of Ethics
We
have adopted a code of ethics pursuant to Rule 17j-1 under the 1940 Act. This code establishes procedures for personal investments and
restricts certain transactions by our personnel. Our code of ethics and our code of business conduct and ethics are available on the
EDGAR Database on the SEC’s Internet site at http://www.sec.gov, and are available on our website. You may also obtain copies
of our code of ethics and our code of business conduct and ethics, after paying a duplicating fee, by electronic request at the following
email address: publicinfo@sec.gov.
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 review these compliance policies and procedures annually for their adequacy and the effectiveness of their implementation. Our
Chief Compliance Officer is responsible for administering these policies and procedures.
Compliance
with Corporate Governance Regulations
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:
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pursuant
to Rule 13a-14 of the Exchange Act, our Chief Executive Officer and Chief Financial Officer must certify the accuracy of the financial
statements contained in our periodic reports; |
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pursuant
to Item 307 of Regulation S-K, our periodic reports must disclose our conclusions about the effectiveness of our disclosure controls
and procedures; |
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pursuant
to Rule 13a-15 of the Exchange Act, our management must prepare an annual report regarding its assessment of our internal control
over financial reporting, and we must obtain an audit of the effectiveness of internal control over financial reporting performed
by our independent registered public accounting firm if we are no longer a non-accelerated filer (as defined in Rule 12b-2 under
the Exchange Act); and |
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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 control 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. |
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.
In
addition, the Nasdaq Global Select Market has adopted various corporate governance requirements as part of its listing standards. We
believe we are in compliance with such corporate governance listing standards. We will continue to monitor our compliance with all future
listing standards and will take actions necessary to ensure that we are in compliance therewith.
Proxy
Voting Policies and Procedures
Proxy
Policies
We
will vote proxies relating to our portfolio securities in what we perceive to be the best interests of our stockholders. We will review
on a case-by-case basis each proposal submitted for a vote to determine its impact on the portfolio securities held by us. Although we
will generally vote against proposals that may have a negative impact on our portfolio securities, we may vote for such a proposal if
there are compelling long-term reasons to do so.
Our
proxy voting decisions are made by our executive officers and investment professionals who are responsible for monitoring the relevant
investments. To ensure that our vote is not the product of a conflict of interest, we require that: (1) anyone involved in the decision-making
process disclose to our Chief Compliance Officer any potential conflict that he or she is aware of and any contact that he or she has
had with any interested party regarding a proxy vote; and (2) employees involved in the decision-making process or vote administration
are prohibited from revealing how we intend to vote on a proposal without the prior approval of the Chief Compliance Officer and our
senior management in order to reduce any attempted influence from interested parties.
Proxy
Voting Records
You
may obtain information about how we voted proxies with respect to our portfolio securities by making a written request for proxy voting
information to: Chief Compliance Officer, SuRo Capital Corp., 640 Fifth Avenue, 12th Floor, New York, NY 10019 or compliance@surocap.com.
Privacy
Principles
We
are committed to maintaining the privacy of our stockholders and to safeguarding their non-public personal information. The following
information is provided to help you understand what personal information we collect, how we protect that information and why, in certain
cases, we may share information with select other parties.
Generally,
we do not receive any non-public personal information relating to our stockholders, although certain non-public personal information
of our stockholders may become available to us. We do not disclose any non-public personal information about our stockholders or former
stockholders to anyone, except as permitted by law or as is necessary in order to service stockholder accounts (for example, to a transfer
agent or third-party administrator).
We
restrict access to non-public personal information about our stockholders to our employees and affiliates with a legitimate business
need for the information. We maintain physical, electronic and procedural safeguards designed to protect the non-public personal information
of our stockholders.
Available
Information
The
SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that
file electronically with the SEC. The address of that site is http://www.sec.gov.
Our
internet address is www.surocap.com. We make available free of charge on our website our annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, proxy statements and amendments to those reports as soon as reasonably practicable
after we electronically file such material with, or furnish it to, the SEC. The information on our website is not incorporated by reference
into and should not be considered to be part of this annual report on Form 10-K.
Material
U.S. Federal Income Tax Considerations
Included
in our consolidated financial statements are GSV Capital Lending, LLC, SuRo Capital Sports, LLC, and the following wholly-owned subsidiaries,
which are taxable subsidiaries (collectively, the “Taxable Subsidiaries”) regardless of whether we qualify for tax treatment
as a RIC: GSVC AE Holdings, Inc., GSVC AV Holdings, Inc., GSVC SW Holdings, Inc., and GSVC SVDS Holdings, Inc. The Taxable Subsidiaries
are C corporations for U.S. federal and state income tax purposes. These taxable subsidiaries are not consolidated for income tax purposes
and may generate income tax expenses as a result of their ownership of the portfolio companies. Such income tax expenses and deferred
taxes, if any, will be reflected in our consolidated financial statements.
We
evaluate tax positions taken, or expected to be taken, in the course of preparing our consolidated financial statements to determine
whether the tax positions are “more-likely-than-not” to be sustained by the applicable tax authority. We recognize the tax
benefits of uncertain tax positions only when the position has met the “more-likely-than-not” threshold. We classify penalties
and interest associated with income taxes, if any, as income tax expense. Conclusions regarding tax positions are subject to review and
may be adjusted at a later date based on factors including, but not limited to, ongoing analyses of tax laws, regulations and interpretations
thereof. We have identified our major tax jurisdictions as U.S. federal and New York.
Election
to be Taxed as a RIC
We
elected to be taxed as a RIC under the Code beginning with our taxable year ended December 31, 2014, and qualified for taxation as a
RIC for such taxable year and each of the subsequent taxable years. We intend to operate in a manner so as to qualify for taxation as
a RIC. So long as we maintain our qualification for taxation a RIC, we generally will not be required to pay U.S. federal income tax
at corporate rates on any ordinary income or capital gains that we timely distribute to our stockholders as dividends. To qualify for
taxation as a RIC, we must, among other things, meet certain source-of-income and asset diversification requirements (as described below).
In addition, in order to qualify for the special treatment accorded to RICs, we are required to distribute to our stockholders on a timely
basis each year at least 90% of our “investment company taxable income,” which is generally our net ordinary income plus
the excess of realized net short-term capital gains over realized net long-term capital losses (the “Annual Distribution Requirement”).
Taxation
as a Regulated Investment Company
If
we:
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qualify
as a RIC; and |
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satisfy
the Annual Distribution Requirement, |
then
we will not be subject to U.S. federal income tax on the portion of our income and capital gains that we timely distribute (or are deemed
to distribute) to stockholders. We will be subject to U.S. federal income tax at the regular corporate rates on any income, including
capital gains not distributed (or deemed distributed) to our stockholders.
We
will be subject to a 4% nondeductible U.S. federal excise tax on certain undistributed income unless we distribute in a timely manner
each calendar year an amount equal to at least the sum of (1) 98% of our net ordinary income for each calendar year, (2) 98.2% of our
capital gains in excess of capital losses for the one-year period ending October 31 in that calendar year and (3) any ordinary income
and net capital gains that we recognized for preceding years but were not distributed during such years and on which we paid no U.S.
federal income tax (the “Excise Tax Avoidance Requirement”). While we intend to timely distribute our income and capital
gains in order to avoid imposition of this 4% U.S. federal excise tax, we may not be successful in avoiding entirely the imposition of
this tax. In that case, we will be liable for the tax only on the amount by which we do not meet the foregoing distribution requirement.
In
order to qualify as a RIC for U.S. federal income tax purposes, we must, among other things:
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continue
to qualify as a BDC under the 1940 Act at all times during each taxable year; |
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derive
in each taxable year at least 90% of our gross income from dividends, interest, payments with respect to loans of certain securities,
gains from the sale of stock or other securities or foreign currencies, other income derived with respect to our business of investing
in such stock or securities and net income from “qualified publicly traded partnerships” (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 the issuer (the “50% Diversification Test”); and |
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no
more than 25% of the value of our assets is invested in the securities of one issuer, other than U.S. government securities or securities
of other RICs, the securities (other than securities of other RICs) of two or more issuers that are controlled, as determined under
applicable Code rules, by us and that are engaged in the same or similar or related trades or the securities of businesses, or of
certain “qualified publicly traded partnerships” (the “25% Diversification Test,” and together with the 50%
Diversification Test, the “Diversification Tests”). |
If
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 such discrepancy is 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 for purposes
of applying the rule described in the preceding sentence.
We
may be required to recognize taxable income in circumstances in which we do not receive cash. For example, if we hold debt obligations
that are treated under applicable tax rules as having original issue discount (which may arise if we receive warrants in connection with
the origination of a loan or possibly in other circumstances), we must include in income each year a portion of the original issue discount
that accrues over the life of the obligation, regardless of whether cash representing such income is received by us in the same taxable
year. We may also have to include in income other amounts that we have not yet received in cash, such as contractual payment-in-kind,
or PIK, interest (which represents contractual interest added to the loan balance and due at the end of the loan term) or dividends and
deferred loan origination fees that are paid after origination of the loan or are paid in non-cash compensation such as warrants or stock.
Because any original issue discount or other amounts accrued will be included in our investment company taxable income for the year of
accrual, we may be required to make a distribution to our stockholders in order to satisfy the Annual Distribution Requirement and the
Excise Tax Avoidance Requirement, even though we will not have received any corresponding cash amount.
We
will 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.
See “—Regulation as a Business Development Company—Senior Securities.” Moreover, our ability to dispose of assets
to meet our distribution requirements may be limited by (1) the illiquid nature of our portfolio and/or (2) other requirements relating
to our status as a RIC, including the Diversification Tests. If we dispose of assets in order to meet the Annual Distribution Requirement
or the Excise Tax Avoidance Requirement, we may make such dispositions at times that, from an investment standpoint, are not advantageous.
We
may be required to sell assets in order to satisfy the Diversification Tests. However, our ability to dispose of assets to meet the Diversification
Tests may be limited by the illiquid nature of our portfolio. If we dispose of assets in order to meet the Diversification Tests, we
may make such dispositions at times that, from an investment standpoint, are not advantageous and may result in substantial losses.
We
may invest in partnerships, including qualified publicly traded partnerships, which may result in our being subject to state, local or
foreign income taxes, franchise taxes, or withholding liabilities. To the extent that we invest in entities treated as partnerships for
U.S. federal income tax purposes (other than a “qualified publicly-traded partnership”), we generally must include the items
of gross income derived by the partnerships for purposes of the 90% Income Test, and the income that is derived from a partnership (other
than a “qualified publicly-traded partnership”) will be treated as qualifying income for purposes of the 90% Income Test
only to the extent that such income is attributable to items of income of the partnership which would be qualifying income if realized
by us directly.
In
order to meet the 90% Income Test, we may establish one or more special purpose corporations to hold assets from which we do not anticipate
earning dividend, interest or other qualifying income under the 90% Income Test. Any investments held through a special purpose corporation
would generally be subject to U.S. federal income and other taxes, and therefore we can expect to achieve a reduced after-tax yield on
such investments.
Certain
of our investment practices may be subject to special and complex U.S. federal income tax provisions that may, among other things: (i)
disallow, suspend or otherwise limit the allowance of certain losses or deductions; (ii) convert lower taxed long-term capital gain into
higher taxed short-term capital gain or ordinary income; (iii) convert an ordinary loss or a deduction into a capital loss (the deductibility
of which is more limited); (iv) cause us to recognize income or gain without a corresponding receipt of cash; (v) adversely affect the
time as to when a purchase or sale of securities is deemed to occur; (vi) adversely alter the characterization of certain complex financial
transactions; and (vii) produce income that will not be qualifying income for purposes of the 90% Income Test described above. We will
monitor our transactions and may make certain tax elections in order to mitigate the potential adverse effect of these provisions.
A
portfolio company may face financial difficulty that requires us to work-out, modify or otherwise restructure our investment in the portfolio
company. Any such restructuring may result in unusable capital losses and future non-cash income. Any restructuring may also result in
our recognition of a substantial amount of non-qualifying income for purposes of the 90% Income Test.
Gain
or loss realized by us from the sale or exchange of warrants acquired by us as well as any loss attributable to the lapse of such warrants
generally will be treated as capital gain or loss. The treatment of such gain or loss as long-term or short-term will depend on how long
we held a particular warrant. Upon the exercise of a warrant acquired by us, our adjusted tax basis in the stock purchased under the
warrant will equal the sum of the amount paid for the warrant plus the strike price paid on the exercise of the warrant.
As
a RIC, we are generally limited in our ability to deduct expenses in excess of our “investment company taxable income” (which
is, generally, ordinary income plus the excess of net short-term capital gains over net long-term capital losses). If our expenses in
a given year exceed investment company taxable income, 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. In addition, expenses can be used only to offset investment company
taxable income, not net capital gain. Due to these limits on the deductibility of expenses, we may, for tax purposes, have aggregate
taxable income or net capital gains for several years that we are required to distribute and that is taxable to our stockholders even
if such income or net capital gains is greater than the aggregate net income we actually earned during those years. Such required distributions
may be made from the Company’s 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, a stockholder may receive a larger capital gain
distribution than it would have received in the absence of such transactions.
Our
investment in non-U.S. securities may be subject to non-U.S. income, withholding and other taxes. In that case, our yield on those securities
would be decreased. Stockholders will generally not be entitled to claim a credit or deduction with respect to non-U.S. taxes paid by
us.
If
we purchase shares in a “passive foreign investment company” (a “PFIC”), we may be subject to U.S. federal income
tax on our allocable share of a portion of any “excess distribution” received on, or any gain from the disposition of, such
shares. Additional charges in the nature of interest generally will be imposed on us in respect of deferred taxes arising from any such
excess distribution or gain. This additional tax and interest may apply even if we make a distribution in an amount equal to any “excess
distribution” or gain from the disposition of such shares as a taxable dividend by us to our shareholders. If we invest in a PFIC
and elect to treat the PFIC as a “qualified electing fund” under the Code (a “QEF”), in lieu of the foregoing
requirements, we will be required to include in income each year our proportionate share of the ordinary earnings and net capital gain
of the QEF, even if such income is not distributed by the QEF. Alternatively, we may be able to elect to mark-to-market at the end of
each taxable year its shares in a PFIC; in this case, we will recognize as ordinary income our allocable share of any increase in the
value of such shares, and as ordinary loss our allocable share of any decrease in such value to the extent that any such decrease does
not exceed prior increases included in our income. Under either election, we may be required to recognize in a year income in excess
of distributions from PFICs and proceeds from dispositions of PFIC stock during that year, and such income will nevertheless be subject
to the Annual Distribution Requirement and will be taken into account for purposes of the 4% U.S. federal excise tax.
Failure
to Maintain our Qualification as a RIC
If
we fail to satisfy the 90% Income Test or the Diversification Tests for any taxable year, we may nevertheless continue to qualify as
a RIC for such year if certain relief provisions are applicable (which may, among other things, require us to pay certain U.S. federal
income taxes at corporate rates or to dispose of certain assets).
If
we were unable to qualify for treatment as a RIC and the foregoing relief provisions are not applicable, we would be subject to tax on
all of our taxable income at regular corporate rates, regardless of whether we make any distributions to our stockholders. Distributions
would not be required, and any distributions would be taxable to our stockholders as ordinary dividend income that, subject to certain
limitations, may be eligible for the 20% maximum rate to the extent of our current and accumulated earnings and profits provided certain
holding period and other requirements were met. 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 that would reduce the stockholder’s adjusted tax basis in its common stock (and correspondingly increase
such stockholder’s gain, or reduce such stockholder’s loss, on disposition of such common stock), and any remaining distributions
would be treated as a capital gain. To requalify as a RIC in a subsequent taxable year, we would be required to satisfy the RIC qualification
requirements for that year 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 are recognized within the subsequent
five years, unless we made a special election to pay U.S. federal income tax at corporate rates on such built-in gain at the time of
our requalification as a RIC.
Tax
matters are complicated and the tax consequences to an investor of an investment in our common stock will depend on the facts of his,
her or its particular situation. We encourage investors to consult their own tax advisers regarding the specific consequences of such
an investment, including tax reporting requirements, the applicability of U.S. federal, state, local and foreign tax laws, eligibility
for the benefits of any applicable tax treaty and the effect of any possible changes in the tax laws.
See
“Risk Factors—Risks Related to Our Business and Structure” in Part I, Item 1A of this Form 10-K and “Note 2—Significant
Accounting Policies—U.S. Federal and State Income Taxes” and “Note 9—Income Taxes” to our consolidated
financial statements for the year ended December 31, 2022 for further detail.
Item
1A. Risk Factors
Investing
in our securities involves a number of significant risks. In addition to the other information contained in this annual report on Form
10-K, you should consider carefully the following information before making an investment in our securities. Although the risks described
below represent the principal risks associated with an investment in us, they are not the only risks we face. 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.
Summary
of Principal Risk Factors
The
following is a summary of the principal risks that you should carefully consider before investing in our securities and is followed by
a more detailed discussion of the material risks related to us and an investment in our securities.
We
are subject to risks related to our investments, including but not limited to the following:
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Our
investments in the rapidly growing venture-capital-backed emerging companies that we target may be extremely risky and we could lose
all or part of our investments. |
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In
the event that we make an investment in a sponsor of a SPAC and the underlying SPAC does not consummate a business combination, we
will lose the entirety of our investment. |
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Because
our investments are generally not in publicly traded securities, there will be uncertainty regarding the value of our investments,
which could adversely affect the determination of our net asset value. |
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The
lack of liquidity in, and potentially extended holding period of, our many investments may adversely affect our business and will
delay any distributions of gains, if any. |
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Technology-related
sectors in which we invest are subject to many risks, including volatility, intense competition, decreasing life cycles, product
obsolescence, changing consumer preferences, periodic downturns, regulatory concerns and litigation risks. |
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Our
portfolio is concentrated in a limited number of portfolio companies or market sectors, which subjects us to a risk of significant
loss if the business or market position of these companies deteriorates or market sectors experiences a market downturn. |
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Because
we will generally not hold controlling equity interests in our portfolio companies, we will likely not be in a position to exercise
control over our portfolio companies or to prevent decisions by substantial stockholders or management of our portfolio companies
that could decrease the value of our investments. |
We
are subject to risks related to our business and structure, including but not limited to the following:
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As
an internally managed BDC, we are subject to certain restrictions that may adversely affect our business and are dependent upon our
management team and investment professionals for our future success. |
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Our
business model depends upon the development and maintenance of strong referral relationships with private equity, venture capital
funds and investment banking firms. |
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Our
financial condition and results of operations will depend on our ability to achieve our investment objective. |
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Changes
in laws or regulations governing our operations may adversely affect our business or cause us to alter our business strategy. |
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Economic,
political and market conditions may adversely affect our business, results of operations and financial condition. |
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We
are exposed to risks associated with changes in interest rates and inflation rates. |
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We
operate in a highly competitive market for direct equity investment opportunities. |
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Our
use of borrowed funds to make investments exposes us to risks typically associated with leverage. |
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Ineffective
internal controls could impact our business and operating results. |
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We
face cyber-security risks. |
Risks
related to our securities, include but are not limited to the following:
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Investing
in our securities may involve an above average degree of risk. |
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Our
common stock price may be volatile and may decrease substantially. |
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We
may not be able to pay distributions to our stockholders and our distributions may not grow over time. |
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Our
stockholders may experience dilution upon the issuance of additional shares of our common stock. |
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If
we default under any future credit facility or any other future indebtedness, we may not be able to make payments on the 6.00% Notes
due 2026. |
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We
may choose to redeem the 6.00% Notes due 2026 when prevailing interest rates are relatively low. |
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An
active trading market for the 6.00% Notes due 2026 may not develop or be maintained, which could limit a holder’s ability to
sell the 6.00% Notes due 2026 and/or adversely impact the market price of the 6.00% Notes due 2026. |
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We
will be subject to U.S. federal income tax at corporate rates if we are profitable and are unable to qualify as a RIC, which could
have a material adverse effect on us and our stockholders. |
Risks
Related to Our Investments
Our
investments in the rapidly growing venture-capital-backed emerging companies that we target may be extremely risky and we could lose
all or part of our investments.
Investment
in the rapidly growing venture-capital-backed emerging companies that we target involves a number of significant risks, including the
following:
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these
companies may have limited financial resources and may be unable to meet their obligations under their existing debt, which may lead
to equity financings, possibly at discounted valuations, in which we could be substantially diluted if we do not or cannot participate,
bankruptcy or liquidation and the reduction or loss of our equity investment; |
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they
typically have limited operating histories, narrower, less established product lines and smaller market shares than larger businesses,
which tend to render them more vulnerable to competitors’ actions, market conditions and consumer sentiment in respect of their
products or services, as well as general economic downturns; |
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they
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 may require substantial additional capital to support
their operations, finance expansion or maintain their competitive position; |
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some
of these private companies may currently experience operating losses, which may be substantial, and there can be no assurance when
or if such companies will operate at a profit; |
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because
they are privately owned, there is generally little publicly available information about these businesses; therefore, although we
will perform due diligence investigations on these portfolio companies, their operations and their prospects, we may not learn all
of the material information we need to know regarding these businesses and, in the case of investments we acquire on private secondary
transactions, we may be unable to obtain financial or other information regarding the companies with respect to which we invest.
Furthermore, there can be no assurance that the information that we do obtain with respect to any investment is reliable; |
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these
private companies frequently have much more complex capital structures than traditional publicly traded companies, and may have multiple
classes of equity securities with differing rights, including with respect to voting and distributions. In certain cases, these private
companies may also have senior or pari passu preferred stock or senior debt outstanding, which may heighten the risk of investing
in the underlying equity of such private companies, particularly in circumstance when we have limited information with respect to
such capital structures; and |
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they
are more likely to depend on the management talents and efforts of a small group of persons; therefore, the death, disability, resignation
or termination of one or more of these persons could have a material adverse impact on the portfolio company and, in turn, on us. |
A
portfolio company’s failure to satisfy financial or operating covenants imposed by its lenders could lead to defaults and, potentially,
termination of its loans and foreclosure on its assets, which could trigger cross-defaults under other agreements and jeopardize our
equity investment in such portfolio company. We may incur expenses to the extent necessary to seek recovery of our equity investment
or to negotiate new terms with a financially distressed portfolio company.
Because
our investments are generally not in publicly traded securities, there will be uncertainty regarding the value of our investments, which
could adversely affect the determination of our net asset value.
Our
portfolio investments will generally not be in publicly traded securities. As a result, although we expect that some of our equity investments
may trade on private secondary marketplaces, the fair value of our direct investments in portfolio companies will often not be readily
determinable. Under the 1940 Act, for our investments for which there are no readily available market quotations, including securities
that, while listed on a private securities exchange, have not actively traded, we will value such securities at fair value quarterly
as determined in good faith by our Board of Directors based upon the recommendation of the Valuation Committee in accordance with our
written valuation policy and in compliance with Rule 2a-5. In connection with that determination, our executive officers and investment
professionals will prepare portfolio company valuations using, where available, the most recent portfolio company financial statements
and forecasts. The Valuation Committee utilizes the services of an independent valuation firm, which prepares valuations for each of
our portfolio investments that are not publicly traded or for which we do not have readily available market quotations, including securities
that while listed on a private securities exchange, have not actively traded. However, the Board of Directors retains ultimate authority
as to the appropriate valuation of each such investment. The types of factors that the Valuation Committee takes into account in providing
its fair value recommendation to the Board of Directors with respect to such non-traded investments include, as relevant and, to the
extent available, the portfolio company’s earnings, the markets in which the portfolio company does business, comparison to valuations
of publicly traded companies, comparisons to recent sales of comparable companies, the discounted value of the cash flows of the portfolio
company and other relevant factors. This information may not be available because it is difficult to obtain financial and other information
with respect to private companies, and even when we are able to obtain such information, there can be no assurance that it is complete
or accurate. Because such valuations are inherently uncertain and may be based on estimates, our determinations of fair value may differ
materially from the values that would be assessed if a readily available market for these securities existed. Due to this uncertainty,
our fair value determinations with respect to any non-traded investments we hold may cause our net asset value on a given date to materially
understate or overstate the value that we may ultimately realize on one or more of our investments. As a result, investors purchasing
our securities based on an overstated net asset value would pay a higher price than the value of our investments might warrant. Conversely,
investors selling securities during a period in which the net asset value understates the value of our investments would receive a lower
price for their securities than the value of our investments might warrant.
The
securities of our private portfolio companies are illiquid, and the inability of these portfolio companies to complete an IPO or consummate
another liquidity event within our targeted time frame will extend the holding period of our investments, may adversely affect the value
of these investments, and will delay the distribution of gains, if any.
The
IPO market is, by its very nature, unpredictable. A lack of IPO opportunities for venture capital-backed companies could lead to companies
staying longer in our portfolio as private entities still requiring funding. This situation may adversely affect the amount of available
venture capital funding to late-stage companies that cannot complete an IPO. Such stagnation could dampen returns or could lead to unrealized
depreciation and realized losses as some companies run short of cash and have to accept lower valuations in private fundings or are not
able to access additional capital at all. A lack of IPO opportunities for venture capital-backed companies may also cause some venture
capital firms 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. This might result in unrealized depreciation and realized losses in such companies by other investment
funds, like us, who are co-investors in such companies. There can be no assurance that we will be able to achieve our targeted return
on our portfolio company investments if, as and when they go public.
The
equity securities we acquire in a private company are generally subject to contractual transfer limitations imposed on the company’s
stockholders as well as other contractual obligations, such as rights of first refusal and co-sale rights. These obligations generally
expire only upon an IPO by the company or the occurrence of another liquidity/exit event. As a result, prior to an IPO or other liquidity/exit
event, our ability to liquidate our private portfolio company positions may be constrained. Transfer restrictions could limit our ability
to liquidate our positions in these securities if we are unable to find buyers acceptable to our portfolio companies, or where applicable,
their stockholders. Such buyers may not be willing to purchase our investments at adequate prices or in volumes sufficient to liquidate
our position, and even where they are willing, other stockholders could exercise their co-sale rights to participate in the sale, thereby
reducing the number of shares available to sell by us. Furthermore, prospective buyers may be deterred from entering into purchase transactions
with us due to the delay and uncertainty that these transfer and other limitations create.
If
the private companies in which we invest do not perform as planned, they may be unable to successfully complete an IPO or consummate
another liquidity event within our targeted time frame, or they may decide to abandon their plans for an IPO. In such cases, we will
likely exceed our targeted holding period and the value of these investments may decline substantially if an IPO or other exit is no
longer viable. We may also be forced to take other steps to exit these investments.
The
illiquidity of our private portfolio company investments, including those that are traded on the trading platforms of private secondary
marketplaces, may make it difficult for us to sell such investments should the need arise. Also, if we were required to liquidate all
or a portion of our portfolio quickly, we may realize significantly less than the value at which we have previously recorded our investments.
We will have no limitation on the portion of our portfolio that may be invested in illiquid securities, and we anticipate that all or
a substantial portion of our portfolio may be invested in such illiquid securities at all times. Due to the inherent uncertainty in determining
the fair value of investments that do not have a readily available market value, the fair value of our investments determined in good
faith by our Board of Directors may differ significantly from the value that would have been used had a ready market existed for such
investments, and the differences could be material.
In
addition, even if a portfolio company completes an IPO, we will typically not be able to sell our position until any applicable post-IPO
lockup restriction expires. As a result of lockup restrictions, the market price of securities that we hold may decline substantially
before we are able to sell them following an IPO. There is also no assurance that a meaningful trading market will develop for our publicly
traded portfolio companies following an IPO to allow us to liquidate our position when we desire.
We
may not realize gains from our equity investments and, because certain of our portfolio companies may incur substantial debt to finance
their operations, we may experience a complete loss on our equity investments in the event of a bankruptcy or liquidation of any of our
portfolio companies.
We
invest principally in the equity and equity-related securities of what we believe to be rapidly growing venture-capital-backed emerging
companies. However, the equity interests we acquire may not appreciate in value and, in fact, may decline in value.
In
addition, the private company securities we acquire may be subject to drag-along rights, which could permit other stockholders, under
certain circumstances, to force us to liquidate our position in a subject company at a specified price, which could be, in our opinion,
inadequate or undesirable or even below our cost basis. In this event, we could realize a loss or fail to realize gain in an amount that
we deem appropriate on our investment. Further, capital market volatility and the overall market environment may preclude our portfolio
companies from realizing liquidity events and impede our exit from these investments. 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 we experience. We will generally have little, if any, control over the timing of any gains we may realize from our equity
investments unless and until the portfolio companies in which we invest become publicly traded. In addition, the companies in which we
invest may have substantial debt loads. In such cases, we would typically be last in line behind any creditors in a bankruptcy or liquidation
and would likely experience a complete loss on our investment.
Many
of our portfolio companies are currently experiencing operating losses, which may be substantial, and there can be no assurance when
or if such companies will operate at a profit.
We
have limited information about the financial performance and profitability of some of our portfolio companies. While certain of our portfolio
companies have earned net income in recent periods, we believe that many of our portfolio companies are currently experiencing operating
losses. There can be no assurance when or if such companies will operate at a profit.
The
lack of liquidity in, and potentially extended holding period of, our many investments may adversely affect our business and will delay
any distributions of gains, if any.
Our
investments will generally not be in publicly traded securities. Although we expect that some of our equity investments will trade on
private secondary marketplaces, certain of the securities we hold will be subject to legal and other restrictions on resale or will otherwise
be less liquid than publicly traded securities. In addition, while some portfolio companies may trade on private secondary marketplaces,
we can provide no assurance that such a trading market will continue or remain active, or that we will be able to sell our position in
any portfolio company at the time we desire to do so and at the price we anticipate. The illiquidity of our investments, including those
that are traded on private secondary marketplaces, will make it difficult for us to sell such investments if the need arises. Also, if
we are required to liquidate all or a portion of our portfolio quickly, we may realize significantly less than the value at which we
have previously recorded our investments. We have no limitation on the portion of our portfolio that may be invested in illiquid securities,
and a substantial portion or all of our portfolio may be invested in such illiquid securities from time to time.
In
addition, because we generally invest in equity and equity-related securities, with respect to the majority of our portfolio companies,
we do not expect regular realization events, if any, to occur in the near term. We expect that our holdings of equity securities may
require several years to appreciate in value, and we can offer no assurance that such appreciation will occur. Even if such appreciation
does occur, it is likely that initial purchasers of our shares could wait for an extended period of time before any appreciation or sale
of our investments, and any attendant distributions of gains, may be realized.
Our
portfolio is concentrated in a limited number of portfolio companies or market sectors, which subjects us to a risk of significant loss
if the business or market position of these companies deteriorates or market sectors experiences a market downturn.
A
consequence of our limited number of investments is that 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. For example, as of December
31, 2022, 58.4% of our net asset value was comprised of investments in ten portfolio companies. Beyond the asset diversification requirements
necessary to qualify as a RIC, we have general guidelines for diversification, however our investments could be concentrated in relatively
few issuers. In addition, our investments may be concentrated in a limited number of market sectors, including in technology-related
sectors. As a result, a downturn in any market sector in which a significant number of our portfolio companies operate or the deterioration
of the market position of any portfolio company in which we have a material position could materially adversely affect us.
Our portfolio may be exposed in part to one
or more specific industries, which may subject us to a risk of significant loss in a particular investment or investments if there is
a downturn in that particular industry. In particular, technology-related sectors in which we invest are subject to many risks, including
volatility, intense competition, decreasing life cycles, product obsolescence, changing consumer preferences, periodic downturns, regulatory
concerns and litigation risks.
Our portfolio may be exposed in part to one or more specific industries.
A downturn in any particular industry in which we are invested could significantly impact the aggregate returns we realize. If an industry
in which we have significant investments suffers from adverse business or economic conditions, a material portion of our investment portfolio
could be adversely affected, which, in turn, could adversely affect our financial position and results of operations.
Given the experience of our executive officers and investment professionals
within the technology space, a number of the companies in which we have invested and intend to invest operate in technology-related sectors,
and as of December 31, 2022, our largest industry concentrations of our total investments at fair value were in the education technology
sector, which represented approximately 39.4% of our portfolio, and the financial technology sector, which represented approximately 24.2%
of our portfolio. Additionally, our investments in the marketplaces sector represented approximately 17.4% of our portfolio. Therefore,
we are susceptible to the economic circumstances and market conditions in these industries, and a downturn in one or more of these industries
could have a material adverse effect.
Our investment in the education technology industry is subject to substantial
risks. The revenue, income (or losses) and valuations of technology-related companies can and often do fluctuate suddenly and dramatically.
In addition, because of rapid technological change, the average selling prices of products and some services provided by companies in
technology-related sectors have historically decreased over their productive lives. In addition, our portfolio companies in these sectors
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. For example, new technologies, including those based on artificial
intelligence, can provide students with more immediate responses to inquiries that traditional tools, and over time, the accuracy of these
tools and their ability to handle complex questions may improve, all of which may be disruptive to education technology businesses.
Potential competitors to our portfolio companies in the education technology
industry range from large and established companies to emerging start-ups. Further, such companies may be 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-related 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. Education technology has been a subject
of particular scrutiny; for example, in 2019, certain members of the United States Senate circulated letters to education technology companies
regarding their concerns about the amount of data being collected on students utilizing such technologies and the potential safety and
security risks to children related to such data collection. Evolving regulatory landscapes and our portfolio companies’ mandated
compliance with new laws and regulations could add new challenges to their operations and negatively affect such companies’ results
of operations and, in turn, our business.
Similarly, our investments in the financial technology industry are subject
to substantial risks. These companies may be unseasoned, unprofitable or have no established operating histories or earnings and may lack
technical, marketing, financial and other resources. These companies often have the need for substantial additional capital to support
expansion or to achieve or maintain a competitive position. Less established companies tend to have lower capitalization and fewer resources
and, therefore, are often more vulnerable to financial failure. These companies may be dependent upon the success of one product or service,
a unique distribution channel, or the effectiveness of a manager or management team. The failure of this one product, service or distribution
channel, or the loss or ineffectiveness of a key executive or executives within the management team may have a materially adverse impact
on such companies. Such companies may face intense competition, including competition from companies with greater financial resources,
more extensive development, manufacturing, marketing and service capabilities and a larger number of qualified managerial and technical
personnel. Further, these companies operate in the highly regulated finance sector, and evolving regulatory regimes specific to financial
technology companies and unclear application of existing laws and regulations to financial technology company products or services may
provide new challenges to such companies’ operations and negatively impact their results of operations and, in turn, our business.
Finally, our investments in the marketplaces sector are subject to substantial
risks. These investments include portfolio companies in sub-industry sectors such as pharmaceutical technology, micromobility and real
estate platforms, all of which are subject to increasing regulatory scrutiny as technological advancements have permitted greater connectivity
and remote consumer engagement. Shifting market trends, intense competition and changing regulations specific to any such sub-industry
could have a significant impact on our portfolio companies’ operations and, in turn, our business, performance and results of operations.
Common to all of the education technology, financial technology and marketplace
sectors are risks related to cybersecurity. Any of the portfolio companies in these sectors could be required to make a significant investment
to remedy the effects of any cybersecurity incident, harm to their reputations, legal claims that they and their respective affiliates
may be subjected to, regulatory action or enforcement arising out of applicable privacy and other laws, adverse publicity, and other events
that may affect their business and financial performance. The increased use of mobile and cloud technologies can heighten these and other
operational risks.
Any of these factors could materially and adversely affect the business
and operations of a portfolio company in the technology industry and, in turn, adversely affect the value of these portfolio companies
and the value of any securities that we may hold.
Our financial results could be negatively
affected if a significant portfolio company 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.
The following table shows the cost and fair value of our ten largest portfolio company positions as of December 31, 2022:
Portfolio Company | |
Cost | | |
Fair Value | | |
% of Net Asset Value | |
Learneo, Inc. (f/k/a Course Hero, Inc.) | |
$ | 14,999,972 | | |
$ | 50,541,374 | | |
| 24.1 | % |
Blink Health, Inc. | |
| 15,004,340 | | |
| 10,949,898 | | |
| 5.2 | % |
Orchard Technologies, Inc. | |
| 10,505,697 | | |
| 10,499,996 | | |
| 4.9 | % |
Locus Robotics Corp. | |
| 10,004,286 | | |
| 10,000,005 | | |
| 4.8 | % |
Architect Capital PayJoy SPV, LLC | |
| 10,006,745 | | |
| 10,000,000 | | |
| 4.8 | % |
Stormwind, LLC | |
| 6,387,741 | | |
| 9,950,835 | | |
| 4.7 | % |
Aspiration Partners, Inc. | |
| 1,283,005 | | |
| 6,541,511 | | |
| 3.1 | % |
Whoop, Inc. | |
| 10,011,460 | | |
| 6,084,041 | | |
| 2.9 | % |
Forge Global, Inc. | |
| 3,443,483 | | |
| 4,338,968 | | |
| 2.1 | % |
Nextdoor Holdings, Inc. | |
| 10,002,666 | | |
| 3,712,977 | | |
| 1.8 | % |
Total | |
$ | 91,649,395 | | |
$ | 122,619,605 | | |
| 58.4 | % |
We
may be limited in our ability to make follow-on investments, and our failure to make follow-on investments in our portfolio companies
could impair the value of our portfolio.
Following
an initial investment in a portfolio company, we may make additional investments in that portfolio company as “follow-on”
investments, in order to: (1) increase or maintain in whole or in part our equity ownership percentage; (2) exercise warrants, options
or convertible securities that were acquired in the original or subsequent financing; or (3) attempt to preserve or enhance the value
of our investment.
We
may elect not to make follow-on investments, or may otherwise lack sufficient funds to make those investments or lack access to desired
follow-on investment opportunities. We have the discretion to make any follow-on investments, subject to the availability of capital
resources and of the investment opportunity. The failure to make follow-on investments may, in some circumstances, jeopardize the continued
viability of a portfolio company and our initial investment, or may result in a missed opportunity for us to increase our participation
in a successful operation. Even if we have sufficient capital to make a desired follow-on investment, we may elect not to make a follow-on
investment because we may not want to increase our concentration of risk, because we prefer other opportunities, or because we are inhibited
by compliance with BDC requirements or the desire to qualify to maintain our status as a RIC, or we lack access to the desired follow-on
investment opportunity.
In
addition, we may be unable to complete follow-on investments in our portfolio companies that have conducted an IPO as a result of regulatory
or financial restrictions. This or any of the preceding rationales for failing to undertake a follow-on investment could impact our portfolio
companies’ performance and, thus, its value.
Because
we will generally not hold controlling equity interests in our portfolio companies, we will likely not be in a position to exercise control
over our portfolio companies or to prevent decisions by substantial stockholders or management of our portfolio companies that could
decrease the value of our investments.
Generally,
we will not take controlling equity positions in our portfolio companies. As a result, we will be subject to the risk that a portfolio
company may make business decisions with which we disagree, and the stockholders and management of a portfolio company may take risks
or otherwise act in ways that are adverse to our interests. In addition, other stockholders, such as venture capital and private equity
sponsors, that have substantial investments in our portfolio companies may have interests that differ from that of the portfolio company
or its minority stockholders, which may lead them to take actions that could materially and adversely affect the value of our investment
in the portfolio company. Due to the lack of liquidity for the equity and equity-related investments that we will typically hold in our
portfolio companies, we may not be able to dispose of our investments in the event we disagree with the actions of a portfolio company
or its substantial stockholders, and may therefore suffer a decrease in the value of our investments.
In
the event that we make an investment in a sponsor of a SPAC and the SPAC does not consummate a business combination, we will lose the
entirety of our investment.
We
will lose the entirety of our investment in a sponsor of a SPAC if the underlying SPAC fails to consummate a business combination. Any
investment by us in a sponsor of a SPAC will not have the same redemption rights that a direct investment in a SPAC may have. As such,
there is a unique risk of experiencing a complete loss on our investment when we invest in a sponsor of a SPAC.
The
number of founder shares allocated to us in respect of any investment in a sponsor of a SPAC may be reduced or otherwise subjected to
forfeiture/dilution in the event that the sponsor of a SPAC raises additional capital.
In
certain circumstances, the managing member of the sponsor of a SPAC in which we invest may determine that the underlying SPAC requires
additional working capital following the IPO of the underlying SPAC but prior to a business combination, as contemplated by the underlying
SPAC’s registration statement. Typically, the managing member of the sponsor of a SPAC, in his or her sole and absolute discretion,
may permit existing or new members in the sponsor of a SPAC, including us, to make loans to the underlying SPAC or to make additional
equity investments in the sponsor of the SPAC as needed. Accordingly, we typically will have no right to participate in any such loans
or equity investments unless the managing member, in his or her sole discretion, offers us the opportunity to invest in any such loans
or equity investments. In connection with such new loans or equity investments, the managing member may reallocate founder shares from
members not participating in any such loans or equity to any such lenders/investors at a ratio calculated in accordance with the formula
used to derive the ratio for the initial allocation of founder shares to us and the other members and so long as any reallocation would
not affect our or any group of members’ membership interests disproportionately to all members in the aggregate. In such a case,
our interest in the founder shares will be reduced or diluted. In the event any such reallocation would affect our or any group of members’
membership interests disproportionately to all members in the aggregate, we will have a limited right to participate in loan or equity
investment at issue. If, however, we choose not to participate, our interest in the founder shares would be reduced or diluted as a result.
Finally, the managing member may determine in his or her sole and absolute discretion that one or more strategic investors in the sponsor
of a SPAC will not be subject to a reallocation of founder shares in the event a loan or equity investment is needed, and if so our interest
in the founder shares will be further diluted as a result.
The
requirement that a SPAC complete a business combination within a specified completion window may give potential target businesses leverage
over the SPAC in negotiating a business combination and may limit the time the SPAC has in which to conduct due diligence on potential
business combination targets, in particular as it approaches its dissolution deadline, which could undermine its ability to complete
a business combination on terms that would produce value for us.
Any
potential target business that enters into negotiations concerning a business combination with a SPAC in which we invest will be aware
that the SPAC must complete a business combination within a specified completion window, which is usually between 18-24 months following
the SPAC’s IPO. Consequently, such target business may obtain leverage over the SPAC in negotiating a business combination, knowing
that if the SPAC does not complete a business combination with that particular target business, it may be unable to complete a business
combination with any target business. This risk will increase as the SPAC gets closer to the timeframe described above. In addition,
the SPAC may have limited time to conduct due diligence and may enter into a business combination on terms that it would have rejected
upon a more comprehensive investigation. The foregoing could undermine the SPAC’s ability to complete a business combination on
terms that would produce value for us.
Investments
in foreign companies may involve significant risks in addition to the risks inherent in U.S. investments.
While
we invest primarily in U.S. companies, we may invest on an opportunistic basis in certain non-U.S. companies, including those located
in emerging markets, that otherwise meet our investment criteria. In regards to the regulatory requirements for BDCs, non-U.S. investments
do not qualify as investments in “eligible portfolio companies,” and thus may not be considered “qualifying assets.”
In addition, investing in foreign companies, and particularly those in emerging markets, may expose us to additional risks not typically
associated with investing in U.S. issuers. These risks include changes in exchange control regulations, political and social instability,
expropriation, imposition of foreign taxes, less liquid markets and less available information than is generally the case in the United
States, higher transaction costs, less government supervision of exchanges, brokers and issuers, less developed bankruptcy laws, difficulty
in enforcing contractual obligations, lack of uniform accounting and auditing standards and greater price volatility. Further, we may
have difficulty enforcing our rights as equity holders in foreign jurisdictions. In addition, to the extent we invest in non-U.S. companies,
we may face greater exposure to foreign economic developments.
Although
we expect that most of our investments will be U.S. dollar-denominated, any investments denominated in a foreign currency will be subject
to the risk that the value of a particular currency will change in relation to one or more other currencies. Among the factors that may
affect currency values are trade balances, the level of short-term interest rates, differences in relative values of similar assets in
different currencies, long-term opportunities for investment and capital appreciation, and political developments.
We
may expose ourselves to risks if we engage in hedging transactions.
If
we engage in hedging transactions, we may expose ourselves to risks associated with such transactions. We may utilize instruments such
as forward contracts, currency options and interest rate swaps, caps, collars and floors to seek to hedge against fluctuations in the
relative values of our portfolio positions from changes in currency exchange rates and market interest rates. Hedging against a decline
in the values of our portfolio positions does not eliminate the possibility of fluctuations in the values of such positions or prevent
losses if the values of such positions decline. However, such hedging can establish other positions designed to gain from those same
developments, thereby offsetting the decline in the value of such portfolio positions. Such hedging transactions may also limit the opportunity
for gain if the values of the underlying portfolio positions should increase. It may not be possible to hedge against an exchange rate
or interest rate fluctuation that is so generally anticipated that we are not able to enter into a hedging transaction at an acceptable
price. Moreover, for a variety of reasons, we may not seek to establish a perfect correlation between such hedging instruments and the
portfolio holdings being hedged. Any such imperfect correlation may prevent us from achieving the intended hedge and expose us to risk
of loss. In addition, it may not be possible to hedge fully or perfectly against currency fluctuations affecting the value of securities
denominated in non-U.S. currencies because the value of those securities is likely to fluctuate as a result of factors not related to
currency fluctuations. Changes to the regulations applicable to the financial instruments we may use to accomplish our hedging strategy
could affect the effectiveness of that strategy. See “—We are exposed to risks associated with changes in interest rates,
including the current rising interest rate environment.”
Our
ability to enter into transactions involving derivatives and financial commitment transactions may be limited.
In August 2022, Rule 18f-4 under the 1940 Act, regarding the ability of
a BDC (or a registered investment company) to use derivatives and other transactions that create future payment or delivery obligations,
became effective. Under the newly adopted rules, BDCs that use derivatives will be subject to a value-at-risk (“VaR”) leverage
limit, certain other derivatives risk management program and testing requirements and requirements related to board reporting. These new
requirements will apply unless the BDC qualifies as a “limited derivatives user” under the adopted rules. Under the new rule,
a BDC may enter into an unfunded commitment agreement that is not a derivatives transaction, such as an agreement to provide financing
to a portfolio company, if the BDC has, among other things, a reasonable belief, at the time it enters into such an agreement, that it
will have sufficient cash and cash equivalents to meet its obligations with respect to all of its unfunded commitment agreements, in each
case as it becomes due. We currently operate as a “limited derivatives user,” which may limit our ability to use derivatives
and/or enter into certain other financial contracts.
The market structure applicable to derivatives imposed by the Dodd-Frank
Act, the U.S. Commodity Futures Trading Commission (“CFTC”) and the SEC may affect our ability to use over-the-counter (“OTC”)
derivatives for hedging purposes.
The Dodd-Frank Act and the CFTC enacted and the SEC has issued rules to
implement, both broad new regulatory requirements and broad new structural requirements applicable to OTC derivatives markets and, to
a lesser extent, listed commodity futures (and futures options) markets. Similar changes are in the process of being implemented in other
major financial markets.
The CFTC and the SEC have issued final rules establishing that certain
swap transactions are subject to CFTC regulation. Engaging in such swap or other commodity interest transactions such as futures contracts
or options on futures contracts may cause us to fall within the definition of “commodity pool” under the Commodity Exchange
Act and related CFTC regulations. We have claimed relief from CFTC registration and regulation as a commodity pool operator with respect
to our operations, with the result that we are limited in our ability to use futures contracts or options on futures contracts or engage
in swap transactions. Specifically, we are subject to strict limitations on using such derivatives other than for hedging purposes, whereby
the use of derivatives not used solely for hedging purposes is generally limited to situations where (i) the aggregate initial margin
and premiums required to establish such positions does not exceed five percent of the liquidation value of our portfolio, after taking
into account unrealized profits and unrealized losses on any such contracts we have entered into; or (ii) the aggregate net notional value
of such derivatives does not exceed 100% of the liquidation value of our portfolio.
The Dodd-Frank Act also imposed requirements relating to real-time public
and regulatory reporting of OTC derivative transactions, enhanced documentation requirements, position limits on an expanded array of
derivatives, and record keeping requirements. Taken as a whole, these changes could significantly increase the cost of using uncleared
OTC derivatives to hedge risks, including interest rate and foreign exchange risk; reduce the level of exposure we are able to obtain
for risk management purposes through OTC derivatives (including as the result of the CFTC imposing position limits on additional products);
reduce the amounts available to us to make non-derivatives investments; impair liquidity in certain OTC derivatives; and adversely affect
the quality of execution pricing obtained by us, all of which could adversely impact our investment returns.
Risks
Related 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 BDCs. For example, BDCs are required to invest at least 70% of their gross
assets in specified types of securities, primarily in private companies or thinly-traded U.S. public 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 BDCs by the 1940 Act could cause the SEC to bring an enforcement action against us and/or expose us
to claims of private litigants. In addition, 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 maintain our qualification, to be regulated as a BDC, we may
be subject to substantially greater regulation under the 1940 Act as a closed-end investment company. Compliance with such regulations
would significantly decrease our operating flexibility and could significantly increase our costs of doing business.
As
an internally managed BDC, we are subject to certain restrictions that may adversely affect our business.
As
an internally managed BDC, the size and categories of our assets under management is limited, and we are unable to offer as wide a variety
of financial products to prospective portfolio companies and sponsors (potentially limiting the size and diversification of our asset
base). We therefore may not achieve efficiencies of scale and greater management resources available to externally managed BDCs.
Additionally,
as an internally managed BDC, our ability to offer more competitive and flexible compensation structures, such as offering both a profit-sharing
plan and an equity incentive plan, is subject to the limitations imposed by the 1940 Act, which limits our ability to attract and retain
talented investment management professionals. As such, these limitations could inhibit our ability to grow, pursue our business plan
and attract and retain professional talent, any or all of which may have a negative impact on our business, financial condition and results
of operations.
As
an internally managed BDC, we are dependent upon our management team and investment professionals for their time availability and for
our future success, and if we are not able to hire and retain qualified personnel, or if we lose key members of our senior management
team, our ability to implement our business strategy could be significantly harmed.
As
an internally managed BDC, our ability to achieve our investment objectives and to make distributions to our stockholders depends
upon the performance of our management team and investment professionals. We depend upon the expertise, skill and network of members
of our management and our investment professionals for the identification, final selection, structuring, closing and monitoring of
our investments. These employees have critical industry experience and relationships on which we rely to implement our business
plan. If we lose the services of key members of our senior management team, we may not be able to operate the business as we expect,
and our ability to compete could be harmed, which could cause our operating results to suffer. We believe our future success will
depend, in part, on our ability to identify, attract and retain sufficient numbers of highly skilled employees. If we do not succeed
in identifying, attracting and retaining such personnel, we may not be able to operate our business as we expect.
As
an internally managed BDC, our compensation structure is determined and set by our Board of Directors and its Compensation Committee.
This structure currently includes salary, bonus and incentive compensation. We are not generally permitted by the 1940 Act to employ
an incentive compensation structure that directly ties performance of our investment portfolio and results of operations to incentive
compensation.
Members
of our senior management team may receive offers of more flexible and attractive compensation arrangements from other companies,
particularly from investment advisers to externally managed BDCs that are not subject to the same limitations on incentive-based
compensation that we are subject to as an internally managed BDC. A departure by one or more members of our senior management team
or competing demands on their time could have a negative impact on our business, financial condition and results of
operations.
Our
financial condition and results of operations will depend on our ability to manage our business effectively and achieve our
investment objective.
Our
ability to achieve our investment objective will depend on our management team’s and investment professionals’ ability to
identify, analyze and invest in companies that meet our investment criteria. Accomplishing this result on a cost-effective basis is largely
a function of our management team’s and investment professionals’ structuring of the investment process and their ability
to provide competent, attentive and efficient services to us. We seek a specified number of investments in rapidly growing venture-capital-backed
emerging companies, which may be extremely risky. There can be no assurance that our management team and investment professionals will
be successful in identifying and investing in companies that meet our investment criteria, or that we will achieve our investment objective.
Even if we are able to grow and build upon our investment operations, any failure to manage our growth effectively could have a material
adverse effect on our business, financial condition, results of operations and prospects.
The
results of our operations will depend on many factors, including the availability of opportunities for investment, readily accessible
short- and long-term funding alternatives in the financial markets and economic conditions. Furthermore, any inability to successfully
operate our business or implement our investment policies and strategies as described herein could adversely impact our ability to pay
dividends.
Our
business model depends upon the development and maintenance of strong referral relationships with private equity, venture capital funds
and investment banking firms.
We
expect that members of our management team and our investment professionals will maintain key informal relationships, which we use to
help identify and gain access to investment opportunities. If our management team and investment professionals fail to maintain relationships
with key firms, or if they fail to establish strong referral relationships with other firms or other sources of investment opportunities,
we will not be able to grow our portfolio of equity investments and achieve our investment objective. In addition, persons with whom
our management team and investment professionals have informal relationships are not obligated to inform them or us of investment opportunities,
and therefore such relationships may not lead to the origination of equity or other investments. Any loss or diminishment of such relationships
could effectively reduce the ability to identify attractive portfolio companies that meet our investment criteria, either for direct
equity investments or for investments through private secondary market transactions or other secondary transactions.
There
are significant potential risks related to investing in securities traded on private secondary marketplaces.
We
have utilized and expect to continue to utilize private secondary marketplaces, such as SharesPost, Inc., to acquire investments for
our portfolio. When we purchase secondary shares, we may have little or no direct access to financial or other information from these
portfolio companies. As a result, we are dependent upon the relationships of our management team and investment professionals and our
Board of Directors to obtain the information necessary to perform research and due diligence, and to monitor our investments after they
are made. There can be no assurance that our management team and investment professionals will be able to acquire adequate information
on which to make its investment decision with respect to any private secondary marketplace purchases, or that the information it is able
to obtain is accurate or complete. Any failure to obtain full and complete information regarding the portfolio companies with respect
to which we invest through private secondary marketplaces could cause us to lose part or all of our investment in such companies, which
would have a material and adverse effect on our net asset value and results of operations.
In
addition, while we believe the ability to trade on private secondary marketplaces provides valuable opportunities for liquidity, there
can be no assurance that the portfolio companies with respect to which we invest through private secondary marketplaces will have or
maintain active trading markets, and the prices of those securities may be subject to irregular trading activity, wide bid/ask spreads
and extended trade settlement periods, which may result in an inability for us to realize full value on our investment. In addition,
wide swings in market prices, which are typical of irregularly traded securities, could cause significant and unexpected declines in
the value of our portfolio investments. Further, prices in private secondary marketplaces, where limited information is available, may
not accurately reflect the true value of a portfolio company, and may overstate a portfolio company’s actual value, which may cause
us to realize future capital losses on our investment in that portfolio company. If any of the foregoing were to occur, it would likely
have a material and adverse effect on our net asset value and results of operations.
Investments
in private companies, including through private secondary marketplaces, also entail additional legal and regulatory risks which expose
participants to the risk of liability due to the imbalance of information among participants and participant qualification and other
transactional requirements applicable to private securities transactions, the non-compliance with which could result in rescission rights
and monetary and other sanctions. The application of these laws within the context of private secondary marketplaces and related market
practices are still evolving, and, despite our efforts to comply with applicable laws, we could be exposed to liability. The regulation
of private secondary marketplaces is also evolving. Additional state or federal regulation of these markets could result in limits on
the operation of or activity on those markets. Conversely, deregulation of these markets could make it easier for investors to invest
directly in private companies and affect the attractiveness of our Company as an access vehicle for investment in private shares. Private
companies may also increasingly seek to limit secondary trading in their stock, such as through contractual transfer restrictions, and
provisions in company charter documents, investor rights of first refusal and co-sale and/or employment and trading policies further
restricting trading. To the extent that these or other developments result in reduced trading activity and/or availability of private
company shares, our ability to find investment opportunities and to liquidate our investments could be adversely affected.
Due
to transfer restrictions and the illiquid nature of our investments, we may not be able to purchase or sell our investments when we wish
to do so.
Most
of our investments are or will be in equity or equity-related securities of privately held companies. The securities we acquire in private
companies are typically subject to contractual transfer limitations, which may include prohibitions on transfer without the company’s
consent, may require that shares owned by us be held in escrow and may include provisions in company charter documents, and may include
investor rights of first refusal and co-sale and/or employment or trading policies further restricting trading. In order to complete
a purchase of shares we may need to, among other things, give the issuer, its assignees or its stockholders a particular period of time,
often 30 days or more, in which to exercise a veto right, or a right of first refusal over, the sale of such securities. We may be unable
to complete a purchase transaction if the subject company or its stockholders chooses to exercise a veto right or right of first refusal.
When we complete an investment, we generally become bound to the contractual transfer limitations imposed on the subject company’s
stockholders as well as other contractual obligations, such as co-sale or tag- along rights. These obligations generally expire only
upon an IPO by the subject company. As a result, prior to an IPO, our ability to liquidate may be constrained. Transfer restrictions
could limit our ability to liquidate our positions in these securities if we are unable to find buyers acceptable to our portfolio companies,
or where applicable, their stockholders. Such buyers may not be willing to purchase our investments at adequate prices or in volumes
sufficient to liquidate our position, and even where they are willing, other stockholders could exercise their co-sales or tag-along
rights to participate in the sale, thereby reducing the number of shares sellable by us. Furthermore, prospective buyers may be deterred
from entering into purchase transactions with us due to the delay and uncertainty that these transfer and other limitations create.
Although
we believe that secondary marketplaces may offer an opportunity to liquidate our private company investments, there can be no assurance
that a trading market will develop for the securities that we wish to liquidate or that the subject companies will permit their shares
to be sold through such marketplaces. Even if some of our portfolio companies complete IPOs, we are typically subject to lock-up provisions
that prohibit us from selling our investments into the public market for specified periods of time after IPOs. As a result, the market
price of securities that we hold may decline substantially before we are able to sell these securities following an IPO.
Due
to the illiquid nature of most of our investments, we may not be able to sell these securities at times when we deem it advantageous
to do so, or at all. Because our net asset value is only determined on a quarterly basis, and due to the difficulty in assessing this
value, our net asset value may not fully reflect the illiquidity of our portfolio, which may change on a daily basis, depending on many
factors, including the status of the private secondary markets and our particular portfolio at any given time.
We
will likely experience fluctuations in our operating results due to a number of factors, including the rate at which we make new investments,
the level of our expenses, changes in the valuation of our portfolio investments, variations in and the timing of the recognition of
realized and unrealized gains and losses, the degree to which we encounter competition in our markets and general economic conditions.
There can be no assurance that we will be able to locate or acquire investments that are of a similar nature to those currently in our
portfolio. As a result of these factors, results for any period should not be relied upon as being indicative of performance in future
periods.
There
are significant potential risks associated with investing in venture capital companies with complex capital structures.
We
invest primarily in what we believe to be rapidly growing, venture-capital-backed emerging companies, either through private secondary
transactions, other secondary transactions or direct investments in companies. Such private companies frequently have much more complex
capital structures than traditional publicly traded companies, and may have multiple classes of equity securities with differing rights,
including with respect to voting and distributions. In addition, it is often difficult to obtain financial and other information with
respect to private companies, and even where we are able to obtain such information, there can be no assurance that it is complete or
accurate. In certain cases, such private companies may also have senior or pari passu preferred stock or senior debt outstanding, which
may heighten the risk of investing in the underlying equity of such private companies, particularly in circumstances when we have limited
information with respect to such capital structures. Although we believe that our management team and investment professionals and our
Board of Directors have extensive experience evaluating and investing in private 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. Any failure on our part to properly evaluate the relative rights and value of a class
of securities in which we invest could cause us to lose part or all of our investment, which in turn could have a material and adverse
effect on our net asset value and results of operations.
Our
business is subject to increasingly complex corporate governance, public disclosure and accounting requirements that are costly and could
adversely affect our business and financial results.
We
are subject to changing rules and regulations of federal and state government as well as the stock exchange on which our common stock
is listed. These entities, including the Public Company Accounting Oversight Board, the SEC and the Nasdaq Global Select Market, have
issued a significant number of new and increasingly complex requirements and regulations over the course of the last several years and
continue to develop additional regulations and requirements in response to laws enacted by Congress. In addition, there are significant
corporate governance and executive compensation-related provisions in the Dodd-Frank Act, and the SEC has adopted, and may continue to
adopt, additional rules and regulations that may impact us. Our efforts to comply with these requirements have resulted in, and are likely
to continue to result in, an increase in expenses and a diversion of management’s time from other business activities.
In
addition, any failure to keep pace with such rules, or for our management to appropriately address compliance with such rules fully and
in a timely manner, would expose us to an increasing risk of inadvertent non-compliance. While our management team takes reasonable efforts
to ensure that we are in full compliance with all laws applicable to our operations, the increasing rate and extent of regulatory change
increases the risk of a failure to comply, which may limit our ability to operate our business in the ordinary course or may subject
us to potential fines, regulatory findings or other matters that may materially impact our business.
Over
the last several years, there has also been an increase in regulatory attention to the extension of credit outside of the traditional
banking sector, raising the possibility that some portion of the non-bank financial sector will be subject to new regulation. While it
cannot be known at this time whether any regulation will be implemented or what form it will take, increased regulation of non-bank credit
extension could negatively impact our operating results or financial condition, impose additional costs on us, intensify the regulatory
supervision of us or otherwise adversely affect our business.
Capital markets may experience periods of
disruption and instability, including as recently experienced. Such market conditions may materially and adversely affect debt
and equity capital markets in the United States and abroad, which may have a negative impact on our business and operations.
From time to time, capital markets may experience periods of disruption
and instability, including during portions of the last three fiscal years. Since 2020, the U.S. capital markets have experienced extreme
volatility and disruption, as evidenced by the volatility in global stock markets as a result of, among other things, uncertainty surrounding
the COVID-19 pandemic, supply chain disruptions, interest rate and inflation rate environments, and the fluctuating price of commodities
such as oil. Despite actions of the U.S. federal government and foreign governments, these types of events contribute to unpredictable
general economic conditions that materially and adversely impact the broader financial and credit markets and reduce the availability
of debt and equity capital for the market as a whole. These conditions could continue for a prolonged period of time or worsen in the
future.
Given the ongoing and dynamic nature of recent market disruption and instability,
it is difficult to predict the full impact of these conditions on our business. The extent of any such impact will depend on future developments,
which are highly uncertain, including the duration or reoccurrence of any potential business or supply chain disruption, changes in interest
rates and inflation rates, the conflict between Russia and Ukraine, health epidemics and pandemics and the actions taken by governments
in response to these conditions.
During any such periods of market disruption and instability, we and other
companies in the financial services sector may have limited access, if available, to alternative markets for debt and equity capital.
Equity capital may be difficult to raise because, subject to some limited exceptions which will apply to us as a BDC, we will generally
not be able to issue additional shares of our common stock at a price less than net asset value without first obtaining approval for such
issuance from our stockholders and our independent directors.
Volatility and dislocation in the capital markets can also create a challenging environment in which to raise or
access debt capital, and our ability to incur indebtedness (including by issuing preferred stock) is limited by applicable regulations
such that our asset coverage (as defined in the 1940 Act) must equal at least 150% immediately after each time we incur indebtedness.
The continuance or reappearance of market conditions similar to those experienced during portions of the last three fiscal years for any
substantial length of time could make it difficult to extend the maturity of or refinance our existing indebtedness or obtain new indebtedness
with similar terms and any failure to do so could have a material adverse effect on our business. The debt capital that will be available
to us in the future, if at all, may be at a higher cost and on less favorable terms and conditions than what we currently experience,
including being at a higher cost in rising rate environments. If we are unable to raise or refinance debt, then our equity investors may
not benefit from the potential for increased returns on equity resulting from leverage and we may be limited in our ability to make new
commitments or to fund existing commitments to our portfolio companies. An inability to extend the maturity of, or refinance, our existing
indebtedness or obtain new indebtedness could have a material adverse effect on our business, financial condition or results of operations.
Significant volatility and disruption, has had, and in the future may
have, a negative effect on the valuations of our investments and on the potential for liquidity events involving these investments.
While most of our investments are not publicly traded, applicable accounting standards require us to assume, as part of our
valuation process, that our investments are sold in orderly mark-to-market transactions between market participants. As a result,
volatility in the capital markets can adversely affect our investment valuations.
Significant disruption or volatility in the capital markets may also affect
the pace of our investment activity and the potential for liquidity events involving our investments. The illiquidity of our investments
may make it difficult for us to sell such investments to access capital if required and to value such investments. Consequently, we may
realize significantly less than the value at which we carry our investments. An inability to raise capital, and any required sale of our
investments for liquidity purposes, could have a material adverse impact on our business, financial condition or results of operations.
In addition, a prolonged period of market illiquidity may cause us to reduce the volume of loans and debt securities we originate and/or
fund and adversely affect the value of our portfolio investments, which could have a material and adverse effect on our business, financial
condition, results of operations and cash flows.
Global economic, political and market conditions,
including uncertainty about the financial stability of the United States, could have a significant adverse effect on our business, financial
condition and results of operations.
Downgrades by rating agencies to the U.S. government’s credit rating
or concerns about its credit and deficit levels in general could cause interest rates and borrowing costs to rise, which may negatively
impact both the perception of credit risk associated with our debt portfolio and our ability to access the debt markets on favorable terms.
In addition, a decreased U.S. government credit rating could create broader financial turmoil and uncertainty, which may weigh heavily
on our financial performance and the value of our common stock.
Deterioration
in the economic conditions in the Eurozone and other regions or countries globally and the resulting instability in global financial
markets may pose a risk to our business. Financial markets have been affected at times by a number of global macroeconomic events, including
the following: large sovereign debts and fiscal deficits of several countries in Europe and in emerging markets jurisdictions, levels
of non-performing loans on the balance sheets of European banks, the effect of the United Kingdom (the “U.K.”) leaving the
European Union (the “EU”), instability in the Chinese capital markets and the COVID-19 pandemic. Global market and economic
disruptions have affected, and may in the future affect, the U.S. capital markets, which could adversely affect our business, financial
condition or results of operations. We cannot assure you that market disruptions in Europe and other regions or countries, including
the increased cost of funding for certain governments and financial institutions, will not impact the global economy, and we cannot assure
you that assistance packages will be available, or if available, be sufficient to stabilize countries and markets in Europe or elsewhere
affected by a financial crisis. To the extent uncertainty regarding any economic recovery in Europe or elsewhere negatively impacts consumer
confidence and consumer credit factors, our and our portfolio companies’ business, financial condition and results of operations
could be significantly and adversely affected. Moreover, there is a risk of both sector-specific and broad-based corrections and/or downturns
in the equity and credit markets. Any of the foregoing could have a significant impact on the markets in which we operate and could have
a material adverse impact on our business prospects and financial condition.
Various social and political circumstances in the United States and around
the world (including wars and other forms of conflict, terrorist acts, security operations and catastrophic events such as fires, floods,
earthquakes, tornadoes, hurricanes and global health epidemics), may also contribute to increased market volatility and economic uncertainties
or deterioration in the United States and worldwide. Such events, including rising trade tensions between the United States and China,
other uncertainties regarding actual and potential shifts in U.S. and foreign, trade, economic and other policies with other countries,
the war between Russia and Ukraine, and the COVID-19 pandemic, could adversely affect our business, financial condition or results of
operations. These market and economic disruptions could negatively impact the operating results of our portfolio companies.
Events outside of our control, including public health crises,
may negatively affect our results of operations and financial performance and the fair value of our investments.
The COVID-19 pandemic and restrictive measures taken to contain or mitigate
its spread have caused business shutdowns, cancellations of events and restrictions on travel, significant reductions in demand for certain
goods and services, reductions in business activity and financial transactions, supply chain interruptions and overall economic and financial
market instability both globally and in the United States. Despite actions of the U.S. federal government and foreign governments, these
events have contributed to unpredictable general economic conditions that are materially and adversely impacting the broader financial
and credit markets and reducing the availability of debt and equity capital for the market as a whole. It is uncertain how long this volatility
will continue, and as a result, even after the COVID-19 pandemic subsides, the U.S. economy and most other major global economies may
continue to experience a recession. Our business and operations, as well as the business and operations of our portfolio companies, could
be materially adversely affected by a prolonged recession in the United States and other major markets. Some economists and major investment
banks have expressed concern that the continued spread of the virus globally could lead to a world-wide economic downturn, the impacts
of which could last for some period after the pandemic is controlled and/or abated.
The extent of the impact of any public health emergency, including the
COVID-19 pandemic, on our and our portfolio companies’ operational and financial performance will depend on many factors, including
the duration and scope of such public health emergency, the actions taken by governmental authorities to contain its financial and economic
impact, the extent of any related travel advisories and restrictions implemented, the impact of such public health emergency on overall
supply and demand, goods and services, investor liquidity, consumer confidence and levels of economic activity and the extent of its disruption
to important global, regional and local supply chains and economic markets, all of which are highly uncertain and cannot be predicted.
In addition, our and our portfolio companies’ operations may be significantly impacted, or even temporarily or permanently halted,
as a result of government quarantine measures, voluntary and precautionary restrictions on travel or meetings and other factors related
to a public health emergency, including its potential adverse impact on the health of any of our or our portfolio companies’ personnel.
This could create widespread business continuity issues for us and our portfolio companies.
These factors may also cause the valuation of our investments to differ
materially from the values that we may ultimately realize. Our valuations, and particularly valuations of private investments and private
companies, are inherently uncertain, may fluctuate over short periods of time and are often based on estimates, comparisons and qualitative
evaluations of private information. As a result, our valuations may not show the completed or continuing impact of the COVID-19 pandemic
and the resulting measures taken in response thereto. Any public health emergency, including the COVID-19 pandemic or any outbreak of
other existing or new epidemic diseases, or the threat thereof, and the resulting financial and economic market uncertainty could have
a significant adverse impact on us and the fair value of our investments and our portfolio companies.
The COVID-19 pandemic is ongoing as of the filing date of this Annual Report,
and its extended duration may have further adverse impacts on us and our portfolio companies after December 31, 2022.
We
are exposed to risks associated with changes in interest rates, including the current rising interest rate environment.
In 2022, the U.S. Federal Reserve began raising short-term interest rates
and is expected to further increase the federal funds rate in 2023. Because we may borrow money to make investments, our net investment
income will depend, in part, upon the difference between the rate at which we borrow funds and the rate at which we invest those funds.
As a result, we can offer no assurance that a significant change in market interest rates will not have a material adverse effect on our
net investment income. A reduction in the interest rates on new investments relative to interest rates on current investments could have
an adverse impact on our net investment income. However, an increase in interest rates could decrease the value of any investments we
hold which earn fixed interest rates and also could increase our interest expense, thereby decreasing our net income. Also, an increase
in interest rates available to investors could make an investment in our common stock less attractive if we are not able to increase our
distribution rate, which could reduce the value of our common stock. Further, rising interest rates could also adversely affect our performance
if such increases cause our borrowing costs to rise at a rate in excess of the rate that our investments yield. In periods of rising interest
rates, to the extent we borrow money subject to a floating interest rate, our cost of funds would increase, which could reduce our net
investment income. Further, rising interest rates could also adversely affect our performance if we hold investments with floating interest
rates, subject to specified minimum interest rates (such as London Inter-Bank Offered Rate (“LIBOR”) or Secured Overnight
Financing Rate (“SOFR”) floor, as applicable), while at the same time engaging in borrowings subject to floating interest
rates not subject to such minimums. In such a scenario, rising interest rates may increase our interest expense, even though our interest
income from investments is not increasing in a corresponding manner as a result of such minimum interest rates.
If general interest rates rise, there is a risk that the portfolio companies
in which we hold floating rate securities will be unable to pay escalating interest amounts, which could result in a default under their
loan documents with us. Rising interest rates could also cause portfolio companies to shift cash from other productive uses to the payment
of interest, which may have a material adverse effect on their business and operations and could, over time, lead to increased defaults.
In addition, rising interest rates may increase pressure on us to provide fixed rate loans to our portfolio companies, which could adversely
affect our net investment income, as increases in our cost of borrowed funds would not be accompanied by increased interest income from
such fixed-rate investments.
The elimination of LIBOR or any other changes or reforms to the determination
or supervision of LIBOR could have an adverse impact on the market for or value of any LIBOR-linked securities, loans, and other financial
obligations or extensions of credit held by or due to us or on our overall financial condition or results of operations. We are assessing
the impact of a transition from LIBOR; however, we cannot reasonably estimate the impact of the transition at this time.
Economic
recessions or downturns could impair our portfolio companies and harm our operating results.
Many
of the portfolio companies in which we make investments may be susceptible to economic slowdowns or recessions and may be unable to repay
any loans made to them during these periods and, thus, jeopardize our equity investment in such portfolio companies. Therefore, the value
of our portfolio may decrease during these periods as we are required to record our investments at their current fair value. Adverse
economic conditions also may decrease the value of our equity investments and the value of any collateral securing our loans, if any.
Economic slowdowns or recessions could lead to financial losses in our portfolio and a decrease in revenues, net income and assets. Unfavorable
economic conditions could also increase our and our portfolio companies’ funding costs, limit our and our portfolio companies’
access to the capital markets or result in a decision by lenders not to extend credit to us or our portfolio companies. These events
could prevent us from increasing investments and 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, acceleration of the time when the loans are due and foreclosure on its secured assets, which could trigger cross- defaults
under other agreements and jeopardize our equity investment in such portfolio company. We may incur additional expenses to the extent
necessary to seek recovery upon default or to negotiate new terms with a financially distressed or defaulting portfolio company. In addition,
if one of our portfolio companies were to go bankrupt, depending on the facts and circumstances, we would typically be last in line behind
any creditors and would likely experience a complete loss on our investment.
Any
disruptive conditions in the financial industry and the impact of new legislation in response to those conditions could restrict our
business operations and could adversely impact our results of operations and financial condition. In addition, the BDC market may be
more sensitive to changes in interest rates or other factors and to the extent the BDC market trades down, our shares might likewise
be affected. If the fair value of our assets declines substantially, we may fail to maintain the asset coverage ratios imposed upon us
by the 1940 Act. Any such failure would affect our ability to issue securities, including borrowings, and pay dividends, which could
materially impair our business operations. Our liquidity could be impaired further by an inability to access the capital markets or to
consummate new borrowing facilities to provide capital for normal operations, including new originations. In recent years, reflecting
concern about the stability of the financial markets, many lenders and institutional investors have reduced or ceased providing funding
to borrowers.
In the past, instability in the global capital markets resulted in disruptions
in liquidity in the debt capital markets, significant write-offs in the financial services sector, the re-pricing of credit risk in the
broadly syndicated credit market and the failure of major domestic and international financial institutions. In particular, in past periods
of instability, the financial services sector was negatively impacted by significant write-offs as the value of the assets held by financial
firms declined, impairing their capital positions and abilities to lend and invest. In addition, continued uncertainty surrounding the
negotiation of trade deals between the United Kingdom and the European Union following the United Kingdom’s exit from the European
Union and uncertainty between the United States and other countries, including China, with respect to trade policies, treaties, and tariffs,
among other factors, have caused disruption in the global markets. There can be no assurance that market conditions will not worsen in
the future.
Economic
sanction laws in the United States and other jurisdictions may prohibit us from transacting with certain countries, individuals and companies.
In the United States, the U.S. Department of the Treasury’s Office of Foreign Assets Control administers and enforces laws, executive
orders and regulations establishing U.S. economic and trade sanctions, which prohibit, among other things, transactions with, and the
provision of services to, certain non-U.S. countries, territories, entities and individuals. These types of sanctions may significantly
restrict or completely prohibit investment activities in certain jurisdictions, and if we, our portfolio companies or other issuers in
which we invest were to violate any such laws or regulations, we may face significant legal and monetary penalties. The Foreign Corrupt
Practices Act, or FCPA, and other anti-corruption laws and regulations, as well as antiboycott regulations, may also apply to and restrict
our activities, our portfolio companies and other issuers of our investments. If an issuer or we were to violate any such laws or regulations,
such issuer or we may face significant legal and monetary penalties.
The
U.S. government has indicated that it is particularly focused on FCPA enforcement, which may increase the risk that an issuer or us becomes
the subject of such actual or threatened enforcement. In addition, certain commentators have suggested that private investment firms
and the funds that they manage may face increased scrutiny and/or liability with respect to the activities of their underlying portfolio
companies. As such, a violation of the FCPA or other applicable regulations by us or an issuer of our portfolio investments could have
a material adverse effect on us. We are committed to complying with the FCPA and other anti-corruption laws and regulations, as well
as anti-boycott regulations. As a result, we may be adversely affected because of our unwillingness to enter into transactions that violate
any such laws or regulations.
Inflation
may adversely affect the business, results of operations and financial condition of our portfolio companies.
Certain
of our portfolio companies may be impacted by inflation. If such portfolio companies are unable to pass any increases in their costs
along to their customers, it could adversely affect their results, which could in turn adversely impact our results of operations. In
addition, any projected future decreases in our portfolio companies’ operating results due to inflation could adversely impact
the fair value of our investments. Any decreases in the fair value of our investments could result in future unrealized losses and therefore
reduce our net assets resulting from operations. Additionally, the Federal Reserve has raised, and has indicated its intent to continue raising, certain benchmark
interest rates in an effort to combat inflation. There is no guarantee that the actions taken by the Federal Reserve will reduce or eliminate
inflation. See “—We are exposed to risks associated with changes in interest rates, including the current rising interest
rate environment.”
We
are subject to risks related to corporate social responsibility.
Our
business faces increasing public scrutiny related to environmental, social and governance (“ESG”) activities, which are increasing
considered to contribute to the long-term sustainability of a company’s performance. A variety of organizations measure the performance
of companies on ESG topics, and the results of these assessments are widely publicized. In addition, investments in funds that specialize
in companies that perform well in such assessments are increasingly popular, and major institutional investors have publicly emphasized
the importance of such ESG measures to their investment decisions.
We risk damage
to our brand and reputation if we fail to act responsibly in a number of areas, such as environmental stewardship, corporate governance
and transparency and considering ESG factors in our investment processes. Adverse incidents with respect to ESG activities could impact
the value of our brand, the cost of our operations and relationships with investors, all of which could adversely affect our business
and results of operations.
Additionally, new regulatory initiatives related to ESG could adversely
affect our business. The SEC has proposed rules that, among other matters, would establish a framework for reporting of climate-related
risks. At this time, there is uncertainty regarding the scope of such proposals or when they would become effective (if at all). Compliance
with any new laws or regulations increases our regulatory burden and could make compliance more difficult and expensive, affect the manner
in which we or our portfolio companies conduct our businesses and adversely affect our profitability.
Our
business and operations could be negatively affected if we become subject to any securities litigation or stockholder activism, which
could cause us to incur significant expense, hinder execution of investment strategy 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. Stockholder 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 stockholder activism, due to
the potential volatility of our stock price and for a variety of other reasons, we may in the future become the target of securities
litigation or stockholder activism. Securities litigation and stockholder 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. Additionally,
such securities litigation and stockholder activism could give rise to perceived uncertainties as to our future, adversely affect our
relationships with service providers and make it more difficult to attract and retain qualified personnel. Also, we may be required to
incur significant legal fees and other expenses related to any securities litigation and activist stockholder matters. Further, our stock
price could be subject to significant fluctuation or otherwise be adversely affected by the events, risks and uncertainties of any securities
litigation and stockholder activism.
We
operate in a highly competitive market for direct equity investment opportunities.
A large number of entities compete with us to make the types of direct
equity investments that we target as part of our business strategy. We compete for such investments with a large number of private equity
and venture capital funds, other equity and non- equity based investment funds, investment banks and other sources of financing, including
traditional financial services companies such as commercial banks and specialty finance companies. Many of our competitors are substantially
larger than us and have considerably greater financial, technical and marketing resources than we do. For example, some competitors may
have a lower cost of funds and access to funding sources that are not available to us. In addition, some of our competitors may have higher
risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments and establish more relationships
than us. Furthermore, many of our competitors are not subject to the regulatory restrictions that the 1940 Act imposes on us as a BDC
or to the distribution and other requirements we must satisfy to maintain our ability to subject to tax as a RIC. These characteristics
could allow our competitors to consider a wider variety of investments, establish more relationships and offer financing at more attractive
terms than we are able to offer. There can be no assurance that the competitive pressures we face will not have a material adverse effect
on our business, financial condition and results of operations. Also, as a result of this competition, we may not be able to take advantage
of attractive investment opportunities from time to time, and we can offer no assurance that we will be able to identify and make direct
equity investments that are consistent with our investment objective.
Borrowings,
such as the 6.00% Notes due 2026, can magnify the potential for gain or loss on amounts invested and may increase the risk of investing
in us.
Borrowings,
also known as leverage, magnify the potential for gain or loss on amounts invested and, therefore, increase the risks associated with
investing in our securities. In addition to the 6.00% Notes due 2026, we may borrow from and issue senior debt securities to banks, insurance
companies and other lenders. Lenders of such senior securities would have fixed dollar claims on our assets that are superior to the
claims of our common stockholders. If the value of our assets increases, then leveraging would cause the net asset value attributable
to our common stock to increase more sharply than it would have had we not leveraged. Conversely, if the value of our assets decreases,
leveraging would cause net asset value to decline more sharply than it otherwise would have had we not leveraged. Similarly, any increase
in our income in excess of interest payable on the borrowed funds would cause our net income to increase more than it would without the
leverage, while any decrease in our income would cause net income to decline more sharply than it would have had we not borrowed. Leverage
is generally considered a speculative investment technique. Our ability to service the 6.00% Notes due 2026, borrowings under any other
future debt that we incur will depend largely on our financial performance and will be subject to prevailing economic conditions and
competitive pressures. As a result of our use of leverage, we have experienced a substantial increase in operating expenses and may continue
to do so in the future.
The
following table illustrates the effect of leverage on returns from an investment in our common stock assuming various annual returns
on our portfolio, net of expenses. Leverage generally magnifies the return of stockholders when the portfolio return is positive and
magnifies their losses when the portfolio return is negative. The calculations in the table below are hypothetical, and actual returns
may be higher or lower than those appearing in the table below.
Assumed Return on Our Portfolio |
(Net of Expenses) |
| |
(10.0)% | | |
(5.0)% | | |
0.0% | | |
5.0% | | |
10.0% | |
Corresponding return to common stockholder(1) | |
| (9.82 | )% | |
| (6.07 | )% | |
| (2.33 | )% | |
| 1.41 | % | |
| 5.15 | % |
(1) |
Assumes
$157.2 million in total portfolio assets excluding U.S. Treasuries, and $75.0 million in outstanding 6.00% Notes due 2026 as of
December 31, 2022. |
Our
use of borrowed funds to make investments exposes us to risks typically associated with leverage.
We
borrow money and may issue additional debt securities or preferred stock to leverage our capital structure. As a result:
|
● |
shares
of our common stock would be exposed to incremental risk of loss; therefore, a decrease in the value of our investments would have
a greater negative impact on the value of our common shares than if we did not use leverage; |
|
|
|
|
● |
any
depreciation in the value of our assets may magnify losses associated with an investment and could totally eliminate the value of
an asset to us; |
|
|
|
|
● |
if
we do not appropriately match the assets and liabilities of our business and interest or dividend rates on such assets and liabilities,
adverse changes in interest rates could reduce or eliminate the incremental income we make with the proceeds of any leverage; |
|
|
|
|
● |
our
ability to pay dividends on our common stock may be restricted if our asset coverage ratio, as provided in the 1940 Act, is not at
least 200% (or 150% if certain requirements are met), and any amounts used to service indebtedness or preferred stock would not be
available for such dividends; |
|
|
|
|
● |
any
future credit facility we may enter would be, subject to periodic renewal by our lenders, whose continued participation cannot be
guaranteed; |
|
|
|
|
● |
such
securities would be governed by an indenture or other instrument containing covenants restricting our operating flexibility or affecting
our investment or operating policies, and may require us to pledge assets or provide other security for such indebtedness; |
|
|
|
|
● |
we,
and indirectly our common stockholders, bear the entire cost of issuing and paying interest or dividends on such securities; |
|
|
|
|
● |
if
we issue preferred stock, the special voting rights and preferences of preferred stockholders may result in such stockholders’
having interests that are not aligned with the interests of our common stockholders, and the rights of our preferred stockholders
to dividends and liquidation preferences will be senior to the rights of our common stockholders; |
|
|
|
|
● |
any
convertible or exchangeable securities that we issue may have rights, preferences and privileges more favorable than those of our
common shares; and |
|
|
|
|
● |
any
custodial relationships associated with our use of leverage would conform to the requirements of the 1940 Act, and no creditor would
have veto power over our investment policies, strategies, objectives or decisions except in an event of default or if our asset coverage
was less than 200% (or 150% if certain requirements are met.) |
Under
the provisions of the 1940 Act, we are permitted, as a BDC, to issue senior securities only in amounts such that our asset coverage ratio
equals at least 200% after each issuance of senior securities. If the value of our assets declines, we may be unable to satisfy this
test and we may be required to sell a portion of our investments and, depending on the nature of our leverage, repay a portion of our
senior securities at a time when such sales may be disadvantageous.
If
we default under any future borrowing facility we enter into or are unable to amend, repay or refinance any such facility on commercially
reasonable terms, or at all, we may suffer material adverse effects on our business, financial condition, results of operations and cash
flows.
Substantially
all of our assets may be pledged as collateral under any future borrowing facility. In the event that we default under any future borrowing
facility, our business could be adversely affected as we may be forced to sell all or a portion of our investments quickly and prematurely
at what may be disadvantageous prices to us in order to meet our outstanding payment obligations and/or support covenants and working
capital requirements under any future borrowing facility, any of which would have a material adverse effect on our business, financial
condition, results of operations and cash flows.
Following
any such default, the agent for the lenders under any future borrowing facility could assume control of the disposition of any or all
of our assets, including the selection of such assets to be disposed and the timing of such disposition, which would have a material
adverse effect on our business, financial condition, results of operations and cash flows. In addition, if the lender exercises its right
to sell the assets pledged under any future borrowing facility, such sales may be completed at distressed sale prices, thereby diminishing
or potentially eliminating the amount of cash available to us after repayment of our outstanding borrowings. Moreover, such deleveraging
of our Company could significantly impair our ability to effectively operate our business in the manner in which we have historically
operated. As a result, we could be forced to curtail or cease new investment activities and lower or eliminate any dividends that we
may pay to our stockholders.
We
may have difficulty paying our required distributions if we recognize income before or without receiving cash representing such income.
Although
we focus on achieving capital gains from our investments, in certain cases we may receive current income, such as interest or dividends,
on our investments. Because in certain cases we may recognize such current income before or without receiving cash representing such
income, we may have difficulty satisfying the annual distribution requirement applicable to RICs. Accordingly, in order to maintain our
qualification as a RIC, we may have to sell some of our investments at times we would not consider advantageous, raise additional debt
or equity capital or reduce new investments to meet these distribution requirements. If we are not able to obtain cash from other sources,
we may fail to qualify for RIC tax treatment and thus would be subject to U.S. federal income tax at corporate rates.
Regulations
governing our operation as a BDC affect our ability to, and the way in which we, raise additional capital, which may expose us to risks,
including the typical risks associated with leverage.
We
may in the future issue additional debt securities or preferred stock and/or borrow money from banks or other financial institutions,
which we refer to collectively (along with the 6.00% Notes due 2026) as “senior securities,” up to the maximum amount permitted
by the 1940 Act. Under the provisions of the 1940 Act, we are permitted, as a BDC, to issue senior securities in amounts such that our
asset coverage ratio, as defined in the 1940 Act, equals at least 200% (or 150% if certain requirements are met) of gross assets less
all liabilities and indebtedness not represented by senior securities, after each issuance of senior securities. If the value of our
assets declines, we may be unable to satisfy this test. If that happens, we may be required to sell a portion of our investments and,
depending on the nature of our leverage, repay a portion of our indebtedness at a time when such sales may be disadvantageous. Furthermore,
any amounts that we use to service our indebtedness would not be available for distributions to our common stockholders.
All
of the costs of offering and servicing the 6.00% Notes due 2026 and any additional debt or preferred stock we may issue in the future,
including interest payments thereon, will be borne by our common stockholders. The interests of the holders of the 6.00% Notes due 2026,
any additional debt or preferred stock we may issue will not necessarily be aligned with the interests of our common stockholders. In
particular, the rights of holders of the 6.00% Notes due 2026 and our debt or preferred stock to receive interest or principal repayment
will be senior to those of our common stockholders. Also, in the event we issue preferred stock, the holders of such preferred stock
will have the ability to elect two members of our Board of Directors. In addition, we may grant a lender a security interest in a significant
portion or all of our assets, even if the total amount we may borrow from such lender is less than the amount of such lender’s
security interest in our assets. In no event, however, will any lender to us have any veto power over, or any vote with respect to, any
change in our, or approval of any new, investment objective or investment policies or strategies.
We
are not generally able to issue and sell our common stock at a price below net asset value per share. We may, however, sell our common
stock, or warrants, options or rights to acquire our common stock, at a price below the then-current net asset value of our common stock
if our Board of Directors determines that such sale is in the best interests of SuRo Capital and its stockholders, and our stockholders
approve such sale. In any such case, the price at which our securities are to be issued and sold may not be less than a price which,
in the determination of our Board of Directors, closely approximates the market value of such securities (less any distributing commission
or discount). We are also generally prohibited under the 1940 Act from issuing securities convertible into voting securities without
obtaining the approval of our existing stockholders.
In
addition to regulatory requirements that restrict our ability to raise capital, the loan agreement governing any future credit facility
may contain various covenants which, if not complied with, could materially and adversely affecting our liquidity, financial condition,
results of operations and ability to pay dividends.
Under
the loan agreement governing any future credit facility, we may take certain customary representations and warranties and may be required
to comply with various affirmative and negative covenants, reporting requirements, and other customary requirements for similar credit
facilities, including, without limitation, restrictions on incurring additional indebtedness, compliance with the asset coverage requirements
under the 1940 Act, a minimum net asset value requirement, a limitation on the reduction of our net asset value, and maintenance of RIC
and BDC status. Such loan agreement may include usual and customary events of default for credit facilities of similar nature, including,
without limitation, nonpayment, misrepresentation of representations and warranties in a material respect, breach of covenant, cross-default
to certain other indebtedness, bankruptcy, and the occurrence of a material adverse effect.
Our
ability to continue to comply with these covenants in the future depends on many factors, some of which are beyond our control. There
are no assurances that we will be able to comply with these covenants. Failure to comply with these covenants would result in a default
which, if we were unable to obtain a waiver under any such loan agreement, would have a material adverse impact on our liquidity, financial
condition, results of operations and ability to pay dividends.
We
will be subject to U.S. federal income tax at corporate rates if we are profitable and are unable to qualify as a RIC, which could have
a material adverse effect on us and our stockholders.
We
elected to be treated as a RIC under the Code beginning with our taxable year ended December 31, 2014, have qualified to be treated as
a RIC for subsequent taxable years and expect to continue to operate in a manner so as to qualify for the tax treatment applicable to
RICs. See “Item 1. Business—Material U.S. Federal Income Tax Considerations” and “Note 2—Significant Accounting
Policies—U.S. Federal and State Income Taxes” and “Note 9—Income Taxes” to our consolidated financial
statements for the year ended December 31, 2022 for more information.
Management
generally believes that it will be in our best interest to be treated as a RIC in any year in which we are profitable. If we fail to
qualify for tax treatment as a RIC for any year in which we are profitable and such profits exceed certain loss carryforwards that we
are entitled to utilize, we will be subject to U.S. federal income tax at corporate rates, which could substantially reduce our net assets,
the amount of income available for distribution or reinvestment and the amount of our distributions. Such a failure could have a material
adverse effect on us and our stockholders.
In
any year in which we intend to be treated as a RIC, we may be forced to dispose of investments at times when our management team would
not otherwise do so or raise additional capital at times when we would not otherwise do so, in each case in order to qualify for the
special tax treatment accorded to RICs.
To
qualify for the special treatment accorded to RICs, 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, other income derived with respect to our business of investing in such stock or securities or income from “qualified
publicly traded partnerships.” 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 in any year in which we intend to be treated as a RIC may result in our
having to dispose of certain investments quickly in order to prevent the loss of RIC status. Because most of our investments are in private
companies, any such dispositions could be made at disadvantageous prices and could result in substantial losses. In addition, in order
to satisfy the Annual Distribution Requirement for a RIC, we must distribute at least 90% of our ordinary income and realized net short-term
capital gains in excess of realized net long-term capital losses, if any, to our stockholders on an annual basis. We will be subject
to certain asset coverage ratio requirements under the 1940 Act and financial covenants under the terms of our indebtedness that could,
under certain circumstances, restrict us from making distributions necessary to satisfy the annual distribution requirement. If we are
unable to dispose of investments quickly enough to meet the asset diversification requirements at the end of a quarter or obtain cash
from other sources in order to meet the annual distribution requirement, we may fail to qualify for special tax treatment accorded to
RICs and, thus, be subject to U.S. federal income tax at corporate rates.
Legislative
or regulatory tax changes could adversely affect our business and financial condition.
The rules dealing with U.S. federal income taxation are constantly under
review by persons involved in the legislative process and by the Internal Revenue Service and the U.S. Treasury Department. Changes in
tax laws, regulations or administrative interpretations or any amendments thereto could adversely affect us, the entities in which we
invest, or the holders of our securities, including our common stock and the 6.00% Notes due 2026. For example, on August 16, 2022, President
Joseph R. Biden signed the Inflation Reduction Act of 2022 into law, which may result in different and potentially adverse tax treatment
for us, our portfolio companies, or the holder of our securities. Additionally, the Biden Administration has announced a number of tax
law proposals, including American Families Plan and Made in America Tax Plan, which include increases in the corporate and individual
tax rates, and impose a minimum tax on book income and profits of certain multinational corporations. . The likelihood of any such legislation
being enacted is uncertain, but new legislation and any U.S. Treasury regulations, administrative interpretations or court decisions interpreting
such legislation could significantly and negatively affect our ability to qualify for tax treatment as a RIC or the U.S. federal income
tax consequences to us and our investors of such qualification, or could have other adverse consequences for us, our portfolio companies,
and/or our investors. Investors are urged to consult with their tax advisors with respect to the impact of this legislation and the status
of any other regulatory or administrative developments and proposals and their potential effect on an investment in our securities.
Because
we expect to distribute substantially all of our net investment income and net realized capital gains to our stockholders, we will need
additional capital to finance our growth and such capital may not be available on favorable terms or at all.
We
have elected to be taxed for U.S. federal income tax purposes as a RIC under Subchapter M of the Code. If we meet certain requirements,
including source of income, asset diversification and distribution requirements, and if we continue to qualify as a BDC, we will continue
to qualify for tax treatment as a RIC under the Code and will not be subject to U.S. income taxes on income we distribute to our stockholders
as dividends, allowing us to substantially reduce or eliminate our U.S. federal income tax liability. As a BDC, we are generally required
to meet a coverage ratio of total assets to total senior securities, which includes all of our borrowings and any preferred stock we
may issue in the future, of at least 200% (or 150% if certain requirements are met) at the time we issue any debt or preferred stock.
This requirement limits the amount that we may borrow. Because we will continue to need capital to grow our investment portfolio, this
limitation may prevent us from incurring debt or preferred stock and require us to raise additional equity at a time when it may be disadvantageous
to do so. We cannot assure you that debt and equity financing will be available to us on favorable terms, or at all, and debt financings
may be restricted by the terms of any of our outstanding borrowings. In addition, as a BDC, we are generally not permitted to issue common
stock priced below net asset value without stockholder approval. If additional funds are not available to us, we could be forced to curtail
or cease new lending and investment activities, and our net asset value could decline.
We
may continue to choose to pay dividends in our common stock, in which case you may be required to pay tax in excess of the cash you receive.
We
have in the past, and may continue to, distribute taxable dividends that are payable in part in shares of our common stock. For example,
on November 3, 2021, our Board of Directors declared a dividend of $2.00 per share to stockholders, paid partially in cash and partially
in shares of our common stock on December 30, 2021. In accordance with certain applicable U.S. Treasury regulations and published guidance
issued by the Internal Revenue Service (“IRS”), a RIC may treat a distribution of its own common stock as fulfilling the
RIC distribution requirements if each stockholder may elect to receive his or her entire distribution in either cash or common stock
of the RIC, subject to a limitation that the aggregate amount of cash to be distributed to all stockholders must not exceed more than
50% of the aggregate declared distribution. If too many stockholders elect to receive cash, the cash available for distribution must
be allocated among the stockholders electing to receive cash (with the balance of the distribution paid in stock). In no event will any
stockholder electing to receive cash, receive less than the lesser of (a) the portion of the distribution such stockholder has elected
to receive in cash or (b) an amount equal to his or her entire distribution times the percentage limitation on cash available for distribution.
If these and certain other requirements are met, for U.S. federal income tax purposes, the amount of the dividend paid in common stock
will be equal to the amount of cash that could have been received instead of common stock. Taxable stockholders receiving such dividends
will be required to include the full amount of the dividend as ordinary income (or as long-term capital gain to the extent such distribution
is properly reported as a capital gain dividend) to the extent of our current and accumulated earnings and profits for U.S. federal income
tax purposes. As a result, a U.S. stockholder may be required to pay tax with respect to such dividends in excess of any cash received.
If a U.S. stockholder sells the stock it receives as a dividend in order to pay this tax, the sales proceeds may be less than the amount
included in income with respect to the dividend, depending on the market price of our common stock at the time of the sale. Furthermore,
with respect to Non-U.S. stockholders, we may be required to withhold U.S. tax with respect to such dividends, including in respect of
all or a portion of such dividend that is payable in common stock. In addition, if a significant number of our stockholders determine
to sell shares of our common stock in order to pay taxes owed on dividends, it may put downward pressure on the trading price of our
common stock.
Changes
in laws or regulations governing our business or the businesses of our portfolio companies, changes in the interpretation thereof or
newly enacted laws or regulations, and any failure by us or our portfolio companies to comply with these laws or regulations may adversely
affect our business and the businesses of our portfolio companies.
We and our portfolio companies are subject to laws and regulations at the
U.S. federal, state and local levels and, in some cases, foreign levels. These laws and regulations, as well as their interpretation,
may change from time to time, and new laws, regulations and interpretations may also come into effect, potentially with retroactive effect.
Any such new or changed laws or regulations could have a material adverse effect on our business or the business of our portfolio companies.
The legal, tax and regulatory environment for BDCs, investment advisers and the instruments that they utilize (including derivative instruments)
is continuously evolving. In addition, there is significant uncertainty regarding enacted legislation and, consequently, the full impact
that such legislation will ultimately have on us and the markets in which we trade and invest is not fully known. For example, on August
16, 2022, the Biden Administration enacted the Inflation Reduction Act of 2022, which modifies key aspects of the Code, including by creating
an alternative minimum tax on certain large corporations and an excise tax on stock repurchases by certain corporations. We are currently
assessing the potential impact of these legislative changes. Such uncertainty and any resulting confusion may itself be detrimental to
the efficient functioning of the markets and the success of certain investment strategies.
In
addition, as private equity firms become more influential participants in the U.S. and global financial markets and economy generally,
there recently has been pressure for greater governmental scrutiny and/or regulation of the private equity industry. It is uncertain
as to what form and in what jurisdictions such enhanced scrutiny and/or regulation, if any, on the private equity industry may ultimately
take. Therefore, there can be no assurance as to whether any such scrutiny or initiatives will have an adverse impact on the private
equity industry, including our ability to effect operating improvements or restructurings of our portfolio companies or otherwise achieve
our objectives.
Over
the last several years, there also has been an increase in regulatory attention to the extension of credit outside of the traditional
banking sector, raising the possibility that some portion of the non-bank financial sector will be subject to new regulation. While it
cannot be known at this time whether any regulation will be implemented or what form it will take, increased regulation of non-bank credit
extension could negatively impact our or our portfolio companies’ operating results or financial condition, impose additional costs
on us or our portfolio companies, intensify the regulatory supervision of us or otherwise adversely affect our business.
Additionally,
any changes to the laws and regulations governing our operations may cause us to alter our investment strategy in order to avail ourselves
of new or different opportunities. Such changes could result in material differences to the strategies and plans set forth herein and
may result in our investment focus shifting from the areas of expertise of our management team and investment professionals to other
types of investments in which the investment team may have less expertise or little or no experience. Thus, any such changes, if they
occur, could have a material adverse effect on our results of operations and the value of your investment.
The SBCAA allows us to incur additional leverage,
which could increase the risk of investing in us.
The 1940 Act had generally prohibited us from incurring indebtedness unless
immediately after such borrowing we had an asset coverage for total borrowings of at least 200% (i.e., the amount of debt may not exceed
50% of the value of our total assets). However, the SBCAA modified the 1940 Act to allow BDCs to decrease their asset coverage requirement
from 200% to 150% (i.e. the amount of debt may not exceed 66.7% of the value of our total assets), if certain requirements are met. Under
the SBCAA, we are allowed to reduce our asset coverage requirement to 150%, and thereby increase our leverage capacity, if shareholders
representing at least a majority of the votes cast, when a quorum is present, approve a proposal to do so. If we receive shareholder approval,
we would be allowed to reduce our asset coverage requirement to 150% on the first day after such approval. Alternatively, the SBCAA allows
the majority of our independent directors to approve the reduction in our asset coverage requirement to 150%, and such approval would
become effective after one year. In either case, we would be required to make certain disclosures on our website and in SEC filings regarding,
among other things, the receipt of approval to reduce our asset coverage requirement to 150%, our leverage capacity and usage, and risks
related to leverage.
As a result of the SBCAA, if we obtain the necessary approval, we may be
able to increase our leverage up to an amount that reduces our asset coverage ratio from 200% to 150%. Leverage magnifies the potential
for loss on investments in our indebtedness and on invested equity capital. As we use leverage to partially finance our investments, you
will experience increased risks of investing in our securities. If the value of our assets increases, then leveraging would cause the
net asset value attributable to our common stock to increase more sharply than it would have had we not leveraged. Conversely, if the
value of our assets decreases, leveraging would cause net asset value to decline more sharply than it otherwise would have had we not
leveraged our business. Similarly, any increase in our income in excess of interest payable on the borrowed funds would cause our net
investment income to increase more than it would without the leverage, while any decrease in our income would cause net investment income
to decline more sharply than it would have had we not borrowed. Such a decline could negatively affect our ability to pay common stock
dividends, scheduled debt payments or other payments related to our securities. Leverage is generally considered a speculative investment
technique.
Certain
investors are limited in their ability to make significant investments in us.
Private
funds that are excluded from the definition of “investment company” either pursuant to Section 3(c)(1) or 3(c)(7) of the
1940 Act are restricted from acquiring directly or through a controlled entity more than 3% of our total outstanding voting stock (measured
at the time of the acquisition). Investment companies registered under the 1940 Act and BDCs, such as us, are also subject to this restriction
as well as other limitations under the 1940 Act that would restrict the amount that they are able to invest in our securities. As a result,
certain investors will be limited in their ability to make significant investments in us at a time that they might desire to do so.
Ineffective
internal controls could impact our business and operating results.
Our
internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations, including the
possibility of human error, the circumvention or overriding of controls, or fraud. Even effective internal controls can provide only
reasonable assurance with respect to the preparation and fair presentation of financial statements. If we fail to maintain the adequacy
of our internal controls, including any failure to implement required new or improved controls, or if we experience difficulties in their
implementation, our business and operating results could be harmed and we could fail to meet our financial reporting obligations.
We
may in the future determine to fund a portion of our investments with preferred stock, which would magnify the potential for gain or
loss and the risks of investing in us in the same way as our borrowings.
Preferred
stock, which is another form of leverage, has the same risks to our common stockholders as borrowings because the dividends on any preferred
stock we issue must be cumulative. Payment of such dividends and repayment of the liquidation preference of such preferred stock must
take preference over any dividends or other payments to our common stockholders, and preferred stockholders are not subject to any of
our expenses or losses and are not entitled to participate in any income or appreciation in excess of their stated preference.
Our
Board of Directors is authorized to reclassify any unissued shares of stock into one or more classes of preferred stock, which could
convey special rights and privileges to its owners.
Our
charter permits our Board of Directors to reclassify any authorized but unissued shares of stock into one or more classes of preferred
stock. Our Board of Directors will generally have broad discretion over the size and timing of any such reclassification, subject to
a finding that the reclassification and issuance of such preferred stock is in the best interests of SuRo Capital and our existing common
stockholders. Any issuance of preferred stock would be subject to certain limitations imposed under the 1940 Act, including the requirement
that such preferred stock have equal voting rights with our outstanding common stock. We are authorized to issue up to 100,000,000 shares
of common stock. In the event our Board of Directors opts to reclassify a portion of our unissued shares of common stock into a class
of preferred stock, those preferred shares would have a preference over our common stock with respect to dividends and liquidation. The
cost of any such reclassification would be borne by our existing common stockholders. In addition, the 1940 Act provides that holders
of preferred stock are entitled to vote separately from holders of common stock to elect two directors. As a result, our preferred stockholders
will have the ability to reject a director that would otherwise be elected by our common stockholders. In addition, while Maryland law
generally requires directors to act in the best interests of all of a corporation’s stockholders, there can be no assurance that
a director elected by our preferred stockholders will not choose to act in a manner that tends to favors our preferred stockholders,
particularly where there is a conflict between the interests of our preferred stockholders and our common stockholders. The class voting
rights of any preferred shares we may issue could make it more difficult for us to take some actions that may, in the future, be proposed
by the Board of Directors and/or the holders of our common stock, such as a merger, exchange of securities, liquidation, or alteration
of the rights of a class of our securities, if these actions were perceived by the holders of preferred shares as not in their best interests.
The issuance of preferred shares convertible into shares of common stock might also reduce the net income and net asset value per share
of our common stock upon conversion. These effects, among others, could have an adverse effect on your investment in our common stock.
Our
Board of Directors may change 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, current operating policies, investment criteria and
strategies without prior notice and without stockholder approval. We cannot predict the effect any changes to our 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 dividends and cause you to lose all or part of your investment.
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.
The
Maryland General Corporation Law and our charter and bylaws contain provisions that may discourage, delay or make more difficult a change
in control of us or the removal of our directors. We are subject to the Maryland Business Combination Act (“MBCA”), subject
to any applicable requirements of the 1940 Act. Our Board of Directors has adopted a resolution exempting from the MBCA any business
combination between us and any other person, subject to prior approval of such business combination by our Board of Directors, including
approval by a majority of our directors who are not “interest persons” as defined in the 1940 Act. If the resolution exempting
business combinations is repealed or our Board of Directors does not approve a business combination, the MBCA may discourage third parties
from trying to acquire control of us and increase the difficulty of consummating such an offer. Our bylaws exempt from the Maryland Control
Share Acquisition Act (“Control Share Act”) acquisitions of our stock by any person. If we amend our bylaws to repeal the
exemption from the Control Share Act, the Control Share Act also may make it more difficult for a third party to obtain control of us
and increase the difficulty of consummating such a transaction. However, we will amend our bylaws to be subject to the Control Share
Act only if our Board of Directors determines that it would be in our best interests and if the SEC staff does not object to our determination
that our being subject to the Control Share Act does not conflict with the 1940 Act.
We
have also adopted measures that may make it difficult for a third party to obtain control of us, including provisions of our charter
classifying our Board of Directors in three classes serving staggered three-year terms, and authorizing our Board of Directors, without
stockholder action, to classify or reclassify shares of our stock in one or more classes or series, including preferred stock, to cause
the issuance of additional shares of our stock, to amend our charter without stockholder approval to increase or decrease the aggregate
number of shares of stock or the number of shares of stock of any class or series that we have authority to issue. These provisions,
as well as other provisions of our charter and bylaws, may delay, defer or prevent a transaction or a change in control that might otherwise
be in the best interests of our stockholders.
We
are highly 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 make distributions.
Our
business is highly 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 may adversely affect our business. There could be:
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electrical or telecommunications outages; |
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natural
disasters such as earthquakes, tornadoes and hurricanes; |
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disease
pandemics (including the COVID-19 pandemic); |
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events
arising from local or larger scale political or social matters, including terrorist acts; and |
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cyber-attacks. |
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 pay dividends to our stockholders.
Risks
Related to the 6.00% Notes due 2026
The
6.00% Notes due 2026 are unsecured and therefore effectively subordinated to any future secured indebtedness we could incur; however,
we have agreed under the indenture to not incur any secured or unsecured indebtedness that would be senior to the 6.00% Notes due 2026
while the 6.00% Notes due 2026 are outstanding, subject to certain exceptions. The 6.00% Notes due 2026 rank pari passu with, or equal
to, all outstanding and future unsecured, unsubordinated indebtedness issued by us and our general liabilities.
The
6.00% Notes due 2026 are not secured by any of our assets or any of the assets of any of our subsidiaries. As a result, the 6.00% Notes
due 2026 are effectively subordinated to any future secured indebtedness we or our subsidiaries may incur in the future (or any indebtedness
that is initially unsecured as to which we subsequently grant a security interest) to the extent of the value of the assets securing
such indebtedness. However, we have agreed under the governing indenture to not incur any secured or unsecured indebtedness that would
be senior to the 6.00% Notes due 2026 while the 6.00% Notes due 2026 are outstanding, subject to certain exceptions. In any liquidation,
dissolution, bankruptcy or other similar proceeding, the holders of any of our future secured indebtedness or secured indebtedness of
our subsidiaries may assert rights against the assets pledged to secure that indebtedness in order to receive full payment of their indebtedness
before the assets may be used to pay other creditors.
The
6.00% Notes due 2026 rank pari passu, which means equal in right of payment, with all outstanding and future unsecured, unsubordinated
indebtedness issued by us. The 6.00% Notes due 2026 also rank pari passu with, or equal to, our general liabilities (total liabilities,
less debt). In total, these general liabilities were approximately $1.0 million as of December 31, 2022. In any liquidation, dissolution,
bankruptcy or other similar proceeding, the holders of such indebtedness may assert rights equal to the holders of the 6.00% Notes due
2026, which may limit recovery by the holders of the 6.00% Notes due 2026.
The
6.00% Notes due 2026 are structurally subordinated to the indebtedness and other liabilities of our subsidiaries.
The
6.00% Notes due 2026 are obligations exclusively of SuRo Capital Corp., and not of any of our subsidiaries. None of our subsidiaries
will be a guarantor of the 6.00% Notes due 2026, and the 6.00% Notes due 2026 are not be required to be guaranteed by any subsidiary
we may acquire or create in the future. Any assets of our subsidiaries will not be directly available to satisfy the claims of our creditors,
including holders of the 6.00% Notes due 2026. Except to the extent we are a creditor with recognized claims against our subsidiaries,
all claims of creditors of our subsidiaries will have priority over our equity interests in such entities (and therefore the claims of
our creditors, including holders of the 6.00% Notes due 2026) with respect to the assets of such entities. Even if we are recognized
as a creditor of one or more of these entities, our claims would still be effectively subordinated to any security interests in the assets
of any such entity and to any indebtedness or other liabilities of any such entity senior to our claims. Consequently, the 6.00% Notes
due 2026 are structurally subordinated to all indebtedness and other liabilities, including trade payables, of any of our existing or
future subsidiaries.
The
indenture under which the 6.00% Notes due 2026 were issued contains limited protection for holders of the 6.00% Notes due 2026.
The
indenture under which the 6.00% Notes due 2026 were issued offers limited protection to holders of the 6.00% Notes due 2026. The terms
of the indenture and the 6.00% Notes due 2026 do not restrict our or any of our subsidiaries’ ability to engage in, or otherwise
be a party to, a variety of corporate transactions, circumstances or events that could have a material adverse impact on an investment
in the 6.00% Notes due 2026. In particular, the terms of the indenture and the 6.00% Notes due 2026 do not place any restrictions on
our or our subsidiaries’ ability to:
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issue
securities or otherwise incur additional indebtedness or other obligations, including (1) any indebtedness or other obligations that
would be equal in right of payment to the 6.00% Notes due 2026, (2) any indebtedness or other obligations that would be secured and
therefore rank effectively senior in right of payment to the 6.00% Notes due 2026 to the extent of the values of the assets securing
such debt, (3) indebtedness of ours that is guaranteed by one or more of our subsidiaries and which therefore is structurally senior
to the 6.00% Notes due 2026 and (4) securities, indebtedness or obligations issued or incurred by our subsidiaries that would be
senior to our equity interests in those entities and therefore rank structurally senior to the 6.00% Notes due 2026 with respect
to the assets of our subsidiaries, in each case other than an incurrence of indebtedness or other obligation that would cause a violation
of Section 18(a)(1)(A) as modified by such provisions of Section 61(a) of the 1940 Act as may be applicable to us from time to time
or any successor provisions, whether or not we continue to be subject to such provisions of the 1940 Act, but giving effect, in each
case, to any exemptive relief granted to us by the SEC. Currently, these provisions generally prohibit us from making additional
borrowings, including through the issuance of additional debt or the sale of additional debt securities, unless our asset coverage,
as defined in the 1940 Act, equals 200% (or 150% if certain requirements are met) after such borrowings. Notwithstanding the foregoing,
for the period of time during which the 6.00% Notes due 2026 are outstanding, we will not seek the requisite approval under the 1940
Act of our board of directors or our shareholders to reduce our asset coverage below 200%. In addition, we have agreed under the
indenture that, for the period of time during which the 6.00% Notes due 2026 are outstanding, we will not incur any indebtedness,
unless at the time of the incurrence of such indebtedness we have an asset coverage (as defined in the 1940 Act) of at least 300%
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pay
dividends on, or purchase or redeem or make any payments in respect of, capital stock or other securities ranking junior in right
of payment to the 6.00% Notes due 2026, including subordinated indebtedness, except that we have agreed under the indenture that,
for the period of time during which the 6.00% Notes due 2026 are outstanding, we will not violate Section 18(a)(1)(B) as modified
by (i) Section 61(a) of the 1940 Act or any successor provisions thereto, whether or not we are subject to such provisions of the
1940 Act and after giving effect to any exemptive relief granted to us by the SEC and (ii) the following two exceptions: (A) we will
be permitted to declare a cash dividend or distribution notwithstanding the prohibition contained in Section 18(a)(1)(B) as modified
by Section 61(a) of the 1940 Act or any successor provisions, but only up to such amount as is necessary for us to maintain our status
as a RIC under Subchapter M of the Code; and (B) this restriction will not be triggered unless and until such time as our asset coverage
has not been in compliance with the minimum asset coverage required by Section 18(a)(1)(B) as modified by Section 61(a) of the 1940
Act or any successor provisions (after giving effect to any exemptive relief granted to us by the SEC) for more than six consecutive
months. Currently, these provisions would generally prohibit us from declaring any cash dividend or distribution upon any class of
our capital stock, or purchasing any such capital stock if our asset coverage, as defined in the 1940 Act, were below 200% (or 150%
if certain requirements are met) at the time of the declaration of the dividend or distribution or the purchase and after deducting
the amount of such dividend, distribution or purchase. Notwithstanding the foregoing, for the period of time during which the 6.00%
Notes due 2026 are outstanding, we will not seek the requisite approval under the 1940 Act of our board of directors or our shareholders
to reduce our asset coverage below 200%. In addition, we have agreed under the indenture that, for the period of time during which
the 6.00% Notes due 2026 are outstanding, we will not purchase any shares of our outstanding capital stock, unless at the time of
any such purchase we have an asset coverage (as defined in the 1940 Act) of at least 300% after deducting the amount of such purchase
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sell
assets (other than certain limited restrictions on our ability to consolidate, merge or sell all or substantially all of our assets); |
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into transactions with affiliates; |
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create
liens (including liens on the shares of our subsidiaries) or enter into sale and leaseback transactions, except that we have agreed
under the indenture to not incur any secured or unsecured indebtedness that would be senior to the 6.00% Notes due 2026 while the
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investments; or |
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In
addition, the indenture governing the 6.00% Notes due 2026 does not require us to make an offer to purchase the 6.00% Notes due 2026
in connection with a change of control or any other event.
Furthermore,
the terms of the indenture and the 6.00% Notes due 2026 do not protect holders of the 6.00% Notes due 2026 in the event that we experience
changes (including significant adverse changes) in our financial condition, results of operations or credit ratings, if any, as they
do not require that we or our subsidiaries adhere to any financial tests or ratios or specified levels of net worth, revenues, income,
cash flow, or liquidity.
Our
ability to recapitalize, incur additional debt (including additional debt that matures prior to the maturity of the 6.00% Notes due 2026),
and take a number of other actions that are not limited by the terms of the 6.00% Notes due 2026 may have important consequences for
a holder of the 6.00% Notes due 2026, including making it more difficult for us to satisfy our obligations with respect to the 6.00%
Notes due 2026 or negatively affecting the trading value of the 6.00% Notes due 2026.
Other
debt we issue or incur in the future could contain more protections for its holders than the indenture and the 6.00% Notes due 2026,
including additional covenants and events of default. The issuance or incurrence of any such debt with incremental protections could
affect the market for, trading levels, and prices of the 6.00% Notes due 2026.
An
active trading market for the 6.00% Notes due 2026 may not develop or be maintained, which could limit a holder’s ability to sell
the 6.00% Notes due 2026 and/or adversely impact the market price of the 6.00% Notes due 2026.
The
6.00% Notes due 2026 are a new issue of debt securities for which there initially was no trading market. The 6.00% Notes due 2026 are
listed on the Nasdaq Global Select Market under the symbol “SSSSL”. We cannot provide any assurances that an active trading
market will develop or be maintained for the 6.00% Notes due 2026 or that a holder will be able to sell its 6.00% Notes due 2026. The
6.00% Notes due 2026 may trade at a discount from their initial offering price depending on prevailing interest rates, the market for
similar securities, our credit ratings, if any, general economic conditions, our financial condition, performance and prospects and other
factors. The underwriters of the public offering of the 6.00% Notes due 2026 have advised us that they intend to make a market in the
6.00% Notes due 2026, but they are not obligated to do so. Such underwriters may discontinue any market-making in the 6.00% Notes due
2026 at any time at their sole discretion.
Accordingly,
we can provide no assurance that a liquid trading market will develop or be maintained for the 6.00% Notes due 2026, that a holder will
be able to sell its 6.00% Notes due 2026 at a particular time or that the price a holder may receive when it sells its 6.00% Notes due
2026 will be favorable. To the extent an active trading market does not develop, the liquidity and trading price for the 6.00% Notes
due 2026 may be harmed. Accordingly, a holder may be required to bear the financial risk of an investment in the 6.00% Notes due 2026
for an indefinite period of time.
If
we default on our obligations to pay our other indebtedness, we may not be able to make payments on the 6.00% Notes due 2026.
Any
default under any agreements governing any of our future indebtedness that is not waived by the required lenders or holders of such indebtedness,
and the remedies sought by lenders or the holders of such indebtedness could make us unable to pay principal, premium, if any, and interest
on the 6.00% Notes due 2026 and substantially decrease the market value of the 6.00% Notes due 2026. If we are unable to generate sufficient
cash flow and are otherwise unable to obtain funds necessary to meet required payments of principal, premium, if any, and interest on
our indebtedness, if any, or if we otherwise fail to comply with any covenants, including financial and operating covenants, as applicable,
in the instruments governing our indebtedness, if any, we could be in default under the terms of the agreements governing such indebtedness
and the 6.00% Notes due 2026. In the event of such default, the holders of such indebtedness could elect to declare all the funds borrowed
thereunder to be due and payable, together with accrued and unpaid interest, the lenders under any credit facility or other debt we may
enter into or incur in the future could elect to terminate their commitment, cease making further loans and institute foreclosure proceedings
against our assets, and we could be forced into bankruptcy or liquidation.
Our
ability to generate sufficient cash flow in the future is, to some extent, subject to general economic, financial, competitive, legislative
and regulatory factors as well as other factors that are beyond our control. We can provide no assurance that our business will generate
cash flow from operations, or that future borrowings will be available to us, in an amount sufficient to enable us to meet our payment
obligations under the 6.00% Notes due 2026, our other debt, and to fund other liquidity needs.
If
our operating performance declines and we are not able to generate sufficient cash flow to service our debt obligations, we may in the
future need to refinance or restructure our debt, including any 6.00% Notes due 2026 sold, sell assets, reduce or delay capital investments,
seek to raise additional capital or seek to obtain waivers from the lenders under any credit facility or other debt we may enter into
or incur in the future to avoid being in default. If we are unable to implement one or more of these alternatives, we may not be able
to meet our payment obligations under the 6.00% Notes due 2026 and any other debt. If we are unable to repay debt, lenders having secured
obligations could proceed against the collateral securing the debt. Because any future credit facilities will likely have customary cross-default
provisions, if we have a default under the terms of the 6.00% Notes due 2026, the obligations under any future credit facility may be
accelerated and we may be unable to repay or finance the amounts due.
We
may choose to redeem the 6.00% Notes due 2026 when prevailing interest rates are relatively low.
On
or after December 30, 2024, we may choose to redeem the 6.00% Notes due 2026 from time to time, especially if prevailing interest rates
are lower than the rate borne by the 6.00% Notes due 2026. If prevailing rates are lower at the time of redemption, and we redeem the
6.00% Notes due 2026, a holder likely would not be able to reinvest the redemption proceeds in a comparable security at an effective
interest rate as high as the interest rate on the 6.00% Notes due 2026 being redeemed. Our redemption right also may adversely impact
a holder’s ability to sell the 6.00% Notes due 2026 as the optional redemption date or period approaches.
A
downgrade, suspension or withdrawal of the credit rating assigned by a rating agency to us or our securities, if any, could cause the
liquidity or market value of the 6.00% Notes due 2026 to decline significantly.
Our
credit ratings, if any, are an assessment by rating agencies of our ability to pay our debts when due. Consequently, real or anticipated
changes in our credit ratings will generally affect the market value of the 6.00% Notes due 2026. These credit ratings may not reflect
the potential impact of risks relating to the structure or marketing of the 6.00% Notes due 2026. Credit ratings are paid for by the
issuer and are not a recommendation to buy, sell or hold any security, and may be revised or withdrawn at any time by the issuing organization
in its sole discretion.
An
explanation of the significance of any ratings of us or our securities may be obtained from the applicable rating agency. Generally,
rating agencies base their ratings on such material and information, and their own investigations, studies and assumptions, as they deem
appropriate. Neither we nor any underwriter undertakes any obligation to maintain any such credit ratings or to advise holders of 6.00%
Notes due 2026 of any changes in credit ratings of us or our securities. There can be no assurance that our credit ratings will remain
at their current levels for any given period of time or that such credit ratings will not be lowered or withdrawn entirely by the rating
agency if in their judgment future circumstances relating to the basis of the credit ratings, such as adverse changes in our company,
so warrant.
Pursuant
to the terms of the indenture governing the 6.00% Notes due 2026, we will use commercially reasonable efforts to maintain a credit rating
on the 6.00% Notes due 2026 by a “nationally recognized statistical rating organization” (as such term is defined in Section
3(a)(62) of the Exchange Act) during the period of time that the 6.00% Notes due 2026 are outstanding; provided that no minimum credit
rating is required. We offer no assurance that such rating, should it be maintained, will comport to any particular minimum level of
creditworthiness.
Risks
Related to an Investment in Our Securities
Investing
in our securities may involve an above average degree of risk.
The
investments we make in accordance with our investment objective may result in a higher amount of risk than alternative investment options
and a higher risk of volatility or loss of principal. Our investments in portfolio companies may be highly speculative, and therefore,
an investment in our shares may not be suitable for someone with lower risk tolerance.
Our
common stock price may be volatile and may decrease substantially.
The
trading price of our common stock may fluctuate substantially. The price of our common stock that will prevail in the market after any
future offering may be higher or lower than the price you pay, depending 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
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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 RICs, BDCs or other financial services companies; |
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changes
in regulatory policies or tax guidelines with respect to RICs or BDCs; |
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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 or fluctuations in our operating results 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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operating
performance of companies comparable to us; |
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market
sentiment against technology-related companies; or |
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departures
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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. For more information, see “Our business and operations could be negatively affected if we become subject to
any securities litigation or stockholder activism, which could cause us to incur significant expenses, hinder the execution of our investment
strategy, and impact our stock price.”
Shares
of our common stock have recently traded, and may in the future trade, at discounts from net asset value or at premiums that may prove
to be unsustainable.
Shares
of BDCs 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 generally, for IPOs and other exit events for venture-capital-backed companies, and the mix of companies in our investment
portfolio over time. 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.
The
possibility that our shares will trade at a discount from net asset value or at premiums that are unsustainable are risks 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
discount or unsustainable premium 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 premium
or discount levels than upon increases or decreases in net asset value per share. As of March 15, 2023, the closing price of our
common stock on the Nasdaq Global Select Market was $3.01 per share, which represented an approximately 59.3% discount to our net asset
value of $7.39 per share as of December 31, 2022.
We
may not be able to pay distributions to our stockholders and our distributions may not grow over time, particularly since we invest primarily
in securities that do not produce current income, and a portion of distributions paid to our stockholders may be a return of capital,
which is a distribution of the stockholders’ invested capital.
The
timing and amount of our distributions, if any, will be determined by our Board of Directors and will be declared out of assets legally
available for distribution. We cannot assure you that we will achieve investment results or maintain a tax treatment that will allow
or require any specified level of cash distributions or year-to-year increases in cash distributions. Our ability to pay distributions
might be adversely affected by, among other things, the impact of one or more of the risk factors described herein. In addition, the
inability to satisfy the asset coverage test applicable to us as a BDC could limit our ability to pay distributions. All distributions
will be paid at the discretion of our Board of Directors and will depend on our earnings, our financial condition, maintenance of our
tax treatment as a RIC, compliance with applicable BDC regulations, compliance with our debt covenants and such other factors as our
Board of Directors may deem relevant from time to time. We cannot assure you that we will pay distributions to our stockholders in the
future.
As
we intend to focus on making primarily capital gains-based investments in equity securities, which generally will not be income producing,
we do not anticipate that we will pay dividends on a quarterly basis or become a predictable issuer of dividends, and we expect that
our dividends, if any, will be less consistent than other BDCs that primarily make debt investments. When we make distributions, we will
be required to determine the extent to which such distributions are paid out of current or accumulated taxable earnings, recognized capital
gains or capital. To the extent there is a return of capital, investors will be required to reduce their basis in our stock for U.S.
federal tax purposes, which may result in higher tax liability when the shares are sold, even if they have not increased in value or
have lost value. In addition, any return of capital will be net of any sales load and offering expenses associated with sales of shares
of our common stock. Our distributions have included a return of capital in the past, and our future distributions may include a return
of capital.
We
have broad discretion over the use of proceeds from our offerings, to the extent they are successful, and will use proceeds in part to
satisfy operating expenses.
We
have significant flexibility in applying the proceeds of our offerings and may use the net proceeds from such offerings in ways with
which you may not agree, or for purposes other than those contemplated at the time of the offering. We cannot assure you that we will
be able to successfully utilize the proceeds within the time frame contemplated. We will also pay operating expenses, and may pay other
expenses such as due diligence expenses of potential new investments, from the net proceeds of any offering. Our ability to achieve our
investment objective may be limited to the extent that the net proceeds of an offering, pending full investment, are used to pay operating
expenses. In addition, we can provide you no assurance that any such offerings will be successful, or that by increasing the size of
our available equity capital our aggregate expenses, and correspondingly, our expense ratio, will be lowered.
We
have internalized our operating structure, including our management and investment functions; as a result, we may incur significant costs
and face significant risks associated with being self-managed, including adverse effects on our business and financial condition.
On
March 12, 2019, our Board of Directors approved internalizing our operating structure, including our management and investment functions.
There can be no assurances that internalizing our operating structure will be beneficial to us and our stockholders, as we may incur
the costs and risks discussed below and may not be able to effectively replicate the services previously provided to us by our former
investment adviser, GSV Asset Management, and our former administrator, GSV Capital Service Company.
While
we will no longer bear the costs of the various fees and expenses we previously paid to GSV Asset Management under the Investment Advisory
Agreement, our direct expenses will generally include general and administrative costs, including legal, accounting, and other expenses
related to corporate governance, SEC reporting and compliance, as well as costs and expenses related to making and managing our investments.
We will also now incur the compensation and benefits costs of our officers and other employees and consultants, and we have issued equity
awards to our officers, employees and consultants, which awards may decrease net income and funds from our operations and may dilute
our stockholders. We may also be subject to potential liabilities commonly faced by employers, such as workers disability and compensation
claims, potential labor disputes and other employee-related liabilities and grievances.
Finally, internalization transactions have also, in some cases, been the
subject of litigation. Even if these claims are without merit, we could be forced to spend significant amounts of time and money defending
claims, which would reduce the amount of funds available for us to make investments and to pay distributions, and may divert our management’s
attention from managing our investments.
All
of these factors could have a material adverse effect on our results of operations, financial condition, and ability to pay distributions.
General
Risk Factors
We
will likely experience fluctuations in our results and we may be unable to replicate past investment opportunities or make the types
of investments we have made to date in future periods.
We
will likely experience fluctuations in our operating results due to a number of factors, including the rate at which we make new investments,
the level of our expenses, changes in the valuation of our portfolio investments, variations in and the timing of the recognition of
realized and unrealized gains or losses, the degree to which we encounter competition in our markets and general economic conditions.
For example, since inception through December 31, 2022, we have experienced substantial cumulative negative cash flows from operations.
These fluctuations may in certain cases be exaggerated as a result of our focus on realizing capital gains rather than current income
from our investments. In addition, there can be no assurance that we will be able to locate or acquire investments that are of a similar
nature to those currently in our portfolio. As a result of these factors, results for any period should not be relied upon as being indicative
of performance in future periods.
Uncertainty
about presidential administration initiatives could negatively impact our business, financial condition and results of operations.
The
current administration has called for significant changes to U.S. trade, healthcare, immigration, foreign and government regulatory policy.
In this regard, there is significant uncertainty with respect to legislation, regulation and government policy at the federal level,
as well as the state and local levels. Recent events have created a climate of heightened uncertainty and introduced new and difficult-to-quantify
macroeconomic and political risks with potentially far-reaching implications. There has been a corresponding meaningful increase in the
uncertainty surrounding interest rates, inflation, foreign exchange rates, trade volumes and fiscal and monetary policy. To the extent
the U.S. Congress or the current administration implements changes to U.S. policy, those changes may impact, among other things, the
U.S. and global economy, international trade and relations, unemployment, immigration, corporate taxes, healthcare, the U.S. regulatory
environment, inflation and other areas.
A
particular area identified as subject to potential change, amendment or repeal includes the Dodd-Frank Wall Street Reform and Consumer
Protection Act, or the “Dodd-Frank Act,” including the Volcker Rule and various swaps and derivatives regulations, credit
risk retention requirements and the authorities of the Federal Reserve, the Financial Stability Oversight Council and the SEC. Given
the uncertainty associated with the manner in which and whether the provisions of the Dodd-Frank Act will be implemented, repealed, amended,
or replaced, the full impact such requirements will have on our business, results of operations or financial condition is unclear. The
changes resulting from the Dodd-Frank Act or any changes to the regulations already implemented thereunder may require us to invest significant
management attention and resources to evaluate and make necessary changes in order to comply with new statutory and regulatory requirements.
Failure to comply with any such laws, regulations or principles, or changes thereto, may negatively impact our business, results of operations
or financial condition. While we cannot predict what effect any changes in the laws or regulations or their interpretations would have
on us as a result of recent financial reform legislation, these changes could be materially adverse to us and our stockholders.
Terrorist
attacks, acts of war or natural disasters may affect any market for our securities, impact the businesses in which we invest and harm
our business, operating results and financial condition.
Terrorist acts, acts of war or natural disasters, including as a result
of global climate change, may disrupt our operations, as well as the operations of the businesses in which we invest. Such acts have created,
and may continue to create, economic and political uncertainties and have contributed to global economic instability. Terrorist activities,
military or security operations, global health emergencies, or extreme weather conditions or other natural disasters, including as a result
of global climate change, could further weaken domestic and/or global economies and create additional uncertainties, which may negatively
impact the businesses in which we invest directly or indirectly and, in turn, could have a material adverse impact on our business, operating
results and financial condition. Losses from terrorist attacks, global health emergencies, and extreme weather conditions or other natural
disasters are generally uninsurable. The nature and level of extreme weather conditions or other natural disasters cannot be predicted
and may be exacerbated by global climate change.
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.
Cybersecurity incidents and cyber-attacks have been occurring globally
at a more frequent and severe level, and will likely continue to increase in frequency in the future. The occurrence of a disaster, such
as a cyber-attack against us or against a third party that has access to our data or networks, a natural catastrophe, an industrial accident,
failure of our disaster recovery systems, or consequential employee error, could have an adverse effect on our ability to communicate
or conduct business, negatively impacting our operations and financial condition. This adverse effect can become particularly acute if
those events affect our electronic data processing, transmission, storage, and retrieval systems, or impact the availability, integrity,
or confidentiality of our data.
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
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 the members of our management team are 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, reputational damage, and increased costs associated with mitigation of damages and
remediation. If unauthorized parties gain access to such information and technology systems, they may be able to steal, publish, delete
or modify private and sensitive information, including nonpublic personal information related to stockholders (and their beneficial owners)
and material nonpublic information. The systems we have implemented to manage risks relating to these types of events could prove to
be inadequate and, if compromised, could become inoperable for extended periods of time, cease to function properly or fail to adequately
secure private information. Breaches such as those involving covertly introduced malware, impersonation of authorized users and industrial
or other espionage may not be identified even with sophisticated prevention and detection systems, potentially resulting in further harm
and preventing them from being addressed appropriately. The failure of these systems or of disaster recovery plans for any reason could
cause significant interruptions in our operations and result in a failure to maintain the security, confidentiality or privacy of sensitive
data, including personal information relating to stockholders, material nonpublic information and other sensitive information in our
possession.
A
disaster or a disruption in the infrastructure that supports our business, including a disruption involving electronic communications
or other services used by us or third parties with whom we conduct business, or directly affecting our headquarters, could have a material
adverse impact on our ability to continue to operate our business without interruption. Our disaster recovery programs may not be sufficient
to mitigate the harm that may result from such a disaster or disruption. In addition, insurance and other safeguards might only partially
reimburse us for our losses, if at all.
Third
parties with which we do business may also be sources of cybersecurity or other technological risk. We outsource certain functions and
these relationships allow for the storage and processing of our information, as well as client, counterparty, employee, and borrower
information. While we engage in actions to reduce our exposure resulting from outsourcing, ongoing threats may result in unauthorized
access, loss, exposure, destruction, or other cybersecurity incident that affects our data, resulting in increased costs and other consequences
as described above.
In
addition, cybersecurity has become a top priority for regulators around the world, and some jurisdictions have enacted laws requiring
companies to notify individuals of data security breaches involving certain types of personal data. If we fail to comply with the relevant
laws and regulations, we could suffer financial losses, a disruption of our businesses, liability to investors, regulatory intervention
or reputational damage.
Finally, the increased use of mobile and cloud technologies due to the
proliferation of remote work resulting from the COVID-19 pandemic could heighten these and other operational risks as certain aspects
of the security of such technologies may be complex and unpredictable. Reliance on mobile or cloud technology or any failure by mobile
technology and cloud service providers to adequately safeguard their systems and prevent cyber-attacks could disrupt our operations, the
operations of a portfolio company or the operations of our or their service providers and result in misappropriation, corruption or loss
of personal, confidential or proprietary information or the inability to conduct ordinary business operations. In addition, there is a
risk that encryption and other protective measures may be circumvented, particularly to the extent that new computing technologies increase
the speed and computing power available. An extended period of remote working, whether by us, our portfolio companies, or our third-party
providers, could strain technology resources and introduce operational risks, including heightened cybersecurity risk. Remote working
environments may be less secure and more susceptible to hacking attacks, including phishing and social engineering attempts. Accordingly,
the risks described above are heightened under current conditions.